<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
FOR THE PERIOD ENDED SEPTEMBER 30, 1998
Commission File Number 0-22334
LODGENET ENTERTAINMENT CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 46-0371161
------------------------------- ---------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3900 WEST INNOVATION STREET, SIOUX FALLS, SOUTH DAKOTA 57107
------------------------------------------------------------------------
(Address of Principal Executive Offices) (ZIP code)
(605) 988-1000
-------------------------------
(Registrant's telephone number,
including area code)
(not applicable)
-------------------------------------------------
(Former name, former address and
former fiscal year, if changed since last report)
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 ___.
At November 3, 1998, there were 11,902,387 shares outstanding of the
Registrant's common stock, $0.01 par value.
THIS REPORT CONTAINS A TOTAL OF 20 PAGES
<PAGE>
LODGENET ENTERTAINMENT CORPORATION
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page
No.
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1 -- Financial Statements:
Consolidated Balance Sheets as of December 31, 1997 and
September 30, 1998 (Unaudited)..................................... 3
Consolidated Statements of Operations (Unaudited) for
the Three and Nine Months Ended September 30, 1997 and 1998........ 4
Consolidated Statements of Cash Flows (Unaudited) for
the Nine Months Ended September 30, 1997 and 1998.................. 5
Notes to Consolidated Financial Statements........................... 6
Item 2 -- Management's Discussion and Analysis of the Results of
Operations........................................................... 8
PART II. OTHER INFORMATION
Item 1 -- Legal Proceedings............................................ 18
Item 2 -- Changes in Securities........................................ 18
Item 3 -- Defaults Upon Senior Securities.............................. 18
Item 4 -- Submission of Matters to a Vote of Security Holders.......... 18
Item 5 -- Other Information............................................ 18
Item 6 -- Exhibits and Reports on Form 8-K............................. 18
SIGNATURES............................................................. 20
</TABLE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS -- CERTAIN STATEMENTS IN THIS
QUARTERLY REPORT ON FORM 10-Q 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 QUARTERLY 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 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 THIS QUARTERLY REPORT,
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 (INCLUDING YEAR 2000 COMPLIANCE), 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 QUARTERLY 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.
- -------------
As used herein (unless the context otherwise requires) "LodgeNet", "the
Company" and/or "the Registrant" means LodgeNet Entertainment Corporation and
its majority-owned subsidiaries.
Page 2
<PAGE>
PART I -- FINANCIAL INFORMATION
LODGENET ENTERTAINMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
------------ -------------
<S> <C> <C>
Assets (Unaudited)
Current assets:
Cash $ 1,021 $ 2,611
Accounts receivable, net of allowance for doubtful accounts 21,835 29,375
Prepaid expenses and other 3,457 4,407
-------- ---------
Total current assets 26,313 36,393
Property and equipment, net of accumulated depreciation 218,948 235,016
Notes receivable from unconsolidated affiliates -- 6,669
Debt issuance costs, net of accumulated amortization 7,641 6,891
Other assets, net of accumulated amortization 7,392 21,522
-------- ---------
$260,294 $306,491
-------- ---------
-------- ---------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 17,930 $ 15,590
Accrued expenses 7,010 10,242
Current maturities of long-term debt 705 5,832
-------- ---------
Total current liabilities 25,645 31,664
Deferred revenue 2,069 2,473
Long-term debt 182,691 244,597
Minority interest in consolidated subsidiary 310 310
-------- ---------
Total liabilities 210,715 279,044
-------- ---------
Commitments and contingencies -- --
Stockholders' equity:
Common stock, $.01 par value, 20,000,000 shares authorized;
11,322,058 shares outstanding at December 31, 1997 and
11,552,387 shares outstanding at September 30, 1998 113 115
Additional paid-in capital 120,792 121,027
Accumulated deficit (71,326) (93,695)
-------- ---------
Total stockholders' equity 49,579 27,447
-------- ---------
$260,294 $306,491
-------- ---------
-------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page 3
<PAGE>
LODGENET ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollar amounts, except per share amounts, in thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
1997 1998 1997 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Guest Pay $ 32,164 $ 40,952 $ 85,850 $ 108,702
Free-to-guest 2,146 1,990 6,417 5,972
Other 2,382 2,834 7,213 8,347
----------- ----------- ----------- -----------
Total revenues 36,692 45,776 99,480 123,021
----------- ----------- ----------- -----------
Direct costs:
Guest Pay 12,641 16,974 32,971 44,724
Free-to-guest 1,323 1,701 4,686 4,874
Other 1,767 1,465 5,229 4,809
----------- ----------- ----------- -----------
Total direct costs 15,731 20,140 42,886 54,407
----------- ----------- ----------- -----------
Gross profit 20,961 25,636 56,594 68,614
----------- ----------- ----------- -----------
Operating expenses:
Guest Pay operations 5,252 6,496 14,951 18,879
Selling, general and administrative 5,147 4,513 14,930 14,300
Depreciation and amortization 10,963 13,955 31,153 39,941
----------- ----------- ----------- -----------
Total operating expenses 21,362 24,964 61,034 73,120
----------- ----------- ----------- -----------
Operating loss (401) 672 (4,440) (4,506)
Interest expense, net 4,638 6,047 13,004 16,827
----------- ----------- ----------- -----------
Loss before income taxes (5,039) (5,375) (17,444) (21,333)
Provision for income taxes 11 82 41 308
----------- ----------- ----------- -----------
Net loss $ (5,050) $ (5,457) $ (17,485) $ (21,641)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Per common share (basic and diluted):
Net loss $ (0.45) $ (0.47) $ (1.56) $ (1.88)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted average shares outstanding 11,266,160 11,552,345 11,229,782 11,485,466
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page 4
<PAGE>
LODGENET ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
1997 1998
--------- ---------
<S> <C> <C>
Operating activities:
Net loss $(17,485) $(21,641)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization 31,153 39,941
Gain on sale of property and equipment -- (309)
Minority interest 15 --
Change in operating assets and liabilities:
Accounts receivable (4,256) (7,639)
Prepaid expenses and other (1,271) (954)
Accounts payable (436) (2,321)
Accrued expenses and deferred revenue 3,420 3,640
Other 57 745
-------- --------
Net cash provided by operating activities 11,197 11,462
-------- --------
Investing activities:
Purchase of property and equipment (73,222) (54,979)
Purchase of cable television operations (4,562) --
Proceeds from sale of property and equipment -- 412
Investment in unconsolidated affiliate -- (6,819)
-------- --------
Net cash used for investing activities (77,784) (61,386)
-------- --------
Financing activities:
Proceeds from long-term debt 665 1,802
Repayment of long-term debt (411) (512)
Payment on license rights liability -- (5,461)
Borrowings under revolving credit facility -- 55,500
Stock option activity 193 238
-------- --------
Net cash provided by financing activities 447 51,567
-------- --------
Effect of exchange rates on cash 33 (53)
-------- --------
Increase (decrease) in cash and cash equivalents (66,107) 1,590
Cash and cash equivalents at beginning of period 86,177 1,021
-------- --------
Cash and cash equivalents at end of period $ 20,070 $ 2,611
-------- --------
-------- --------
Supplemental cash flow information:
Cash paid for interest $ 10,010 $ 13,147
-------- --------
-------- --------
Noncash investing and financing activity:
License rights acquired by incurring liability $ -- $ 15,709
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page 5
<PAGE>
LODGENET ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 -- Basis of Presentation
The accompanying consolidated financial statements as of September 30,
1998, and for the three and nine month periods ended September 30, 1997 and
1998, have been prepared by LodgeNet Entertainment Corporation (the "Company"),
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission (the "Commission"). The information furnished in the
accompanying consolidated financial statements reflects all adjustments,
consisting only of normal recurring adjustments, which, in the opinion of
management, are necessary for a fair presentation of such financial statements.
Certain information and footnote disclosures, normally included in
financial statements prepared in accordance with generally accepted accounting
principles, have been condensed or omitted pursuant to the rules and
regulations of the Commission. Although the Company believes that the
disclosures are adequate to make the information presented herein not
misleading, it is recommended that these unaudited consolidated financial
statements be read in conjunction with the more detailed information contained
in the Company's Annual Report on Form 10-K for 1997, as filed with the
Commission. The results of operations for the three and nine month periods
ended September 30, 1998 are not necessarily indicative of the results of
operations for the full year.
The consolidated financial statements include the accounts of the Company
and its majority-owned subsidiaries. All significant inter-company accounts
and transactions have been eliminated in consolidation.
Note 2 -- Property and Equipment, Net
Property and equipment was comprised as follows at (in thousands of dollars):
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
------------ -------------
<S> <C> <C>
Land, building and equipment $ 40,051 $ 48,150
Free-to-guest equipment 11,855 15,360
Cable television equipment 13,877 24,160
Guest pay systems:
Installed 220,778 250,445
System components 30,720 28,114
Software costs 8,053 9,625
---------- ----------
Total 325,334 375,854
Less - depreciation and amortization (106,386) (140,838)
---------- ----------
Property and equipment, net $ 218,948 $ 235,016
---------- ----------
---------- ----------
</TABLE>
Note 3 -- Loss Per Share Computation
Effective in the fourth quarter of 1997, the Company adopted Statement of
Financial Accounting Standard ("SFAS") No. 128, "Earnings Per Share". SFAS No.
128 changed the manner in which earnings per share ("EPS") are calculated and
presented. The new standard requires the computation and disclosure of two EPS
amounts, basic and diluted. Basic EPS is computed based only on the weighted
average number of common shares actually outstanding during the period.
Diluted EPS is computed based on the weighted average number of common shares
outstanding plus all potentially dilutive common shares outstanding during the
period. The loss per share amount for the nine months ended September 30, 1997
has been restated from $(1.55) per share to $(1.56) per share to give effect to
the adoption of SFAS No. 128. No change occurred to the loss per share amount
for the three months ended September 30, 1997.
Page 6
<PAGE>
Note 4 -- Comprehensive Income
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income". This statement established standards for reporting and
disclosure of comprehensive income and its components. Comprehensive income
reflects the change in equity of a business enterprise during a period from
transactions and other events and circumstances from non-owner sources. For
the Company, comprehensive income primarily represents net income adjusted for
foreign currency translation adjustments. Comprehensive income was $(5,857)
and $(5,054) for the quarters ended September 30, 1998 and 1997, respectively.
For the nine months ended September 30, 1998 and 1997, comprehensive income was
$(22,368) and $(17,425), respectively.
Note 5 -- Effect of Recently Issued Accounting Standards
In March 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use". SOP 98-1 defines which costs of computer software
developed or obtained for internal use are capitalized and which costs are
expense. The SOP is effective for financial statements for fiscal years
beginning after December 15, 1998. The effect of adoption is not expected to
have a material effect on the Company's financial condition or results of
operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. The
statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met.
Special accounting for qualifying hedges allows a derivative's gains and losses
to offset related results on the hedged item in the income statement and
requires that a company must formally document, designate and assess the
effectiveness of transactions that receive hedge accounting. SFAS No. 133 is
effective for fiscal years beginning after June 15, 1999. The Company has not
yet quantified the impacts of SFAS No. 133 on its financial statements and has
not determined the timing of adoption. However, SFAS No. 133 could increase
volatility in earnings and other comprehensive income.
Note 6 -- Resolution of Patent Litigation
Since the first quarter of 1995, the Company has been engaged in legal
proceedings resulting from a lawsuit filed by On Command Video Corporation ("On
Command") asserting patent infringement by the Company relating to its on-
demand video system. During the third quarter of 1998, the Company entered
into an agreement with On Command to settle all matters of pending litigation
between the companies and enter into cross licensing arrangements regarding the
use of each of the companies' patented technologies. The cross licensing
arrangements, in consideration of the relative fair value of the patents
involved, provides for the Company to make cash payments to On Command totaling
approximately $16 million plus interest, payable in three annual installments
which commenced in September 1998. The Company has capitalized the present
value of the obligation to On Command based on the fair value of the license
rights acquired. The fair value of the license rights acquired will be
amortized over the remaining average lives of the underlying patents.
Note 7 -- Proposed Investment Transaction
The Company is engaged in a plan, and has entered into preliminary
agreements, to combine its majority-owned subsidiary, ResNet Communications,
LLC ("ResNet") with two non-affiliated entities to form a new entity whose
business will consist of providing cable television and telecommunications
services to the multi-family dwelling unit market. This transaction is
expected to result in LodgeNet receiving an equity ownership interest of
approximately 30% of the newly formed entity. The transaction is contingent on
the execution of definitive agreements among and between the parties. In
connection with the closing of this transaction, which is expected to occur in
the fourth quarter of 1998, the Company will record a pre-tax charge to
operations estimated to range from $2.5 million to $3.0 million to provide for
costs related to the transaction.
Page 7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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-SM- system architecture.
LODGING SERVICES
GUEST PAY SERVICES. The Company's Guest Pay services include Guest
Scheduled-TM- 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 Company's guest pay revenues depend on a number of factors, including
the number of rooms equipped with the Company's systems, Guest Pay buy rates,
hotel occupancy rates, hotel guest demographics, the popularity, selection and
pricing of the Company's program offerings and the length of time programming
is available to the Company prior to its release to the home video and cable
television markets. The primary direct costs of providing guest pay services
are (i) license fees paid to studios for non-exclusive distribution rights to
recently-released major motion pictures, (ii) nominal one-time license fees
paid for independent films, (iii) license fees for video games and other
services, and (iv) the commission retained by the hotel. Guest pay operating
expenses include costs of system maintenance and support, in-room marketing,
video tape duplication and distribution, data retrieval, insurance and personal
property taxes.
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- Entertainment System ("SNES") video game
playing system. During the second quarter of 1998, the Company entered into a
new ten year non-exclusive license agreement with Nintendo to become the first
provider of Nintendo 64-SM- ("N64") video games to the lodging industry. The
Company anticipates the rollout of the N64 game technology to begin during the
first quarter of 1999.
FREE-TO-GUEST SERVICES. In addition to Guest Pay services, the Company
provides cable television programming for which the hotel, rather than its
guests, pays the charges. Free-to-guest services include the satellite
delivery of various programming channels through a satellite earth station,
which generally is owned or leased by the hotel. The hotel pays the Company a
fixed monthly charge per room for each programming channel provided. The
Company obtains its free-to-guest programming pursuant to multi-year agreements
with the programmers and pays a fixed monthly fee per room which varies
depending on incentive programs in effect from time to time from the
programming networks. In April 1996, the Company entered into an agreement
with PRIMESTAR Partners (since succeeded by PRIMESTAR, Inc. ("PRIMESTAR"))
pursuant to which the Company was appointed as the exclusive third-party
provider (other than partners in PRIMESTAR and their affiliated distributors)
of the PRIMESTAR-Registered Trademark- DBS (digital direct broadcast satellite)
signal to the lodging industry. Pursuant to this agreement, the Company pays a
fee to PRIMESTAR for access to the PRIMESTAR DBS signal, which enables the
Company to provide free-to-guest digital satellite programming to a broader
segment of the lodging industry than can be cost-effectively served with
traditional C-band satellite systems.
Page 8
<PAGE>
During the three months and twelve months ended September 30, 1998, the
Company installed its systems in the following number of rooms, net of de-
installations:
<TABLE>
<CAPTION>
Three Months Twelve Months
Ended Ended
September 30, 1998 September 30, 1998
------------------ ------------------
<S> <C> <C>
Guest Pay rooms 22,713 87,358
------------------ ------------------
------------------ ------------------
Nintendo game system rooms 27,153 106,004
------------------ ------------------
------------------ ------------------
Free-to-guest rooms 8,410 44,197
------------------ ------------------
------------------ ------------------
</TABLE>
The room installations for the twelve months ended September 30, 1998
represent increases of 17.8% for Guest Pay, 25.0% for Nintendo, and 13.4% for
free-to-guest, over the room bases at September 30, 1997.
The Company's base of installed rooms was comprised as follows at September 30:
<TABLE>
<CAPTION>
1997 1998
------------------ ------------------
Rooms % Rooms %
---------- ------ ---------- ------
<S> <C> <C> <C> <C>
Guest Pay Rooms:
Scheduled 31,683 7.4 16,403 2.8
On-demand 459,940 92.6 562,578 97.2
------- ----- ------- -----
491,623 100.0 578,981 100.0
------- ----- ------- -----
------- ----- ------- -----
Nintendo game system rooms 424,190 530,194
------- -------
------- -------
Free-to-guest rooms:
At hotels with Guest Pay services 235,596 281,023
At hotels with only free-to-guest services 94,959 93,729
------- -------
330,555 374,752
------- -------
------- -------
</TABLE>
RESIDENTIAL SERVICES
In January 1996, the Company formed ResNet Communications, Inc. (later
reorganized as a Delaware limited liability company, "ResNet") for the purpose
of extending the Company's proprietary B-LAN-SM- system architecture and
operational expertise into the Multi-family Dwelling Unit ("MDU") market. In
October 1996, TCI Satellite MDU, Inc. ("TSAT") agreed to invest up to
$40 million in cash and satellite receiving equipment in ResNet in exchange for
up to a 36.99% interest in ResNet and agreed to provide ResNet with long-term
access to the PRIMESTAR DBS signals for the MDU market on a nationwide basis.
ResNet began installations of its first systems during the quarter ended
September 30, 1996. The following table sets forth the number of residential
units passed as of September 30:
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Residential units passed 16,890 33,590
------ ------
------ ------
</TABLE>
The Company is engaged in a plan, and has entered into preliminary
agreements, to combine ResNet with two non-affiliated entities to form a new
entity whose business will consist of providing cable television and
telecommunications services to the MDU market. This transaction is expected to
result in LodgeNet receiving an equity ownership interest of approximately 30%
of the newly formed entity. The transaction is contingent on the execution of
definitive agreements among and between the parties. In connection with the
closing of this transaction, which is expected to occur in the fourth quarter
of 1998, the Company will record a pre-tax charge to operations estimated to
range from $2.5 million to $3.0 million to provide for costs related to the
transaction.
Page 9
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998
REVENUE ANALYSIS
The Company's total revenue for the third quarter of 1998 increased 24.8%,
or $9.1 million, in comparison to the third quarter of 1997. The following
table sets forth the components of the Company's revenue for the quarter ending
September 30 (dollar amounts in thousands):
<TABLE>
<CAPTION>
1997 1998
----------------------- ------------------------
Percent Percent
of Total of Total
Amount Revenue Amount Revenue
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Guest Pay $32,164 87.7 $40,952 89.5
Free-to-guest 2,146 5.8 1,990 4.3
Other 2,382 6.5 2,834 6.2
------- ----- ------- -----
Total $36,692 100.0 $45,776 100.0
------- ----- ------- -----
------- ----- ------- -----
</TABLE>
Guest Pay Revenue -- Guest Pay revenue increased 27.3%, or $8.8 million,
in the third quarter of 1998 in comparison to the same quarter of 1997. This
increase was the result of a 18.9% increase in the average number of installed
Guest Pay rooms and an increase in the average monthly revenue per room. The
following table sets forth information in regard to average monthly revenue per
installed Guest Pay room for the quarter ending September 30:
<TABLE>
<CAPTION>
1997 1998
------ ------
<S> <C> <C>
Average monthly revenue per room:
Movie revenue $18.66 $19.86
Video game and other service revenue 3.91 4.31
------ ------
Total per Guest Pay room $22.57 $24.17
------ ------
------ ------
</TABLE>
Average movie revenue per room was impacted by higher average buy rates,
attributable to a more popular selection of newly-released major motion
pictures in the current quarter as compared to the year earlier quarter, and an
increase in the average movie price charged to hotel guests resulting from
recently implemented price increases. This increase was partially offset by
lower average hotel occupancy levels in the current quarter compared to the
year earlier quarter.
Average video game and other service revenue per room increased primarily
as a result of the increase in the number of rooms with information and other
services installed, partially offset by a decrease in average monthly video
game revenue per room.
Free-to-Guest Revenue -- Free-to-guest revenue decreased 7.3%, or
$156,000, in the third quarter of 1998 as compared to the same quarter of 1997.
This decrease is primarily the result of a slight decrease in the average
number of rooms at hotels receiving only free-to-guest services during the
period (although total rooms receiving free-to-guest services increased 13.4%).
Other Revenue -- Revenue from other sources includes cable television
revenue generated by the residential services segment (which was $1,563,000 in
the third quarter of 1998 as compared to $758,000 in the same period of 1997),
revenue from international license arrangements, and revenue from the sale of
televisions, system equipment, and service parts and labor. The increase in
the third quarter of 1998 from the third quarter of 1997 of $452,000 or 19.0%,
is primarily due to increased cable television revenue generated by the
residential services segment of $805,000, partially offset by a decrease in
television sales.
Page 10
<PAGE>
EXPENSE ANALYSIS
Direct Costs -- The following table sets forth information in regard to
the Company's direct costs and gross profit margin for the quarter ending
September 30 (dollar amounts in thousands):
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Direct costs:
Guest Pay $12,641 $16,974
Free-to-guest 1,323 1,701
Other 1,767 1,465
------- -------
$15,731 $20,140
------- -------
------- -------
Gross profit margin:
Guest Pay 60.7% 58.6%
Free-to-guest 38.4% 14.5%
Other 25.8% 48.3%
Composite 57.1% 56.0%
</TABLE>
Guest Pay direct costs increased 34.3%, or $4.3 million, in the third
quarter of 1998 as compared to the year earlier quarter. Since Guest Pay
direct costs (primarily studio license fees, video game license fees and the
commission retained by the hotel) are primarily based on related revenue, such
direct costs tend to vary directly with revenue. As a percentage of revenue,
such costs increased from 39.3% in the third quarter of 1997 to 41.4% in the
current quarter. The increase in Guest Pay direct costs as a percentage of
revenue reflects higher video game costs (which are incurred based on the
number of rooms receiving video game services rather than the number of game
buys) and an increasing proportion of guest pay rooms subscribing to lower
margin free-to-guest services.
Free-to-guest direct costs increased $378,000 or 28.6% in the third
quarter of 1998 from the year earlier quarter. As a percentage of free-to-
guest revenue, free-to-guest direct costs increased to 85.5% from 61.6% in the
year-earlier quarter due to increased signal carriage fees owed to PRIMESTAR
under the agreement previously described and decreased incentive discounts
earned from certain programming networks.
Direct costs associated with other revenue decreased $302,000 or 17.1% in
the third quarter of 1998 from the year earlier quarter. As a percentage of
related revenues, such direct costs decreased to 51.7% of other revenue in the
current quarter versus 74.2% in the third quarter of 1997. This decrease is
primarily due to the effect of the increased cable television revenue
previously described, which generally earns a higher margin than the other
sources of other revenue (direct costs of the residential services segment were
$713,000 in the third quarter of 1998 compared to $299,000 in the same period
of 1997). Additionally, the Company realized increased royalties under
international license arrangements as well as increased profit on the sale of
equipment to international customers.
The Company's overall gross profit increased 22.3%, or $4.7 million, to
$25.6 million in the third quarter of 1998 on a 24.8% increase in revenue in
comparison to the same period of the prior year. The Company's overall gross
profit margin was 56.0% in the current quarter, as compared to the year earlier
57.1%.
Page 11
<PAGE>
Operating Expenses -- The following table sets forth information in regard
to the Company's operating expenses for the quarter ending September 30 (dollar
amounts in thousands):
<TABLE>
<CAPTION>
1997 1998
----------------------- ------------------------
Percent Percent
of Total of Total
Amount Revenue Amount Revenue
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Operating expenses:
Guest Pay operations $ 5,252 14.3% $ 6,496 14.2%
Selling, general and administrative 5,147 14.0% 4,513 9.9%
Depreciation and amortization 10,963 29.9% 13,955 30.5%
------- ----- ------- -----
Total operating expenses $21,362 58.2% $24,964 54.6%
------- ----- ------- -----
------- ----- ------- -----
</TABLE>
Guest Pay operations expenses consist of costs directly related to the
operation of systems at the hotel sites as well as at residential sites
serviced by the residential services segment. Excluding the expenses incurred
to operate the systems at residential sites, which were $799,000 in the third
quarter of 1998 and $329,000 in the third quarter of 1997, expenses related to
Guest Pay operations increased 15.7%, or $774,000 in the third quarter of 1998
compared to the year earlier quarter. This increase is primarily attributable
to the 18.9% increase in average installed Guest Pay rooms in the third quarter
of 1998 as compared to the year earlier quarter, partially offset by lower
average operating and service expenses incurred on a per room basis. Per
average installed Guest Pay room, such expenses were $3.36 per month in the
third quarter of 1998 as compared to $3.46 per month in the third quarter of
1997.
Selling, general and administrative expenses decreased 12.3%, or $634,000
in the third quarter of 1998 compared to the year earlier quarter. As a
percentage of revenue, such expenses decreased to 9.9% in the current quarter
as compared to 14.0% in the year earlier quarter. This decrease is primarily
due to lower litigation related expenses. Selling, general and administrative
expenses incurred by the residential services segment were $436,000 in the
third quarter of 1998 compared to $357,000 in the same period of 1997.
Depreciation and amortization expenses increased 27.3% to $14.0 million in
the third quarter of 1998 from $11.0 million in the year earlier quarter. This
increase is directly attributable to the increases in the number of installed
Guest Pay rooms and ResNet units, associated software and other capitalized
costs such as service vans, equipment and computers that are related to the
increased number of rooms and units in service since the year-earlier quarter.
ResNet depreciation and amortization was $1,042,000 in the third quarter of
1998 compared to $428,000 in the year earlier quarter.
Operating Income (Loss) -- As a result of the factors previously
described, the Company earned income from operations totaling $672,000 for the
quarter ending September 30, 1998 compared to a loss from operations totaling
$(401,000) in the same quarter of 1997. Excluding the residential services
segment, income from operations was $2,099,000 for the third quarter of 1998 as
compared to $254,000 in the same period of 1997.
Interest Expense -- Interest expense, net of interest income, increased to
$6.0 million in the current quarter from $4.6 million in the comparable quarter
of 1997 due to increases in long-term debt to fund the Company's continuing
expansion of its business. Long-term debt increased from $180.0 million at
September 30, 1997 to $250.4 million at September 30, 1998. Average principal
amount of long-term debt outstanding during the quarter ended September 30,
1998 was approximately $232 million (at an average effective interest rate of
approximately 10.4%) as compared to an average principal amount outstanding of
approximately $180 million (at an average effective interest rate of
approximately 10.9%) during the comparable period of 1997.
Net Loss -- For the reasons previously described, the Company's net loss
increased to $(5.5) million in the third quarter of 1998 from a net loss of
$(5.1) million in the same quarter a year earlier.
EBITDA -- As a result of increasing revenues from Guest Pay services, and
the other factors previously described, EBITDA (defined as "earnings before
interest, income taxes, depreciation and amortization") increased 38.5% to
$14.6 million in the third quarter of 1998 as compared to $10.6 million in the
third quarter of 1997. EBITDA as a percentage of total revenue was 32.0% in
the current quarter as compared to 28.8% in the same quarter of 1997. EBITDA
is included herein because it is a widely accepted financial indicator used by
certain investors and financial analysts to assess and compare companies on the
basis of operating performance. EBITDA is not intended to represent an
alternative to net income (as determined in accordance with generally accepted
accounting principles) as a measure of performance, but management believes
that it does provide 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.
Page 12
<PAGE>
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998
REVENUE ANALYSIS
The Company's total revenue for the nine months ended September 30, 1998
increased 23.7%, or $23.5 million, in comparison to the nine months ended
September 30, 1997. The following table sets forth the components of the
Company's revenue for the nine months ended September 30 (dollar amounts in
thousands):
<TABLE>
<CAPTION>
1997 1998
----------------------- ------------------------
Percent Percent
of Total of Total
Amount Revenue Amount Revenue
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Guest Pay $85,850 86.3 $108,702 88.4
Free-to-guest 6,417 6.5 5,972 4.9
Other 7,213 7.2 8,347 6.7
------- ----- -------- -----
Total $99,480 100.0 $123,021 100.0
------- ----- -------- -----
------- ----- -------- -----
</TABLE>
Guest Pay Revenue -- Guest Pay revenue increased 26.6%, or $22.9 million,
in the first nine months of 1998 in comparison to the same period of 1997.
This increase was the result of a 22.1% increase in the average number of
installed Guest Pay rooms and an increase in the average monthly revenue per
room. The following table sets forth information in regard to average monthly
revenue per installed Guest Pay room for the nine months ending September 30:
<TABLE>
<CAPTION>
1997 1998
-------- -------
<S> <C> <C>
Average monthly revenue per room:
Movie revenue $18.09 $18.67
Video game and other service revenue 3.39 3.60
------ ------
Total per Guest Pay room $21.48 $22.27
------ ------
------ ------
</TABLE>
Average movie revenue per room was impacted by higher average buy rates,
attributable to a more popular selection of newly-released major motion
pictures in the current period as compared to the year earlier period, and an
increase in the average movie price charged to hotel guests resulting from
recently implemented price increases. This increase was partially offset by
lower average hotel occupancy levels in the current period compared to the year
earlier period.
Average video game and other service revenue per room increased primarily
as a result of the increase in the number of rooms with information and other
services installed, partially offset by a decrease in average monthly video
game revenue per room.
Free-to-Guest Revenue -- Free-to-guest revenue decreased 6.9%, or $445,000
in the first nine months of 1998 as compared to the same period of 1997. This
decrease is primarily the result of an 11.8% decrease in the average number of
rooms at hotels receiving only free-to-guest services during the period
(although total rooms receiving free-to-guest services increased 13.4%),
partially offset by increased revenue per room resulting primarily from program
price increases.
Other Revenue -- Revenue from other sources includes cable television
revenue generated by the residential services segment (which was $4,192,000 for
the nine months ending September 30, 1998 as compared to $1,763,000 for the
same period of 1997), revenue from international license arrangements, and
revenue from the sale of televisions, system equipment, and service parts and
labor. The increase in the first nine months of 1998 from the same period of
1997 of $1.1 million or 15.7%, is primarily due to increased cable television
revenue generated by the residential services segment of $2.4 million,
partially offset by a $1.0 million decrease in television sales.
Page 13
<PAGE>
EXPENSE ANALYSIS
Direct Costs -- The following table sets forth information in regard to
the Company's direct costs and gross profit margin for the nine months ending
September 30 (dollar amounts in thousands):
<TABLE>
<CAPTION>
1997 1998
-------- -------
<S> <C> <C>
Direct costs:
Guest Pay $32,971 $44,724
Free-to-guest 4,686 4,874
Other 5,229 4,809
------- -------
$42,886 $54,407
------- -------
------- -------
Gross profit margin:
Guest Pay 61.6% 58.9%
Free-to-guest 27.0% 18.4%
Other 27.5% 42.4%
Composite 56.9% 55.8%
</TABLE>
Guest Pay direct costs increased 35.6%, or $11.8 million, in the first
nine months of 1998 as compared to the comparable period of 1997. Since Guest
Pay direct costs (primarily studio license fees, video game license fees and
the commission retained by the hotel) are primarily based on related revenue,
such direct costs tend to vary directly with revenue. As a percentage of
revenue, such costs increased from 38.4% during the first nine months of 1997
to 41.1% during the same period of 1998. The increase in Guest Pay direct
costs as a percentage of revenue reflects higher video game costs (which are
incurred based on the number of rooms receiving video game services rather than
the number of game buys) and an increasing proportion of guest pay rooms
subscribing to lower margin free-to-guest services.
Free-to-guest direct costs increased from $4.7 million during the first
nine months of 1997 to $4.9 million. As a percentage of free-to-guest revenue,
free-to-guest direct costs increased to 81.6% from 73.0% in the year-earlier
period. The increase in free-to-guest direct costs as a percentage of revenue
is the result of increased signal carriage fees owed to PRIMESTAR under the
agreement previously described and decreased incentive discounts earned from
certain programming networks. This increase was partially offset by a shift of
certain free-to-guest rooms, which have historically incurred direct costs
higher than the average free-to-guest room, from the free-to-guest revenue
component to the Guest Pay revenue component in the first nine months of 1998.
Direct costs associated with other revenue decreased $420,000 or 8.0% in
the first nine months of 1998 from the year earlier period. As a percentage of
related revenue, such direct costs decreased to 57.6% in the current period
versus 72.5% in the year earlier period, primarily reflecting the effect of the
increased cable television revenue previously described, which generally earns
a higher margin than the other sources of other revenue (direct costs of the
residential services segment were $1,948,000 during the nine months ending
September 30, 1998 as compared to $690,000 during the same period of 1997).
Additionally, the Company realized increased royalties under international
license arrangements during the current period compared to the year earlier
period.
The Company's overall gross profit increased 21.2%, or $12.0 million, to
$68.6 million in the first nine months of 1998 on a 23.7% increase in revenues
in comparison to the same period in the prior year. The Company's overall
gross profit margin was 55.8% in the current nine month period, as compared to
the year earlier 56.9%.
Page 14
<PAGE>
Operating Expenses -- The following table sets forth information in regard
to the Company's operating expenses for the nine months ending September 30
(dollar amounts in thousands):
<TABLE>
<CAPTION>
1997 1998
----------------------- ------------------------
Percent Percent
of Total of Total
Amount Revenue Amount Revenue
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Operating expenses:
Guest Pay operations $14,951 15.0% $18,879 15.3%
Selling, general and administrative 14,930 15.0% 14,300 11.6%
Depreciation and amortization 31,153 31.3% 39,941 32.5%
------- ----- ------- -----
Total operating expenses $61,034 61.3% $73,120 59.4%
------- ----- ------- -----
------- ----- ------- -----
</TABLE>
Guest Pay operations expenses consist of costs directly related to the
operation of systems at the hotel sites as well as at residential sites
serviced by the residential services segment. Excluding the expenses incurred
to operate the systems at residential sites, which were $2,256,000 in the first
nine months of 1998 and $767,000 in the first nine months of 1997, expenses
related to Guest Pay operations increased 16.9%, or $2.4 million in the first
nine months of 1998 compared to the year earlier period. This increase is
primarily attributable to the 22.1% increase in average installed Guest Pay
rooms in the first nine months of 1998 as compared to the year earlier period,
partially offset by lower average operating and service expenses incurred on a
per room basis. Per average installed Guest Pay room, such expenses were $3.40
per month during the first nine months of 1998 as compared to $3.58 per month
in the same period of 1997.
Selling, general and administrative expenses were $14.3 million in the
first nine months of 1998 compared to $14.9 million during the year earlier
period. As a percentage of revenue, such expenses decreased to 11.6% in the
current period as compared to 15.0% in the year earlier period. This decrease
is primarily due to lower legal expenses during the current period as compared
to the year earlier period. Selling, general and administrative expenses
incurred by the residential services segment were $1,494,000 during the nine
months ending September 30, 1998 as compared to $963,0000 during the same
period of 1997.
Depreciation and amortization expenses increased 28.2% to $39.9 million in
the first nine months of 1998 from $31.2 million in the year earlier period.
This increase is directly attributable to the increases in the number of
installed Guest Pay rooms and ResNet units, associated software and other
capitalized costs such as service vans, equipment and computers that are
related to the increased number of rooms and units in service since the year-
earlier period. ResNet depreciation and amortization was $2,814,000 in the
first nine months of 1998 compared to $962,000 in the year earlier period.
Operating Loss -- The Company's operating loss, as a result of the factors
previously described, was $(4.5) million in the current period as compared to
$(4.4) million in the same period of 1997. Excluding the residential services
segment, the operating loss was $(186,000) for the first nine months of 1998 as
compared to $(2,821,000) in the same period of 1997.
Interest Expense -- Interest expense, net of interest income, increased to
$16.8 million in the current nine month period from $13.0 million in the
comparable period of 1997 due to increases in long-term debt to fund the
Company's continuing expansion of its business and decreased interest income.
Long-term debt increased from $180.0 million at September 30, 1997 to $250.4
million at September 30, 1998. Average principal amount of long-term debt
outstanding during the nine months ended September 30, 1998 was approximately
$215 million (at an average effective interest rate of approximately 10.3%) as
compared to an average principal amount outstanding of approximately $180
million (at an average effective interest rate of approximately 10.9%) during
the comparable period of 1997. Interest income decreased from $1.7 million in
the first nine months of 1997 to $42,000 during the comparable period of 1998
due to the use of proceeds from previous borrowings to fund the Company's
expansion.
Net Loss -- For the reasons previously described, the Company's net loss
increased to $(21.6) million in the first nine months of 1998 from a net loss
of $(17.5) million in the same period of the prior year.
EBITDA -- As a result of increasing revenues from Guest Pay services, and
the other factors previously described, EBITDA (defined as "earnings before
interest, income taxes, depreciation and amortization") increased 32.7% to
$35.4 million in the first nine months of 1998 as compared to $26.7 million in
the first nine months of 1997. EBITDA as a percentage of total revenue was
28.8% in the current nine month period as compared to 26.8% in the same period
of 1997.
Page 15
<PAGE>
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 calendar quarters due to seasonal
travel patterns.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the growth of the Company's business has required
substantial amounts of capital. The Company has incurred operating and net
losses due in large part to the depreciation, amortization and interest
expenses related to the capital expenditures required to expand its lodging and
residential businesses. Historically, cash flow from operations has not been
sufficient to fund the cost of expanding the Company's business and to service
existing indebtedness. Capital expenditures were approximately $106 million
during 1997, and net cash provided by operating activities was approximately
$17 million. During the first nine months of 1998, capital expenditures were
approximately $55 million (of which approximately $11 million was incurred by
ResNet) and net cash provided by operating activities was $11.5 million
(including negative operating cash flow of $3.9 million from ResNet).
Depending on the rate of growth of its lodging business and other factors,
the Company expects to incur capital expenditures of between approximately $13
to $18 million during the remainder of 1998 and between approximately $50 to
$60 million in 1999. 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. This a forward-looking statement and there
can be no assurance in this regard. In addition, the Company's Revolving Credit
Facility limits the amount of the Company's annual capital expenditures to a
certain base amount plus the amounts of certain additional financing.
The Company believes that its operating cash flows and borrowings
permitted under its $100 million Revolving Credit Facility (which may be
increased to $175 million, subject to certain conditions) will be sufficient to
fund the Company's cash requirements through 1999. However, if the Company's
plans or assumptions change, if its assumptions prove to be inaccurate or if
the Company experiences unanticipated costs or competitive pressures, the
Company may be required to seek additional capital sooner than currently
anticipated. There can be no assurance that the Company will be able to obtain
financing, or, if such financing is available, that the Company will be able to
obtain it on acceptable terms. Failure to obtain additional financing, if
needed, could result in the delay or abandonment of some or all of the
Company's expansion plans.
ResNet is currently at a stage of development during which it will
consume, through operating losses and capital expenditures for installations,
substantially more capital than it is generating. During the first nine months
of 1998, the Company has provided approximately $15 million to fund ResNet's
operating and investing activity. As previously described, the Company has
entered into preliminary agreements to divest of a portion of its interest in
ResNet. The transaction provides for ResNet to be combined with two non-
affiliated entities to form a new entity whose business will consist of
providing cable television and telecommunications services to the multi-family
dwelling unit market. The successful execution of this plan will result in the
deconsolidation of ResNet's operations from the Company's consolidated
operating results which will eliminate the negative financial impact of the
operating losses and capital requirements of ResNet.
YEAR 2000 INFORMATION
The Company is engaged in a comprehensive review of internal computer
systems and software and external business relationships in regard to Year 2000
issues.
STATE OF READINESS. The Company has a project team comprised of key
members from cross-organization departments. The team's objectives are to
gather information and facilitate research on Year 2000 issues that could
affect the Company, and to take necessary actions to eliminate or minimize the
impact of such issues. Internally, the Company has nearly completed its
efforts to identify the computer hardware and software that is used both at its
in-house facilities as well as at its hotel properties. Research and testing
of these systems for Year 2000 compliance is underway. The Company expects to
complete its research and testing of internal computer hardware and software by
the end of the first quarter of 1999. Correction or replacement of hardware
and software containing Year 2000 issues is in progress and is estimated for
completion by the end of the third quarter of 1999.
Page 16
<PAGE>
Externally, the Company is working to identify third party business
relationships. Research and review of these relationships is underway
including contacting the third parties to solicit information and assurances
relating to potential Year 2000 issues and reviewing responses. The Company
plans to continue its research and remediation efforts toward completion by the
end of the second quarter of 1999, although no assurance can be given as to the
Year 2000 remediation of third parties.
COSTS ASSOCIATED WITH YEAR 2000 ISSUES. Incremental costs are expected to
be comprised primarily of costs to purchase software upgrades and hardware.
Additionally, external consulting, programming and training costs may be
incurred. Estimated costs of Year 2000 compliance are not fully determined at
this time. Based on current assessment, management does not expect any
material adverse impact on the Company's financial position or results of
operations as a result of such expenditures.
RISKS ASSOCIATED WITH YEAR 2000 ISSUES. The Company is highly dependent
upon its own information technology systems and that of its suppliers and
customers. The Company or third party's failure to correct a material Year
2000 problem could result in a failure of or interruption in the Company's
business activities and operations. Such interruptions and failures could
materially and adversely affect the Company's results of operations, liquidity
and financial condition. Due to the general uncertainty inherent in the Year
2000 problem, resulting in part from the uncertainty of the readiness of third-
party providers and customers, the Company is not able at this time to
determine whether the Year 2000 problems will have a material adverse effect on
the Company's results of operations, liquidity or financial condition. The
Company's Year 2000 project is expected to reduce significantly the Company's
level of uncertainty and the possibility of significant or long-lasting
interruptions of the Company's business operations; however, the Company
believes that it is impossible to predict all of the areas in which material
problems may arise.
CONTINGENCY PLANS. The Company has not yet developed specific contingency
plans for Year 2000 issues. The Company is in the process of identifying and
prioritizing functions critical to its business, so that it may make available
alternate vendors and service providers as well as to develop manual systems
which could be used to process data.
While the Company anticipates achieving Year 2000 compliance in a timely
manner, there can be no assurance that all processes will be compliant, that
there will be no significant delay or loss of revenues, or that no material
supply sources will be interrupted. However, the Company believes that its
planning and action efforts will help minimize any loss or disruption.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS -- CERTAIN STATEMENTS IN THIS
QUARTERLY REPORT ON FORM 10-Q 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 QUARTERLY 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 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 THIS QUARTERLY REPORT,
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 (INCLUDING YEAR 2000 COMPLIANCE), 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 QUARTERLY 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.
Page 17
<PAGE>
PART II -- OTHER INFORMATION
ITEM 1 -- LEGAL PROCEEDINGS
On September 11, 1998, LodgeNet and On Command settled all pending
litigation between the companies. The terms of the confidential settlement
included no admission of liability by either party, a covenant not to engage in
patent litigation against the other party for a period of five years, and a
cross-license of each company's involved patented technologies to the other.
In addition, each company agreed to be responsible for its own legal costs and
expenses. In connection with the multiple cross-licenses LodgeNet will pay On
Command approximately $16 million plus interest in three roughly equal payments
over three calendar years. The first payment was made on the settlement date
of September 11, 1998. The next two payments will be made on July 15, 1999 and
July 15, 2000.
From time to time, the Company is subject to other litigation arising in
the ordinary course of business. As of the date hereof, in the opinion of
management, the resolution of such other litigation will not have a material
adverse effect upon the Company's business or financial condition.
ITEM 2 -- CHANGES IN SECURITIES
(a) Not applicable
(b) Not applicable
(c) Recent Sales of Unregistered Securities
On October 15, 1998, the Company issued 350,000 shares of common
stock to the shareholders of Connect Group Corporation, a California
corporation ("CGC"), which were not registered under the Securities
Act of 1933, as amended (the "Securities Act"). The Company received
all of the issued and outstanding shares of common stock, no par
value, of CGC in consideration of such issuance. The Company relied
upon the exemption from registration provided under Section 4(2) of
the Securities Act.
The recipients of the above-described securities represented their
intention to acquire the securities for investment only and not with
a view to distribution thereof. Appropriate legends were affixed to
the stock certificates issued in the transaction. All recipients
were provided with or had access to adequate information about the
Company.
(d) Not applicable
ITEM 3 -- DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5 -- OTHER INFORMATION
In October 1998, the Company closed its previously announced acquisition
of CGC. Terms of the acquisition included the issuance of 350,000 shares of
common stock of LodgeNet of which 200,000 shares will be held in escrow
subject to performance criteria and as collateral for indemnification
provisions and for breach of the representations and warranties. In addition,
the terms included payment of $500,000 at closing and future payments of $1
million after the first twelve months and another $1 million during the second
twelve months subject to performance criteria.
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
a. EXHIBITS:
2.2 Amended and Restated Agreement and Plan of Merger among LodgeNet
Entertainment Corporation, Connect Group Corporation and the
Securityholders Named Therein, dated as of September 30, 1998.
Page 18
<PAGE>
b. REPORTS ON FORM 8-K:
The Company filed no Reports on Form 8 - K during the three months ended
September 30, 1998.
Page 19
<PAGE>
LODGENET ENTERTAINMENT CORPORATION
FORM 10-Q
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LODGENET ENTERTAINMENT CORPORATION
--------------------------------------------
(Registrant)
Date: November 11, 1998 /s/ SCOTT C. PETERSEN
--------------------------------------------
Scott C. Petersen
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 11, 1998 /s/ JEFFREY T. WEISNER
--------------------------------------------
Jeffrey T. Weisner
Vice President - Finance
(Principal Financial and Accounting Officer)
Page 20
<PAGE>
EXECUTION COPY
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
Among
LODGENET ENTERTAINMENT CORPORATION,
CONNECT GROUP CORPORATION
and
THE SECURITYHOLDERS NAMED HEREIN
September 30, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE I THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 The Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Closing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.3 Effective Time . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.4 Corporate Organization . . . . . . . . . . . . . . . . . . . . . . . 2
ARTICLE II EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT
CORPORATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.1 Conversion of CGC Common Stock . . . . . . . . . . . . . . . . . . . 2
2.2 Escrow Shares. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.3 Surrender and Payment. . . . . . . . . . . . . . . . . . . . . . . . 3
2.4 Adjustments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.5 Additional Consideration . . . . . . . . . . . . . . . . . . . . . . 4
ARTICLE III THE SURVIVING CORPORATION . . . . . . . . . . . . . . . . . . . . . .4
3.1 Certificate of Incorporation . . . . . . . . . . . . . . . . . . . . 4
3.2 Bylaws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
3.3 Directors and Officers . . . . . . . . . . . . . . . . . . . . . . . 4
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF CGC . . . . . . . . . . . . . . . .4
4.1 Organization and Qualification . . . . . . . . . . . . . . . . . . . 4
4.2 Capital Structure. . . . . . . . . . . . . . . . . . . . . . . . . . 5
4.3 Subsidiaries; Equity Investments . . . . . . . . . . . . . . . . . . 6
4.4 Authority. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
4.5 No Conflict with Other Instruments . . . . . . . . . . . . . . . . . 6
4.6 Governmental Consents. . . . . . . . . . . . . . . . . . . . . . . . 6
4.7 Balance Sheet. . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
4.8 Absence of Changes . . . . . . . . . . . . . . . . . . . . . . . . . 7
4.9 Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
4.10 Environmental Matters. . . . . . . . . . . . . . . . . . . . . . . . 8
4.11 Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
4.12 Employees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
4.13 Compliance with Law. . . . . . . . . . . . . . . . . . . . . . . . .11
4.14 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
4.15 Contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
4.16 No Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
4.17 Proprietary Rights . . . . . . . . . . . . . . . . . . . . . . . . .12
4.18 CGC Technology . . . . . . . . . . . . . . . . . . . . . . . . . . .13
4.19 Brokers or Finders . . . . . . . . . . . . . . . . . . . . . . . . .13
4.20 Related Parties. . . . . . . . . . . . . . . . . . . . . . . . . . .14
4.21 Certain Advances . . . . . . . . . . . . . . . . . . . . . . . . . .14
4.22 Underlying Documents . . . . . . . . . . . . . . . . . . . . . . . .14
4.23 No Misleading Statements . . . . . . . . . . . . . . . . . . . . . .14
</TABLE>
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ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE SECURITYHOLDERS. . . . . . . . . . 14
5.1 CGC Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . .14
5.2 Investment Representations . . . . . . . . . . . . . . . . . . . . .15
ARTICLE VI REPRESENTATIONS AND WARRANTIES OF LODGENET. . . . . . . . . . . . . 16
6.1 Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
6.2 Authority. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
6.3 No Conflict with Other Instruments . . . . . . . . . . . . . . . . .16
6.4 Governmental Consents. . . . . . . . . . . . . . . . . . . . . . . .17
6.5 SEC Documents. . . . . . . . . . . . . . . . . . . . . . . . . . . .17
6.6 Shares of LodgeNet Common Stock. . . . . . . . . . . . . . . . . . .17
6.7 Brokers or Finders . . . . . . . . . . . . . . . . . . . . . . . . .17
6.8 Absence of Changes . . . . . . . . . . . . . . . . . . . . . . . . .17
6.9 Compliance with Law. . . . . . . . . . . . . . . . . . . . . . . . .17
ARTICLE VII CONDUCT PRIOR TO THE EFFECTIVE TIME . . . . . . . . . . . . . . . . 18
7.1 Conduct of Business of CGC . . . . . . . . . . . . . . . . . . . . .18
7.2 No Solicitation. . . . . . . . . . . . . . . . . . . . . . . . . . .20
ARTICLE VIII ADDITIONAL AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . 21
8.1 Approval of CGC Shareholders . . . . . . . . . . . . . . . . . . . .21
8.2 Access to Information; Interim Financial Information.. . . . . . . .21
8.3 Confidentiality. . . . . . . . . . . . . . . . . . . . . . . . . . .21
8.4 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21
8.5 Public Disclosure. . . . . . . . . . . . . . . . . . . . . . . . . .21
8.6 Best Efforts . . . . . . . . . . . . . . . . . . . . . . . . . . . .21
8.7 Conduct; Notification of Certain Matters . . . . . . . . . . . . . .22
8.8 Tax-Free Reorganization. . . . . . . . . . . . . . . . . . . . . . .22
8.9 Blue Sky Laws. . . . . . . . . . . . . . . . . . . . . . . . . . . .22
8.10 Stockholders Agreement . . . . . . . . . . . . . . . . . . . . . . .22
8.11 Key Employee Retention . . . . . . . . . . . . . . . . . . . . . . .22
8.12 Transfer of CGC Technology . . . . . . . . . . . . . . . . . . . . .22
8.13 Formation of 1stUp . . . . . . . . . . . . . . . . . . . . . . . . .23
8.14 Additional Documents and Further Assurances. . . . . . . . . . . . .24
8.15 Indemnification. . . . . . . . . . . . . . . . . . . . . . . . . . .24
ARTICLE IX CONDITIONS TO THE MERGER. . . . . . . . . . . . . . . . . . . . . . 24
9.1 Conditions to Obligations of Each Party to Effect the Merger.. . . .24
9.2 Additional Conditions to Obligations of CGC. . . . . . . . . . . . .24
9.3 Additional Conditions to the Obligations of LodgeNet . . . . . . . .25
ARTICLE X INDEMNIFICATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
10.1 Survival of Representations and Warranties . . . . . . . . . . . . .26
</TABLE>
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10.2 Indemnification by CGC and the Securityholders . . . . . . . . . . .27
10.3 Indemnification by LodgeNet. . . . . . . . . . . . . . . . . . . . .28
10.4 Defense of Claims. . . . . . . . . . . . . . . . . . . . . . . . . .28
ARTICLE XI TERMINATION, AMENDMENT, WAIVER, CLOSING . . . . . . . . . . . . . . 29
11.1 Termination. . . . . . . . . . . . . . . . . . . . . . . . . . . . .29
11.2 Effect of Termination. . . . . . . . . . . . . . . . . . . . . . . .30
11.3 Amendment or Supplement. . . . . . . . . . . . . . . . . . . . . . .30
11.4 Extension of Time, Waiver. . . . . . . . . . . . . . . . . . . . . .30
ARTICLE XII GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
12.1 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31
12.2 Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32
12.3 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . .32
12.4 Entire Agreement; Assignment . . . . . . . . . . . . . . . . . . . .32
12.5 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . .32
12.6 Other Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . .32
12.7 Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . . . .33
12.8 Arbitration. . . . . . . . . . . . . . . . . . . . . . . . . . . . .33
12.9 Absence of Third-Party Beneficiary Rights. . . . . . . . . . . . . .33
</TABLE>
Exhibit A Certificate of Merger (DE)
Exhibit B Agreement of Merger (CA)
Exhibit C Escrow Agreement
Exhibit D Additional Consideration Terms
Exhibit E Balance Sheet
Exhibit F CGC Technology
Exhibit G Form of Stockholders Agreement
Schedule 2.1 Initial Merger Consideration and Escrow Shares
Schedule 4.2(d) Addresses of Securityholders
Schedule 4.7 Liability Schedule
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AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER
THIS AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER (this
"Agreement"), made and entered into as of the 30th day of September 1998, by
and among LODGENET ENTERTAINMENT CORPORATION, a Delaware corporation
("LodgeNet"), CONNECT GROUP CORPORATION, a California corporation ("CGC"),
and certain shareholders of CGC named on the signature pages hereto (the
"Securityholders").
W I T N E S S E T H:
WHEREAS, the Boards of Directors of LodgeNet and CGC deem it advisable
and in the best interests of their respective companies and their respective
stockholders or shareholders, as the case may be, to effect the merger
hereafter provided for, in which CGC would merge with and into LodgeNet, with
LodgeNet as the surviving corporation (the "Merger");
WHEREAS, it is intended that the Merger qualify as a tax-free
reorganization within the meaning of Section 368(a) of the Internal Revenue
Code of 1986, as amended (the "Code");
WHEREAS, the parties hereto originally entered into an Agreement and
Plan of Merger dated as of June 16, 1998 (the "Original Merger Agreement");
WHEREAS, the Original Merger Agreement was amended as of July 30, 1998,
August 12, 1998, August 31, 1998, September 11, 1998 and September 25, 1998;
and
WHEREAS, the parties hereto desire to amend and restate the Original
Merger Agreement in its entirety to reflect the preceding changes and other
amendments:
N O W, T H E R E F O R E, in consideration of the premises and of the
mutual agreements, provisions and covenants herein contained, LodgeNet, CGC
and the Securityholders hereby agree as follows:
ARTICLE I
THE MERGER
1.1 THE MERGER. At the Effective Time (as defined in Section 1.3),
upon the terms and subject to the conditions of this Agreement, CGC shall be
merged with and into LodgeNet in accordance with the California General
Corporation Law (the "CGCL") and the General Corporation Law of the State of
Delaware ("DGCL"), whereupon the separate existence of CGC shall cease and
LodgeNet shall be the surviving corporation.
1.2 CLOSING. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Pillsbury
Madison & Sutro LLP, 235 Montgomery Street, San Francisco, California as soon
as practicable following satisfaction or waiver of all of the conditions to
the obligations of the parties to consummate the transactions contemplated
hereby in accordance with this Agreement, or at such other time, place and
date as is mutually agreed to by the parties hereto. The date of the Closing
is referred to in this Agreement as the "Closing Date."
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1.3 EFFECTIVE TIME. As soon as practicable after satisfaction or, to
the extent permitted hereunder, waiver of all conditions to the Merger,
LodgeNet shall file a Certificate of Merger, in the form attached hereto as
Exhibit A, with the Secretary of State of the State of Delaware and CGC shall
file an Agreement of Merger in the form attached hereto as Exhibit B, with
the Secretary of State of the State of California and each of LodgeNet and
CGC shall make all other filings or recordings required by the CGCL and the
DGCL in connection with the Merger. The Merger shall become effective at
such time as both the Certificate of Merger is duly filed with the Secretary
of State of the State of Delaware and the Agreement of Merger is duly filed
with the Secretary of State of the State of California (the "Effective Time").
1.4 CORPORATE ORGANIZATION. At and after the Effective Time, LodgeNet
shall possess all the rights, privileges, powers and franchises and be
subject to all of the restrictions, liabilities and duties of CGC, all as
provided under the CGCL and the DGCL.
ARTICLE II
EFFECT OF THE MERGER ON THE
CAPITAL STOCK OF THE CONSTITUENT CORPORATIONS
2.1 CONVERSION OF CGC COMMON STOCK. At the Effective Time, by virtue
of the Merger and without any action on the part of any holder of common
stock of CGC ("CGC Common Stock"), the following shall occur:
(a) Each share of CGC Common Stock held by CGC as treasury stock shall
be canceled, and no payment shall be made with respect thereto.
(b) The Securityholders shall exchange their shares of CGC Common Stock
for the initial merger consideration (the "Initial Merger Consideration"),
which shall consist of an aggregate of (i) five hundred thousand dollars
($500,000) and (ii) three hundred fifty thousand (350,000) shares of common
stock, $.01 par value, of LodgeNet ("LodgeNet Common Stock"). The Initial
Merger Consideration, less the Escrow Shares, as defined in Section 2.2,
shall be paid to each Securityholder as set forth in Schedule 2.1 attached
hereto.
2.2 ESCROW SHARES. Of the total number of shares of LodgeNet Common
Stock issued in connection with the Merger, an aggregate of two hundred
thousand (200,000) shares (the "Escrow Shares") shall be held in escrow as
collateral for the indemnification obligations of the Securityholders
pursuant to Exhibit D hereto, Article X of this Agreement and the provisions
of the Escrow Agreement in substantially the form attached hereto as Exhibit
C (the "Escrow Agreement"). The Escrow Shares shall be withheld pro rata
(based on the number of shares of CGC Common Stock held by each
Securityholder immediately prior to the Effective Time relative to the total
number of outstanding shares of CGC Common Stock immediately prior to the
Effective Time) from the LodgeNet Common Stock to be received by each
Securityholder. Such withheld amount shall be issued in accordance with the
terms of the Escrow Agreement in the names of the Securityholders, but shall
be delivered at the Effective Time to the Escrow Agent to be held and
distributed in accordance with the provisions of Exhibit D hereto, Article X
and the Escrow Agreement.
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2.3 SURRENDER AND PAYMENT.
(a) Prior to the Effective Time, CGC shall provide LodgeNet with a list
of the names and addresses of each of CGC's shareholders for the purpose of
exchanging certificates representing shares of CGC Common Stock for the
Common Stock portion of the Initial Merger Consideration. Promptly after the
Effective Time, LodgeNet shall send to each holder of record of shares of CGC
Common Stock at the Effective Time a letter of transmittal for use in such
exchange (which shall specify that the delivery shall be effected, and risk
of loss and title shall pass, only upon proper delivery of the certificates
representing shares of CGC Common Stock to LodgeNet).
(b) Holders of shares of CGC Common Stock that have been converted into
a right to receive a portion of the Initial Merger Consideration, upon
surrender to LodgeNet of a certificate or certificates representing such
shares of CGC Common Stock, together with a properly completed letter of
transmittal covering such shares of CGC Common Stock, will be entitled to
receive the Initial Merger Consideration payable in respect of such shares of
CGC Common Stock. Until so surrendered, each certificate representing shares
of CGC Common Stock shall, after the Effective Time, represent for all
purposes only the right to receive such Initial Merger Consideration.
(c) If any portion of the Initial Merger Consideration is to be paid to
a person other than the registered holder of shares of CGC Common Stock
represented by the certificate or certificates surrendered in exchange
therefor, it shall be a condition to such payment that the certificate or
certificates so surrendered shall be properly endorsed or otherwise be in
proper form for transfer and accompanied by all documents required to
evidence and effect the transfer and that the person requesting such payment
shall pay to LodgeNet any transfer or other taxes required as a result of
such payment to a person other than the registered holder of such shares of
CGC Common Stock or establish to the satisfaction of LodgeNet that such tax
has been paid or is not payable.
(d) After the Effective Time, there shall be no further registration of
transfers of shares of CGC Common Stock. If, after the Effective Time,
certificates representing shares of CGC Common Stock are presented to
LodgeNet, they shall be canceled and exchanged for the consideration provided
for, and in accordance with the procedures set forth, in this Article II.
(e) Any amounts remaining unclaimed by holders of shares of CGC Common
Stock three years after the Effective Time (or such earlier date prior to
such time as such amounts would otherwise escheat to or become property of
any governmental entity) shall, to the extent permitted by applicable law,
become the property of LodgeNet free and clear of any claims or interest of
any person previously entitled thereto.
(f) No dividends, interest or other distributions with respect to
LodgeNet Common Stock constituting part of the Initial Merger Consideration
shall be paid to the holder of any unsurrendered certificates representing
shares of CGC Common Stock until such certificates are surrendered as
provided in this Section 2.3. Upon such surrender, there shall be paid,
without interest, to the person in whose name the certificates representing
LodgeNet Common Stock into which such shares of CGC Common Stock were
converted are registered, all dividends, interest and other distributions
payable in respect of such shares of CGC Common Stock on a date subsequent
to, and in respect of a record date after, the Effective Time.
2.4 ADJUSTMENTS. If at any time during the period between the date of
this Agreement and the Effective Time, any change in the outstanding shares
of capital stock of LodgeNet shall occur, including by reason of any
reclassification, recapitalization, stock split or combination, exchange or
readjustment of shares,
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or any stock dividend thereon with a record date during such period, the
number of shares of LodgeNet Common Stock constituting all or part of the
Initial Merger Consideration shall be appropriately adjusted.
2.5 ADDITIONAL CONSIDERATION. LodgeNet shall pay to the
Securityholders the additional consideration, if any (the "Additional
Consideration"), determined pursuant to the terms and conditions for such
Additional Consideration contained in Exhibit D attached hereto. For the
purposes of this Agreement, the term "Merger Consideration" shall mean the
Initial Merger Consideration and the Additional Consideration.
ARTICLE III
THE SURVIVING CORPORATION
3.1 CERTIFICATE OF INCORPORATION. The Certificate of Incorporation
of LodgeNet in effect at the Effective Time shall remain the certificate of
incorporation of LodgeNet until amended in accordance with applicable law.
3.2 BYLAWS. The Bylaws of LodgeNet in effect at the Effective Time
shall remain the Bylaws of LodgeNet until amended in accordance with applicable
law.
3.3 DIRECTORS AND OFFICERS. From and after the Effective Time,
until successors are duly elected or appointed and qualified in accordance
with applicable law, the directors of LodgeNet at the Effective Time shall
remain the directors of LodgeNet and the officers of LodgeNet at the
Effective Time shall remain the officers of LodgeNet to serve at the pleasure
of the Board of Directors of LodgeNet.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF CGC
Except as otherwise specifically set forth on the disclosure schedule
delivered by CGC to LodgeNet prior to the execution of this Agreement (the
"Disclosure Schedule"), CGC represents and warrants to LodgeNet as follows:
4.1 ORGANIZATION AND QUALIFICATION. CGC is a corporation duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation or organization and has all requisite power and
authority to own, lease and operate its respective properties and to carry on
its business as now being conducted.
CGC is qualified to do business as a foreign corporation and is in good
standing under the laws of each state or other jurisdiction in which the
nature of its business requires such qualification, which states or
jurisdictions are listed on the Disclosure Schedule, except where the failure
to be so qualified or in good standing which, taken together with all other
such failures, would not have a material adverse effect on CGC. As used in
this Agreement, any reference to any event, change or effect being "material"
or "materially adverse" or having a "material adverse effect" on or with
respect to an entity (or group of entities, taken as a whole) means such
event, change or effect is material or materially adverse, as the case may
be, to the business, condition (financial or otherwise), properties, assets,
liabilities, or results of operations of such entity (or, if
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with respect thereto, of such group of entities taken as a whole).
CGC has delivered or made available to LodgeNet true, complete and
correct copies, with respect to CGC, of its (i) Articles of Incorporation and
Bylaws (or other applicable charter documents), as amended to the date
hereof, (ii) minutes of all of directors' and shareholders' meetings (or
other applicable meetings), complete and accurate as of the date hereof,
(iii) stock certificate books and all other records that collectively
correctly set forth the record ownership of all outstanding shares of its
capital stock or other equity interests and all rights to purchase capital
stock or other equity interests, and (iv) form of stock certificates, option
agreements and rights to purchase shares of its capital stock or other equity
interests. Such Articles of Incorporation and Bylaws and other applicable
charter documents are in full force and effect.
4.2 CAPITAL STRUCTURE.
(a) The authorized capital stock of CGC consists of three million
(3,000,000) shares of CGC Common Stock, no par value. As of the date of this
Agreement, there were issued and outstanding one million four hundred seventy
thousand (1,470,000) shares of CGC Common Stock.
(b) Other than as described in paragraph (a) above, there are no other
outstanding shares of capital stock or other equity securities of CGC and no
other options, warrants, calls, conversion rights, commitments or agreements
of any character to which CGC is a party or by which CGC may be bound that do
or may obligate CGC to issue, deliver or sell, or cause to be issued,
delivered or sold, additional shares of CGC's capital stock or securities
convertible into or exchangeable for CGC's capital stock or that do or may
obligate CGC to grant, extend or enter into any such option, warrant, call,
conversion right, commitment or agreement.
(c) Except as set forth in the Disclosure Schedule, no shares of the
issued and outstanding CGC Common Stock are subject to repurchase or
redemption. All outstanding shares of CGC Common Stock are validly issued,
fully paid and nonassessable and not subject to preemptive rights created by
statute, CGC's Articles of Incorporation or Bylaws or any agreement to which
CGC is a party or by which CGC may be bound. All outstanding securities of
CGC have been issued in compliance with applicable federal and state
securities laws.
(d) Section 4.2 of the Disclosure Schedule ("Schedule 4.2") contains
complete and accurate lists of, and the number of shares owned of record by,
the holders of outstanding CGC Common Stock, including in each case the
addresses of such holders. Schedule 4.2 is complete and accurate on the date
hereof and, if required, an updated Schedule 4.2 to be attached hereto will
be complete and accurate as of the Closing Date.
(e) Except as set forth in the Disclosure Schedule and except for any
restrictions imposed by applicable federal and state securities laws, there
is no right of first refusal, co-sale right, right of participation, right of
first offer, option or other restriction on transfer applicable to any shares
of CGC Common Stock.
(f) CGC is not a party or subject to any agreement or understanding,
and there is no voting trust, proxy, or other agreement or understanding
between or among any persons that affects or relates to the voting or giving
of written consent with respect to any outstanding security of CGC, the
election of directors, the appointment of officers or other actions of CGC's
Board of Directors (the "CGC Board") or the management of CGC.
4.3 SUBSIDIARIES; EQUITY INVESTMENTS. CGC does not have and has never
had any subsidiaries or
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companies controlled by CGC and does not own and has never owned any equity
interest in, or controlled, directly or indirectly, any other corporation,
partnership, joint venture, trust, firm or other entity.
4.4 AUTHORITY. CGC has all requisite corporate power and authority to
enter into this Agreement and, subject only to the requisite approval of this
Agreement by CGC's shareholders, to perform its obligations hereunder and
consummate the transactions contemplated hereby. The vote required of CGC's
shareholders to duly approve the Merger and this Agreement is that number of
shares as would constitute a majority of the outstanding shares of CGC Common
Stock. The execution and delivery of this Agreement, the performance by CGC
of its obligations hereunder and the consummation of the transactions
contemplated hereby have been duly and validly authorized by all necessary
corporate action on the part of CGC, including approval of the CGC Board and
CGC's shareholders. This Agreement is a valid and binding obligation of CGC.
4.5 NO CONFLICT WITH OTHER INSTRUMENTS. The execution, delivery and
performance of this Agreement and the transactions contemplated hereby (a)
will not result in any violation of, conflict with, constitute a breach,
violation or default (with or without notice or lapse of time, or both)
under, give rise to a right of termination, cancellation, forfeiture or
acceleration of any obligation or loss of any benefit under, or result in the
creation or encumbrance on any of the properties or assets of CGC pursuant to
(i) any provision of CGC's Articles of Incorporation or Bylaws or (ii) any
agreement, contract, understanding, note, mortgage, indenture, lease,
franchise, license, permit or other instrument to which CGC is a party or by
which the properties or assets of CGC is bound, or (b) to the knowledge of
CGC, conflict with or result in any breach or violation of any statute,
judgment, decree, order, rule or governmental regulation applicable to CGC or
its properties or assets, except, in the case of clauses (a)(ii) and (b) for
any of the foregoing that would not, individually or in the aggregate, have a
material adverse effect on CGC taken as a whole, or that could not result in
the creation of any material lien, charge or encumbrance upon any assets of
CGC or that could not prevent, materially delay or materially burden the
transactions contemplated by this Agreement.
4.6 GOVERNMENTAL CONSENTS. No consent, approval, order or
authorization of, or registration, declaration of, or qualification or filing
with, any court, administrative agency, commission, regulatory authority or
other governmental or administrative body or instrumentality, whether
domestic or foreign, is required by or with respect to CGC in connection with
the execution, delivery and performance of this Agreement by CGC or the
consummation by CGC of the transactions contemplated hereby, except for (a)
the filing of the Agreement of Merger with the California Secretary of State
and the Certificate of Merger with the Delaware Secretary of State and (b)
such consents, approvals, orders, authorizations, registrations,
declarations, qualifications or filings as may be required under federal or
state securities laws in connection with the transactions contemplated hereby.
4.7 BALANCE SHEET. Exhibit E attached hereto is a complete and
accurate copy of the balance sheet of CGC (including accrued liabilities) as
of May 31, 1998 (the "Balance Sheet"). The Balance Sheet is complete and
correct in all material respects. At the date of this Agreement and as of
the Closing Date, except as set forth in the Disclosure Schedule, CGC had and
will have no liabilities or obligations, secured or unsecured (whether
accrued, absolute, contingent or otherwise) not reflected in the Balance
Sheet except for liabilities and obligations that have arisen in the ordinary
course of business prior to the date of this Agreement and liabilities
incurred in the ordinary course of business since the date of the Balance
Sheet which are usual and normal in amount. Prior to the Closing Date, CGC
will deliver to LodgeNet an updated Balance Sheet reflecting all liabilities
and obligations incurred from June 1, 1998 to the Closing Date. Schedule 4.7
to be delivered with the Balance Sheet sets forth individually each liability
of CGC reflected in the Balance Sheet.
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4.8 ABSENCE OF CHANGES. Since May 31, 1998, except as otherwise
contemplated by this Agreement or set forth in the Disclosure Schedule, CGC
has conducted its respective business only in the ordinary and usual course
and, without limiting the generality of the foregoing:
(a) There have been no changes in the condition (financial or
otherwise), business, assets, properties, employees, operations, obligations
or liabilities of CGC, taken as a whole, which, in the aggregate, have had or
may be reasonably expected to have a material adverse effect on CGC, taken as
a whole;
(b) CGC has not issued, or authorized for issuance, or entered into any
commitment to issue, any equity security, bond, note or other security;
(c) CGC has not incurred additional debt for borrowed money, or
incurred any obligation or liability except in the ordinary course of
business consistent with past practice and in any event not in excess of ten
thousand dollars ($10,000) for any single occurrence except to LodgeNet;
(d) CGC has not paid any obligation or liability, or discharged,
settled or satisfied any claim, lien or encumbrance, except for current
liabilities in the ordinary course of business consistent with past practice
and in any event not in excess of ten thousand dollars ($10,000) for any
single occurrence;
(e) CGC has not declared or made any dividend, payment or other
distribution on or with respect to any share of capital stock;
(f) CGC has not purchased, redeemed or otherwise acquired or committed
itself to acquire, directly or indirectly, any share or shares of its capital
stock;
(g) CGC has not mortgaged, pledged, or otherwise encumbered any of its
assets or properties, except for liens for current taxes which are not yet
delinquent and purchase-money liens arising out of the purchase or sale of
services or products made in the ordinary course of business consistent with
past practice and in any event not in excess of ten thousand dollars
($10,000) for any single item or fifty thousand dollars ($50,000) in the
aggregate;
(h) CGC has not disposed of, or agreed to dispose of, by sale, lease,
license or otherwise, any asset or property, tangible or intangible, except
in the ordinary course of business consistent with past practice, and in each
case for a consideration believed to be at least equal to the fair value of
such asset or property and in any event not in excess of ten thousand dollars
($10,000) for any single item or twenty-five thousand ($25,000) in the
aggregate;
(i) CGC has not purchased or agreed to purchase or otherwise acquire
any securities of any corporation, partnership, joint venture, firm or other
entity;
(j) CGC has not made any expenditure or commitment for the purchase,
acquisition, construction or improvement of a capital asset, except in the
ordinary course of business consistent with past practice and in any event
not in excess of ten thousand dollars ($10,000) for any single item or
twenty-five thousand dollars ($25,000) in the aggregate;
(k) CGC has not entered into any material transaction or contract, or
made any commitment to do the same;
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(l) CGC has not sold, assigned, licensed, transferred or conveyed, or
committed itself to sell, assign, transfer or convey, any Proprietary Rights
(as defined in Section 4.17);
(m) CGC has not adopted or amended any bonus, incentive,
profit-sharing, stock option, stock purchase, pension, retirement,
deferred-compensation, severance, life insurance, medical or other benefit
plan, agreement, trust, fund or arrangement for the benefit of employees of
any kind whatsoever, nor entered into or amended any agreement relating to
employment, services as an independent contractor or consultant, or severance
or termination pay, nor agreed to do any of the foregoing;
(n) CGC has not effected or agreed to effect any change in its
directors, officers or key employees; and
(o) CGC has not effected or committed itself to effect any amendment or
modification in its Articles of Incorporation or Bylaws.
4.9 PROPERTIES. CGC does not own any real property, nor has it ever
owned any real property.
4.10 ENVIRONMENTAL MATTERS.
(a) CGC is, and at all times has been, in compliance with all
applicable local, state and federal statutes, orders, rules, ordinances,
regulations, codes and policies and all judicial or administrative
interpretations thereof (collectively, "Environmental Laws") relating to
pollution or protection of the environment, including, without limitation,
laws relating to exposures, emissions, discharges, releases or threatened
releases of Hazardous Substances (as defined below) into or on land, ambient
air, surface water, groundwater, personal property or structures (including
the protection, cleanup, removal, remediation or damage thereof), or
otherwise related to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport, discharge or handling of Hazardous
Substances. CGC has not received any notice of any investigation, claim or
proceeding against CGC relating to Hazardous Substances or any action
pursuant to or violation or alleged violation under any Environmental Law,
and CGC is not aware of any fact or circumstance which could involve CGC in
any environmental litigation, proceeding, investigation or claim or impose
any environmental liability upon CGC. As used in this Agreement, "Hazardous
Substances" means any pollutant, contaminant, material, substance, waste,
chemical or compound regulated, restricted or prohibited by any law,
regulation or ordinance or designated by any governmental agency to be
hazardous, toxic, radioactive, biohazardous or otherwise a danger to health
or the environment.
(b) To the best of CGC's knowledge, there are no Hazardous Substances
in, under or about the soil, sediment, surface water or groundwater on, under
or around any properties at any time owned, leased or occupied by CGC. CGC
has not disposed of any Hazardous Substances on or about such properties. To
the best of CGC's knowledge, there is no present release or threatened
release of any Hazardous Substances in, on, under or around such properties.
CGC has not disposed of any materials at any site being investigated or
remediated for contamination or possible contamination of the environment.
(c) CGC has all permits, licenses and approvals required by
Environmental Laws for the use and occupancy of, and for all operations and
activities conducted on, the Properties, and CGC is in full compliance with
all such permits, licenses and approvals, and all such permits, licenses and
approvals were duly issued, are in full force and effect, and, to the extent
necessary and permitted by applicable law, will be transferred to
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LodgeNet at the Closing, and will remain in full force and effect as so
transferred to LodgeNet.
4.11 TAXES.
(a) For purposes of this Agreement, the following terms have the
following meanings: "Tax" (and, with correlative meaning, "Taxes" and
"Taxable") means any and all taxes, including without limitation (i) any
income, profits, alternative or add-on minimum tax, gross receipts, sales,
use, value-added, ad valorem, transfer, franchise, profits, license,
withholding, payroll, employment, excise, severance, stamp, occupation, net
worth, premium, property, environmental or windfall profit tax, custom, duty
or other tax, governmental fee or assessment or charge of any kind
whatsoever, together with any interest or any penalty, addition to tax or
additional amount imposed by any governmental entity responsible for the
imposition of any such tax (domestic or foreign) (a "Taxing Authority"), (ii)
any liability for the payment of any amounts of the type described in clause
(i) above as a result of being a member of an affiliated, consolidated,
combined or unitary group for any Taxable period or as the result of being a
transferee or successor thereof, and (iii) any liability for the payment of
any amounts of the type described in clause (i) or (ii) above as a result of
any express or implied obligation to indemnify any other person.
(b) All Tax returns, statements, reports and forms (including estimated
Tax returns and reports and information returns and reports) required to be
filed prior to the Effective Time with any Taxing Authority with respect to
any Taxable period ending on or before the Effective Time, by or on behalf of
CGC (collectively, the "CGC Returns"), have been or will be filed when due
(including any extensions of such due date), and all amounts shown to be due
thereon on or before the Effective Time have been or will be paid on or
before such date. The Balance Sheet (i) fully accrues consistent with past
practices all actual and contingent liabilities for Taxes with respect to all
periods through the date of the Balance Sheet and (ii) properly accrues
consistent with past practices all liabilities for Taxes payable after the
Balance Sheet Date with respect to all transactions and events occurring on
or prior to such date. All information set forth in the notes to the Balance
Sheet relating to Tax matters is true, complete and accurate in all material
respects.
(c) No Tax liability has been incurred since the date of the Balance
Sheet other than in the ordinary course of business or any Tax liability that
may arise as a result of the Merger. CGC has withheld and paid to the
applicable financial institution or Taxing Authority all amounts required to
be withheld. As of the date of this Agreement, CGC has not been required to
file any federal income tax returns.
(d) There is no claim, audit, action, suit, proceeding or investigation
now pending or threatened against or with respect to CGC in respect of any
Tax or assessment. There are no liabilities for Taxes with respect to any
notice of deficiency or similar document of any Tax Authority received by CGC
which have not been satisfied in full (including liabilities for interest,
additions to tax and penalties thereon and related expenses). Neither CGC,
nor any person on behalf of CGC has entered into or will enter into any
agreement or consent pursuant to Section 341(f) of the Code. There are no
liens for Taxes upon the assets of CGC except liens for current Taxes not yet
due. Except as may be required as a result of the Merger, CGC has not been
nor will it be required to include any adjustment in Taxable income for any
Tax period (or portion thereof) pursuant to Section 481 or 263A of the Code
or any comparable provision under state or foreign Tax laws as a result of
transactions, events or accounting methods employed prior to the Effective
Time.
(e) There is no contract, agreement, plan or arrangement, including
without limitation the provisions of this Agreement, covering any employee or
independent contractor or former employee or independent contractor of CGC
that, individually or collectively, could give rise to the payment of any
amount that would
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not be deductible pursuant to Section 280G or Section 162 of the Code (as
determined without regard to Section 280G(b)(4)). Other than pursuant to
this Agreement, CGC is not a party to or bound by (nor will it prior to the
Effective Time become a party to or bound by) any tax indemnity, tax sharing
or tax allocation agreement (whether written, unwritten or arising under
operation of federal law as a result of being a member of a group filing
consolidated tax returns, under operation of certain state laws as a result
of being a member of a unitary group, or under comparable laws of other
states or foreign jurisdictions) which includes a party other than CGC. None
of the assets of CGC (i) is property that CGC is required to treat as owned
by any other person pursuant to the so-called "safe harbor lease" provisions
of former Section 168(f)(8) of the Code, (ii) directly or indirectly secures
any debt the interest on which is tax exempt under Section 103(a) of the
Code, or (iii) is "tax exempt use property" within the meaning of Section
168(h) of the Code. CGC has not participated in (and prior to the Effective
Time CGC will not participate in) an international boycott within the meaning
of Section 999 of the Code. CGC has previously provided or made available to
LodgeNet complete and accurate copies of all CGC Returns, and will, as
reasonably requested by LodgeNet, provide any presently existing information
statements, reports, work papers, Tax opinions and memoranda and other Tax
data and documents.
4.12 EMPLOYEES. CGC will provide LodgeNet prior to the Closing
with a complete and accurate list setting forth all employees and consultants
of CGC as of the date thereof, together with their titles or positions, dates
of hire, regular work location and current compensation. CGC does not have
any employment contract with any officer or employee or any other consultant
or person which is not terminable by it at will without liability, except as
the right of CGC to terminate its employees at will may be limited by
applicable federal, state or foreign law. CGC does not have any deferred
compensation, pension, health, profit sharing, bonus, stock purchase, stock
option, hospitalization, insurance, severance, workers' compensation,
supplemental unemployment benefits, vacation benefits, disability benefits,
or any other employee pension benefit (as defined in the Employee Retirement
Income Security Act of 1974 ("ERISA") or otherwise) or welfare benefit plan
or obligation covering any of its officers or employees ("Employee Plans") or
any informal understanding with respect to the foregoing. CGC does not
maintain or has ever maintained or contributed to any Employee Plan subject
to Title IV of ERISA (relating to defined benefit plans).
There are no controversies or labor disputes or union organization
activities pending or threatened between CGC and any of its employees. None
of the employees of CGC belongs to any union or collective bargaining unit.
CGC has complied with all applicable foreign, state and federal equal
employment opportunity and other laws and regulations related to employment
or working conditions.
4.13 COMPLIANCE WITH LAW. All material licenses, franchises,
permits, clearances, consents, certificates and other evidences of authority
of CGC which are necessary to the conduct of CGC's business ("Permits") are
in full force and effect and CGC is not in violation of any Permit in any
material respect. Except for exceptions which would not have a material
adverse effect on CGC, the business of CGC has been conducted in accordance
with all applicable laws, regulations, orders and other requirements of
governmental authorities.
4.14 LITIGATION. There is no claim, dispute, action, proceeding,
notice, order, suit, appeal or investigation, at law or in equity, pending
or, to the knowledge of CGC, threatened, against CGC or any of its directors,
officers, employees or agents, or involving any of their respective assets or
properties used in or related to the business of CGC, before any court,
agency, authority, arbitration panel or other tribunal. CGC is not aware of
any facts which, if known to shareholders, customers, suppliers, governmental
authorities or other persons, would result in any such claim (other than
customary and normal returns of product in the ordinary course of business
consistent with past practice), dispute, action, proceeding, suit or appeal
or investigation.
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CGC is not subject to any order, writ, injunction or decree of any court,
agency, authority, arbitration panel or other tribunal, nor is CGC in default
with respect to any notice, order, writ, injunction or decree, any of which
would have a material adverse effect on CGC.
4.15 CONTRACTS. Section 4.15 of the Disclosure Schedule contains a
complete and accurate list of each executory contract and agreement to which
CGC is a party, or by which CGC is bound in any respect.
CGC has not, nor, to the knowledge of CGC, has any of its employees
entered into any contract or agreement containing covenants limiting the
right of CGC to compete in any business or with any person. As used in this
Agreement, the terms "contract" and "agreement" include every contract,
agreement, commitment, understanding and promise, whether written or oral.
4.16 NO DEFAULT.
(a) Each of the contracts, agreements or other instruments referred to
in Section 4.15 is a legal, binding and enforceable obligation by or against
CGC subject to the effect of applicable bankruptcy, insolvency,
reorganization, moratorium or other similar federal or state laws affecting
the rights of creditors and the effect or availability of rules of law
governing specific performance, injunctive relief or other equitable
remedies. No party with whom CGC has an agreement or contract is in default
thereunder or has breached any term or provision thereof where such default
or breach would have a material adverse effect on the business of CGC.
(b) CGC has performed, or is now performing, the obligations of, and
CGC is not in material default (or would by the lapse of time and/or the
giving of notice be in material default) in respect of, any contract,
agreement or commitment binding upon it or its assets or properties and
material to the conduct of its business. No third party has notified CGC of
any claim, dispute or controversy with respect to any of the executory
contracts of CGC nor has CGC received notice or warning of alleged
nonperformance, delay in delivery or other noncompliance by CGC with respect
to its obligations under any of those contracts, where such alleged
nonperformance, delay in delivery or other noncompliance would have a
material adverse effect on CGC, nor are there any facts which exist
indicating that any of those contracts may be totally or partially terminated
or suspended by the other parties thereto.
4.17 PROPRIETARY RIGHTS.
(a) Section 4.17 of the Disclosure Schedule sets forth a complete and
accurate list (the "Intellectual Property Disclosure Schedule") of all
patents and applications for patents, trademarks, trade names, service marks,
and copyrights, and applications therefor, owned or used by CGC or in which
it has any rights or licenses. Such list specifies, as applicable: (i) the
title of the patent, trademark, trade name, service mark, copyright or
application therefor; (ii) the jurisdiction by or in which such patent,
trademark, trade name, service mark or copyright has been issued or
registered or in which an application has been filed, including the
registration or application numbers; and (iii) material licenses, sublicenses
and similar agreements to which CGC is a party or pursuant to which any other
party is authorized to use, exercise or receive any benefit from any
Proprietary Rights (as defined below) of CGC. CGC has provided LodgeNet with
copies of all agreements of CGC with each officer, employee or consultant of
CGC providing CGC with title and ownership to patents, patent applications,
trade secrets, inventions and inventions developed or used by CGC in its
business. All of such agreements are valid, enforceable and legally binding,
subject to the effect or availability of rules of law governing specific
performance, injunctive relief or other equitable remedies (regardless of
whether any such remedy is considered in a proceeding at law or in equity).
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(b) CGC owns or possesses or has the right to obtain valid licenses or
other rights to use all patents, patent applications, trademarks, trademark
applications, trade secrets, service marks, trade names, copyrights,
inventions, drawings, designs, proprietary know-how or information, or other
rights with respect thereto (collectively referred to as "Proprietary
Rights"), used or currently proposed to be used in the business of CGC and
the same are sufficient to conduct CGC's business as it has been and is now
being conducted or as it is currently proposed to be conducted. CGC has the
rights to use, sell, license, sublicense, assign, transfer, convey or dispose
of such Proprietary Rights and the products, processes and materials covered
thereby.
(c) To the knowledge of CGC, the operations of CGC do not conflict with
or infringe, and no one has asserted to CGC that such operations conflict
with or infringe, any Proprietary Rights, owned, possessed or used by any
third party. There are no claims, disputes, actions, proceedings, suits or
appeals pending against CGC with respect to any Proprietary Rights, and to
the knowledge of CGC, none has been threatened against the Proprietary
Rights. To the knowledge of CGC, there are no facts or alleged facts which
would reasonably serve as a basis for any claim that CGC does not have the
right to use and to transfer the right or use, free of any rights or claims
of others, all Proprietary Rights in the development, manufacture, use, sale
or other disposition of any or all products or services presently being used,
furnished or sold in the conduct of the business of CGC as it has been and is
now being conducted. The Proprietary Rights referred to in the preceding
sentence are free of any unresolved ownership disputes with respect to any
third party and to the best knowledge of CGC there is no unauthorized use,
infringement or misappropriation of any of such Proprietary Rights by any
third party, including any employee or former employee of CGC nor is there
any breach of any license, sublicense or other agreement authorizing another
party to use such Proprietary Rights. CGC has not has entered into any
agreement granting any third party the right to bring infringement actions
with respect to, or otherwise to enforce rights with respect to, any such
Proprietary Right.
(d) The Intellectual Property Disclosure Schedule contains a complete
and accurate list of any proceedings before any patent or trademark authority
to which CGC is a party, a description of the subject matter of each
proceeding, and the current status of each proceeding, including, without
limitation, interferences, priority contests, opposition, and protests. Such
list includes any pending applications for reissue or reexamination of a
patent. CGC has the exclusive right to file, prosecute and maintain any such
applications for patents, copyrights or trademarks and the patents and
registrations that issue therefrom.
(e) CGC holds no patents, registered trademarks, service marks, other
product or service identifiers, or registered copyrights.
(f) CGC has taken all other measures it deems reasonable to maintain
the confidentiality of the Proprietary Rights used or proposed to be used in
the conduct of its business the value of which to CGC is contingent upon
maintenance of the confidentiality thereof.
(g) CGC has secured valid written assignments from all inventors,
co-inventors, consultants and employees who contributed to the creation or
development of CGC's Proprietary Rights of the rights to such contributions
that CGC does not already own by operation of law.
(h) No employee or officer of or consultant to CGC is in violation of
any term of any employment contract, proprietary information and inventions
agreement, non-competition agreement, or any other contract or agreement
relating to the relationship of any such employee or consultant with CGC or
any previous employer.
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4.18 CGC TECHNOLOGY. CGC's Proprietary Rights, including without
limitation the Guest Room Technology and the Meeting Room Technology (the
"CGC Technology"), conforms in all material respects to the performance
benchmarks, technical specifications and cost parameters (the "Benchmarks")
all as described in Exhibit F attached hereto.
4.19 BROKERS OR FINDERS. Neither CGC nor any of its officers,
directors, employees or shareholders has employed any broker or finder or
incurred any liability for any brokerage, finder's or similar fees or
commissions in connection with this Agreement or the transactions
contemplated hereby.
4.20 RELATED PARTIES. No officer or director of CGC, or any
affiliate of CGC or any such person, has, either directly or indirectly, (a)
an interest in any corporation, partnership, firm or other person or entity
which furnishes or sells services or products which are similar to those
furnished or sold by CGC, or (b) a beneficial interest in any contract or
agreement to which CGC is a party or by which CGC may be bound.
4.21 CERTAIN ADVANCES. There are no receivables of CGC owing from
directors, officers, employees, consultants or shareholders of CGC or owing
by any affiliate of any director or officer of CGC, other than advances in
the ordinary course of business consistent with past practice to officers and
employees for reimbursable business expenses which are not in excess of five
thousand dollars ($5,000) for any one individual.
4.22 UNDERLYING DOCUMENTS. Copies of any underlying documents
listed or described as having been disclosed to LodgeNet pursuant to this
Agreement have been furnished to LodgeNet. All such documents furnished to
LodgeNet are true and correct copies, and there are no amendments or
modifications thereto that have not been disclosed in writing to LodgeNet.
4.23 NO MISLEADING STATEMENTS. No representation or warranty made
herein, in the Disclosure Schedule or in the Appendices, Schedules and
Exhibits attached hereto or any written statement or certificate furnished or
to be furnished to LodgeNet pursuant hereto or in connection with the
transactions contemplated hereby (when read together) contains any untrue
statement of a material fact or omits a material fact necessary in order to
make the statements contained herein or therein, in the light of the
circumstances under which they are made, not misleading. CGC has disclosed
to LodgeNet all material information of which it is aware relating
specifically to the operations and business of CGC as of the date of this
Agreement or relating to the transactions contemplated by this Agreement.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF
THE SECURITYHOLDERS
Each of the Securityholders represents, warrants and covenants to
LodgeNet as follows:
5.1 CGC COMMON STOCK. Such Securityholder holds of record and owns
beneficially the shares of CGC Common Stock set forth opposite his name on
Schedule 4.2 free and clear of any restrictions on transfer (other than any
restrictions under the Securities Act of 1933, as amended (the "Securities
Act") and state securities laws or any other restrictions as disclosed in the
Disclosure Schedule, which will be removed or
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waived by the Effective Time), claims, Taxes, liens, pledges, options,
warrants, rights, contracts, calls, commitments, equities and demands. Such
Securityholder is not a party to any option, warrant, right, contract, call,
put, or other agreement providing for the disposition of any capital stock of
CGC (other than pursuant to this Agreement). Such Securityholder is not a
party to any voting trust, proxy, or other agreement or understanding with
respect to any capital stock of CGC.
5.2 INVESTMENT REPRESENTATIONS.
(a) Such Securityholder understands that the LodgeNet Common Stock
issued as the Initial Merger Consideration (the "LodgeNet Shares") are
"restricted securities" under the federal securities laws inasmuch as they
are being acquired from LodgeNet in a transaction not involving a public
offering and that under such laws and applicable regulations the LodgeNet
Shares may be resold without registration under the Securities Act only in
certain limited circumstances. Such Securityholder is familiar with Rule 144
as promulgated under the Securities Act, as presently in effect, and
understands the resale limitations imposed thereby and by the Securities Act.
(b) Such Securityholder is acquiring the LodgeNet Shares solely for his
or its own account for investment and not with a view to the resale or
distribution of any part thereof within the meaning of the Securities Act or
any applicable state or foreign securities laws, and has no present intention
of selling, granting any participation in, or otherwise distributing the
LodgeNet Shares. Such Securityholder does not have any contract, undertaking,
agreement or arrangement with any person to sell, transfer or grant
participations to such person or to any third person, with respect to the
LodgeNet Shares.
(c) By reason of his or its business or financial experience, such
Securityholder is capable of evaluating the merits and risks of an investment
in the LodgeNet Shares pursuant to the terms of this Agreement and related
documents, and is able to protect his or its own interest in connection with
the transactions contemplated by this Agreement. Such Securityholder is
financially able to bear the economic risk of an investment in the LodgeNet
Shares.
(d) Such Securityholder has received all information that he or it
deems necessary or advisable in order to make an informed decision on whether
to acquire the LodgeNet Shares. Without limiting the foregoing, such
Securityholder has received and reviewed this Agreement, including all
Schedules and Exhibits hereto, and has had the opportunity to ask questions
and receive answers with respect to LodgeNet, its business, operations and
financial condition, and the terms and conditions of the offering of the
LodgeNet Shares in connection with the transactions contemplated by this
Agreement. With respect to tax and other economic considerations involved in
this investment, such Securityholder has relied on his or its own counsel for
advice and has expressly not relied on LodgeNet.
(e) Such Securityholder understands that the LodgeNet Shares are not
registered under the Securities Act and that the sale provided for in this
Agreement and LodgeNet's issuance of the LodgeNet Shares thereunder will be
made in reliance upon an exemption from registration under Section 4(2) of
the Securities Act or pursuant to Regulation D promulgated thereunder, and in
reliance upon exemptions from registration contained in the securities laws
of the various states and that, in such case, LodgeNet's reliance on such
exemptions will be at least partially based on such Securityholder's
representations as set forth herein.
(f) Such Securityholder understands that, to the extent applicable,
each certificate or other document evidencing any of the LodgeNet Shares may
bear the following legend and covenants that, except to the extent
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such restrictions are waived by the Company, such Securityholder will not
transfer the LodgeNet Shares represented by any such certificate without
complying with the restrictions on transfer described in the legend endorsed
on such certificate:
"THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, OFFERED FOR SALE,
TRANSFERRED, ASSIGNED, PLEDGED, OR HYPOTHECATED IN THE ABSENCE OF A
REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES UNDER
SUCH SECURITIES ACT OR AN OPINION OF COUNSEL SATISFACTORY TO LODGENET
ENTERTAINMENT CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED OR
UNLESS SOLD PURSUANT TO RULE 144 OF SUCH ACT. THE SECURITIES
REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE TERMS OF A
STOCKHOLDERS AGREEMENT DATED AS OF SEPTEMBER 30, 1998 AND MAY BE
VOTED, SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF ONLY IN ACCORDANCE
WITH SUCH AGREEMENT."
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF LODGENET
LodgeNet represents and warrants to CGC and the Securityholders as
follows:
6.1 ORGANIZATION. LodgeNet is a corporation duly incorporated, validly
existing and in good standing under the laws of Delaware and has all
requisite corporate power and authority to own, lease and operate its
properties and to carry on its business as now being conducted. LodgeNet is
qualified to do business as a foreign corporation and is in good standing
under the laws of each state or other jurisdiction in which the nature of its
business requires such qualification, except where the failure to be so
qualified or in good standing would not have a material adverse effect on
LodgeNet and its subsidiaries, taken as a whole.
6.2 AUTHORITY. LodgeNet has all requisite corporate power and
authority to enter into this Agreement and to perform its obligations
hereunder and consummate the transactions contemplated hereby. The execution
and delivery of this Agreement, the performance by LodgeNet of its
obligations hereunder and the consummation of the transactions contemplated
hereby have been duly and validly authorized by all necessary corporate
action on the part of LodgeNet, including approval of the Board of Directors
of LodgeNet (the "LodgeNet Board"). This Agreement is a valid and binding
obligation of LodgeNet.
6.3 NO CONFLICT WITH OTHER INSTRUMENTS. The execution, delivery and
performance of this Agreement and the transactions contemplated hereby (a)
will not result in any violation of, conflict with, constitute a breach,
violation or default (with or without notice or lapse of time, or both)
under, give rise to a right of termination, cancellation, forfeiture or
acceleration of any obligation or loss of any benefit under, or result in the
creation or encumbrance on any of the properties or assets of LodgeNet or any
of its
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subsidiaries pursuant to (i) any provision of LodgeNet's Certificate of
Incorporation or Bylaws, or (ii) any agreement, contract, understanding,
note, mortgage, indenture, lease, franchise, license, permit or other
instrument to which LodgeNet or any of its subsidiaries is a party or by
which the properties or assets of LodgeNet or any of its subsidiaries is
bound, or (b) to the knowledge of LodgeNet, conflict with or result in any
breach or violation of any statute, judgment, decree, order, rule or
governmental regulation applicable to LodgeNet or any of its subsidiaries or
their respective properties or assets, except, in the case of clauses (a)(ii)
and (b) for any of the foregoing that would not, individually or in the
aggregate, have a material adverse effect on LodgeNet and its subsidiaries,
taken as a whole, or that could not result in the creation of any material
lien, charge or encumbrance upon any assets of LodgeNet or any of its
subsidiaries or that could not prevent, materially delay or materially burden
the transactions contemplated by this Agreement.
6.4 GOVERNMENTAL CONSENTS. No consent, approval, order or
authorization of, or registration, declaration or filing with, any
governmental authority is required by or with respect to LodgeNet in
connection with the execution and delivery of this Agreement by LodgeNet or
the consummation by LodgeNet of the transactions contemplated hereby, except
for (a) the filing of the Certificate of Merger with the Delaware Secretary
of State and the Agreement of Merger with the California Secretary of State
and (b) such consents, approvals, orders, authorizations, registrations,
declarations, qualifications or filings as may be required under federal or
state securities laws in connection with the transactions set forth herein or
which the failure to obtain would not have a material adverse effect on the
consummation by LodgeNet of the transactions contemplated hereby.
6.5 SEC DOCUMENTS. LodgeNet has furnished to CGC complete and accurate
copies of LodgeNet's Annual Report on Form 10-K for the year ended December
31, 1997, LodgeNet's Quarterly Report on Form 10-Q for the quarter ended June
30, 1998, and LodgeNet's Definitive Proxy Statement for its Annual Meeting of
Stockholders held on May 13, 1998 ("LodgeNet's SEC Filings"), all filed with
the SEC under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). As of their respective filing dates, LodgeNet's SEC Filings complied
in all material respects with the requirements of the Exchange Act and, as of
their respective filing dates, LodgeNet's SEC Filings did not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made therein, in the light of the
circumstances under which they were made, not misleading.
6.6 SHARES OF LODGENET COMMON STOCK. The shares of LodgeNet Common
Stock to be issued pursuant to the Merger will, when issued and delivered to
the Securityholders, be duly authorized, validly issued, fully paid and
nonassessable.
6.7 BROKERS OR FINDERS. Neither LodgeNet nor any of its officers,
directors or employees has employed any broker or finder or incurred any
liability for any brokerage, finder's or similar fees or commissions in
connection with this Agreement or the transactions contemplated hereby.
6.8 ABSENCE OF CHANGES. Since June 30, 1998, there have been no
changes in the condition (financial or otherwise), business, assets,
properties, employees, operations, obligations or liabilities of LodgeNet,
taken as a whole, which, in the aggregate, have had or may be reasonably
expected to have a material adverse effect on LodgeNet, taken as a whole.
6.9 COMPLIANCE WITH LAW. All material licenses, franchises, permits,
clearances, consents, certificates and other evidences of authority of
LodgeNet which are necessary to the conduct of LodgeNet's business
("Permits") are in full force and effect and LodgeNet is not in violation of
any Permit in any material respect. Except for exceptions which would not
have a material adverse effect on LodgeNet, the business of LodgeNet has been
conducted in accordance with all applicable laws, regulations, orders and
other requirements of governmental authorities.
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ARTICLE VII
CONDUCT PRIOR TO THE EFFECTIVE TIME
7.1 CONDUCT OF BUSINESS OF CGC. During the period from the date
of this Agreement and continuing until the earlier of the termination of this
Agreement and the Effective Time, CGC agrees (except as contemplated by this
Agreement or to the extent that LodgeNet shall otherwise consent in writing)
to carry on its business in the usual, regular and ordinary course in
substantially the same manner as heretofore conducted, to pay its debts and
Taxes when due, to pay or perform other obligations when due, and, to the
extent consistent with such business, to use all commercially reasonable
efforts consistent with past practice and policies to preserve intact its
present business organization, keep available the services of its present
officers and key employees and preserve its relationships with customers,
suppliers, licensors, licensees, and others having business dealings with it,
all with the goal of preserving unimpaired its goodwill and ongoing
businesses at the Effective Time.
Following the date of this Agreement, CGC shall promptly notify LodgeNet
of any materially adverse event related to CGC or the business of CGC.
Without limiting the foregoing, except as expressly contemplated by this
Agreement, CGC shall not, without the prior written consent of LodgeNet:
(a) Enter into any material commitment or transaction not in the
ordinary course of business consistent with past practice;
(b) Transfer to any person or entity any rights to the Proprietary
Rights;
(c) Enter into any agreements (or material amendments thereto) pursuant
to which any unrelated third party is granted marketing, distribution or
similar rights of any type or scope with respect to any products of CGC;
(d) Amend or otherwise modify, except in the ordinary course of
business consistent with past practice, or violate the material terms of, any
of the agreements set forth or described in the Disclosure Schedule;
(e) Commence a lawsuit other than (i) for the routine collection of
bills or (ii) in such cases where it in good faith determines that failure to
commence suit would result in the material impairment of a valuable aspect of
its business provided that it consults with LodgeNet prior to the filing of
such suit;
(f) Declare, set aside or pay any dividends on or make any other
distributions (whether in cash, stock or property) in respect of any of its
capital stock, or split, combine or reclassify any of its capital stock or
issue or authorize the issuance of any other securities in respect of, in
lieu of or in substitution for shares of its capital stock or other equity
interests, or repurchase, redeem or otherwise acquire, directly or
indirectly, any shares of its capital stock (or options, warrants or other
rights exercisable therefor);
(g) Issue, grant, deliver or sell or authorize or propose the issuance,
grant, delivery or sale of, or purchase or propose the purchase of, any
shares of its capital stock or securities convertible into, or subscriptions,
rights, warrants or options to acquire, or other agreements or commitments of
any character obligating it to issue any such shares or other convertible
securities;
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(h) Cause or permit any amendments to its Articles of Incorporation or
Bylaws (or other charter documents);
(i) Acquire by merging or consolidating with, or by purchasing any
assets or equity securities of, or by any other manner, any business or any
corporation, partnership, association or other business organization or
division thereof, or otherwise acquire or agree to acquire any assets;
(j) Sell, lease, license or otherwise dispose of any of its properties
or assets, except in the ordinary course of business consistent with past
practice;
(k) Incur any indebtedness for borrowed money or guarantee any such
indebtedness or issue or sell any of its debt securities or guarantee any
debt securities of others;
(l) Grant any severance or termination pay (i) to any director or
officer or (ii) to any other employee other than pursuant to the existing
agreements of CGC;
(m) Adopt or amend any employee benefit plan, or enter into any
employment contract, extend employment offers to any person whose aggregate
annual base salary would exceed fifty thousand dollars ($50,000), pay or
agree to pay any special bonus or special remuneration to any director or
employee other than in connection with normal annual bonus and salary
adjustments for all non-officers and directors upon consultation with
LodgeNet, or increase the salaries or wage rates of its other employees,
except as consistent with the ordinary course of business consistent with
past practice;
(n) Revalue any of its assets, including without limitation writing
down the value of inventory or writing off notes or accounts receivable,
other than in the ordinary course of business consistent with past practice;
(o) Pay, discharge or satisfy, in an amount in excess of ten thousand
dollars ($10,000) (in any one case) or twenty-five thousand dollars ($25,000)
(in the aggregate), any claim, liability or obligation (absolute, accrued,
asserted or unasserted, contingent or otherwise), other than the payment,
discharge or satisfaction in the ordinary course of business of liabilities
reflected or reserved against in the Balance Sheet or that arose in the
ordinary course of business subsequent to March 31, 1998 or unless payment of
such claim, liability or obligation is due in accordance with its terms or
expenses consistent with the provisions of this Agreement incurred in
connection with the transactions contemplated hereby and is not in excess of
twenty-five thousand dollars ($25,000);
(p) Make or change any material election in respect of Taxes, adopt or
change any accounting method in respect of Taxes, enter into any closing
agreement, settle any claim or assessment in respect of Taxes, or consent to
any extension or waiver of the limitation period applicable to any claim or
assessment in respect of Taxes; or
(q) Take, or agree in writing or otherwise to take, any of the actions
described in Sections 7.1(a) through 7.1(p) above, or any other action that
would prevent CGC from performing or cause CGC not to perform its covenants
hereunder.
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7.2 NO SOLICITATION.
(a) Until the earlier of the Effective Time or the date of termination
of this Agreement, CGC agrees that it shall not directly or indirectly, take
any of the following actions with any party other than LodgeNet and its
designees: solicit, initiate, facilitate or encourage (including by way of
furnishing or disclosing non-public information) any inquiries or the making
of any proposal with respect to any merger, consolidation or other business
combination involving CGC or acquisition of any kind of material portion of
the capital stock or assets of CGC, CGC agrees that its Board of Directors
shall recommend the approval of the transactions contemplated herein to the
CGC shareholders and shall not endorse or recommend any alternative proposal.
CGC further agrees that neither it nor any of its directors, officers,
employees, agents and representatives (including, without limitation, any
financial advisor, attorney or accountant) will initiate, solicit or
encourage, directly or indirectly, any inquiries or the making or
implementation of any proposal or offer with respect to (i) a merger,
acquisition, consolidation, recapitalization, liquidation, asset sale or
similar acquisition involving the purchase, sale or other disposition of all
or any significant portion of the assets of CGC, (ii) the issuance, sale or
other transfer of any of the shares of the capital stock of CGC (or any
securities convertible into or exchangeable or exercisable for such capital
stock), or (iii) any agreement, arrangement, contract, license or
understanding that could reasonably be expected to obstruct or delay the
transactions contemplated herein (an "Acquisition Transaction") or negotiate,
explore or otherwise communicate in any way with any third party with respect
to any Acquisition Transaction or enter into any agreement, arrangement or
understanding with respect to an Acquisition Transaction or requiring it to
abandon, terminate, or fail to consummate the Merger or any other
transactions contemplated by this Agreement, or make or authorize any
statement, recommendation or solicitation in support of any Acquisition
Transaction with any third party other than LodgeNet. CGC agrees to notify
LodgeNet immediately if any such inquiries or proposals regarding any such
alternative proposal are received.
(b) If CGC and/or its Board of Directors, irrespective of the parties'
expressed intent to be bound by the foregoing covenant, breaches such
covenant and approves endorses, recommends or enters into an Acquisition
Transaction as described above, then LodgeNet shall have the right to elect
to exercise one of the following rights (in addition to any other rights or
remedies available at law or in equity including an action for breach of
contract): (i) LodgeNet shall have a right of first refusal to elect to
match the terms of any such Acquisition Transaction on substantially the same
terms and conditions set forth therein (provided that, if the Acquisition
Transaction includes consideration in the form of securities of the proposing
party or other property, LodgeNet shall be entitled to substitute comparable
securities and substantially similar property); or (ii) LodgeNet shall have
the right to cause CGC to grant to LodgeNet an option, immediately
exercisable, to purchase shares of the capital stock of CGC representing
one-third of the fully diluted voting power and equity ownership of CGC
(giving effect to any securities issuable in connection with such Acquisition
Transaction) for an aggregate exercise price equal to lower of one million
dollars ($1,000,000) or the lowest price per share paid or agreed to be paid
for such securities or their equivalents in any such alternative transaction.
ARTICLE VIII
ADDITIONAL AGREEMENTS
8.1 APPROVAL OF CGC SHAREHOLDERS. At or prior to the execution of
this Agreement, CGC will have received written consents from all of its
shareholders, other than USWeb Corporation ("USWeb"), approving this
Agreement. CGC will use its best efforts to obtain the written consent of
USWeb at or prior to the
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Effective Time. The signatures of the Securityholders on this Agreement
shall constitute their written consent to the Merger under California law.
8.2 ACCESS TO INFORMATION; INTERIM FINANCIAL INFORMATION. Subject
to any applicable contractual confidentiality obligations (which CGC shall
use all commercially reasonable efforts to cause to be waived) CGC shall
afford LodgeNet and its accountants, counsel and other representatives,
reasonable access during normal business hours during the period prior to the
Effective Time to (i) all of CGC's financial and technical information,
installation sites, properties, books, contracts, agreements and records, and
(ii) all other information concerning the business, properties and personnel
(subject to restrictions imposed by applicable law) of CGC as LodgeNet may
reasonably request. No information or knowledge obtained in any
investigation pursuant to this Section 8.2 shall affect or be deemed to
modify any representation or warranty contained herein or the conditions to
the obligations of the parties to consummate the Merger.
8.3 CONFIDENTIALITY. Each of the parties hereto hereby agrees to
and reaffirms the terms and provisions of the Mutual Nondisclosure Agreement
between LodgeNet and CGC effective as of June 15, 1998.
8.4 EXPENSES. All fees and expenses incurred in connection with
the Merger including, without limitation, all legal, accounting, financial
advisory, consulting and all other fees and expenses of third parties
incurred by a party in connection with the negotiation and effectuation of
the terms and conditions of this Agreement and the transactions contemplated
hereby, shall be the obligation of the respective party incurring such fees
and expenses.
8.5 PUBLIC DISCLOSURE. Unless otherwise required by law
(including, without limitation, securities laws) and, as to LodgeNet, by the
rules and regulations of Nasdaq, prior to the Effective Time, no disclosure
(whether or not in response to an inquiry) of the discussions or subject
matter of this Agreement shall be made by any party hereto unless approved by
LodgeNet and CGC prior to release, provided that such approval shall not be
unreasonably withheld.
8.6 BEST EFFORTS. Subject to the terms and conditions of this
Agreement, each of the parties hereto shall use their best efforts to take
promptly, or cause to be taken promptly, all actions, and to do promptly, or
cause to be done promptly all things reasonably necessary, proper or
advisable under applicable laws and regulations to consummate and make
effective the transactions contemplated hereby, to obtain all necessary
waivers, consents and approvals, to effect all necessary registrations and
filings and to remove any injunctions or other impediments or delays, legal
or otherwise, in order to consummate and make effective the transactions
contemplated by this Agreement for the purpose of securing to the parties
hereto the benefits contemplated by this Agreement; provided that neither CGC
nor LodgeNet shall be required to agree to any divestiture by LodgeNet or
CGC, as may be applicable, or any of LodgeNet's or CGC's subsidiaries or
affiliates of shares of capital stock or of any business, assets or
properties of LodgeNet or its affiliates or CGC, its subsidiaries or its
affiliates, or the imposition of any material limitation on the ability of
any of them to conduct their businesses or to own or exercise control of such
assets, properties and stock.
8.7 CONDUCT; NOTIFICATION OF CERTAIN MATTERS. Each of LodgeNet
and CGC shall use all commercially reasonable efforts to not take, or fail to
take, any action that from the date hereof through the Closing would cause or
constitute a breach of any of its respective representations, warranties,
agreements and covenants set forth in this Agreement. CGC shall give prompt
written notice to LodgeNet, and LodgeNet shall give prompt written notice to
CGC, of (a) the occurrence or non-occurrence of any event, the occurrence or
non-occurrence of which causes or is likely to cause any representation or
warranty of CGC or LodgeNet, respectively,
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contained in this Agreement to be untrue or inaccurate in any material
respect at or prior to the Effective Time and (b) any failure of CGC or
LodgeNet, as the case may be, to comply with or satisfy in any material
respect any covenant, condition or agreement to be complied with or satisfied
by it hereunder; provided, however, that the delivery of any notice pursuant
to this Section 8.7 shall not limit or otherwise affect the other party's
right to rely on the representations and warranties herein or any the other
remedies available to the party receiving such notice.
8.8 TAX-FREE REORGANIZATION. LodgeNet and CGC shall each use
their best efforts to cause the Merger to be treated as a tax-free
reorganization within the meaning of Section 368(a) of the Code. None of the
Securityholders shall have any liability to LodgeNet for any Tax liability
that may arise with respect to CGC as a result of the Merger
8.9 BLUE SKY LAWS. LodgeNet shall take such steps as may be
necessary to comply with the securities and blue sky laws of all
jurisdictions which are applicable to the issuance of the shares of LodgeNet
Common Stock pursuant hereto. CGC shall use all reasonable efforts to assist
LodgeNet as may be reasonably necessary to comply with the securities and
blue sky laws of all jurisdictions which are applicable in connection with
the issuance of the shares of LodgeNet Common Stock pursuant hereto.
8.10 STOCKHOLDERS AGREEMENT. LodgeNet and the Securityholders
agree that, at or prior to the Effective Time, they will enter into a
Stockholders Agreement substantially in the form of Exhibit G attached hereto
(the "Stockholders Agreement").
8.11 KEY EMPLOYEE RETENTION. Certain key employees of CGC
designated by LodgeNet will execute employment agreements and employee
proprietary information and inventions agreements in form and substance
mutually satisfactory to the parties. In addition, the parties hereto will
mutually approve the terms of a key employee retention program.
8.12 TRANSFER OF CGC TECHNOLOGY. As soon as practicable after the
Effective Time, the Securityholders will take all actions necessary to assign
all of their right, title and interest in the CGC Technology to LodgeNet.
Each Securityholder hereby irrevocably constitutes and appoints LodgeNet, and
the authorized executive officers of LodgeNet, and each of them acting
individually, its true and lawful agent and attorney-in-fact, with full power
and authority of substitution, to make, amend, execute, acknowledge, swear
to, deliver, file and record for and on behalf of such Securityholder, such
documents and instruments as may be necessary or appropriate to carry out the
provisions of, and which are permitted by this Section 8.12. The foregoing
power of attorney, being coupled with an interest, is hereby declared to be
irrevocable, and shall survive the death, dissolution or incapacity of any
Securityholder.
8.13 FORMATION OF 1STUP. (a) The Securityholders shall form a new
Delaware corporation, to be known as 1stUp Corporation ("1stUp") to the
extent such name is legally available, the purpose of which shall be, among
other things and to the extent lawfully permitted, to engage in internet
access management in the "non-lodging" market. The incorporation and
subsequent representation of 1stUp will be handled by Wilson Sonsini Goodrich
& Rosati, a professional corporation, of Palo Alto, California. The board of
directors of 1stUp shall initially consist of Charles Katz (Chairman), Roger
McAulay and a person appointed by LodgeNet in its sole discretion.
(b) To the extent permitted by law, LodgeNet will acquire an initial
equity interest in 1stUp of twenty percent (20%) of the outstanding capital
stock in consideration for an aggregate of twenty-five thousand dollars
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($25,000) to be paid as soon as practicable after the Effective Time and will
contribute additional capital and/or make advances to 1stUp on a dollar for
dollar basis with any other additional financing, on the same terms and
conditions applicable thereto, in an aggregate amount of up to two hundred
twenty-five thousand dollars ($225,000). In addition, LodgeNet shall have
preemptive rights with respect to any offering of equity securities by 1stUp
to allow LodgeNet to maintain its percentage equity interest in 1stUp.
(c) Effective upon the effective date of the incorporation of 1stUp,
LodgeNet hereby grants to 1stUp a worldwide, perpetual, exclusive and
fully-paid license (the "License") to the CGC Technology (including any
modifications, improvements or derivative works thereof) to use, copy,
distribute, sell, modify or prepare derivative works of the CGC Technology
for use in 1stUp's products or as stand-alone products solely in "non-lodging
markets." The License shall be non-transferable and non-assignable, except
that: (i) 1stUp shall have the right to assign the License to any entity
that acquires 1stUp or substantially all of its assets; and (ii) 1stUp shall
have the right to sub-license the CGC Technology, subject to the restrictions
contained herein and subject to additional market segment restrictions that
1stUp may negotiate, to any of its wholly-owned subsidiaries, and any such
subsidiary may assign such sub-license to any entity that acquires such
subsidiary or substantially all of its assets. Without limiting the
foregoing, with respect to the source code elements of the CGC Technology
(the "Source Code"), the License specifically includes the right solely for
1stUp to use, copy, modify and prepare derivative works of the Source Code
(but not the right to assign, sell, license, sublicense, or otherwise
transfer ownership of the Source Code). LodgeNet shall be the sole owner of
all right, title and interest in and to any modifications or improvements to
the CGC Technology or derivative works thereof, whether or not patentable,
developed by or on behalf of 1stUp, or acquired by 1stUp during the term of
the License which are based upon, derived from or designed for use in
connection with the CGC Technology, including, without limitation,
derivations, revisions, updates, enhancements, conversions, modifications or
improvements thereof (collectively, "Improvements"), and 1stUp shall have the
right to utilize the Improvements in accordance with the terms of the
License. LodgeNet shall have the exclusive right, in its sole judgment, to
prepare, file, prosecute and renew, in its name as owner, and at its own
expense, United States or foreign patent applications (or inventor's
certificates or other similar registrations of rights) with respect to all
Improvements to the CGC Technology. 1stUp shall execute any documents and
perform such other acts as LodgeNet may reasonably request in writing in
connection with any such patent application or other technology related
registration.
(d) For purposes of this Agreement and the Transaction Documents (as
defined herein), the term "non-lodging markets" shall mean markets other than
those relating to hotels, motels, guest suites, bed and breakfasts, hostels,
residence inns, time shares, lodges, campgrounds or other temporary residence
facilities (including adjacent, proximate and/or integrated facilities, such
as convention or meeting facilities, arenas, theatres, or other areas of
public congregation or any property owned by a lodging customer (or its
affiliate) of LodgeNet).
(e) As soon as practicable after the Effective Time, LodgeNet will
transfer to 1stUp all rights and title to any and all equipment in the 1stUp
apartment test site, located at 175 Bluxome Street, San Francisco, CA 94107.
The value of such equipment shall not exceed ten thousand dollars ($10,000).
8.14 ADDITIONAL DOCUMENTS AND FURTHER ASSURANCES. Each party
hereto, at the reasonable request of the other party hereto, shall execute
and deliver such other instruments and do and perform such other acts and
things as may be reasonably necessary or desirable for effecting completely
the consummation of this Agreement and the transactions contemplated hereby.
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8.15 INDEMNIFICATION. LodgeNet shall maintain and perform in the
same manner CGC's existing indemnification provisions with respect to present
and former directors and officers of CGC for all losses, claims, damages,
expenses or liabilities arising out of actions or omissions or alleged
actions or omissions occurring at or prior to the Effective Time to the
extent permitted or required under applicable law and CGC's Articles of
Incorporation and Bylaws in effect as of the date hereof (to the extent
consistent with applicable law), for a period of not less than three (3)
years after the Effective Time.
8.16 LISTING OF ADDITIONAL SHARES. Prior to the Effective Time,
LodgeNet shall file with the Nasdaq National Market a Notification Form for
Listing of Additional Shares with respect to the LodgeNet Shares issued as
part of the Merger Consideration.
ARTICLE IX
CONDITIONS TO THE MERGER
9.1 CONDITIONS TO OBLIGATIONS OF EACH PARTY TO EFFECT THE MERGER. The
respective obligations of each party to this Agreement to consummate the
Merger shall be subject to the satisfaction at or prior to the Closing of the
following conditions:
(a) SHAREHOLDER APPROVAL. This Agreement shall have been approved and
adopted by the requisite vote of the shareholders of CGC.
(b) NO INJUNCTIONS OR RESTRAINTS; ILLEGALITY. No temporary restraining
order, preliminary or permanent injunction or other order issued by any court
of competent jurisdiction or other legal or regulatory restraint or
prohibition preventing the consummation of the Merger shall be in effect.
9.2 ADDITIONAL CONDITIONS TO OBLIGATIONS OF CGC. The obligations of
CGC to consummate the Merger and the transactions contemplated by this
Agreement shall be subject to the satisfaction at or prior to the Closing of
each of the following conditions, any of which may be waived, in writing,
exclusively by CGC:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties
of LodgeNet contained in this Agreement shall be true and correct on the date
hereof and on and as of the Closing Date, as though made on and as of the
Closing Date (except for representations and warranties made as of a
specified date, which need be true and correct only as of the specified
date), except for changes contemplated by this Agreement and except for such
inaccuracies that, considered collectively, have not had and would not
reasonably be expected to have a material adverse effect on LodgeNet (it
being understood that, for purposes of determining the accuracy of such
representations and warranties, all "material adverse effect" and other
materiality qualifications contained in such representations and warranties
shall be disregarded).
(b) AGREEMENTS AND COVENANTS. LodgeNet shall have performed or
complied in all material respects with all agreements and covenants required
by this Agreement to be performed or complied with by it on or prior to the
Effective Time.
(c) OFFICER'S CERTIFICATE. LodgeNet shall have furnished CGC with a
certificate dated the Closing Date signed on behalf of it by an executive
officer to the effect that the conditions set forth in Sections 9.2(a) and
(b) have been satisfied.
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(d) LEGAL OPINION. CGC shall have received a legal opinion from
Pillsbury Madison & Sutro LLP, counsel to LodgeNet, in form and substance
mutually satisfactory to the parties.
9.3 ADDITIONAL CONDITIONS TO THE OBLIGATIONS OF LODGENET. The
obligations of LodgeNet to consummate the Merger and the transactions
contemplated by this Agreement shall be subject to the satisfaction at or
prior to the Closing of each of the following conditions, any of which may be
waived, in writing, exclusively by LodgeNet:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties
of CGC contained in this Agreement shall be true and correct on the date
hereof and on and as of the Closing Date, as though made on and as of the
Closing Date (except for representations and warranties made as of a
specified date, which need be true and correct only as of the specified
date), except for changes contemplated by this Agreement and except for such
inaccuracies that, considered collectively, have not had and would not
reasonably be expected to have a material adverse effect on CGC (it being
understood that, for purposes of determining the accuracy of such
representations and warranties, all "material adverse effect" and other
materiality qualifications contained in such representations and warranties
shall be disregarded).
(b) AGREEMENTS AND COVENANTS. CGC shall have performed or complied in
all material respects with all agreements and covenants required by this
Agreement to be performed or complied with by it on or prior to the Effective
Time.
(c) OFFICER'S CERTIFICATE. CGC shall have furnished LodgeNet with a
certificate dated the Closing Date signed on behalf of it by an executive
officer to the effect that the conditions set forth in Sections 9.3(a) and
(b) have been satisfied.
(d) LEGAL OPINION. LodgeNet shall have received a legal opinion from
Brobeck, Phleger & Harrison LLP, legal counsel to CGC, in form and substance
mutually satisfactory to the parties.
(e) MATERIAL ADVERSE EFFECT. Since the date of this Agreement, there
shall not have been any material adverse change in the business, financial
condition or results of operations of CGC.
(f) THIRD PARTY CONSENTS. LodgeNet shall have been furnished with
evidence satisfactory to it that CGC has obtained the consents, approvals,
assignments and waivers set forth in the Disclosure Schedule subject to no
term, condition or restriction unacceptable to LodgeNet in its sole
discretion.
(g) DUE DILIGENCE. LodgeNet shall have completed, to its reasonable
satisfaction, its due diligence investigation of the assets, business and
financial affairs of CGC.
(h) OUTSTANDING INDEBTEDNESS. CGC's existing indebtedness, capital
lease obligations and accounts payable shall be on terms and conditions
approved by LodgeNet in its sole discretion and shall not exceed two hundred
fifty thousand dollars ($250,000).
(i) STOCKHOLDERS AGREEMENT. LodgeNet and the Securityholders shall
have entered into the Stockholders Agreement.
(j) ESCROW AGREEMENT. LodgeNet, the Securityholders, and the Escrow
Agent referred to in
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Section 2.2 shall have entered into the Escrow Agreement in substantially the
form attached hereto as Exhibit C.
ARTICLE X
INDEMNIFICATION
10.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES.
(a) All of the representations and warranties made by CGC and the
Securityholders in this Agreement or in any instrument by CGC and the
Securityholders delivered pursuant to this Agreement shall survive the Merger
and continue until 5:00 p.m., California time on the date which is
twenty-four (24) months after the Closing Date and shall not be affected by
any investigation conducted for or on behalf of CGC or the Stockholders with
respect thereto or any knowledge acquired by CGC or the Stockholders or their
officers, directors, employees, shareholders or agents as to the accuracy or
inaccuracy of any such representation or warranty; provided that the
representations and warranties with respect to Taxes in Section 4.11 shall
survive the Merger and continue for a period of six (6) years; provided
further, that the representations and warranties with respect to title of the
CGC Common Stock contained in Section 5.1 shall survive indefinitely.
(b) All of the representations and warranties made by LodgeNet in this
Agreement or in any instrument by LodgeNet delivered pursuant to this
Agreement shall survive the Merger and continue until 5:00 p.m. California
time on the date which is one (1) year after the Closing Date and shall not
be affected by any investigation conducted for or on behalf of CGC or the
Stockholders with respect thereto or any knowledge acquired by CGC or the
Stockholders or their officers, directors, employees, shareholders or agents
as to the accuracy or inaccuracy of any such representation or warranty.
(c) The waiver of any condition based on the accuracy of any
representation or warranty, or the performance or compliance of any covenant
or obligation, will not affect the right to indemnification set forth in this
Article X.
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10.2 INDEMNIFICATION BY CGC AND THE SECURITYHOLDERS. Subject to the
limitations set forth herein, by approval and adoption of this Agreement,
each of the Securityholders agrees to indemnify LodgeNet for such
Securityholder's pro rata portion (based upon the number of shares of CGC
Common Stock held by such Securityholder immediately prior to the Effective
Time relative to the total number of shares of CGC Common Stock outstanding
immediately prior to the Effective Time) of claims, losses, liabilities,
damages, deficiencies, costs and expenses, including reasonable attorneys'
fees and expenses, and expenses of investigation and defense (calculated
after deduction for insurance proceeds recovered or recoverable) incurred by
LodgeNet directly or indirectly as a result of any inaccuracy or breach of a
representation or warranty of CGC contained herein (including, without
limitation, a material and repeated failure of the CGC Technology to perform
in accordance with the Benchmarks) or in any instrument delivered pursuant to
this Agreement or any failure by CGC to perform or comply with any covenant
contained herein or any claims that the CGC Technology (other than the Inline
Technology) has infringed on the patent or other intellectual property rights
of any party (hereinafter individually a "Loss" and collectively "Losses").
For the purposes of this Agreement, the term "Inline Technology" means only
that portion of the CGC Technology that can be used to provide simultaneous
transmission of digital data and analog voice signals over the same twisted
wire pair. The right of LodgeNet after the Effective Time to assert
indemnification claims and receive indemnification payments from the
Securityholders pursuant to this Article X shall be the sole and exclusive
right and remedy exercisable by such parties with respect to any
unintentional inaccuracy or breach in any representation, warranty, or
covenant contained in this Agreement or in any instrument delivered pursuant
to this Agreement or in connection with the transactions contemplated hereby;
provided, however, this section shall not apply to any misrepresentation or
breach or warranty of which the Securityholders had actual knowledge or any
intentional failure to perform or comply with any agreement to which
intentional acts and knowing misrepresentations Securityholders shall be
liable for all Losses with respect thereto. LodgeNet may not receive any
indemnification from the Securityholders unless and until a Claim Notice (as
defined in Section 10.4 below) identifying Losses, the aggregate cumulative
amount of which exceed one hundred thousand dollars ($100,000), have been
delivered to the Securityholders as provided in Section 10.4; in such case,
LodgeNet may recover from the Securityholders the entire amount of the
cumulative Losses. LodgeNet's sole recourse with respect to any individual
Securityholder pursuant to this Agreement shall be the Escrow Shares and the
Additional Consideration. The adoption and approval of this Agreement by the
Securityholders shall constitute approval of the Escrow Agreement and of all
of the arrangements relating thereto, including without limitation the
placement of the Escrow Shares in escrow. At the Effective Time, the
Securityholders will be deemed to have received and deposited with the Escrow
Agent (as defined below) the Escrow Shares (plus any additional shares as may
be issued upon any stock split, stock dividend or recapitalization effected
by LodgeNet after the Effective Time), without any act on the part of any
Securityholder. As soon as practicable after the Effective Time, the Escrow
Shares will be deposited with Pillsbury Madison & Sutro LLP (or other
institution acceptable to LodgeNet and the Securityholders), as Escrow Agent
(the "Escrow Agent"), such deposit to constitute an escrow fund (the "Escrow
Fund") to be governed by the terms set forth herein (including, without
limitation, Exhibit D hereto) and in the Escrow Agreement. The portion of
the Escrow Shares contributed on behalf of each holder shall be determined in
accordance with the provisions of Section 2.2, rounded down to the nearest
whole share, with the remaining number of shares that are distributed to such
holder being rounded up to the nearest whole share. The Escrow Fund shall be
available to compensate LodgeNet for any Losses.
10.3 INDEMNIFICATION BY LODGENET. For one (1) year after the Closing
Date, LodgeNet agrees to indemnify, defend and hold harmless the
Securityholders against and in respect of any and all claims and damages as
and when made and incurred arising out of, based upon, or relating to any and
all misrepresentations or breaches of warranties or any nonperformance or
breach of any covenant or agreement by LodgeNet contained in this Agreement.
The right of the Securityholders after the Effective Time to assert
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indemnification claims and receive indemnification payments from LodgeNet
pursuant to this Article X shall be the sole and exclusive right and remedy
exercisable by the Securityholders with respect to any unintentional
inaccuracy or breach in any representation, warranty, or covenant contained
in this Agreement or in any instrument delivered pursuant to this Agreement
or in connection with the transactions contemplated hereby; provided,
however, this section shall not apply to any misrepresentation or breach or
warranty of which LodgeNet had actual knowledge or any intentional failure to
perform or comply with any agreement to which intentional acts and knowing
misrepresentations LodgeNet shall be liable for all Losses with respect
thereto. The Securityholders may not receive any indemnification from
LodgeNet unless and until a Claim Notice (as defined in Section 10.4 below)
identifying Losses, the aggregate cumulative amount of which exceed one
hundred thousand dollars ($100,000), have been delivered to LodgeNet as
provided in Section 10.4; in such case, the Securityholders may recover from
LodgeNet the entire amount of the cumulative Losses.
10.4 DEFENSE OF CLAIMS. No right to indemnification under this Article
X shall be available to any party otherwise entitled to indemnification (the
"Indemnified Party"), unless such Indemnified Party gives to the party
obligated to provide indemnification to such Indemnified Party (the
"Indemnitor") a notice (a "Claim Notice") describing in reasonable detail the
facts giving rise to any claim for indemnification hereunder promptly after
the receipt of knowledge of the facts upon which such claim is based (but in
no event later than ten (10) days prior to the time any response to the
asserted claim is required); except that the failure of any Indemnified Party
to so notify the Indemnitor will not relieve the Indemnitor from any
liability it may have if and to the extent the Indemnitor is not prejudiced
by such omission. Upon receipt by the Indemnitor of a Claim Notice from an
Indemnified Party with respect to any claim of a third party, such Indemnitor
may control negotiations towards the resolution of any such claim without the
necessity for litigation, and, if litigation ensues, assume the defense
thereof at such Indemnitor's cost and with counsel reasonably satisfactory to
the Indemnified Party, and the Indemnified Party will extend reasonable
cooperation in the defense or prosecution thereof and will furnish such
records, information and testimony and attend all such conferences, discovery
proceedings, hearings, trials and appeals as may be reasonably requested in
connection therewith. The Indemnified Party will have the right to employ its
own counsel in any such case, but the fees and expenses of such counsel will
be at the expense of the Indemnified Party unless (i) the Indemnitor does not
promptly employ counsel reasonably satisfactory to such Indemnified Party to
take charge of the defense of such action or (ii) such Indemnified Party
reasonably concludes, based upon the opinion of its outside legal counsel,
that there may be one or more legal defenses available to it, or to any other
Indemnified Party who has submitted a Claim Notice to the Indemnitor, which
are different from or additional to those available to the Indemnitor, in
either of which events such reasonable fees and expenses will be borne by the
Indemnitor (but in no event will the Indemnitor be required to pay the fees
and expenses of more than one counsel employed by more than one Indemnified
Party with respect to any claim) and the Indemnitor will not have the right
to direct the defense of any such action on behalf of the Indemnified Party.
The Indemnitor will have the right, in its sole discretion, to settle any
claim for monetary damages for which indemnification has been sought and is
available hereunder, except that neither Indemnitor nor the Indemnified Party
will settle, compromise or make any disposition of any claim under this
Article X which would or may result in liability to the Indemnified Party or
Indemnitor, respectively, without the written consent of Indemnitee or
Indemnitor, respectively.
ARTICLE XI
TERMINATION, AMENDMENT, WAIVER, CLOSING
11.1 TERMINATION. Except as provided in Section 11.2 below, this Agreement
may be terminated and the
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Merger abandoned at any time prior to the Effective Time:
(a) By mutual consent of CGC and LodgeNet;
(b) By LodgeNet or CGC if: (i) the Effective Time has not occurred by
October 15, 1998 (provided that the right to terminate this Agreement under
this clause (i) shall not be available to any party whose willful failure to
fulfill any obligation hereunder has been the cause of, or resulted in, the
failure of the Effective Time to occur on or before such date); (ii) there
shall be a final non-appealable order, decree or ruling of a court of
competent jurisdiction in effect preventing consummation of the Merger; or
(iii) there shall be any statute, rule, regulation or non-appealable order
enacted, promulgated or issued or deemed applicable to the Merger by any
governmental entity that would make consummation of the Merger illegal;
(c) By LodgeNet or CGC if there shall be any action taken, or any
statute, rule, regulation or order enacted, promulgated or issued or deemed
applicable to the Merger, by any governmental entity, which would: (i)
prohibit LodgeNet's or CGC's ownership or operation of any portion of the
business of CGC or (ii) compel LodgeNet or CGC to dispose of or hold
separate, as a result of the Merger, any portion of the business or assets of
CGC or LodgeNet; in either case, the unavailability of which assets or
business would have a material adverse effect on LodgeNet or would reasonably
be expected to have a material adverse effect on LodgeNet's ability to
realize the benefits expected from the Merger;
(d) By LodgeNet if it is not in material breach of its representations,
warranties or obligations under this Agreement and there has been a material
breach of any representation, warranty, covenant or agreement contained in
this Agreement on the part of CGC or if any representation or warranty of CGC
shall have become materially untrue, in either case such that the conditions
set forth in Section 9.3 would not be satisfied; provided, however, if such
breach or breaches are capable of being cured prior to the Effective Time,
such breaches shall not have been cured within thirty (30) days of delivery
to CGC of written notice of such breach or breaches (but no such cure period
shall be required if such breach by its nature cannot be cured);
(e) By CGC if it is not in material breach of its representations,
warranties or obligations under this Agreement and there has been a material
breach of any representation, warranty, covenant or agreement contained in
this Agreement on the part of LodgeNet or if any representation or warranty
of LodgeNet shall have become materially untrue, in either case such that the
conditions set forth in Section 9.2 would not be satisfied; provided,
however, if such breach or breaches are capable of being cured prior to the
Effective Time, such breaches shall not have been cured within thirty (30)
days of delivery to LodgeNet of written notice of such breach or breaches
(but no such cure period shall be required if such breach by its nature
cannot be cured);
(f) By CGC if the LodgeNet Board of Directors shall have failed to
approve this Agreement by October 15, 1998;
(g) By LodgeNet if the CGC Board of Directors makes any recommendation
with respect to an Acquisition Transaction (including making no
recommendation or stating an inability to make a recommendation) or the CGC
Board of Directors shall have resolved to take any such action and publicly
disclosed this resolution.
(h) By LodgeNet if the results of its due diligence investigation of
the CGC Technology are not reasonably satisfactory to LodgeNet.
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Where action is taken to terminate this Agreement pursuant to this
Section 11.1, it shall be sufficient for such action to be authorized by the
Board of Directors (as applicable) of the party taking such action.
11.2 EFFECT OF TERMINATION. In the event of termination of this
Agreement as provided in Section 11.1, this Agreement shall forthwith become
void and there shall be no liability or obligation on the part of LodgeNet or
CGC, or their respective subsidiaries, officers, directors or shareholders,
provided that, the provisions of Sections 7.2(b), 8.3, 8.4, 10.2, 10.3, 12.7
and 12.8 of this Agreement shall remain in full force and effect and survive
any termination of this Agreement.
11.3 AMENDMENT OR SUPPLEMENT. This Agreement, the Escrow Agreement, the
NonDisclosure Agreement, the Stockholders Agreement, and all other
agreements, documents, instruments and certificates contemplated by, and
executed and delivered pursuant to, this Agreement (the "Transaction
Documents") may be amended or supplemented at any time before or after
approval of this Agreement and any action contemplated by this Agreement or
any of the Transaction Documents may be taken by a majority in interest of
the shareholders of CGC to the extent permitted under the CGCL. No amendment
or supplement to this Agreement shall be effective unless in writing and
signed by each of LodgeNet and CGC.
11.4 EXTENSION OF TIME, WAIVER. At any time prior to the Effective
Time, LodgeNet, on the one hand, and CGC and a majority in interest of the
Securityholders, on the other hand, may, to the extent legally allowed:
(a) Extend the time for the performance of any of the obligations or
other acts of the other party hereto,
(b) Waive any inaccuracies in the representations and warranties made
to such party contained herein or in any document delivered pursuant
hereto, or
(c) Waive compliance with any of the agreements or conditions for the
benefit of such party contained herein; provided, that no failure or delay
by any party hereto in exercising any right hereunder shall operate as a
waiver thereof nor shall any single or partial exercise thereof preclude
any other or further exercise thereof or the exercise of any other right
hereunder.
Any agreement on the part of any party hereto to any such extension or waiver
shall be valid if set forth in an instrument in writing signed on behalf of
such party.
ARTICLE XII
GENERAL
12.1 NOTICES. Any notice, request, instruction or other document
to be given hereunder by any party to the other shall be in writing and
delivered personally or sent by certified mail, postage prepaid, by telecopy
(with receipt confirmed and promptly confirmed by personal delivery, U.S.
first class mail, or courier), or by courier service, as follows:
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(a) If to LodgeNet to:
LodgeNet Entertainment Corporation
3900 West Innovation Street
Sioux Falls, South Dakota 57107
Attn: Chief Operating Officer
Fax: (605) 988-1323
with a copy similarly addressed to the attention of
Eric R. Jacobsen, Vice President and General Counsel
with a copy to:
Pillsbury Madison & Sutro LLP
235 Montgomery Street
San Francisco, CA 94104
Attn: Gregg Vignos
Fax: (415) 983-1200
(b) If to CGC to:
Connect Group Corporation
300 Montgomery Street
San Francisco, CA 94104
Attention: Roger D. McAulay
Fax: (415) 288-3955
with a copy to:
Brobeck, Phleger & Harrison LLP
One Market Plaza
Spear Street Tower
San Francisco, CA 94105
Attn: Scott Lester, Esq.
Fax: (415) 442-1010
(c) If to a Securityholder to:
Connect Group Corporation
300 Montgomery Street
San Francisco, CA 94104
Attention: Roger D. McAulay
Fax: (415) 288-3955
or to such other persons as may be designated in writing by the parties, by a
notice given as aforesaid.
12.2 HEADINGS. The headings of the several sections of this
Agreement are inserted for convenience of
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reference only and are not intended to affect the meaning or interpretation
of this Agreement.
12.3 COUNTERPARTS. This Agreement may be executed in counterparts,
and when so executed each counterpart shall be deemed to be an original, and
said counterparts together shall constitute one and the same instrument.
12.4 ENTIRE AGREEMENT; ASSIGNMENT. This Agreement, the Schedules
and Exhibits hereto (including the Disclosure Schedule), and the documents
and instruments and other agreements among the parties hereto referenced
herein: (a) constitute the entire agreement among the parties with respect to
the subject matter hereof and supersede all prior agreements and
understandings, both written and oral, among the parties with respect to the
subject matter hereof; (b) are not intended to confer upon any other person
any rights or remedies hereunder (except as provided in Section 12.9 below);
and (c), except as contemplated by Section 11.3 shall not be assigned by
operation of law or otherwise except as mutually agreed in writing between
the parties
12.5 SEVERABILITY. In the event that any provision of this
Agreement or the application thereof, becomes or is declared by a court of
competent jurisdiction to be illegal, void or unenforceable, the remainder of
this Agreement will continue in full force and effect and the application of
such provision to other persons or circumstances will be interpreted so as
reasonably to effect the intent of the parties hereto. The parties further
agree to replace such void or unenforceable provision of this Agreement with
a valid and enforceable provision that will achieve, to the extent possible,
the economic, business and other purposes of such void or unenforceable
provision.
12.6 OTHER REMEDIES. Except as otherwise provided herein, any and
all remedies herein expressly conferred upon a party will be deemed
cumulative with and not exclusive of any other remedy conferred hereby, or by
law or equity upon such party, and the exercise by a party of any one remedy
will not preclude the exercise of any other remedy.
12.7 GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware, regardless of
the laws that might otherwise govern under applicable principles of conflicts
of laws thereof. Each of the parties hereto agrees that process may be
served them in any manner authorized by the laws of the State of Delaware for
such persons and waives and covenants not to assert or plead any objection
which they might otherwise have to such jurisdiction and such process.
12.8 ARBITRATION. All disputes arising in connection with or
relating to this Agreement, or the breach thereof, shall be finally settled
by arbitration in accordance with the Commercial Arbitration Rules of the
American Arbitration Association by one or more arbitrators appointed in
accordance with said Rules. The site of such arbitration shall be Denver,
Colorado. The award of the arbitrator shall be final and binding and may be
enforced in any and all courts having jurisdiction over the party against
which the award is rendered. The prevailing party in any legal or arbitration
action brought by one party against the other shall be entitled, in addition
to any other rights and remedies it may have, to reimbursement for its
expenses incurred thereby, including the costs of investigation, consultant
fees, court costs and reasonable attorney's fees.
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12.9 ABSENCE OF THIRD-PARTY BENEFICIARY RIGHTS. No provision of
this Agreement is intended, or will be interpreted, to provide to or create
for any third-party beneficiary rights or any other rights of any kind in any
client, customer, affiliate, shareholder, employee, partner or any party
hereto or any other person or entity, and all provisions hereof will be
personal solely between the parties to this Agreement, except that upon
consummation of the Merger the provisions of Section 8.15 shall be for the
benefit of, and enforceable by, the indemnified persons referred to therein.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed, all as of the date first above written.
LODGENET ENTERTAINMENT CORPORATION
By /s/ ERIC R. JACOBSEN
------------------------------------
Title VICE PRESIDENT, GENERAL COUNSEL
---------------------------------
CONNECT GROUP CORPORATION
By /s/ ROGER MCAULAY
------------------------------------
Title PRESIDENT
---------------------------------
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SECURITYHOLDERS:
/s/ MICHAEL SLEMMER
------------------------------------
Michael Slemmer
/s/ MICHAEL PETRAS
------------------------------------
Michael Petras
/s/ CHARLES KATZ
------------------------------------
Charles Katz
/s/ KEVIN HARTZ
------------------------------------
Kevin Hartz
/s/ JONAH STEINHART
------------------------------------
Jonah Steinhart
/s/ ROGER MCAULAY
------------------------------------
Roger McAulay
/s/ JOHN WITCHEL
------------------------------------
John Witchel
US WEB CORPORATION
By
----------------------------------
Title
-------------------------------
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EXHIBIT C
ESCROW AGREEMENT
This Escrow Agreement ("Agreement") is dated as of September 30, 1998
and entered into among Pillsbury Madison & Sutro LLP (the "Escrow Agent"),
LodgeNet Entertainment Corporation, a Delaware corporation ("LodgeNet"), and
each of the individuals or entities that are signatories hereto
(collectively, the "Securityholders"). The Securityholders and LodgeNet are
collectively referred to in this Agreement as the "Transaction Parties." The
Securityholders and LodgeNet are parties to an Amended and Restated Agreement
and Plan of Merger Agreement, dated as of September 30, 1998 (the "Merger
Agreement") a copy of which has been delivered to the Escrow Agent.
For valuable consideration, the parties agree as follows:
(a) DEFINITIONS. Capitalized terms not otherwise defined in this
Agreement shall have the meanings set forth in the Merger Agreement.
(b) ESCROW AGENT.
(1) The Transaction Parties appoint and designate the Escrow Agent as
escrow agent for the purposes set forth in this Agreement, and the Escrow
Agent accepts such appointment on the terms provided in this Agreement.
(2) The Securityholders hereby agree to waive any conflict of interest
that may arise in connection with this Agreement as a result of the Escrow
Agent's representation of LodgeNet in connection with the Merger Agreement
and the Transaction Documents, and the Securityholders will not object to or
seek to remove the Escrow Agent as counsel to LodgeNet in any matter,
including without limitation, any dispute arising in connection with this
Agreement.
(c) ESTABLISHMENT OF ESCROW.
(1) At the Effective Time, the Securityholders shall be deemed to have
received and deposited with the Escrow Agent the Escrow Shares (plus any
additional shares as may be issued upon any stock split, stock dividend or
recapitalization effected by LodgeNet with respect to the Escrow Shares after
the Effective Time), without any act of any Securityholder. As soon as
practicable after the Effective Time, the Escrow Shares will be deposited
with the Escrow Agent, such deposit to constitute an escrow fund (the "Escrow
Fund"). The Escrow Fund shall be held by the Escrow Agent in escrow subject
to the terms and conditions set forth herein and in the Merger Agreement,
including, without limitation, the terms and conditions of Exhibit D thereto.
(2) The Escrow Agent shall hold and safeguard the Escrow Fund until the
Escrow Disbursement Date (as defined below), shall treat such fund as a trust
fund in accordance with the terms of this Agreement and not as the property
of LodgeNet and shall hold and dispose of the Escrow Fund only in accordance
with the terms hereof.
(3) Any shares of LodgeNet Common Stock or other securities issued or
distributed by LodgeNet (including shares issued upon a stock split, stock
dividend or recapitalization) in respect of shares of
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LodgeNet Common Stock in the Escrow Fund at the time of issuance or
distribution shall be added to the Escrow Fund and become a part thereof.
Cash dividends on shares of LodgeNet Common Stock in the Escrow Fund shall
not be added to the Escrow Fund but shall be distributed to the recordholders
thereof.
(4) Each Securityholder shall have voting rights with respect to the
shares of LodgeNet Common Stock contributed to the Escrow Fund on behalf of
such Securityholder (and on any voting securities added to the Escrow Fund in
respect of such shares of LodgeNet Common Stock).
(d) DISBURSEMENT OF AMOUNTS HELD IN ESCROW FUND. Except as otherwise
provided in this Section 4, the Escrow Agent will disburse the Escrow Shares
to the Securityholders on September 30, 2000 (the "Escrow Disbursement Date")
on a pro rata basis (based on the number of shares of CGC Common Stock held
by each Securityholder immediately prior to the Effective Time relative to
the total number of outstanding shares of CGC Common Stock immediately prior
to the Effective Time).
(1)(i) If, prior to the Escrow Disbursement Date, the Escrow Agent
receives a certificate signed on behalf of LodgeNet (the "Claim Certificate")
in the form of Exhibit A attached hereto with completed information
concerning the nature and amount of an indemnification claim by LodgeNet
under the Merger Agreement resulting or reasonably expected to result in
Losses within twenty-four (24) months of the Closing Date, which will in no
event exceed the aggregate value of the Escrow Shares remaining in the Escrow
Fund, the Escrow Agent shall deliver to LodgeNet out of the Escrow Fund no
earlier than twenty (20) days after delivery of the Claim Certificate and
subject to the provisions of Section 4(c) shares of LodgeNet Common Stock
held in the Escrow Fund in an amount equal to such Losses. Upon a
distribution by the Escrow Agent to LodgeNet pursuant to this Section 4(a),
the Escrow Fund will be correspondingly reduced. The Escrow Agent will
disburse the remainder of the Escrow Shares that is not required to be
retained pursuant to the preceding sentence to the Securityholders on the
Escrow Disbursement Date, subject to the terms of Section 4(b).
(ii) For the purposes of determining the number of shares of LodgeNet
Common Stock to be delivered to LodgeNet pursuant to Section 4(a) hereof, the
shares of LodgeNet Common Stock shall be valued at the volume-weighted daily
average price per share of LodgeNet Common Stock on the Nasdaq National
Market for the 45-day period ending ten (10) days prior to the Closing Date
(the "LodgeNet Common Stock Market Value") LodgeNet and the Securityholders
shall certify such LodgeNet Common Stock Market Value in a certificate signed
by both LodgeNet and the Securityholders, and shall deliver such certificate
to the Escrow Agent.
(iii) LodgeNet will deliver a copy of any Claim Certificate to the
Securityholders contemporaneously with or before delivery of the Claim
Certificate to Escrow Agent.
(2) If before the Escrow Disbursement Date the Escrow Agent receives a
certificate signed by LodgeNet and the Securityholders (the "Release
Certificate") in the form of Exhibit B attached hereto to the effect that the
Securityholders have met the Benchmarks for the payment of the Year One
Additional Consideration, the Escrow Agent will promptly disburse that amount
of Escrow Shares remaining in the Escrow Fund (not subject to any Claim
Certificate) and specified in the Release Certificate to the Securityholders
on a pro rata basis (based on the number of shares of CGC Common Stock held
by each Securityholder immediately prior to the Effective Time relative to
the total number of outstanding shares of CGC Common Stock immediately prior
to the Effective Time). Any such shares not disbursed because they are
subject to a Claim Certificate shall be promptly disbursed, if applicable,
upon resolution pursuant to
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Section 4(c).
(3) If the Escrow Agent receives notice from any of the Transaction
Parties objecting to either a Claim Certificate or Release Certificate
delivered to the Escrow Agent pursuant to either subparagraph (a) or (b)
above, in either case within twenty (20) days after delivery of such
certificate, the Escrow Agent will retain the disputed amount in the Escrow
Fund pursuant to this Agreement until either (i) the Escrow Agent receives
joint written instructions signed on behalf of the Securityholders and
LodgeNet specifying the method for disbursing the disputed amount, in which
case such amount will be disbursed promptly by the Escrow Agent in accordance
with such instructions; or (ii) the Escrow Agent receives an official copy of
a final, non-appealable order issued by a court of competent jurisdiction
specifying the method for disbursement of the disputed amount, in which case
such amount will be disbursed promptly by the Escrow Agent in accordance with
such instructions.
(4) Notwithstanding anything to the contrary in this Agreement, the
Escrow Agent will disburse the Escrow Shares in accordance with any joint
written instructions signed by the Transaction Parties.
(5) If on the Escrow Disbursement Date there are any remaining Escrow
Shares in the Escrow Fund that are not subject to disbursement to the
Securityholders pursuant to any Release Certificate, such Escrow Shares will
be delivered to LodgeNet.
(e) RIGHTS, DUTIES, AND LIABILITIES OF ESCROW AGENT.
(1) The Escrow Agent will have no duty to know or determine the
performance or nonperformance of any provision of any agreement between the
Transaction Parties, including, but not limited to, the Merger Agreement (and
the terms and conditions of Exhibit D thereto), which will not bind the
Escrow Agent in any manner. The Escrow Agent assumes no responsibility for
the validity or sufficiency of any document or paper or payment deposited or
called for under this Agreement except as may be expressly and specifically
set forth in this Agreement, and the duties and responsibilities of the
Escrow Agent under this Agreement are limited to those expressly and
specifically stated in this Agreement.
(2) The Escrow Agent will not be personally liable for any act it may
do or omit to do under this Agreement as such agent while acting in good
faith and in the exercise of its own best judgment, and any act done or
omitted by it pursuant to the written advice of its counsel will be
conclusive evidence of such good faith unless, in any event, the same
constitutes gross negligence or willful misconduct. The Escrow Agent will
have the right at any time to consult with its counsel upon any question
arising under this Agreement and will incur no liability for any delay
reasonably required to obtain the advice of counsel.
(3) Other than those notices, or demands expressly provided in this
Agreement, the Escrow Agent is expressly authorized to disregard any and all
notices or demands given by the Securityholders or LodgeNet, or by any other
person, firm or corporation, excepting only orders or process of court, and
the Escrow Agent is expressly authorized to comply with and obey any and all
final process, orders, judgments, or decrees of any court, and to the extent
the Escrow Agent obeys or complies with any thereof of any court, it will not
be liable to any party to this Agreement or to any other person, firm or
corporation by reason of such compliance.
(4) In consideration of the acceptance of this Escrow by the Escrow
Agent, the Securityholders and LodgeNet agree, for themselves and their
successors and assigns, to pay the Escrow Agent its charges, fees
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<PAGE>
and reasonable expenses as contemplated by this Agreement. As between
LodgeNet and the Securityholders (in the case of the Securityholders, pro
rata based upon their percentage interest in the Escrow Fund), they will each
be responsible for one-half of such charges, fees and expenses. Such
charges, fees and expenses are intended as compensation for the Escrow
Agent's ordinary services as contemplated by this Agreement, including
without limitation, the disbursement of the Escrow Shares thereof to the
Transaction Parties. In the event the Escrow Agent renders services not
provided for in this Agreement, the Escrow Agent will be entitled to receive
from LodgeNet and the Securityholders reasonable compensation and reasonable
costs, if any, for such extraordinary services, and such compensation and
costs will be borne equally by LodgeNet and the Securityholders (in the case
of the Securityholders, pro rata based upon their percentage interest in the
Escrow Fund).
(5) The Escrow Agent will be under no duty or obligation to ascertain
the identity, authority or right of the Securityholders or LodgeNet (or their
agents) to execute or deliver or purport to execute or deliver this Agreement
or any certificates, documents or papers or payments deposited or called for
or given under this Agreement.
(6) The Escrow Agent will not be liable for the outlawing of any rights
under any statute of limitations or by reason of laches in respect of this
Agreement or any documents or papers deposited with the Escrow Agent.
(7) In the event of any dispute among the parties to this Agreement as
to the facts or as to the validity or meaning of any provision of this
Agreement, or any other fact or matter relating to this Agreement or to the
transactions between the Securityholders and LodgeNet, the Escrow Agent is
instructed that it will be under no obligation to act, except in accordance
with this Agreement or under process or order of court or, if there be no
such process or order, until it has filed or caused to be filed an
appropriate action interpleading the Securityholders and LodgeNet and
delivering the Escrow Shares (or the portion of the Escrow Shares in dispute)
to such court, and the Escrow Agent will sustain no liability for its failure
to act pending such process of court or order or interpleader of action.
(f) MODIFICATION OF AGREEMENT. The provisions of this Agreement may be
supplemented, altered, amended, modified, or revoked by writing only, signed
by LodgeNet and the Securityholders and approved in writing by the Escrow
Agent, and upon payment of all fees, costs and expenses incident thereto.
(g) ASSIGNMENT OF AGREEMENT. No assignment, transfer, conveyance, or
hypothecation of any right, title or interest in and to the subject matter of
this Agreement will be binding upon any party, including the Escrow Agent,
unless all fees, costs, and expenses incident thereto have been paid and then
only upon the assent thereto by all parties in writing.
(h) MISCELLANEOUS.
(1) All notices and communications under this Agreement will be in
writing and will be deemed to be duly given if sent by registered mail,
return receipt requested, personal delivery or telecopier, as follows:
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(i) if to the Escrow Agent, to:
Pillsbury Madison & Sutro LLP
235 Montgomery Street
San Francisco, CA 94104
Attn: Gregg Vignos
Fax: (415) 983-1200
(ii) if to LodgeNet, to:
LodgeNet Entertainment Corporation
3900 West Innovation Street
Sioux Falls, South Dakota 57107
Attn: Chief Operating Officer
Fax: (605) 988-1323
with a copy similarly addressed to the attention of
Eric R. Jacobsen, Vice President and General Counsel
with a copy to:
Pillsbury Madison & Sutro LLP
235 Montgomery Street
San Francisco, CA 94104
Attn: Gregg Vignos
Fax: (415) 983-1200
(iii) if to the Securityholders, to their respective
addresses and facsimile numbers set forth on Schedule I
hereto.
or at such other address or telecopy number as any of the above may have
furnished to the other parties in writing and any such notice or
communication given in the manner specified in this Section 8(a) will be
deemed to have been given as of the date received. In the event that Escrow
Agent, in its sole discretion, determines that an emergency exists, the
Escrow Agent may use such other means of communications as the Escrow Agent
reasonably deems advisable.
(2) The undertakings and agreements contained in this Agreement will
bind and inure to the benefit of the parties to this Agreement and their
respective heirs, personal representatives, successors, and permitted assigns.
(3) This Agreement may be executed in one or more counterparts, each of
which will be deemed an original. Whenever pursuant to this Agreement
LodgeNet and the Securityholders are to deliver a jointly signed writing to
the Escrow Agent or jointly advise the Escrow Agent in writing, such writing
may in each and all cases be signed jointly or in counterparts and such
counterparts will be deemed to be one instrument.
(4) The Escrow Agent may resign and be discharged from its duties or
obligations under this Agreement by giving notice in writing of such
resignation to the Transaction Parties at least thirty (30) days
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<PAGE>
in advance of such resignation (unless waived in writing by the Transaction
Parties). Such resignation will be effective upon the appointment by
LodgeNet and the Securityholders of a successor escrow agent; provided, that
if any such appointment of any successor agent is not effectuated within
thirty (30) days of such written notice, the Escrow Agent may file an action
for interpleader and deposit all funds with a court of competent
jurisdiction, all as provided for in Section 5(g). Any such successor escrow
agent will be appointed by a written instrument mutually satisfactory to and
executed by LodgeNet, the Securityholders, the Escrow Agent and the successor
escrow agent. Any successor escrow agent appointed under the provisions of
this Agreement will have all of the same rights, powers, privileges,
immunities and authority with respect to the matters contemplated herein as
are granted herein to the original Escrow Agent.
(5) LodgeNet and the Securityholders hereby jointly and severally agree
to indemnify the Escrow Agent for, and to hold it harmless against any loss,
liability or reasonable out-of-pocket expense arising out of or in connection
with this Agreement and carrying out its duties hereunder, including the
reasonable out-of-pocket costs and expenses of defending itself against any
claim of liability, except in those cases where the Escrow Agent has been
guilty of gross negligence or willful misconduct (provided, that in no event
will the Transaction Parties be liable for any allocated cost or expense of
persons regularly employed by the Escrow Agent). Anything in this Agreement
to the contrary notwithstanding, in no event will the Escrow Agent be liable
for special, indirect or consequential loss or damage of any kind whatsoever
(including but not limited to lost profits), even if the Escrow Agent has
been advised of the likelihood of such loss or damage and regardless of the
form of action.
(6) This Agreement shall be governed by, and construed in accordance
with, the laws of the State of Delaware (without regard to principles of
conflicts of law). The parties agree that any service of process to be made
hereunder may be made by certified mail, return receipt requested, addressed
to the party at the address appearing in Section 8(a) together with a copy to
be delivered to such party's attorneys as provided in Section 8(a).
(7) All disputes arising in connection with or relating to this
Agreement, or the breach thereof, shall be finally settled by arbitration in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association by one or more arbitrators appointed in accordance with said
Rules. The site of such arbitration shall be Denver, Colorado. The award of
the arbitrator shall be final and binding and may be enforced in any and all
courts having jurisdiction over the party against which the award is
rendered. The prevailing party in any legal or arbitration action brought by
one party against the other shall be entitled, in addition to any other
rights and remedies it may have, to reimbursement for its expenses incurred
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<PAGE>
thereby, including the costs of investigation, consultant fees, court costs
and reasonable attorney's fees.
(8) Any provision of this Agreement that requires any collective
consent, agreement, waiver, designation or other determination or decision of
the Securityholders, shall require, and shall be deemed to have been given or
made upon, the consent, agreement, waiver, designation or other determination
or decision of holders of a majority in interest of the shares of LodgeNet
Common Stock held by the Securityholders, as of the Closing Date.
(9) Except as otherwise specified herein. Each of the parties will pay
all costs and expenses incurred or to be incurred by it in negotiating and
preparing this Escrow Agreement and in closing and carrying out the
transactions contemplated by this Escrow Agreement.
(10) If any legal action or proceeding is brought for the enforcement of
this Escrow Agreement, or because of an alleged dispute, breach, default or
misrepresentation in connection with any of the provisions of this Escrow
Agreement, the substantially prevailing party or parties will be entitled to
recover reasonable attorneys' fees and other costs incurred in that action or
proceeding, in addition to any other relief to which it or they may be
entitled.
IN WITNESS WHEREOF, the parties have caused this Agreement to be signed
the day and year first above written.
PILLSBURY MADISON & SUTRO LLP
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
LODGENET ENTERTAINMENT CORPORATION
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
SECURITYHOLDERS:
-----------------------------------------
Michael Slemmer
-----------------------------------------
Michael Petras
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<PAGE>
-----------------------------------------
Charles Katz
-----------------------------------------
Kevin Hartz
----------------------------------------
Jonah Steinhart
-----------------------------------------
Roger McAulay
-----------------------------------------
John Witchel
US WEB CORPORATION
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
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<PAGE>
SCHEDULE I
SCHEDULE OF HOLDERS
NAME & ADDRESS
OF HOLDER
Michael Slemmer
400 East 13th Street, Apt. 310
Sioux Falls, SD 57104
Facsimile: __________________
Telephone: (605) 988-1541
Michael Petras
300 Montgomery Street, Suite 904
San Francisco, CA 94104
Facsimile: __________________
Telephone: (415) 981-7711
Charles Katz
2005 18th Street
San Francisco, CA 94107
Facsimile: __________________
Telephone: (415) 550-9246
Kevin Hartz
601 4th Street, #329
San Francisco, CA 94107
Facsimile: __________________
Telephone: __________________
Jonah Steinhart
1070 Church Street, Apt. 207
San Francisco, CA 94114
Facsimile: __________________
Telephone: (415) 550-4123
Roger McAulay
2218 St. Charles Circle
Sioux Falls, SD 57103
Facsimile: __________________
Telephone: (605) 988-1555
John Witchel
155 Alma Street
San Francisco, CA 94117
Facsimile: __________________
Telephone: __________________
USWeb Corporation
2880 Lakeside Drive, Suite 300
Santa Clara, CA 95054
Facsimile: __________________
Telephone: __________________
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<PAGE>
EXHIBIT A TO ESCROW AGREEMENT
FORM OF CLAIM CERTIFICATE
The undersigned on behalf of LodgeNet Entertainment Corporation
("LodgeNet") hereby certifies as follows:
A. Connect Group Corporation ("CGC") merged with and into LodgeNet
pursuant to an Amended and Restated Agreement and Plan of Merger dated as of
September 30, 1998 (the "Merger Agreement") between LodgeNet, CGC and certain
securityholders of CGC named therein ("the Securityholders").
B. LodgeNet in good faith believes that the Securityholders have
breached certain representations, warranties, covenants or obligations made
by the Securityholders in the Merger Agreement or are obligated to indemnify
LodgeNet with respect to certain claims. In particular, LodgeNet in good
faith is asserting claims against the Securityholders based on the following:
[reasonably detailed description of claim and reference to portion of Merger
Agreement in question to be inserted by LodgeNet at time of delivery
of Certificate].
C. Attached to this Certificate is a copy of LodgeNet's notice to the
Securityholders relating to the claim pursuant to the Merger Agreement.
LodgeNet intends to pursue the claim with due diligence. LodgeNet in good
faith believes the amount of its claim described in its notice is
$___________.
D. LodgeNet is furnishing this Certificate to [Escrow Agent] which is
acting as Escrow Agent pursuant to the terms of an Escrow Agreement dated
September __, 1998 among LodgeNet, the Securityholders and [Escrow Agent],
and LodgeNet has delivered or contemporaneously is delivering a copy of this
Certificate to the Securityholders as well.
This Certificate is signed this ______ day of _______________.
LODGENET ENTERTAINMENT CORPORATION
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
Receipt of this Certificate is acknowledged this ___ day of
_______________.
[ESCROW AGENT]
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
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<PAGE>
EXHIBIT B TO ESCROW AGREEMENT
FORM OF RELEASE CERTIFICATE
LodgeNet Entertainment Corporation ("LodgeNet") and certain stockholders
(the "Securityholders") hereby certify as follows:
A. CGC merged with and into LodgeNet pursuant to an Amended and
Restated Agreement and Plan of Merger dated as of September 30, 1998 (the
"Merger Agreement") between LodgeNet, CGC and the Securityholders.
B. CGC's Guest Room Technology has satisfied the Benchmarks on the
terms and conditions as set forth in Exhibit D to the Merger Agreement, and
the Securityholders are entitled to receive that amount of Escrow Shares
remaining in the Escrow Fund (not subject to any indemnification claim), to
be released pro rata to each Securityholder (based on the percentage interest
in the Escrow Fund held by each Securityholder).
C. LodgeNet is furnishing this Certificate to [Escrow Agent] which is
acting as Escrow Agent pursuant to the terms of an Escrow Agreement dated as
of September 30, 1998 among LodgeNet, the Securityholders and [Escrow Agent].
All capitalized terms not otherwise defined herein shall have the
meaning ascribed to them in the Merger Agreement, including the exhibits
thereto.
This Certificate is signed this ______ day of _______________.
LODGENET ENTERTAINMENT CORPORATION
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
SECURITYHOLDERS:
-----------------------------------------
Michael Slemmer
-----------------------------------------
Michael Petras
-----------------------------------------
Charles Katz
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----------------------------------------
Kevin Hartz
-----------------------------------------
Jonah Steinhart
-----------------------------------------
Roger McAulay
-----------------------------------------
John Witchel
US WEB CORPORATION
By:
--------------------------------------
Title:
--------------------------------------
Receipt of this Certificate is acknowledged this ___ day of
_______________.
[ESCROW AGENT]
By:
--------------------------------------
Name:
--------------------------------------
Title:
--------------------------------------
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<PAGE>
EXHIBIT G
FORM OF STOCKHOLDERS AGREEMENT
THIS STOCKHOLDERS AGREEMENT (the "Agreement"), dated as of September 30,
1998, by and among LODGENET ENTERTAINMENT CORPORATION, a Delaware corporation
(the "Company"), and each of the individuals or entities that are (or are
deemed to be) or become signatories hereto (each of such other individuals or
entities are collectively referred to herein as the "Stockholders").
WHEREAS, the Company, Connect Group Corporation, a California
corporation ("CGC") and the Stockholders have entered into an Amended and
Restated Agreement and Plan of Merger dated as of September 30, 1998 (the
"Merger Agreement") providing for the merger (the "Merger") of CGC with and
into the Company with the Company being the surviving corporation, upon the
terms and subject to the conditions set forth in the Merger Agreement;
WHEREAS, following the consummation of the Merger, the Stockholders will
own certain of the issued and outstanding shares of the common stock of the
Company par value $0.01 per share (the "Common Stock") issued as
consideration pursuant to the Merger Agreement; and
WHEREAS, the parties hereto desire to enter into this Agreement for the
purpose of agreeing to certain aspects of their continuing relationship as
Stockholders of the Company after the consummation of the Merger;
WHEREAS, this Agreement is not effective unless and until the Merger has
occurred;
NOW, THEREFORE, in consideration of the foregoing and the mutual
promises, covenants and agreements of the parties hereto, and for other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, and subject to the conditions hereof, the parties hereto agree
as follows:
ARTICLE I
1.1 DEFINITIONS. In addition to the terms defined herein, for purposes
of this Agreement, the following terms shall have the meanings specified
below. Capitalized terms used but not defined herein having the meanings set
forth in the Merger Agreement.
"1933 ACT" means the Securities Act of 1933, as amended, or any similar
successor federal statute and the rules and regulations thereunder, all as
the same shall be in effect from time to time.
"1934 ACT" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated thereunder.
"AFFILIATE" means, with respect to any Person, any other Person directly
or indirectly controlling, controlled by or under common control with such
Person; "control" when used with respect to any Person means the possession,
directly or indirectly, of the power to direct or cause the direction of the
management or policies of such Person, whether through the ownership of
voting securities or by contract or otherwise; and the term "voting
securities" means securities or interests entitling the holder thereof to
vote or designate directors or individuals performing a similar function.
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<PAGE>
"AGREEMENT" has the meaning ascribed to it in the preamble hereto.
"CERTIFICATE" means the certificate of incorporation of the Company as
amended in accordance with the Merger Agreement and in effect immediately
following the Effective Time.
"COMMISSION" means the Securities and Exchange Commission or any other
federal agency at the time administering the 1933 Act.
"COMMON STOCK" has the meaning ascribed to it in the recitals.
"COMPANY" has the meaning ascribed to it in the preamble hereto.
"DEMAND NOTICE" has the meaning ascribed to it in Section 5.1.
"DEMAND REGISTRATION" has the meaning ascribed to it in Section 5.1.
"FORM S-3" means such form under the 1933 Act as in effect on the date
hereof or any comparable form or successor form under the 1933 Act
subsequently adopted by the Commission which permits inclusion or
incorporation of substantial information by reference to other documents
filed by the Company with the Commission.
"MERGER" has the meaning ascribed to it in the recitals.
"MINIMUM PRICE" has the meaning ascribed to it in Section 2.3.
"NOTIFICATION" has the meaning ascribed to it in Section 2.3.
"OFFERED SHARES" has the meaning ascribed to it in Section 2.3.
"OFFERING STOCKHOLDER" has the meaning ascribed to it in Section 2.3.
"PERSON" means any individual, partnership, joint venture, firm,
corporation, limited liability company, association, trust or any other
entity or any government or political subdivision or an agency, department or
instrumentality thereof.
"REGISTER," "REGISTERED" and "REGISTRATION" refer to a registration
effected by preparing and filing a registration statement or similar document
in compliance with the 1933 Act, and the declaration or ordering of
effectiveness of such registration statement or document.
"REGISTRABLE SECURITIES" means Common Stock issued as Additional
Consideration, excluding in all cases, however, any Registrable Securities
sold by a person in a transaction in which such person's registration rights
are not assigned; provided, however, that any shares of Common Stock
previously sold to the public pursuant to a registered public offering or
pursuant to Rule 144 under the 1933 Act shall cease to be Registrable
Securities.
"SALEABLE OFFERED SHARES" has the meaning ascribed to it in Section 2.5.
"STOCKHOLDERS" has the meaning ascribed to it in the preamble hereto.
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<PAGE>
"SUBSIDIARY" means, with respect to any Person, any other Person of
which a majority of the outstanding voting securities or ownership interests
is owned, directly or indirectly, by such Person.
1.2 INTERPRETATION. For all purposes of this Agreement, except as
otherwise expressly provided herein or unless the context otherwise requires:
(a) the terms defined in this Article I or elsewhere in this Agreement
have the meanings assigned to them in this Article I or elsewhere in this
Agreement and include the plural as well as the singular and vice-versa;
(b) words importing neuter or gender include all genders;
(c) any reference to an "Article", a "Section", an "Exhibit" or a
"Schedule" refers to an Article, a Section, an Exhibit or a Schedule, as the
case may be, of this Agreement;
(d) all references to this Agreement and the words "herein", "hereof",
"hereto", and "hereunder" and other words of similar import refer to this
Agreement as a whole and not to any particular Article, Section, Exhibit,
Schedule or other subdivision;
(e) any references to agreements or contracts, including this
Agreement, shall mean such agreements or contracts together with all
exhibits, schedules, appendices and attachments thereto and as such
agreements or contracts may be amended, restated, supplemented or otherwise
modified from time to time; and
(f) the determination of whether a Person is a "beneficial owner," has
"beneficial ownership" or "beneficially owns" Shares or any other securities
shall be made in accordance with Rule 13d-3 of the 1934 Act.
ARTICLE II
TRANSFER RESTRICTIONS
2.1 GENERAL PROHIBITION ON TRANSFERS OF COMMON STOCK. No Stockholder
shall, directly or indirectly, sell, assign, pledge, hypothecate, encumber or
otherwise dispose (voluntarily or involuntarily) of any shares of Common
Stock or any interest therein beneficially owned by it (all of which acts
shall be deemed included in the term "transfer" as used in this Agreement)
except pursuant to the terms of Section 2.3. Any transfer in violation of
such restrictions shall be void and ineffectual and shall not operate to
transfer any interest of title in the shares of Common Stock so transferred
to the proposed transferee. If, notwithstanding the immediately preceding
sentence, any such transfer is held by a court of competent jurisdiction to
be effective, then the provisions of this Agreement shall apply to the
transferee and to any subsequent transferee as fully as if such transferee
were a party hereto.
2.2 RESTRICTIVE LEGEND. Each certificate evidencing shares of Common
Stock shall contain the following restrictive legend:
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, AND MAY NOT BE SOLD, OFFERED FOR SALE.
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<PAGE>
TRANSFERRED, ASSIGNED, PLEDGED, OR HYPOTHECATED IN THE ABSENCE OF A
REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES UNDER
SUCH SECURITIES ACT OR AN OPINION OF COUNSEL SATISFACTORY TO CORPORATION
THAT SUCH REGISTRATION IS NOT REQUIRED OR UNLESS SOLD PURSUANT TO RULE
144 OF SUCH ACT. THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE
SUBJECT TO THE TERMS OF A STOCKHOLDERS' AGREEMENT DATED AS OF SEPTEMBER
30, 1998 AND MAY BE VOTED, SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF
ONLY IN ACCORDANCE WITH SUCH AGREEMENT.
2.3 RIGHT OF FIRST REFUSAL. If at any time any Stockholder desires to
transfer any shares of Common Stock to any Person other than (i) pursuant to
Rule 144 under the 1933 Act, (ii) as a bona fide gift or gifts, (iii) to the
spouse, siblings, lineal descendants or ancestors of such Stockholder or (iv)
a trust the sole current beneficiaries of which are such Stockholder, his
spouse, siblings, lineal descendants and/or ancestors, such Stockholder (the
"Offering Stockholder") will notify the Company in writing (the
"Notification") of such Stockholder's intention to do so, specifying the
number of shares of Common Stock proposed to be transferred (the "Offered
Shares"), the name of the Person or Persons to whom such Stockholder proposes
to transfer the Offered Shares (or if no particular purchaser is identified,
then the general class of persons to whom such Stockholder proposes to
transfer the Offered Shares), and a price per share which shall be the
minimum price at which such Stockholder proposes to effect the transfer (the
"Minimum Price"). The Notification shall contain an affirmation by the
Offering Stockholder that such Stockholder has a reasonable expectation of
being able to effect the proposed transfer to such Person or Persons (or
class of Persons) at the Minimum Price, and shall recite the basis for such
expectation. The Notification shall offer to sell to the Company, Offered
Shares, free and clear of any liens or encumbrances in favor of third
Persons, at the Minimum Price and on such other terms and conditions, if any,
not less favorable to the Company than those proposed to be offered to such
other Person or Persons (or class of Persons). In the event all or any part
of the consideration for the proposed transfer shall consist of other than
cash, the Minimum Price shall mean the fair value of such consideration,
including the fair value of any promissory notes of the prospective purchaser
(taking into account, among other matters, the terms of the notes and the
credit worthiness of the prospective purchaser).
2.4 NOTIFICATION BY COMPANY. The Company shall have the right and
option (subject to the provisions of Section 2.5 hereof), for a period of
thirty (30) days after delivery of the Notification, to elect to purchase all
or any part of the Offered Shares at ninety five percent (95%) of the
aggregate Minimum Price of the Offered Shares and on the terms and conditions
stated therein.
2.5 THIRD PARTY SALES. If effective acceptance shall not be received
pursuant to Section 2.4 hereof with respect to all Offered Shares pursuant to
any Notification, then the Offering Stockholder may sell all or any part of
such Offered Shares as to which such an effective acceptance has not been so
received (the "Saleable Offered Shares") at a price not less than the Minimum
Price, and on other terms not materially more favorable to the purchaser
thereof than the terms stated in such Notification, at any time within ninety
(90) days after the expiration of the offer pursuant to the Notification. In
the event such Saleable Offered Shares are not sold by the Offering
Stockholder during such 90-day period, the right of the Offering Stockholder
to sell such Saleable Offered Shares shall expire and the obligations of this
Article II shall be reinstated; PROVIDED, HOWEVER, that in the event the
Offering Stockholder determines, at any time during such 90-day period, that
the sale of all or any part of the Saleable Offered Shares on the terms set
forth in the preceding sentence is impractical, the Offering Stockholder can
terminate the offer and reinstate the procedure provided in this Article II,
without waiting for the expiration of such 90-day period. The Offering
Stockholder may specify in the Notification that all Offered Shares must be
sold, in which case acceptances
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<PAGE>
received pursuant to Section 2.4 hereof shall be deemed conditioned upon (i)
receipt of written notices of acceptance with respect to all Offered Shares
mentioned in such Notification and/or (ii) the sale of all or the remaining
Offered Shares pursuant to this Section 2.5.
ARTICLE III
PROXY
3.1 AGREEMENT TO VOTE. The Stockholders shall vote, and hereby grant
an irrevocable proxy to the Board of Directors of the Company to vote, all
shares of Common Stock then owned by them, directly or indirectly: (a) in
accordance with the recommendation of a majority of the Board of Directors of
the Company with respect to (i) any election of directors, (ii) any amendment
to the Company's charter documents, (iii) any stockholder proposal, and (iv)
any merger, acquisition, consolidation, sale or disposition of all or
substantially all of the assets of the Company; and (b) with respect to all
other matters, at the election of the holder, either in accordance with the
recommendation of the majority of the Board of Directors or in the same
proportion as all other voting securities voted on the matter.
ARTICLE IV
STANDSTILL PROVISIONS
4.1 STANDSTILL. Without the prior written consent of the Board of
Directors, each Stockholder shall agree not to, directly or indirectly: (a)
in any manner acquire or agree to acquire beneficial ownership of voting
securities of the Company if the aggregate percentage of voting securities
beneficially owned by such Stockholder after giving effect to such
transaction would exceed five percent (5%) of the outstanding Common Stock;
(b) make or participate in any solicitation of proxies or join any voting
group or grant any proxy with respect to the Company's securities; (iii) make
any proposal relating to a tender or exchange offer for the Company's
securities or a merger, business combination, sale of assets, liquidation or
other extraordinary corporate transaction; or (iv) disclose publicly any
intention, plan or arrangement inconsistent with the foregoing or otherwise
act, alone or in concert, to seek control or influence over the management or
Board of Directors of the Company.
ARTICLE V
REGISTRATION RIGHTS
5.1 DEMAND REGISTRATION RIGHTS. The holders of Registrable Securities
may request, by written notice to the Company (a "Demand Notice"), that the
Company file a registration statement registering for offering and sale all
or a portion of the Registrable Securities (a "Demand Registration"). The
Company will give notice of its receipt of such request to the Stockholders
that did not join in such request at the addresses for notice to them on
Schedule I attached hereto, and will use its reasonable best efforts to file,
within forty-five (45) days after receipt of the initial request for
registration, a registration statement on Form S-3 with the Commission
covering all Registrable Securities owned by the Stockholders (the "Selling
Stockholders") for which registration is requested by written notice given to
the Company within fifteen (15) days after the Company gives notice of its
receipt of a request for registration, subject to the Company's blackout
rights described below. The Company will use its reasonable best efforts to
cause such registration
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statement to be declared effective as soon thereafter as practicable. The
Company will include in such registration statement provisions permitting the
use of such registration statement and the related prospectus in connection
with the offering of such Registrable Securities for ninety (90) days after
the effective date of such registration statement, subject to the Company's
blackout rights described below. The Company agrees to keep such
registration statement effective for such 90-day period and, after the
expiration of such 90-day period, may deregister the Registrable Securities
registered thereon that have not been sold. The Company will not be
obligated to effect more than two (2) Demand Registrations in total and no
more than one (1) Demand Registration during any 12-month period.
Notwithstanding the preceding provisions of this section, a Demand
Registration will be effected by the Company only if the Selling Holders have
demanded the registration of an aggregate of one hundred thousand (100,000)
or more shares of Registrable Securities. If a Demand Notice covers less
than one hundred thousand (100,000) shares of Registrable Securities, such
Demand Notice will be disregarded and the Company will give notice of that
fact to the Stockholders.
5.2 PIGGYBACK REGISTRATION RIGHTS.
(a) If at any time or times the Company proposes to make a registered
public offering of any of its securities under the 1933 Act, whether to be
sold by it or by one or more third parties, other than an offering registered
on Form S-8, Form S-4 or other Commission registration form not suitable for
inclusion of shares of selling stockholders for offer to the public, the
Company shall give written notice of the proposed registration to each
Stockholder not less than forty-five (45) days prior to the proposed filing
date of the registration form, and in any underwriting of such offering,
shall cause to be registered under the 1933 Act all Registrable Shares that
have been designated for registration at such Stockholder's request. The
Company may withdraw any proposed registration statement or offering of
securities under this Section 5.2 at any time without any liability to the
Stockholders hereunder.
(b) If a registration in which the Stockholders have the right to
participate pursuant to this Section 5.2 is an underwritten primary
registration on behalf of the Company and the managing underwriters advise
the Company in writing that in their opinion the number of securities
requested to be included in such registration exceeds the number that can be
sold in such offering, the Company shall include in such offering (i) first,
the securities the Company proposes to sell and (ii) second, the Registrable
Securities requested to be included in such registration and any other
securities requested to be in such registration, pro rata among the holders
of Registrable Securities and other securities on the basis of the number of
shares requested to be included by such holder.
5.3 OBLIGATIONS OF THE COMPANY.
Whenever required under this Agreement to effect the registration of any
Registrable Securities, the Company shall, as expeditiously as reasonably
possible:
(a) Prepare and file with the Commission a registration statement with
respect to such Registrable Securities and use its reasonable efforts to
cause such registration statement to become effective, and keep such
registration statement continuously effective under the 1933 Act until the
earlier of the expiration of ninety (90) days after the date of declaration
of effectiveness of such registration statement by the Commission (the
"Expiration Date") or the date on which this Agreement has terminated with
respect to all the Stockholders. In the event that, in the judgment of the
Company, it is advisable to suspend use of the prospectus relating to such
registration statement for a discrete period of time (a "Deferral Period")
due to pending material corporate developments or similar material events
that have not yet been publicly disclosed and as to which the Company
believes public disclosure will be prejudicial to the Company, the Company
shall deliver a certificate in writing, signed by an executive officer, to
each Stockholder, to the effect of the
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<PAGE>
foregoing and, upon receipt of such certificate, such Stockholders agree not
to dispose of such Stockholder's Registrable Securities covered by such
registration or prospectus (other than in transactions exempt from the
registration requirements under the 1933 Act); provided, however, that such
Deferral Period shall be no longer than ninety (90) days. The Expiration
Date shall be extended for a period of time equal to such Deferral Period.
(b) Prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in
connection with such registration statement as may be necessary to comply
with the provisions of the 1933 Act with respect to the disposition of all
securities covered by such registration statement.
(c) Furnish to the Stockholders covered by such registration statement
such numbers of copies of a prospectus, including a preliminary prospectus,
in conformity with the requirements of the 1933 Act, and such other documents
as they may reasonably request in order to facilitate the disposition of such
Registrable Securities.
(d) Use all reasonable efforts to register and qualify the securities
covered by such registration statement under such other securities or Blue
Sky laws of such jurisdictions as shall be reasonably requested by the
Stockholders thereof, provided that the Company shall not be required in
connection therewith or as a condition thereto to qualify to do business or
to file a general consent to service of process in any such states or
jurisdictions.
(e) In the event of any underwritten public offering, enter into and
perform its obligations under an underwriting agreement, in usual and
customary form, with the managing underwriter of such offering. Each Selling
Stockholder participating in such underwriting shall also enter into and
perform its obligations under such an agreement.
(f) Notify each Selling Stockholder of Registrable Securities covered
by such registration statement at any time when a prospectus relating thereto
is required to be delivered under the 1933 Act of the happening of any event
as a result of which the prospectus included in such registration statement,
as then in effect, includes an untrue statement of a material fact or omits
to state a material fact required to be stated therein or necessary to make
the statements therein not misleading in the light of the circumstances then
existing.
(g) At the request of any such Selling Stockholder (i) furnish to such
Selling Stockholder on the effective date of the registration statement or,
if such registration includes an underwritten public offering, at the closing
provided for in the underwriting agreement, an opinion, dated such date, of
the counsel representing the Company for the purposes of such registration,
addressed to the underwriters, if any, and to the Selling Stockholder or
Selling Stockholder making such request, covering such matters with respect
to the registration statement, the prospectus and each amendment or
supplement thereto, proceedings under state and federal securities laws,
other matters relating to the Company, the securities being registered and
the offer and sale of such securities as are customarily the subject of
opinions of issuer's counsel provided to underwriters in underwritten public
offerings, and (ii) use its best effort to furnish to such Selling
Stockholder letters dated each such effective date and such closing date,
from the independent certified public accountants of the Company, addressed
to the underwriters, if any, and to the Selling Stockholder or Selling
Stockholders making such request, stating that they are independent certified
public accountants within the meaning of the 1933 Act and dealing with such
matters as the underwriters may request, or, if the offering is not
underwritten, that in the opinion of such accountants the financial
statements and other financial data of the Company included in the
registration statement or the prospectus or any amendment or
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<PAGE>
supplement thereto comply in all material respects with the applicable
accounting requirements of the 1933 Act, and additionally covering such other
financial matters, including information as to the period ending not more
than five (5) business days prior to the date of such letter with respect to
the registration statement and prospectus, as such requesting selling
Stockholder or Stockholders may reasonably request.
5.4 OBLIGATIONS OF THE STOCKHOLDERS.
(a) It shall be a condition precedent to the obligations of the Company
to take any action pursuant to this Article V that the Selling Stockholders
shall furnish to the Company such information regarding themselves, the
Registrable Securities held by them, and the intended method of disposition
of such securities as shall be required to effect the registration of the
Registrable Securities.
(b) Upon the receipt by a Stockholder of any notice from the Company of
(i) the existence of any fact or the happening of any event as a result of
which the prospectus included in a registration statement filed pursuant to
Section 5.2, as such registration statement is then in effect, includes an
untrue statement of a material fact or omits to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading in the light of the circumstances then existing, (ii) the issuance
by the Commission of any stop order or injunction suspending or enjoining the
use or the effectiveness of such registration statement or the initiation of
any proceedings for that purpose, or the taking of any similar action by the
securities regulators of any state or other jurisdiction, or (iii) the
request by the Commission or any other federal or state governmental agency
for amendments or supplements to such registration statement or related
prospectus or for additional information related thereto, such Stockholder
shall forthwith discontinue disposition of such Stockholder's Registrable
Securities covered by such registration or prospectus (other than in
transactions exempt from the registration requirements under the 1933 Act)
until such Stockholder's receipt of the supplemented or amended prospectus or
until such Stockholder is advised in writing by the Company that the use of
the applicable prospectus may be resumed. In such a case, the period of such
registration statement shall be extended by the number of days from and
including the date of the giving of such notice to and including the date
when each Stockholder shall have received a copy of the supplemented or
amended prospectus or when such Stockholder is advised in writing by the
Company that the use of the applicable prospectus may be resumed.
5.5 LOCK-UP PROVISION.
In connection with any underwritten public offering by the Company of
its equity securities pursuant to an effective registration statement filed
under the 1933 Act, if requested by the underwriter the Stockholders will not
engage in transactions involving the Company's equity securities, including
by commencing any public offering of the Company's equity securities or by
causing a Demand Registration, for a period (not to exceed one hundred eighty
(180) days after the effective date of any registration statement of the
Company) that is equal to the shortest period that such restriction is made
applicable to all directors and officers of the Company.
5.6 EXPENSES.
(a) The holders of Registrable Securities included in any Demand
Registration shall bear and pay all expenses incurred by the Company in
connection with any registration, filing or qualification of Registrable
Securities with respect to registrations pursuant to Section 5.1 hereof, pro
rata based upon the number of shares included by each such holder. Each
Stockholder shall pay all underwriting discounts and commissions and transfer
taxes, if any, relating to the sale or disposition of such holder's
Registrable Securities included in the Demand Registration.
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<PAGE>
(b) The Company shall bear and pay all expenses incurred by the Company
in connection with any registration, filing or qualification of Registrable
Securities with respect to the registrations pursuant to Section 5.2 hereof
(solely with respect to registered public offerings by the Company for the
primary sale of its securities) for each Stockholder thereof, including
(without limitation) all registration, filing and qualification fees,
printers' and accounting fees relating or apportionable thereto, fees and
disbursements of counsel for the Company, blue sky fees and expenses,
including fees and disbursements of counsel related to all blue sky matters,
the expenses of providing materials pursuant to Section 5.3(c) hereof, but
excluding the fees and disbursements of counsel for the selling the
Stockholders, stock transfer taxes that may be payable by the selling the
Stockholders, and all underwriting discounts and commissions relating to
Registrable Securities, which shall be borne by the Stockholders, pro rata
based on the number of shares included by such holder.
5.7 DELAY OF REGISTRATION.
No Stockholder shall have any right to obtain or seek an injunction
restraining or otherwise delaying any such registration as the result of any
controversy that might arise with respect to the interpretation or
implementation of this Agreement.
5.8 INDEMNIFICATION.
In the event any Registrable Securities are included in a registration
statement under this Agreement:
(a) To the extent permitted by law, the Company will indemnify and hold
harmless each Stockholder of such Registrable Securities, the officers and
directors of each such Stockholder, and each person, if any, who controls
such Stockholder within the meaning of the 1933 Act or the 1934 Act, against
any losses, claims, damages or liabilities (joint or several) to which they
may become subject under the 1933 Act, the 1934 Act or other federal or state
law, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any of the following
statements, omissions or violations (collectively, a "Violation"): (i) any
untrue statement or alleged untrue statement of a material fact contained in
such registration statement, including any preliminary prospectus or final
prospectus contained therein or any amendments or supplements thereto, (ii)
the 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 (iii) any violation or alleged violation by the Company of the
1933 Act, the 1934 Act, any state securities law or any rule or regulation
promulgated under the 1933 Act, the 1934 Act or any state securities law; and
the Company will reimburse each such Stockholder, officer or director, or
controlling person for any legal or other expenses reasonably incurred by
them in connection with investigating or defending any such loss, claim,
damage, liability or action; provided, however, that the indemnity agreement
contained in this Section 5.8(a) shall not apply to amounts paid in
settlement of any such loss, claim, damage, liability or action if such
settlement is effected without the consent of the Company (which consent
shall not be unreasonably withheld), nor shall the Company be liable in any
such case for any such loss, claim, damage, liability or action to the extent
that it arises out of or is based upon a Violation which occurs in reliance
upon and in conformity with written information furnished expressly for use
in connection with such registration by any such Stockholder, officer,
director, or controlling person.
(b) To the extent permitted by law, each Selling Stockholder will
indemnify and hold harmless the Company, each of its directors, each of its
officers who have signed the registration statement, each person, if any, who
controls the Company within the meaning of the 1933 Act, and any other
Stockholder selling securities in such registration statement or any of its
directors or officers or any person who controls
-54-
<PAGE>
such Stockholder, against any losses, claims, damages or liabilities (joint
or several) to which the Company or any such director, officer or controlling
person, or other such Stockholder or director, officer or controlling person
may become subject, under the 1933 Act, the 1934 Act or other federal or
state law, insofar as such losses, claims, damages or liabilities (or actions
in respect thereto) arise out of or are based upon any Violation, in each
case to the extent (and only to the extent) that such Violation occurs in
reliance upon and in conformity with written information furnished by such
Stockholder expressly for use in connection with such registration; and each
such Stockholder will reimburse any legal or other expenses reasonably
incurred by the Company or any such director, officer, controlling person, or
other Stockholder, director, officer or controlling person in connection with
investigating or defending any such loss, claim, damage, liability, or
action; provided, however, that the indemnity agreement contained in this
Section 5.8(b) shall not apply to amounts paid in settlement of any such
loss, claim, damage, liability or action if such settlement is effected
without the consent of the Stockholder, which consent shall not be
unreasonably withheld; provided, that in no event shall any indemnity under
this Section 5.8(b) exceed the net proceeds received by such Stockholder from
the sale of Registrable Securities as contemplated hereunder.
(c) Promptly after receipt by an indemnified party under this Section
5.8 of notice of the commencement of any action (including any governmental
action), such indemnified party will, if a claim in respect thereof is to be
made against any indemnifying party under this Section 5.8, deliver to the
indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party
shall have the right to retain its own counsel, with the fees and expenses to
be paid by the indemnifying party, if representation of such indemnified
party by the counsel retained by the indemnifying party would be
inappropriate due to actual or potential differing interests between such
indemnified party and any other party represented by such counsel in such
proceeding. The failure to deliver written notice to the indemnifying party
within a reasonable time of the commencement of any such action, if
prejudicial to its ability to defend such action, shall relieve such
indemnifying party of any liability to the indemnified party under this
Section 5.8, but the omission so to deliver written notice to the
indemnifying party will not relieve it of any liability that it may have to
any indemnified party otherwise than under this Section 5.8.
(d) The obligations of the Company and the Stockholders under this
Section 5.8 shall survive the completion of any offering of Registrable
Securities in a registration statement under this Agreement, and otherwise.
5.9 REPORTS UNDER 1934 ACT.
With a view to making available to the Selling Stockholders the benefits
of Rule 144 promulgated under the 1933 Act and any other rule or regulation
of the Commission that may at any time permit a Selling Stockholder to sell
securities of the Company to the public without registration or pursuant to a
registration on Form S-3, the Company agrees to:
(a) make and keep public information available, as those terms are
understood and defined in Commission Rule 144, at all times;
(b) file with the Commission in a timely manner all reports and other
documents required of the Company under the 1933 Act and the 1934 Act; and
(c) furnish to any Selling Stockholder, so long as the Selling
Stockholder owns any Registrable
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<PAGE>
Securities, forthwith upon request (i) a written statement by the Company
that it has complied with the reporting requirements of Commission Rule 144,
the 1933 Act or the 1934 Act, or that it qualifies as a registrant whose
securities may be resold pursuant to Form S-3, (ii) a copy of the most recent
annual or quarterly report of the Company and such other reports and
documents so filed by the Company, and (iii) such other information as may be
reasonably requested in availing any Selling Stockholder of any rule or
regulation of the Commission which permits the selling of any such securities
without registration or pursuant to such form.
5.10. TERMINATION OF REGISTRATION RIGHTS.
The Company's obligations pursuant to Article V of this Agreement shall
terminate as to any Stockholder's shares of Registrable Securities which can
be sold in any three month period pursuant to Rule 144 promulgated under the
1933 Act or any successor exemption under the 1933 Act. The registration
rights provided hereunder shall not be assignable or transferable.
ARTICLE VI
MISCELLANEOUS PROVISIONS
6.1 CONFLICT WITH CERTIFICATE AND/OR BYLAWS. The parties hereto intend
that in the event of any conflict or inconsistency between this Agreement and
the Certificate or Bylaws of the Company, the provisions of this Agreement
shall control, and therefore in the event that any term or provision of this
Agreement is rendered invalid, illegal or unenforceable by the Certificate or
Bylaws, the parties agree to take all action, including voting their shares
of Preferred Stock, to amend the Certificate or Bylaws (as the case may be)
so as to render such term or provision valid, legal and enforceable, if and
to the extent legally permitted.
6.2 AMENDMENT. This Agreement may be altered or amended only with the
written consent of the Company, and the collective consent of the
Stockholders. Any provision of this Agreement which is prohibited or
unenforceable shall be ineffective to the extent of such prohibition or
unenforceability without affecting the validity or enforceability of the
remaining provisions hereof.
6.3 SPECIFIC PERFORMANCE. The parties hereto agree that the
obligations imposed on them in this Agreement are special, unique and of an
extraordinary character, and that in the event of breach by any party damages
would not be an adequate remedy, and each of the other parties shall be
entitled to specific performance and injunctive and other equitable relief in
addition to any other remedy to which it may be entitled, at law or in
equity; and the parties hereto further agree to waive any requirement for the
securing or posting of any bond in connection with the obtaining of any such
injunctive or other equitable relief.
6.4 SUCCESSORS AND ASSIGNS. The terms and conditions of this Agreement
shall inure to the benefit of and be binding upon the respective successors
and permitted assignees of the parties hereto; PROVIDED that except as
expressly permitted or required elsewhere in this Agreement, the rights and
obligations of the parties hereto may not be assigned without the prior
written consent of all of the other parties; PROVIDED FURTHER, that the
provisions of Articles III and IV shall not be binding on successors and
permitted assigns who received their share of Common Stock in a public sale
pursuant to a registered public offering or pursuant to Rule 144 under the
1933 Act.
6.5 SHARES OF COMMON STOCK SUBJECT TO THIS AGREEMENT. All outstanding
shares of the Common Stock issued as consideration in connection with the
Merger beneficially owned or hereafter acquired by the
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<PAGE>
Stockholders or their Affiliates shall be subject to the terms of this
Agreement.
6.6 NOTICES. All notices, statements, instructions or other documents
provided for herein shall be in writing and shall be delivered either
personally or by mailing the same in a sealed envelope, first-class mail,
postage prepaid and either certified or registered, return receipt requested
or by mailing (as set forth above) and transmitting by facsimile a copy of
such writing, addressed as follows:
(a) if to the Company, to:
LodgeNet Entertainment Corporation
3900 West Innovation Street
Sioux Falls, South Dakota 57107
Attn: Chief Operating Officer
Fax: (605) 988-1323
with a copy similarly addressed to the attention of
Eric R. Jacobsen, Vice President and General Counsel
with a copy to:
Pillsbury Madison & Sutro LLP
235 Montgomery Street
San Francisco, CA 94104
Attn: Gregg Vignos
Fax: (415) 983-1200
(b) if to the Stockholders, to their respective addresses and
facsimile numbers set forth on Schedule I hereto.
Each party, by written notice given to the other parties in accordance with
this Section 6.6, may change the address to which notices, statements,
instructions or other documents are to be sent to such party. Except as
otherwise provided herein, all notices, statements, instructions and other
documents hereunder shall be deemed to have been given on the earlier of the
date of actual delivery and three (3) days after the date of mailing, except
that notice of a change of address shall be effective only upon actual
delivery.
6.7 COMPLETE AGREEMENT; COUNTERPARTS. This Agreement constitutes the
entire agreement among the parties hereto or any of them with respect to the
matters referred to herein as they relate to the parties hereto. This
Agreement may be executed by the parties hereto in any number of
counterparts, each of which shall be deemed to be an original, but all of
which shall together constitute one and the same instrument.
6.8 TERM OF THE AGREEMENT. Unless this Section 6.8 is amended in
accordance with the provisions of Section 6.2 hereof, this Agreement shall
expire on the fifth (5th) anniversary of the Closing Date.
6.9 HEADINGS. The section headings herein are for convenience of
reference only and in no way define, limit or extend the scope or intent of
this Agreement or any provisions hereof.
6.10 GOVERNING LAW. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of Delaware (without regard to
principles of conflicts of law). The parties agree that any service of
process to be made hereunder may be made by certified mail, return receipt
requested, addressed
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<PAGE>
to the party at the address appearing in Section 6.6 together with a copy to
be delivered to such party's attorneys as provided in Section 6.6.
6.11 ARBITRATION. All disputes arising in connection with or relating
to this Agreement, or the breach thereof, shall be finally settled by
arbitration in accordance with the Commercial Arbitration Rules of the
American Arbitration Association by one or more arbitrators appointed in
accordance with said Rules. The site of such arbitration shall be Denver,
Colorado. The award of the arbitrator shall be final and binding and may be
enforced in any and all courts having jurisdiction over the party against
which the award is rendered. The prevailing party in any legal or
arbitration action brought by one party against the other shall be entitled,
in addition to any other rights and remedies it may have, to reimbursement
for its expenses incurred thereby, including the costs of investigation,
consultant fees, court costs and reasonable attorney's fees.
6.12 CONSENT BY THE STOCKHOLDERS. Any provision of this Agreement that
requires any collective consent, agreement, waiver, designation or other
determination or decision of the Stockholders, shall require, and shall be
deemed to have been given or made upon, the consent, agreement, waiver,
designation or other determination or decision of holders of a majority in
interest of the shares of Preferred Stock held by the Stockholders, as of the
date such collective consent, agreement, waiver, designation or other
determination or decision is required.
6.13 EFFECTIVENESS OF AGREEMENT. This Agreement shall not be effective
unless and until the Merger has occurred.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
LODGENET ENTERTAINMENT CORPORATION
By
------------------------------------
Title
------------------------------------
STOCKHOLDERS:
--------------------------------------
Michael Slemmer
--------------------------------------
Michael Petras
--------------------------------------
Charles Katz
--------------------------------------
Kevin Hartz
--------------------------------------
Jonah Steinhart
--------------------------------------
Roger McAulay
--------------------------------------
John Witchel
USWEB CORPORATION
By
------------------------------------
Title
------------------------------------
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<PAGE>
SCHEDULE I
SCHEDULE OF STOCKHOLDERS
NAME & ADDRESS
OF STOCKHOLDER
Michael Slemmer
400 East 13th Street, Apt. 310
Sioux Falls, SD 57104
Facsimile: __________________
Telephone: (605) 988-1541
Michael Petras
300 Montgomery Street, Suite 904
San Francisco, CA 94104
Facsimile: __________________
Telephone: (415) 981-7711
Charles Katz
2005 18th Street
San Francisco, CA 94107
Facsimile: __________________
Telephone: (415) 550-9246
Kevin Hartz
601 4th Street, #329
San Francisco, CA 94107
Facsimile: __________________
Telephone: __________________
Jonah Steinhart
1070 Church Street, Apt. 207
San Francisco, CA 94114
Facsimile: __________________
Telephone: (415) 550-4123
Roger McAulay
2218 St. Charles Circle
Sioux Falls, SD 57103
Facsimile: __________________
Telephone: (605) 988-1555
John Witchel
155 Alma Street
San Francisco, CA 94117
Facsimile: __________________
Telephone: (415) 772-3660
USWeb Corporation
2880 Lakeside Drive, Suite 300
Santa Clara, CA 95054
Facsimile: __________________
Telephone: __________________
-60-
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0
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