-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LtXEk4F/bPnAUvs9/XkapJGXCHHOY9fsXSCshrsV5F1utq03TVxsY6s8hN3S2JlQ imdrgLDqswsaiKedkH9/Ww== 0001017062-98-002019.txt : 19980930 0001017062-98-002019.hdr.sgml : 19980930 ACCESSION NUMBER: 0001017062-98-002019 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 21 FILED AS OF DATE: 19980929 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: DIVA SYSTEMS CORP CENTRAL INDEX KEY: 0001003439 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 943226532 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-64483 FILM NUMBER: 98716840 BUSINESS ADDRESS: STREET 1: 333 RAVENSWOOD AVE STREET 2: BUILDING 205 CITY: MENLO PARK STATE: CA ZIP: 94025 BUSINESS PHONE: 6508596400 MAIL ADDRESS: STREET 1: 333 RAVENSWOOD AVE STREET 2: BLDG 205 CITY: MENLO PARK STATE: CA ZIP: 94025 S-4 1 FORM S-4 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 29, 1998 REGISTRATION NO. 333- ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- NOTE EXCHANGE OFFER ON FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------- DIVA SYSTEMS CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) --------------- DELAWARE 4841 94-3226532 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
333 RAVENSWOOD AVENUE, BUILDING 205 MENLO PARK, CALIFORNIA 94025 (650) 859-6400 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) --------------- ALAN H. BUSHELL PRESIDENT, CHIEF OPERATING OFFICER AND CHIEF FINANCIAL OFFICER DIVA SYSTEMS CORPORATION 333 RAVENSWOOD AVENUE, BUILDING 205 MENLO PARK, CALIFORNIA 94025 (650) 859-6400 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) --------------- COPIES TO: BARRY E. TAYLOR, ESQ. MEREDITH S. JACKSON, ESQ. WILSON SONSINI GOODRICH & ROSATI PROFESSIONAL CORPORATION 650 PAGE MILL ROAD PALO ALTO, CA 94304 (650) 493-9300 --------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier registration statement for the same offering. [_] CALCULATION OF REGISTRATION FEE
========================================================================================== PROPOSED MAXIMUM TITLE OF EACH CLASS OF PROPOSED MAXIMUM AGGREGATE SECURITIES TO BE AMOUNT TO BE OFFERING PRICE OFFERING AMOUNT OF REGISTERED REGISTERED PER UNIT(1) PRICE(1) REGISTRATION FEE - ----------------------------------------------------------------------------------------- 12 5/8% Senior Discount Notes due 2008, Series B.................... $463,000,000 58% $269,782,000 $79,586 =========================================================================================
(1) Estimated solely for the purpose of calculating the registration fee based on the aggregate accreted value of the 12 5/8% Senior Discount Notes due 2008, Series A as of September 29, 1998. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. =============================================================================== ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS + +OF ANY SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION DATED SEPTEMBER 29, 1998 PROSPECTUS DIVA SYSTEMS CORPORATION OFFER TO EXCHANGE ITS 12 5/8% SENIOR DISCOUNT NOTES DUE MARCH 1, 2008, SERIES B WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT FOR ANY AND ALL OF ITS OUTSTANDING 12 5/8% SENIOR DISCOUNT NOTES DUE MARCH 1, 2008, SERIES A ----------- THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME ON , 199 , UNLESS EXTENDED. ----------- DIVA Systems Corporation (the "Company") hereby offers, upon the terms and subject to the conditions set forth in this Prospectus (as the same may be amended or supplemented from time to time, the "Prospectus") and the accompanying Letter of Transmittal (the "Letter of Transmittal" and together with this Prospectus, the "Exchange Offer"), to exchange $1,000 principal amount at maturity of its 12 5/8% Senior Discount Notes due March 1, 2008, Series B (the "New Notes") which have been registered under the Securities Act of 1933, as amended (the "Securities Act"), pursuant to a registration statement of which this Prospectus is a part, for each $1,000 principal amount at maturity of its outstanding 12 5/8% Senior Discount Notes due March 1, 2008, Series A (the "Old Notes"), of which $463,000,000 principal amount at maturity is outstanding as of the date hereof. The Company will accept for exchange any and all validly tendered Old Notes prior to 5:00 P.M., New York City time, on , 199 , unless extended (the "Expiration Date"). Old Notes may be tendered only in integral multiples of $1,000 principal amount at maturity. Tenders of Old Notes may be withdrawn at any time prior to 5:00 P.M., New York City time, on the Expiration Date. The Exchange Offer is not conditioned upon any minimum amount of Old Notes being tendered for exchange. However, the Exchange Offer is subject to certain customary conditions. In the event the Company terminates the Exchange Offer and does not accept for exchange any Old Notes, the Company will promptly return the Old Notes to the holders thereof. The Company will not receive any proceeds from the Exchange Offer. See "The Exchange Offer." The terms of the New Notes will be identical in all material respects to those of the Old Notes, except that the New Notes (i) will have been registered under the Securities Act of 1933, as amended (the "Securities Act") and therefore will not be subject to certain restrictions on transfer applicable to the Old Notes and (ii) will not be entitled to certain registration or other rights under the Registration Rights Agreement (as defined below), including the provision in the Registration Rights Agreement that if the Exchange Offer is not consummated by the time period specified therein, interest on the Old Notes (in addition to interest otherwise accruing on the Old Notes after March 1, 2003) will accrue at the rate of 0.5% per annum of the Accreted Value (as defined) of the Old Notes on the preceding Semi-Annual Accrual Date (as defined) and be payable in cash semi-annually on March 1 and September 1 commencing September 1, 1999, until the Exchange Offer is consummated. See "Description of the Old Notes -- Registration Rights; Additional Interest." The New Notes will be entitled to the benefits of the indenture (the "Indenture") governing the Old Notes. See "Description of the Old Notes" and "The Exchange Offer." The definitions of certain terms used herein are set forth in "Description of the Old Notes -- Certain Definitions" or in Appendix A of this Prospectus. (Continued on following page) THIS PROSPECTUS AND THE LETTER OF TRANSMITTAL ARE FIRST BEING MAILED TO HOLDERS ON , 199 . SEE "RISK FACTORS" ON PAGE 10 FOR INFORMATION THAT SHOULD BE CONSIDERED IN CONNECTION WITH THE EXCHANGE OFFER. ----------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ----------- The date of this Prospectus is , 199 The New Notes are being offered hereunder in order to satisfy certain obligations of the Company under the Registration Rights Agreement dated as of February 19, 1998 (the "Registration Rights Agreement") by and among the Company and Merrill Lynch & Co., Chase Securities Inc. and Morgan Stanley Dean Witter (the "Initial Purchasers"), a copy of which has been filed as an exhibit to the Registration Statement of which this Prospectus is a part. The Exchange Offer is intended to satisfy the Company's obligations under the Registration Rights Agreement to register the Old Notes under the Securities Act. Once the Exchange Offer is consummated, the Company will have no further obligations to register any of the Old Notes not tendered by the holders of the Old Notes (together with the holders of the New Notes, the "Holders") for exchange. See "Risk Factors --Consequences to Non-Tendering Holders of Old Notes." The Old Notes were initially represented (i) in the case of Old Notes initially purchased by "qualified institutional buyers" (as such term is defined in Rule 144A under the Securities Act), by four global Old Notes in fully registered form, all registered in the name of a nominee of The Depository Trust Company ("DTC"), and (ii) in the case of Old Notes initially purchased by persons other than U.S. persons in reliance upon Regulation S under the Securities Act, by four global Regulation S Old Notes in fully registered form, all registered in the name of a nominee of DTC for the accounts of Euroclear System ("Euroclear") and Cedel Bank, societe anonyme ("Cedel Bank"). The New Notes exchanged for the Old Notes represented by the global Old Notes and the global Regulation S Old Notes will both be represented (a) in the case of "qualified institutional buyers," by one global New Note in fully registered form, registered in the name of the nominee of DTC, and (ii) one global Regulation S New Note in fully registered form registered in the name of the nominee of DTC for the accounts of Euroclear and Cedel Bank. The global New Note and global Regulation S New Note will be exchangeable for definitive New Notes in registered form, in denominations of $1,000 principal amount at maturity and integral multiples thereof. The New Notes in global form will trade in The Depository Trust Company's Same-Day Funds Settlement System, and secondary market trading activity in such New Notes will therefore settle in immediately available funds. See "The Exchange Offer -- Book-Entry Transfer; Delivery and Form." The New Notes will accrete in principal amount at the rate of 12 5/8% per annum from the date of issuance thereof until March 1, 2003. Thereafter, the New Notes will bear interest at a rate equal to 12 5/8% per annum, payable semi-annually in arrears on March 1 and September 1 of each year, commencing September 1, 2003. Old Notes validly tendered and accepted for exchange will continue to accrete in principal amount at the rate of 12 5/8% per annum to, but not including, the date of issuance of the New Notes. Such accretion will become a part of the Accreted Value (as defined in "Description of the Old Notes -- Certain Definitions") of the New Notes. Any Old Notes not tendered or accepted for exchange will continue to accrete in principal amount at the rate of 12 5/8% per annum in accordance with its terms. The New Notes will be redeemable at the option of the Company, in whole or in part, at any time on or after March 1, 2003, at the redemption prices set forth herein, together with accrued and unpaid interest, if any, to the date of redemption. On or prior to March 1, 2001, up to 35% of the Accreted Value of the New Notes will be redeemable at the option of the Company with the net cash proceeds of one or more sales of Capital Stock (other than Disqualified Stock) (as such terms are defined in "Description of the Old Notes -- Certain Definitions") at a redemption price of 112.625% of the Accreted Value on the date of redemption; provided, however, that New Notes representing $301.0 million of aggregate principal amount at maturity of the New Notes remain outstanding immediately after such redemption. Upon the occurrence of a Change of Control (as defined in "Description of the Old Notes -- Certain Definitions"), the Company must repurchase all or a portion of such Holder's New Notes at 101% of the aggregate Accreted Value thereof (if prior to March 1, 2003) or the principal amount thereof (if on or after March 1, 2003), together with accrued and unpaid interest if any, to the date of repurchase. See "Description of the Old Notes" and "Description of the New Notes." The Company is making the Exchange Offer in reliance on the position of the Staff of the Division of Corporation Finance of the Securities Exchange Commission (the "SEC" or "Commission") as set forth in the Staff's Exxon Capital Holdings Corp. SEC No-Action Letter (available April 13, 1989), Morgan Stanley & Co., Inc. SEC No-Action Letter (available June 5, 1991), Shearman & Sterling SEC No-Action Letter (available i July 7, 1993), and other interpretive letters addressed to third parties in other transactions. However, the Company has not sought its own interpretive letter and there can be no assurance that the Staff of the Division of Corporation Finance of the SEC would make a similar determination with respect to the Exchange Offer as it has in such interpretive letters to third parties. Based on these interpretations by the Staff of the Division of Corporation Finance, and subject to the two immediately following sentences, the Company believes that New Notes issued pursuant to this Exchange Offer in exchange for Old Notes may be offered for resale, resold and otherwise transferred by a Holder thereof (other than a Holder who is a broker-dealer) without further compliance with the registration and prospectus delivery requirements of the Securities Act; provided, that such New Notes are acquired in the ordinary course of such Holder's business and that such Holder is not participating, and has no arrangement or understanding with any person to participate, in a distribution (within the meaning of the Securities Act) of such New Notes. However, any Holder of Old Notes who is an "affiliate" of the Company or who intends to participate in the Exchange Offer for the purpose of distributing New Notes, or any broker-dealer who purchased Old Notes from the Company to resell pursuant to Rule 144A under the Securities Act ("Rule 144A") or any other available exemption under the Securities Act, (a) will not be able to rely on the interpretations of the Staff of the Division of Corporation Finance of the SEC set forth in the above-mentioned interpretive letters, (b) will not be permitted or entitled to tender such Old Notes in the Exchange Offer and (c) must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any sale or other transfer of such Old Notes unless such sale is made pursuant to an exemption from such requirements. See "Risk Factors -- Consequences to Non- Tendering Holders of Old Notes." In addition, as described below, if any broker-dealer holds Old Notes acquired for its own account as a result of market-making or other trading activities (a "Participating Broker-Dealer") and exchanges such Old Notes for New Notes, then such Participating Broker- Dealer must deliver a prospectus meeting the requirements of the Securities Act in connection with any resales of such New Notes. Each Holder of Old Notes who wishes to exchange Old Notes for New Notes in the Exchange Offer will be required to represent that (i) it is not an "affiliate" of the Company, (ii) any New Notes to be received by it are being acquired in the ordinary course of its business, (iii) it has no arrangement or understanding with any person to participate in a distribution (within the meaning of the Securities Act) of such New Notes, and (iv) if such Holder is not a broker-dealer, such Holder is not engaged in, and does not intend to engage in, a distribution (within the meaning of the Securities Act) of such New Notes. Each Participating Broker-Dealer that receives New Notes for its own account pursuant to the Exchange Offer must acknowledge that it acquired the Old Notes for its own account as a result of market-making activities or other trading activities and must agree that it will deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of such New Notes. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, a Participating Broker-Dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. Based on the position taken by the Staff of the Division of Corporation Finance of the SEC in the interpretive letters referred to above, the Company believes that Participating Broker-Dealers may fulfill their prospectus delivery requirements with respect to the New Notes received upon exchange of such Old Notes (other than Old Notes which represent an unsold allotment from the original sale of the Old Notes) with a prospectus meeting the requirements of the Securities Act, which may be the prospectus prepared for an exchange offer so long as it contains a description of the plan of distribution with respect to the resale of such New Notes. Accordingly, this Prospectus may be used by a Participating Broker-Dealer during the period referred to below in connection with resales of New Notes received in exchange for Old Notes where such Old Notes were acquired by such Participating Broker- Dealer for its own account as a result of market-making or other trading activities. Subject to certain provisions set forth in the Registration Rights Agreement, the Company has agreed that this Prospectus may be used by a Participating Broker-Dealer in connection with resales of such New Notes for a period ending 180 days after the effective date of the Registration Statement (subject to extension under certain limited circumstances described below) or, if earlier, when such Participating Broker-Dealer is no longer required to deliver a prospectus in connection with market-making or other trading activities. See "Plan of Distribution." Any Participating Broker-Dealer who is an "affiliate" of the Company may not rely on such interpretive letters and must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction. ii In that regard, each Participating Broker-Dealer who surrenders Old Notes pursuant to the Exchange Offer will be deemed to have agreed, by execution of the Letter of Transmittal, that upon receipt of notice from the Company of the occurrence of any event or the discovery of any fact which makes any statement contained or incorporated by reference in this Prospectus untrue in any material respect or which causes this Prospectus to omit to state a material fact necessary in order to make the statements contained or incorporated by reference herein, in light of the circumstances under which they were made, not misleading or of the occurrence of certain other events specified in the Registration Rights Agreement, such Participating Broker-Dealer will suspend the sale of New Notes pursuant to this Prospectus until the Company has amended or supplemented this Prospectus to correct such misstatement or omission and has furnished copies of the amended or supplemented Prospectus to such Participating Broker-Dealer or the Company has given notice that the sale of the New Notes may be resumed, as the case may be. If the Company gives such notice to suspend the sale of the New Notes, it shall extend the 180-day period referred to above during which Participating Broker-Dealers are entitled to use this Prospectus in connection with the resale of New Notes by the number of days during the period from and including the date of the giving of such notice to and including the date when Participating Broker-Dealers shall have received copies of the amended or supplemented Prospectus necessary to permit resales of the New Notes or to and including the date on which the Company has given notice that the sale of New Notes may be resumed, as the case may be. The New Notes will be senior unsecured obligations of the Company, will rank pari passu (equally) in right of payment with all existing and future unsubordinated unsecured Indebtedness (as defined in "Description of the Old Notes -- Certain Definitions") of the Company and will be senior in right of payment to all future subordinated Indebtedness of the Company. As of September 28, 1998, the Company had approximately $269.3 million of Indebtedness (not giving effect to any amounts attributable to the value of warrants issued in conjunction with the Old Notes). However, the Company is a holding company and expects to conduct a substantial portion of its business through its subsidiaries. The New Notes will be effectively subordinated to future Indebtedness and other liabilities (including any subordinated Indebtedness and trade payables) of the Company's subsidiaries. See "Risk Factors -- Substantial Leverage; Ability to Service Indebtedness; Restrictive Covenants" and "-- Holding Company Structure; Dependence of Company on Subsidiaries for Repayment of Notes." The Indenture permits the Company and its subsidiaries to incur substantial additional Indebtedness, including secured Indebtedness, subject to certain limitations. The Company's subsidiaries are separate legal entities, do not guarantee the Old Notes and will not be required to guarantee the New Notes, and are not otherwise directly or indirectly obligated in respect of the New Notes, and the Company is permitted to make substantial investments in these subsidiaries. Any Old Notes not tendered and accepted in the Exchange Offer will remain outstanding and will be entitled to all the same rights and will be subject to the same limitations applicable thereto under the Indenture and the Registration Rights Agreement (except for those rights which terminate upon consummation of the Exchange Offer). Following consummation of the Exchange Offer, the Holders of Old Notes will continue to be subject to the existing restrictions upon transfer thereof and the Company will have no further obligation to such Holders (other than to the Initial Purchasers under certain limited circumstances) to provide for registration under the Securities Act of the Old Notes held by them. To the extent that Old Notes are tendered and accepted in the Exchange Offer, a Holder's ability to sell untendered Old Notes could be adversely affected. See "Prospectus Summary -- Certain Consequences of a Failure to Exchange Old Notes." THIS PROSPECTUS AND THE RELATED LETTER OF TRANSMITTAL CONTAIN IMPORTANT INFORMATION. HOLDERS OF OLD NOTES ARE URGED TO READ THIS PROSPECTUS AND THE RELATED LETTER OF TRANSMITTAL CAREFULLY BEFORE DECIDING WHETHER TO TENDER THEIR OLD NOTES PURSUANT TO THE EXCHANGE OFFER. Prior to this Exchange Offer, there has been no public market for the Old Notes or New Notes. The Company does not intend to list the New Notes on a national securities exchange or to seek approval for iii quotation through the Nasdaq National Market. As the Old Notes were issued and the New Notes are being issued to a limited number of institutions who typically hold similar securities for investments, the Company does not expect that an active public market for the New Notes will develop. In addition, resales by certain Holders of any outstanding Old Notes and the New Notes of a substantial percentage of the aggregate principal amount at maturity of such New Notes could constrain the ability of any market maker to develop or maintain a market for the New Notes. To the extent that a market for the New Notes should develop, the market value of the New Notes will depend on prevailing interest rates, the market for similar securities and other factors, including the financial condition, performance and prospects of the Company. Such factors might cause the New Notes to trade at a discount from face value. See "Risk Factors -- Absence of Public Market for the New Notes and No Assurance of Active Trading Market." The Company has agreed to pay the expenses of the Exchange Offer. The Company will not receive any cash proceeds from the issuance of the New Notes offered hereby. No dealer-manager is being used in connection with the Exchange Offer. See "Use of Proceeds" and "Plan of Distribution." AVAILABLE INFORMATION The Company is not currently subject to the periodic reporting and other informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company has agreed that, whether or not it is required to do so by the rules and regulations of the SEC, for so long as any of the Old Notes and New Notes remain outstanding, it will furnish to the Holders of the Old Notes and New Notes (i) all quarterly and annual financial information that would be required to be contained in a filing with the SEC on Forms 10-Q and 10-K if the Company were required to file such forms, including a "Management's Discussion and Analysis of Results of Operations and Financial Condition" and, with respect to the annual information only, a report thereon by the Company's independent auditors and (ii) all reports that would be required to be filed with the SEC on Form 8-K if the Company were required to file such reports, in each case, within the time periods set forth in the rules and regulations of the SEC. In addition, for so long as the Company is not a reporting Company under the Exchange Act and any of the Old Notes and New Notes remain outstanding, the Company has agreed to make available to any prospective purchaser of the Old Notes and New Notes or beneficial owner of the Old Notes and New Notes in connection with any sale thereof, the information required by Rule 144A(d)(4) under the Securities Act. Statements made herein concerning the contents of any contract or other documents are not necessarily complete. Requests for relevant documents or other information should be submitted in writing to the Company's Vice President and Treasurer at the Company's principal executive offices at 333 Ravenswood Avenue, Building 205, Menlo Park, California 94025, or by telephone at (650) 859-6400. Market data and certain industry forecasts used throughout this Prospectus were obtained from internal surveys, market research, publicly available information and industry publications. Industry publications generally state that the information contained therein has been obtained from sources believed to be reliable, but that the accuracy and completeness of such information is not guaranteed. Similarly, internal surveys, industry forecasts and market research, while believed to be reliable, have not been independently verified by the Company and the Company makes no representation as to the accuracy of such information. Unless otherwise indicated, the source for all industry data in this Prospectus is Veronis, Suhler & Associates. DIVA is a trademark of the Company. The Company has filed applications for federal registration of this trademark. This Prospectus also makes reference to trade names and trademarks of other companies. The Indenture requires the Company to furnish Holders of the Old Notes and New Notes annual reports containing audited financial statements and quarterly reports for the first three quarters of each fiscal year containing unaudited financial statements. iv ADDITIONAL INFORMATION This Prospectus constitutes a part of a registration statement on Form S-4 (together with all amendments thereto, the "Registration Statement") filed by the Company with the SEC under the Securities Act. This Prospectus, which forms a part of the Registration Statement, does not contain all the information set forth in the Registration Statement, certain parts of which have been omitted in accordance with the rules and regulations of the SEC. Reference is hereby made to the Registration Statement and related exhibits and schedules filed therewith for further information with respect to the Company and the New Notes offered hereby. Statements contained herein concerning the provisions of any document are not necessarily complete and, in each instance, reference is made to the copy of such document filed as an exhibit to the Registration Statement or otherwise filed by the Company with the SEC and each such statement is qualified in its entirety by such reference. The Registration Statement and the exhibits and schedules thereto may be inspected and copied at the public reference facilities maintained by the SEC: New York Regional Office, Seven World Trade Center, New York, New York 10048, and Chicago Regional Office, 500 West Madison Street, Chicago, Illinois 60661. The SEC maintains a Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. Copies of the Registration Statement may be obtained from the SEC's Internet address at http://www.sec.gov. v PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and the consolidated financial statements, including the related notes thereto, appearing elsewhere in this Prospectus. References to "DIVA" or "the Company" are to DIVA Systems Corporation. Unless otherwise indicated, information in this Prospectus reflects a two-for-one stock split effected by the Company in March 1998. THE COMPANY DIVA provides a true video-on-demand ("VOD") service over the cable television infrastructure. The Company's VOD service offers immediate in-home access to a diverse and continuously available selection of hundreds of movies with VCR functionality (i.e., pause, play, fast forward and rewind) and high quality digital picture and sound. DIVA's proprietary technology is designed to provide an economically viable turnkey digital VOD system that offers movies at prices comparable to those charged for videotape rentals, pay-per-view ("PPV") and near video-on-demand ("NVOD") movies, but with greater convenience and functionality. In order to shorten the time to market for the Company's VOD service, DIVA provides a turnkey solution for cable operators that combines a technology platform with programming content and marketing and billing services. The technology foundation of the Company's VOD system is its proprietary, scalable and modular video server (the "Sarnoff Server"), a massively parallel processing computer capable of storing hundreds of movie titles, any of which can be simultaneously delivered to multiple customers. Even though only one copy of each movie title is resident on the system, customers may view and interact (i.e., pause, play, fast forward and rewind) independently with the same or different movie titles at any time. In contrast to PPV services and NVOD, which require continuous broadcasting of programming content to all homes in a cable system, the Company's technology delivers programming content to viewers on a "pointcast" basis, as requested by individual customers. DIVA's solution results in lower bandwidth requirements for cable operators, while increasing convenience and variety for cable operators' customers. DIVA believes that its VOD service offers significant advantages to cable operators, who face increased competition for subscribers from DBS companies, the telecommunications industry and other video delivery services. To date, DIVA has entered into discussions for deployment of its VOD system with a number of multiple systems operators ("MSOs") in the United States that have upgraded or have begun the process of upgrading to two-way capable hybrid fiber/coaxial ("HFC") plant. DIVA has deployed its VOD service in a single headend location in cable systems owned by Lenfest Communications, Inc. ("Lenfest"), Adelphia Communications Corporation ("Adelphia"), Cablevision Systems Corporation ("Cablevision") and Rifkin & Associates ("Rifkin"). The Company has obtained the rights to provide a broad array of entertainment content through license arrangements with Warner Bros. (including New Line Cinema, Turner and WarnerVision), Sony Pictures (including Columbia, Tristar and Sony Classics), Universal Pictures, Polygram, Walt Disney Pictures, Twentieth Century Fox, MGM, HBO and other specialized programmers. Under these arrangements, the Company has rights to over 3,000 video titles for its initial deployments, including new releases, library titles and classics, special interest videos, children's videos and adult-content movies. The Company is seeking to expand its license arrangements to include additional studios and specialized programmers and is pursuing distribution rights for new entertainment offerings, including on-demand music videos and educational, instructional and other content. The Company was founded in June 1995 when it acquired certain exclusive rights for consumer applications of the Sarnoff Server from Sarnoff Real Time Corp. ("SRTC"), a company formed as a spin-off from Sarnoff Corporation ("Sarnoff"), formerly RCA Labs, which was responsible for inventing color television. Sarnoff, a premier visual image laboratory, played a key role in developing the DIRECTV satellite system and the high definition television ("HDTV") standard. DIVA acquired SRTC in April 1998. 1 THE EXCHANGE OFFER The Exchange Offer.......... $1,000 principal amount at maturity of the New Notes in exchange for each $1,000 principal amount at maturity of the Old Notes. As of September 28, 1998, $463,000,000 in aggregate principal amount at maturity of Old Notes were outstanding. The Company will issue the New Notes to Holders on or promptly after the Expiration Date. Based on an interpretation by the Staff of the SEC set forth in the Staff's Exxon Capital Holdings Corp. SEC No-Action Letter (available April 13, 1989), Morgan Stanley & Co., Inc. SEC No-Action Letter (available June 5, 1991), Shearman & Sterling SEC No-Action Letter (available July 7, 1993), and other no-action letters issued to third parties, the Company believes that New Notes issued pursuant to the Exchange Offer in exchange for Old Notes may be offered for resale, resold and otherwise transferred by Holders thereof without compliance with the registration and prospectus delivery provisions of the Securities Act. However, any Holder who is an "affiliate" of the Company or who intends to participate in the Exchange Offer for the purpose of distributing the New Notes, or any broker-dealer who purchased Old Notes from the Company to resell pursuant to Rule 144A or any other available exemption under the Securities Act (i) cannot rely on the interpretation by the Staff of the SEC set forth in the above referenced no-action letters, (ii) cannot tender its Old Notes in the Exchange Offer and (iii) must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any sale or transfer of the Old Notes, unless such sale or transfer is made pursuant to an exemption from such requirements. See "Risk Factors -- Consequences to Non-Tendering Holder of Old Notes." Each Participating Broker-Dealer that receives New Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such New Notes. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, a Participating Broker-Dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus may be used by a Participating Broker-Dealer in connection with resales of New Notes received in exchange for Old Notes where such Old Notes were acquired by such Participating Broker-Dealer as a result of market-making activities or other trading activities and not acquired directly from the Company. The Company has agreed that for a period of 180 days after the effective date of the Registration Statement, it will make this Prospectus available to any Participating Broker-Dealer for use in connection with any such resale. See "Plan of Distribution." 2 Expiration Date................. , 199 , unless the Exchange Offer is extended, in which case the term "Expiration Date" means the latest date and time to which the Exchange Offer is extended. Accretion of the New Notes and the Old Notes................... No cash interest will accrue or be payable in respect of the New Notes prior to March 1, 2003. Thereafter, interest will accrue at the rate of 12 5/8% per annum, payable semi-annually in arrears on each March 1 and September 1, commencing September 1, 2003. The Old Notes validly tendered and accepted for exchange will continue to accrete in principal amount at the rate of 12 5/8% per annum to, but excluding, the issuance date of the New Notes and will cease to accrete in principal amount upon cancellation of the Old Notes and issuance of the New Notes. Any Old Notes not tendered or accepted for exchange will continue to accrete in principal amount at the rate of 12 5/8% per annum in accordance with its terms. The Accreted Value of the New Notes upon issuance will equal the Accreted Value of the Old Notes accepted for exchange immediately prior to issuance of the New Notes. Conditions to the Exchange The Exchange Offer is subject to certain Offer........................... customary conditions. The conditions are limited and relate in general to proceedings which have been instituted or laws which have been adopted that might impair the ability of the Company to proceed with the Exchange Offer. As of the date hereof, none of these events had occurred, and the Company believes their occurrence to be unlikely. If any such conditions do exist prior to the Expiration Date, the Company may (i) refuse to accept any Old Notes and return all previously tendered Old Notes, (ii) extend the Exchange Offer or (iii) waive such conditions. See "The Exchange Offer -- Conditions." Procedures for Tendering Old Each Holder of Old Notes wishing to Notes........................... accept the Exchange Offer must complete, sign and date the Letter of Transmittal, or a facsimile thereof, in accordance with the instructions contained herein and therein, and mail or otherwise deliver such Letter of Transmittal, or such facsimile, together with such Old Notes to be exchanged and any other required documentation to The Bank of New York, as Exchange Agent (the "Exchange Agent"), at the address set forth herein and therein or effect a tender of such Old Notes pursuant to the procedures for book-entry transfer as provided for herein. By executing the Letter of Transmittal or effecting a book-entry transfer, each Holder will represent to the Company that, among other things, the New Notes acquired pursuant to the Exchange Offer are being obtained in the ordinary course of business of the person receiving such New Notes, whether or not such person is the Holder, that neither the Holder nor any 3 such other person has an arrangement or understanding with any person to participate in the distribution of such New Notes and that neither the Holder nor any such person is an "affiliate," as defined in Rule 405 under the Securities Act, of the Company. Each Participating Broker-Dealer that receives New Notes not acquired directly from the Company must acknowledge that it will deliver a copy of this Prospectus in connection with any resale of such New Notes. See "The Exchange Offer -- Procedures for Tendering" and "Plan of Distribution." Special Procedures for Any beneficial owner whose Old Notes are Beneficial Owners............... registered in the name of a broker, dealer, commercial bank, trust company or other nominee and who wishes to tender such Old Notes in the Exchange Offer should contact such registered Holder promptly and instruct such registered Holder to tender such Old Notes on such beneficial owner's behalf. If such beneficial owner wishes to tender on such beneficial owner's own behalf, such owner must, prior to completing and executing the Letter of Transmittal and delivering its Old Notes, either make appropriate arrangements to register ownership of the Old Notes in such beneficial owner's name or obtain a properly completed bond power from the registered Holder. The transfer of registered ownership may take considerable time and may not be able to be completed prior to the Expiration Date. See "The Exchange Offer -- Procedures for Tendering." Guaranteed Delivery Procedures.. Holders of Old Notes who wish to tender their Old Notes and whose Old Notes are not immediately available or who cannot deliver their Old Notes, the Letter of Transmittal or any other documents required by the Letter of Transmittal to the Exchange Agent, or cannot complete the procedure for book-entry transfer, prior to the Expiration Date must tender their Old Notes according to the guaranteed delivery procedures set forth in "The Exchange Offer -- Guaranteed Delivery Procedures." Withdrawal Rights............... Tenders may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date by delivering a written notice of such withdrawal to the Exchange Agent in conformity with certain procedures set forth under "The Exchange Offer -- Withdrawal of Tenders." Acceptance of Old Notes and Delivery of New Notes........... The Company will accept for exchange any and all Old Notes which are properly tendered in the Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date. The New Notes issued pursuant to the Exchange Offer will be delivered promptly following the Expiration Date. Any Old Notes not accepted for exchange will be returned without 4 expense to the tendering Holder thereof as promptly as practicable after the expiration or termination of the Exchange Offer. See "The Exchange Offer -- Terms of the Exchange Offer." Certain Tax Considerations...... The exchange pursuant to the Exchange Offer should not be a taxable event for federal income tax purposes. See "Certain Federal Income Tax Considerations." Exchange Agent.................. The Bank of New York. 5 TERMS OF NEW NOTES The Exchange Offer applies to up to $463,000,000 aggregate principal amount at maturity of the Company's Old Notes. The New Notes will be obligations of the Company evidencing the same Indebtedness as the Old Notes and will be entitled to the benefits of the same Indenture. See "Description of the New Notes." The form and terms of the New Notes are the same as the form and terms of the Old Notes in all material respects except that the New Notes have been registered under the Securities Act and hence do not include certain rights to registration thereunder and do not contain transfer restrictions or terms with respect to additional interest payments applicable to the Old Notes. See "Description of the New Notes." New Notes Offered............... $463,000,000 aggregate principal amount at maturity of 12 5/8% Senior Discount Notes due 2008, Series B. Maturity........................ March 1, 2008. Interest........................ The New Notes will accrete in value through March 1, 2003 (the "Full Accretion Date") at a rate of 12 5/8% per annum, compounded semi-annually. Cash interest will neither accrue nor be payable on the New Notes prior to the Full Accretion Date. Thereafter, the New Notes will bear interest at the rate of 12 5/8% per annum, payable in cash semi- annually in arrears on March 1 and September 1, commencing September 1, 2003. Ranking......................... The New Notes will be senior unsecured obligations of the Company, will rank pari passu (equally) in right of payment with all existing and future unsubordinated unsecured Indebtedness (as defined in "Description of the Old Notes -- Certain Definitions") of the Company and will be senior in right of payment to all future subordinated Indebtedness of the Company. As of September 28, 1998, the Company had approximately $269.3 million of Indebtedness (not giving effect to any amounts attributable to the value of warrants issued in conjunction with the Old Notes). However, the Company is a holding company and the New Notes will be effectively subordinated to future Indebtedness and other liabilities (including any subordinated Indebtedness and trade payables) of the Company's subsidiaries. See "Risk Factors-- Substantial Leverage; Ability to Service Indebtedness; Restrictive Covenants" and "-- Holding Company Structure; Dependence of Company on Subsidiaries for Repayment of Notes." Sinking Fund.................... None. Optional Redemption............. The New Notes may be redeemed at the option of the Company, in whole or in part, at any time on or after March 1, 2003, at a premium declining to par on March 1, 2006, plus accrued and unpaid interest through the redemption date. In addition, at any time prior to or on March 1, 2001, the Company may redeem up to 35% of the aggregate principal amount at maturity of the New Notes at a redemption price of 6 112.625% of the Accreted Value on the date of redemption, with the net cash proceeds of one or more sales of Capital Stock (other than Disqualified Stock); provided, however, that New Notes representing at least $301.0 million of aggregate principal amount at maturity remain outstanding immediately after the occurrence of such redemption. Change of Control............... In the event of a Change of Control, the Company must repurchase the New Notes at a price equal to 101% of the aggregate principal amount or Accreted Value thereof, as applicable, plus accrued and unpaid interest to the date of purchase. There can be no assurance that the Company will have the financial resources necessary to repurchase the New Notes upon a Change of Control. See "Risk Factors -- Substantial Leverage; Ability to Service Indebtedness; Restrictive Covenants" and "Description of the Old Notes -- Events of Default." Covenants....................... The Indenture contains certain covenants that, among other things, limit the ability of the Company and its Restricted Subsidiaries (as defined in "Description of the Old Notes -- Certain Definitions") to make certain restricted payments, incur additional Indebtedness and issue and sell Capital Stock (as defined in "Description of the Old Notes -- Certain Definitions"), pay dividends or make other distributions, repurchase equity interests or subordinated Indebtedness, engage in sale or leaseback transactions, create certain liens, enter into certain transactions with affiliates, sell assets of the Company or its Restricted Subsidiaries, issue or sell equity interests of the Company's Restricted Subsidiaries or enter into mergers and consolidations. In addition, under certain circumstances, the Company will be required to offer to purchase the New Notes at a price equal to 100% of the principal amount or Accreted Value thereof, as applicable, plus accrued and unpaid interest to the date of purchase, with the proceeds of certain asset sales. See "Description of the Old Notes -- Certain Covenants" and "Description of the New Notes." Exchange Rights................. Holders of New Notes will not be entitled to any exchange or registration rights with respect to the New Notes. Holders of Old Notes are entitled to certain exchange rights pursuant to the Registration Rights Agreement. Under the Registration Rights Agreement, the Company is required to offer to exchange the Old Notes for New Notes having substantially identical terms which have been registered under the Securities Act. This Exchange Offer is intended to satisfy such obligation. Once the Exchange Offer is consummated, the Company will have no further obligations to register any Old Notes not tendered by the Holders thereof for exchange. See "Risk Factors -- Consequences to Non- Tendering of Old Notes." 7 Form of New Notes............... The New Notes will be represented by one permanent global Note in definitive, fully registered form, to be deposited with The Bank of New York, as the Trustee (the "Trustee") under the Indenture, as custodian for, and registered in the name of, a nominee of DTC. Any New Notes sold in offshore transactions in reliance on Regulation S under the Securities Act will be represented by one permanent global Note in definitive, fully registered form deposited with the Trustee as custodian for, and registered in the name of, a nominee of DTC for the accounts of Morgan Guaranty Trust Company of New York, Brussels office, as operator of Euroclear and Cedel Bank. See "The Exchange Offer -- Book-Entry Transfers; Delivery and Form." Use of Proceeds................. The Company will not receive any proceeds from the Exchange Offer. CERTAIN CONSEQUENCES OF A FAILURE TO EXCHANGE OLD NOTES The Old Notes have not been registered under the Securities Act or any state securities laws and therefore may not be offered, sold or otherwise transferred except in compliance with the registration requirements of the Securities Act and any other applicable securities laws, or pursuant to an exemption therefrom or in a transaction not subject thereto, and in each case in compliance with certain other conditions and restrictions, including the Company's and the Trustee's right in certain cases to require the delivery of opinions of counsel, certifications and other information prior to any such transfer. Old Notes which remain outstanding after consummation of the Exchange Offer will continue to bear a legend reflecting such restrictions on transfer. In addition, upon consummation of the Exchange Offer, Holders of Old Notes which remain outstanding will not be entitled to any rights to have such Old Notes registered under the Securities Act or to any similar rights under the Registration Rights Agreement (subject to certain limited exceptions applicable solely to the Initial Purchasers). The Company currently does not intend to register under the Securities Act any Old Notes which remain outstanding after consummation of the Exchange Offer (subject to such limited exceptions, if applicable). To the extent that Old Notes are tendered and accepted in the Exchange Offer, any trading market for Old Notes which remain outstanding after the Exchange Offer could be adversely affected. The New Notes and any Old Notes which remain outstanding after consummation of the Exchange Offer will vote together as a single class for purposes of determining whether Holders of the requisite percentage in outstanding principal amount at maturity thereof have taken certain actions or exercised certain rights under the Indenture. The Registration Rights Agreement provides that, if the Exchange Offer was not consummated within the time period specified therein, additional interest will accrue on the Old Notes at a rate of 0.50% per annum (over the rate at which interest is then accruing) of the Accreted Value on the preceding Semi- Annual Accrual Date and be payable in cash semiannually on March 1 and September 1 of each year, commencing September 1, 1999, until the Exchange Offer is consummated or a shelf registration statement is declared effective. See "Description of the Old Notes -- Registration Rights." Following consummation of the Exchange Offer, neither the Old Notes nor the New Notes will be entitled to any such additional interest. 8 SUMMARY CONSOLIDATED FINANCIAL DATA The following Summary Consolidated Financial Data should be read in conjunction with the Company's Consolidated Financial Statements and related notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere herein.
PERIOD FROM YEAR ENDED JUNE 30, JULY 1, 1995 ---------------------------- (INCEPTION) TO 1996 1997 1998 JUNE 30, 1998 -------- -------- -------- -------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenue........................... $ -- $ -- $ 82 $ 82 -------- -------- -------- -------- Operating expenses: Research and development......... 8,451 17,539 28,278 54,268 Sales and marketing.............. 1,071 3,168 4,170 8,409 General and administrative....... 1,778 3,940 14,248 19,966 Acquired in-process research and development(1).................. -- 4,061 18,656 22,717 -------- -------- -------- -------- Total operating expenses....... 11,300 28,708 65,352 105,360 -------- -------- -------- -------- Net operating loss................ 11,300 28,708 65,270 105,278 -------- -------- -------- -------- Other (income) expense, net: Equity in (income) loss of investee........................ (357) 2,080 1,631 3,354 Interest income.................. (65) (410) (5,632) (6,107) Interest expense................. 395 3,590 13,730 17,715 -------- -------- -------- -------- Total other (income) expense, net........................... (27) 5,260 9,729 14,962 -------- -------- -------- -------- Net loss before extraordinary item............................. 11,273 33,968 74,999 120,240 Extraordinary loss early extinguishment of debt........... -- -- 10,676 10,676 -------- -------- -------- -------- Net loss.......................... $ 11,273 $ 33,968 $ 85,675 $130,916 ======== ======== ======== ======== Basic and diluted net loss per share: Loss before extraordinary item... $ 1.04 $ 2.22 $ 4.56 $ 8.46 Extraordinary loss early extinguishment of debt.......... -- -- 0.65 0.75 -------- -------- -------- -------- Net loss....................... $ 1.04 $ 2.22 $ 5.21 $ 9.21 ======== ======== ======== ======== Shares used in per share computations..................... 10,895 15,316 16,447 14,219 ======== ======== ======== ======== OTHER DATA: Depreciation and amortization..... $ 31 $ 891 $ 5,778 $ 6,700 EBITDA(2)......................... (11,269) (27,817) (59,492) (98,578) Capital expenditures.............. 2,568 6,044 13,364 21,976 Ratio of earnings to fixed charges(3)....................... -- -- -- --
AS OF JUNE 30, 1998 ------------------- (IN THOUSANDS) BALANCE SHEET DATA: Cash, cash equivalents, and short-term investments.......... $197,564 Property and equipment, net................................. 19,349 Total assets................................................ 233,398 Long-term debt.............................................. 243,031 Total stockholders' deficit................................. (13,980)
- -------- (1) In connection with the acquisition of Norstar Multimedia Inc. in July 1996 and SRTC in April 1998, the Company wrote off acquired in-process research and development of $4.1 million and $18.7 million, respectively, as a one- time charge to operations for the fiscal years ended June 30, 1997 and 1998, respectively. (2) EBITDA consists of net loss before equity in (income) loss of investee, net interest expense and income taxes, and depreciation and amortization. EBITDA is a commonly used measure in the media industry. It is not intended to represent cash flow or results of operations in accordance with generally accepted accounting principles ("GAAP") for the periods indicated. (3) In calculating the ratio of earnings to fixed charges, "earnings" consist of net loss before income tax expense, fixed charges, and undistributed income or losses attributable to an entity less than 50% owned by the Company accounted for under the equity method, where there is no guarantee, directly or indirectly, to service the debt of such entity. Fixed charges consist of net interest expense, including such portion of rental expense that is attributed to interest. For the fiscal years ended June 30, 1996, 1997 and 1998, and for the period from July 1, 1995 (inception) to June 30, 1998, earnings were inadequate to cover fixed charges by $11.6 million, $31.9 million, $84.0 million, and $127.6 million, respectively. 9 RISK FACTORS In addition to the other information contained in this Prospectus, prospective investors should carefully consider the following factors in evaluating the Exchange Offer. In addition, this Prospectus includes "forward-looking" statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Although the Company believes that its plans, intentions and expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such plans, intentions or expectations will be achieved. Actual results will differ and such differences may be material. Important factors that could cause actual results to differ materially from the Company's forward-looking statements are set forth below and elsewhere in this Prospectus. All forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the cautionary statements set forth below. SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE INDEBTEDNESS; RESTRICTIVE COVENANTS As a result of the issuance of the Old Notes, the Company is highly leveraged. As of June 30, 1998, the Company had total debt of approximately $243.0 million, accreting to $463.0 million in 2003. As of June 30, 1998, the actual accreted value of such debt (not giving effect to any amounts attributable to the value of the warrants issued in conjunction with such debt) was $261.4. The Indenture permits the Company and its Restricted Subsidiaries to incur substantial additional indebtedness. See "Description of the Old Notes -- Certain Covenants." The Company believes its existing cash and cash equivalents will be sufficient to meet its cash requirements for at least the next 18 months. Thereafter, the Company expects to require substantial additional indebtedness primarily to fund operating deficits and to finance the continued development and enhancement of its VOD system and to fund capital expenditures in connection with commercial deployment of its system. See "-- Substantial Future Capital Requirements." As a result, the Company expects that it will continue to have substantial indebtedness. The degree to which the Company is leveraged could have important consequences to the holders of the New Notes, including, but not limited to, the following: (i) the Company's ability to obtain additional financing in the future for working capital, system deployments, development and enhancement of its VOD system, capital expenditures, acquisitions and other general corporate purposes may be materially limited or impaired; (ii) the Company's cash flow, if any, will not be available for the Company's business because a substantial portion of the Company's cash flow must be dedicated to the payment of principal and interest on its indebtedness; (iii) the terms of future permitted indebtedness may limit the Company's ability to redeem the New Notes in the event of a Change of Control (as defined); and (iv) the Company's high degree of leverage may make it more vulnerable to economic downturns, may limit its ability to withstand competitive pressures and may reduce its flexibility in responding to changing business and economic conditions. The ability of the Company to make scheduled debt service payments (including with respect to the New Notes) will depend upon the Company's ability to achieve significant and sustained growth in its cash from operations and to complete necessary additional financing. The Company's ability to generate sufficient cash from operations is dependent upon, among other things, the market acceptance and customer demand for DIVA's VOD service, the Company's ability to successfully continue the development and enhancement of its system including the Sarnoff Server, set-top box and network, including compatibility with evolving industry standards as they are defined, the future operating performance of the Company, the Company's ability to obtain long-term contracts with MSOs, and the rate of and success of commercial deployment of its VOD system. The Company expects that it will continue to generate operating losses and negative cash flow for at least the next several years. No assurance can be given that the Company will be successful in achieving and maintaining a level of cash from operations sufficient to permit it to pay the principal, premium, if any, and interest on its indebtedness. If the Company is unable to generate sufficient cash from operations to service its indebtedness, it may have to forego or delay development and enhancement of its VOD system and service, reduce or delay system deployments, restructure or refinance its indebtedness or seek additional equity capital or debt financing. There can be no assurance that (i) any such strategy could be effected on satisfactory terms, if at all, in light of the Company's high leverage or (ii) any such strategy would yield sufficient proceeds to service the Company's 10 indebtedness, including the New Notes. Any failure by the Company to satisfy its obligations with respect to the New Notes or any other indebtedness could result in a default under the Indenture and could cause a default under agreements governing other indebtedness of the Company. In the event of such a default, the holders of such indebtedness would have enforcement rights, including the right to accelerate such debt and the right to commence an involuntary bankruptcy proceeding against the Company. Absent a certain level of successful commercial deployment of its VOD service, ongoing technical development and enhancement of its VOD system and significant growth of its cash flow, the Company will not be able to service its indebtedness. The Indenture imposes operating and financial restrictions on the Company and its subsidiaries. These restrictions will affect, and in certain cases significantly limit or prohibit, among other things, the ability of the Company and its subsidiaries to incur additional indebtedness, create liens upon assets, apply the proceeds from the disposal of assets, make investments, make dividend payments and other distributions on capital stock and redeem capital stock. See "Description of the Old Notes." There can be no assurance that such covenants will not adversely affect the Company's ability to finance its future operations or capital needs or to engage in other business activities that may be in the interest of the Company. However, the limitations in the Indenture will be subject to a number of important qualifications and exceptions. In particular, while the Indenture will restrict the Company's ability to incur indebtedness by requiring that specified leverage ratios are met, it will permit the Company and its subsidiaries to incur substantial indebtedness (which may be secured indebtedness), without regard to such ratios, to finance the acquisition of equipment, inventory or network assets or to finance or support working capital and capital expenditures for its business. SUBSTANTIAL FUTURE CAPITAL REQUIREMENTS The Company will require substantial additional funds for the continued development and commercial deployment of its VOD service. As of June 30, 1998, the Company had approximately $197.6 million in cash, cash equivalents and short-term investments. From inception until June 30, 1998, the Company had an accumulated deficit of $130.9 million. The Company has made and expects to continue to make significant investments in working capital and capital expenditures in order to continue required development activities, continue to commercially deploy its VOD service and fund operations until such time, if at all, as the Company begins to generate positive cash flows from operations. The Company expects that its cash flow from operating and investing activities will be increasingly negative over the next several years. The Company believes that its existing cash, cash equivalents and short-term investments will be sufficient to meet its working capital and capital expenditure requirements for at least the next 18 months. Thereafter, the Company anticipates that it will need to raise significant additional funds to support its operations. However, the Company may need to raise additional funds earlier if its estimates of working capital and/or capital expenditure requirements change or prove to be inaccurate. The Company may also need to raise significant additional funds in order to respond to unforeseen technological or marketing hurdles or to take advantage of unanticipated opportunities. Actual capital requirements may vary from expectations and will depend on numerous future factors and conditions, many of which are outside of the Company's control, including, but not limited to (i) the ability of the Company to meet its development and deployment schedules; (ii) the accuracy of the Company's assumptions regarding the rate and extent of commercial deployment and market acceptance by cable operators and customers; (iii) the extent that cable operators choose to deploy DIVA Converter Units ("DCUs") as opposed to industry standard, DIVA-compatible set- top boxes; (iv) the number of customers choosing DIVA's VOD service and their buying patterns; (v) the nature and penetration of new services to be offered by the Company; (vi) unanticipated costs; and (vii) the need to respond to competitive pressures and technological changes. The Company has no present commitments or arrangements assuring it of any future equity or debt financing, and there can be no assurance that the Company will be able to obtain any such equity or debt financing on favorable terms or at all. In the event that the Company is unable to obtain such additional capital, the Company will be required to delay the expansion of its business or take other actions that could have a material adverse effect on the Company's business, operating results and financial condition and its ability to achieve sufficient cash flow to service its indebtedness, including the New Notes. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." 11 DEVELOPMENT STAGE COMPANY; LIMITED REVENUES; HISTORY OF LOSSES The Company is a development stage company with limited commercial operating history, having commercially deployed its VOD service on a limited basis beginning in September 1997. The Company has incurred substantial net losses in the period since inception through June 30, 1998 of approximately $130.9 million. The Company expects to continue to incur substantial losses and experience substantial negative cash flow for at least the next several years as it continues to develop and deploy its VOD service. The Company's limited operating history makes the prediction of future operating results difficult or impossible. The Company has entered into contingent contracts with Lenfest, Adelphia, Cablevision and Rifkin. Through June 30, 1998, the Company recognized revenues of approximately $82,000. DIVA does not expect to generate any substantial revenues unless and until its VOD service is deployed at a significant number of additional headend locations and it has a substantial number of customers. The Company's prospects should be considered in light of the risks, expenses and difficulties frequently encountered by companies in their early stage of development, particularly companies in new and rapidly evolving markets. The Company's future success depends in part on its ability to accomplish a number of objectives, including, but not limited to (i) further technical development of and reduction of the cost of manufacturing the Sarnoff Server and other system components and modification of the service software for future advances, (ii) further integration of its headend equipment to achieve cost reductions and reduce physical space requirements for widespread VOD deployment in a large number of headends, (iii) continued scaling of the entire end-to-end system and its implementation for use with larger numbers of customers and an increased number of movie titles, (iv) further development of the Sarnoff Server required for large-scale deployment of its VOD service and for other interactive and digital applications, (v) the integration of secondary storage with the Sarnoff Server to increase the number of available movie titles, (vi) integrating DIVA's VOD system with various industry-adopted two-way digital platforms, including digital set-top boxes and other digital applications, (vii) designing and accessing content packages and service offerings that will attract ongoing consumer demand for DIVA's VOD service on competitive economic terms, (viii) enhancement of its system to offer additional services, including music videos and time-shifting, (ix) completion of initial deployments with acceptable system performance and consumer acceptance, (x) integrating DIVA's VOD service with other digital services that cable operators may offer, (xi) entering into long-term service contracts on acceptable terms with MSOs and (xii) raising significant additional debt and/or equity financing to fund the Company's cash requirements beyond 1999. See "Business -- Research and Development Activity." RISKS ASSOCIATED WITH ANTICIPATED GROWTH The Company intends to aggressively expand its operations. The growth in size and scale of the Company's business has placed and is expected to continue to place significant demands on its management, operating, third party manufacturing and financial resources. The Company's ability to manage growth effectively will require continued implementation of and improvements to its operating, manufacturing and financial systems and will require the Company to expand and continue to train and manage its employee base. These demands likely will require the addition of new management personnel and the development of additional expertise by existing management personnel. Although the Company believes that it has made adequate allowances for the costs and risks associated with future growth, there can be no assurance that the Company's systems, procedures or controls or financial resources will be adequate to support the Company's operations or that management will be able to keep pace with such growth. If the Company is unable to manage its growth effectively, the Company's business, operating results, financial condition and ability to achieve sufficient cash flow to service its indebtedness, including the New Notes, will be materially adversely affected. See "Management." UNCERTAINTY OF FUTURE REVENUES; FLUCTUATING OPERATING RESULTS As a result of the Company's limited operating history and the emerging nature of the market in which it competes, the Company is unable to accurately forecast its revenues. The Company does not have historical 12 financial data for a significant number of periods on which to base planned operating expenses and plans its operating expenses based in part on anticipated revenues. If revenues in a particular period do not meet expectations, it is likely that the Company will not be able to adjust significantly its level of expenditures for such period, which could have a material adverse effect on the Company's business, operating results and financial condition and its ability to achieve sufficient cash flow to service its indebtedness, including the New Notes. The Company expects to incur significant operating expenses in order to continue development activities, continue to commercially deploy its VOD service and expand its operations. The cost of deployments is highly variable and will depend upon a wide variety of factors, including the cable system architecture, the size of the service area served by a headend, local labor rates and other economic factors. In particular, the Company must install Sarnoff Servers at a headend well in advance of generating any revenues from customers served by such headend. To the extent that expenses precede or are not subsequently followed by increased revenues, the Company's business, operating results and financial condition and its ability to achieve sufficient cash flow to service its indebtedness, including the New Notes, could be materially adversely affected. The timing and amount of future revenues will depend in large part upon the Company's ability to obtain long-term contracts with cable companies and the successful deployment of DIVA's VOD service pursuant to such agreements. New deployment agreements are expected to be secured on an irregular basis, if at all, and there may be prolonged periods of time during which the Company does not enter into new agreements or expanded arrangements. Furthermore, actual deployments under such agreements are expected to occur at irregular intervals, and the Company will have little control over when such deployments will occur, which will make revenues difficult to forecast. Factors that may affect the Company's operating results included, but are not limited to: (i) the Company's success in obtaining and retaining customers, (ii) customers' usage of the Company's VOD service and their buying patterns, (iii) the rate of growth in customers, (iv) the cost of continued development of the DIVA system and other costs relating to the expansion of operations, (v) pricing changes by the Company and its competitors, (vi) prices charged by suppliers, (vii) the mix of the Company's service offerings sold, (viii) the introduction of new service offerings by the Company's competitors, (ix) the evolution of alternative forms of in-home entertainment systems, (x) economic conditions in the cable television industry, (xi) the market for home video entertainment services and (xii) general economic conditions. Any one of these factors, most of which are outside of the Company's control, could cause the Company's operating results to fluctuate significantly in the future. In response to a changing competitive environment and in order to respond to local viewing patterns, the Company may choose or may be required from time to time to make certain pricing, service or marketing decisions or enter into strategic alliances or investments or be required to develop upgrades or enhancements to its system that could have a material adverse effect on the Company's business, operating results and financial condition and its ability to achieve sufficient cash flow to service its indebtedness, including the New Notes. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Due to the foregoing factors, the Company's revenues and operating results are difficult to forecast. The Company believes that its quarterly revenues, expenses and operating results will vary significantly in the future and that period-to-period comparisons are not meaningful and are not indicative of future performance. As a result of the foregoing factors, it is likely that in some future quarters or years the Company's operating results will fall below the expectations of securities analysts or investors, which would have a material adverse effect on the trading price of the New Notes. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." DEPENDENCE ON SINGLE SERVICE; ACCEPTANCE BY SUBSCRIBERS The Company expects to derive a substantial portion of its future revenues from providing its VOD service to cable operators and their subscribers. The Company's future financial performance will depend on the successful introduction and broad customer acceptance of DIVA's VOD service, as to which there can be no assurance. Numerous factors could have a material adverse effect on the level of consumer acceptance, including, but not limited to, the degree of consumer sensitivity to (i) the price of DIVA's service and (ii) the 13 inability of DIVA or third-party manufacturers to provide a single set-top box that both enables DIVA's VOD service and replaces the customer's existing set- top box. Since there is no existing market for true VOD service, there can be no assurance that an acceptable level of consumer demand will be achieved. If sufficient demand for DIVA's VOD service does not develop due to lack of market acceptance, technological change, competition or other factors, the Company's business, operating results and financial condition and its ability to generate sufficient cash flow to service its indebtedness, including the New Notes, would be materially adversely affected. LIMITED COMMERCIAL DEPLOYMENTS TO DATE The Company has deployed its VOD service in a single headend location in cable systems owned by Lenfest, Adelphia, Cablevision and Rifkin. Prior to launch of the service to commercial subscribers, the Company (i) installed a Sarnoff Server at each headend location with associated DIVA control and management systems; (ii) installed DCUs in an agreed-to number of homes and business locations and delivered DIVA's VOD service without charge to such locations; and (iii) completed technical testing designed to stress both the MSO's two-way HFC plant and DIVA's system and VOD service. During these periods, the Company experienced delays due to set-top box development, two- way cable plant readiness, and integration and related stability testing of the Company's and the cable operator's operating platforms and systems. The Company experienced both fewer causes of delay and delays of more limited duration with each successive installation. While the Company anticipates continued reduction in the duration of these periods that precede commercial deployments, there can be no assurance that the Company will not experience other delays in the testing, rollout or delivery of its VOD service, or that such service can be delivered on the scale anticipated by the Company. The existing commercial deployments, unless expanded in scope, will not serve more than a limited number of customers. Until the Company is able to deploy on a large scale in one cable system, the scalability of the Company's VOD system will remain unproven. Further, there can be no assurance that unforeseen problems will not develop as the Company evolves its technology, products and services, or that the Company will be successful in the continued development, cost reduction and commercial implementation of its technology, products and services on a wide scale. See "Business." DEPENDENCE ON CABLE OPERATOR PARTICIPATION The Company's future success depends in large part on its ability to sign long-term service contracts with cable operators to deploy DIVA's VOD service. The Company's ability to enter into long-term commitments will depend upon, among other things, successful commercial deployment of the Company's fully-integrated VOD system and the Company's ability to demonstrate that its VOD service is reliable and more attractive to customers than alternative entertainment services such as PPV services and NVOD. To date, the Company has obtained contingent commitments, subject to significant conditions, from Lenfest, Adelphia, Cablevision and Rifkin. The Company is in discussions with various other cable operators regarding its VOD service. There can be no assurance that the Company will be able to enter into definitive agreements with any of these or any other cable operators or that the ongoing viability of DIVA's VOD service will be successfully demonstrated. If cable operators are not persuaded to deploy the Company's VOD service, there can be no assurance that the Company's VOD system can be modified and successfully marketed to other potential video providers, and such modifications would require additional time and capital if pursued. The Company must negotiate separate agreements with each cable operator as well as for each service the Company seeks to provide over their cable plant. Cable operators generally enter into service agreements on a wholesale basis and own, install and fund all customer and headend equipment. By contrast, DIVA provides all headend hardware and software components of its VOD service and intends to generate earnings through long-term, revenue sharing agreements with MSOs. In addition, certain MSOs may desire to determine the service packaging and set the pricing of DIVA's VOD service for their subscribers. In the event that different pricing models are required to establish business relationships with MSOs, there can be no assurance that DIVA will be able to maintain comparable rates of return. DIVA believes that, in order to implement its VOD service with certain MSOs, it may have to alter its business model. There can be no assurance that DIVA will be able to successfully alter its business model, that 14 such an alteration would not produce a material adverse change to the economics of DIVA's business model or that cable operators will be willing to deploy DIVA's VOD service on these or any other terms. VOD is a new market, and the Company's VOD service is only one possible means available to cable operators for providing movies in the home. Although the Company believes that it has an economically viable turnkey solution, there can be no assurance that the Company will be successful in achieving the widespread adoption of its VOD service by the cable industry or that it will be able to attract and retain customers. The inability of the Company to enter into definitive agreements with cable operators or the lack of acceptance of DIVA's VOD service by cable operators and their subscribers would have a material adverse effect on the Company's business, operating results and financial condition and its ability to achieve sufficient cash flow to service its indebtedness, including the New Notes. See "Business." LONG-TERM CABLE OPERATOR AGREEMENTS DEPENDENT ON INITIAL COMMERCIAL DEPLOYMENT The Company's agreements with each of Lenfest, Adelphia, Cablevision and Rifkin are conditioned upon the successful completion of an initial commercial deployment phase, which is designed to allow both parties to verify the business viability of DIVA's VOD service, in accordance with certain criteria set forth in the agreements. The Company is currently in the initial commercial deployment phase with each of these cable operators. Following the initial commercial deployment phase, if any such cable operator is satisfied that DIVA's VOD service meets its business and operational expectations, DIVA will continue and expand the existing deployment and commence commercial deployment in certain of such cable operators' other cable systems on an agreed-to schedule. If DIVA's VOD service does not demonstrate business viability or if the cable operator otherwise determines that such service does not meet its business or operational expectations, none of Lenfest, Adelphia, Cablevision nor Rifkin is obligated to deploy DIVA's VOD service. There can be no assurance that the Company will successfully complete its initial commercial deployment phases or that DIVA's VOD system and service will be deployed beyond the initial phases in any such cable operator's systems. In the event the Company fails to successfully complete initial commercial deployment in any such cable operator's systems in accordance with the contracts, the Company will be unable to generate any cash flow from such systems and other prospective cable companies may be reluctant to enter into long-term commitments with the Company due to concerns about the viability of DIVA's VOD system. DEPENDENCE ON ADVANCED CABLE DISTRIBUTION NETWORKS DIVA's system requires deployment on cable systems upgraded to HFC architecture linking headends with nodes serving not more than 2,000 homes, with the return path from the customer to the headend activated to enable two- way operation. Only a portion of existing cable plant in the U.S. has been upgraded to HFC architecture with return path capability, and only a portion of the upgraded plant is currently activated for two-way transmission. A number of cable operators have announced and begun to implement major infrastructure investments to deploy two-way capable HFC systems which require significant financial, managerial, operating and other resources. HFC upgrades have been, and likely will continue to be, subject to delay or cancellation. In addition, the Company believes that the widespread deployment of VOD services such as DIVA's will not occur until MSOs decide to deploy digital services through this upgraded plant and invest in new digital set-top boxes. There can be no assurance that these or any other cable operators will continue to upgrade their cable plant or that sufficient, suitable cable plant will be available in the future to support DIVA's VOD service. The failure of cable operators to complete planned upgrades in a timely and satisfactory manner, or at all, and the lack of suitable cable plant to support DIVA's VOD service would have a material adverse effect on the Company's business, operating results and financial condition and its ability to achieve sufficient cash flow to service its indebtedness, including the New Notes. In addition, the Company will be highly dependent on cable operators to continue to maintain their cable infrastructure in such a manner that the Company will be able to provide consistently high performance and reliable service. Therefore, the future success and growth of the Company's business will also be subject to economic and other factors affecting the ability of cable operators to 15 finance substantial capital expenditures to maintain and upgrade the cable infrastructure. See "Business -- Business Strategy," "-- Deployment Agreements and Relationships" and "-- Technology." RISK OF TECHNOLOGICAL CHANGE AND NEW PRODUCT DEVELOPMENT Rapid technological developments are expected to occur in the home video entertainment industry. As a result, the Company has modified and expects to continue to modify its research and development plan. Such modifications, including those of its set-top box, have resulted in delays and increased costs. Furthermore, the Company expects that it will be required to continue to enhance its current VOD service and develop and introduce increased functionality and performance to keep pace with technological developments and consumer preferences. In particular, the Company must (i) continue technical development of and reduce the cost of manufacturing the Sarnoff Server, Video Session Manager and the DCU and integrate software, (ii) further integrate its headend equipment to achieve cost reductions and reduce physical space requirements for widespread VOD deployment in a large number of headends, (iii) complete a scalable turnkey system and test it for use with larger numbers of customers and a large number of movie titles, (iv) continue further development of the Sarnoff Server required for large-scale deployment of its VOD service and for other interactive and digital applications, (v) integrate the Sarnoff Server with the secondary storage to be able to provide an increased number of titles and (vi) in order to achieve broader deployment, port its application on to industry standard digital platforms. There can be no assurance that DIVA will, on a satisfactory timetable, be able to accomplish any of these tasks or do so while maintaining the same functionality. See "Business -- Research and Development Activity." The cable industry has launched an initiative called "open cable," which will redefine the requirements and features of the digital set-top converters and their control systems. The open cable initiative is managed by CableLabs on behalf of the cable MSOs and is supported by some of the set-top box manufacturers, including General Instrument Corporation ("General Instrument") and Scientific-Atlanta, Inc. ("Scientific-Atlanta"). The open cable initiative is defining future set-top box requirements, which could affect DIVA's set-top box development program presently being implemented. There can be no assurance that the Company will be successful in developing and marketing product and service enhancements or new services that respond to technological and market changes or that the Company will not experience difficulties that could delay or prevent the successful development, introduction and marketing of such new services or enhancements. The Company has encountered delays in product development, service integration and field tests and other difficulties affecting both software and hardware components of its system and its ability to operate successfully over HFC plant. In addition, many of the Company's competitors have substantially greater resources than the Company to devote to further technological and new product development. See "-- Competition for VOD Services." There can be no assurance that technological and market changes or other significant developments in VOD technology by the Company's competitors will not render DIVA's VOD service obsolete. For the initial deployments, DIVA is using a separate set-top box that is deployed in parallel with the customer's analog cable set-top box. DIVA has signed a non-binding letter of intent with General Instrument pursuant to which the Company has agreed to cooperate with General Instrument to make DIVA's VOD system compatible with General Instrument's Digital Network System. In future years, DIVA will need to port its VOD solution onto other industry-adopted two-way digital platforms that may be offered by General Instrument, Scientific-Atlanta and other companies. There can be no assurance that the Company will be successful in accomplishing any of these integrations on a cost-effective basis or at all. Furthermore, there can be no assurance that this letter of intent will lead to a definitive agreement with General Instrument. The Company previously entered into a non-binding letter of intent with Scientific-Atlanta to achieve compatibility between DIVA's VOD System and Scientific-Atlanta's Digital Broadband Delivery System. This letter of intent has since expired without resulting in a definitive agreement. 16 RELIANCE ON THIRD-PARTY MANUFACTURERS; EXPOSURE TO COMPONENT SHORTAGES The Company depends and will continue to depend on third parties to manufacture the major elements of its VOD system. The Company has subcontracted manufacturing of the Sarnoff Server to one company, the DCU to another company and components of its Video Session Manager to a third company. As a result of the complexity of the Company's hardware components, manufacturing and quality control are time consuming processes. Consequently, there can be no assurance that these manufacturers will be able to meet the Company's requirements in a timely and satisfactory manner or the Company would be able to find or maintain a suitable relationship with alternate qualified manufacturers for any such elements. The Company's reliance on third-party manufacturers involves a number of additional risks, including the absence of guaranteed capacity and reduced control over delivery schedules, quality assurance, production yields and costs. In the event the Company is unable to obtain such manufacturing on commercially reasonable terms, DIVA's business, operating results and financial condition and its ability to achieve sufficient cash flow to service its indebtedness, including the New Notes, would be materially adversely affected. Certain of the Company's subassemblies and components used in the Sarnoff Server, the Video Session Manager and the DCU are procured from single sources and others are procured only from a limited number of sources. Consequently, the Company may be adversely affected by worldwide shortages of certain components, significant price increases, reduced control over delivery schedules, and manufacturing capability, quality and cost. Although the Company believes alternative suppliers of products, services, subassemblies and components are available, the lack of alternative sources could materially impair the Company's ability to deploy its VOD system. Manufacturing lead times can be as long as nine months for certain critical components. Therefore, the Company may require significant working capital to pay for such components well in advance of revenues. Moreover, a prolonged inability to obtain certain components could have a material adverse effect on the Company's business, operating results and financial condition and its ability to achieve sufficient cash flow to service its indebtedness, including the New Notes, and could result in damage to MSO or customer relationships. See "Business -- Operations." UNCERTAINTY OF PROTECTION OF PATENTS AND PROPRIETARY RIGHTS The Company's future success depends, in part, on its ability to protect its intellectual property and maintain the proprietary nature of its technology through a combination of patents, licenses and other intellectual property arrangements. The Company has licensed rights to the Sarnoff Server and the DCU initially developed by Sarnoff. Sarnoff and the Company have filed applications and intend to file additional applications for patents covering the Sarnoff Server. Sarnoff and the Company have filed applications for patents covering the DCU, and the Company has filed patent applications, and intends to file additional and derivative patent applications covering the interactive service and its technology. There can be no assurance, however, that any patents issued to Sarnoff or the Company will not be challenged, invalidated or circumvented, or that the rights granted thereunder will provide proprietary protection to the Company. Despite the efforts of Sarnoff and the Company to safeguard and maintain these proprietary rights, there can be no assurance that the Company will be successful in doing so or that the Company's competitors will not independently develop or patent technologies that are substantially equivalent or superior to the Company's technologies. On August 18, 1998, the Company received a notice from a third party licensing company stating that it has acquired rights in two U.S. patents and that the Company's VOD system and process are described in the claims of these patents. The Company and outside patent counsel are conducting a preliminary analysis of these third party patents. The Company has filed trademark applications on certain marks and logos. In July 1996, DIVA received a notice from a third party claiming that the Company's use of one of its trademarks infringes a trademark right held by such party. DIVA responded to the letter in late July 1996, asserting that the use of the trademark does not infringe on the trademark right that the party holds. The Company has received no further response. In August 1998, the Company received a notice from a third party, which provides integrated circuits for digital multimedia applications, claiming that such third party's trademark application gives it priority over the Company's use of the "DIVA" mark. The Company is in the process of preparing its response to this letter. DIVA could encounter similar challenges to its trademarks in the future. 17 Since patent applications in the U.S. are not publicly disclosed until the patent has been issued, applications may have been filed which, if issued as patents, would relate to the Company's products. In addition, the Company has not conducted a comprehensive patent search relating to the technology used in the Sarnoff Server or the Company's VOD system. The Company is subject to the risk of claims and litigation alleging infringement of the intellectual property rights of others. There can be no assurance that third parties will not assert infringement claims against the Company in the future based on patents or trade secrets or that such claims will not be successful. Parties making such claims may be able to obtain injunctive or other equitable relief which could effectively block the Company's ability to provide its VOD service in the U.S. and internationally, and could result in an award of substantial damages. In the event of a successful claim of infringement, the Company, its MSOs and other end users may be required to obtain one or more licenses from third parties. There can be no assurance that the Company or its customers could obtain necessary licenses from third parties at a reasonable cost or at all. The defense of any lawsuit could result in time consuming and expensive litigation regardless of the merits of such claims, and damages, license fees, royalty payments and restrictions on the Company's ability to provide its VOD service, any of which could have a material adverse effect on the Company's business, operating results and financial condition and its ability to achieve sufficient cash flow to service its indebtedness, including the New Notes. AVAILABILITY OF PROGRAMMING CONTENT; RELEASE WINDOWS DIVA's success will depend in part on its ability to obtain access to sufficient movies (including new releases and library titles), special interest videos and other programming content on commercially acceptable terms. Although DIVA has entered into arrangements with most of the major movie studios and a number of other content providers for its initial deployments, there can be no assurance that DIVA will be able to continue to obtain the content, during the segment of time available to VOD providers and others such as PPV, to support its VOD service beyond the geographic area of its initial deployments. DIVA could encounter increased competition for access to movie titles from competitors with greater resources and stronger relationships with major movie studios than the Company, including other VOD, NVOD or DBS providers and providers of video rentals. Such competitors could successfully negotiate with movie studios to obtain exclusive access to certain titles. Furthermore, studios could delay the period of time before a title becomes available to the Company, and reduce the period of time in which a title may be available for the VOD market. DIVA's failure to obtain timely access to such content for other areas on commercially acceptable terms would have a material adverse effect on its business, operating results and financial condition and its ability to achieve sufficient cash flow to service its indebtedness, including the New Notes. COMPETITION FOR VOD SERVICES The market for in-home video entertainment services is intensely competitive, rapidly evolving and subject to rapid technological change. The Company expects competition in the market for VOD services to intensify and increase in the future. A number of companies have announced an intention to introduce a VOD service or deliver VOD components that might be deployed by a video service provider. Intertainer, a company funded by Comcast Cable Communications ("Comcast"), Intel Corporation ("Intel"), Sony Corp. of America and NBC, is currently conducting trials with Comcast and US West to provide VOD and other services over high speed networks such as ADSL and cable modems primarily to the personal computer, but plans to provide services to television sets in the future. It is possible that companies currently operating overseas will adapt their technology and offer it through high-speed networks in the U.S. Elmsdale Media is currently conducting a trial for a VOD system in Cardiff, Wales for its cable partner, NTL, and has announced an intention to extend such trial to cover 2,000 homes. Elmsdale Media's service is slated to provide 24-hour consumer access to up to 300 movie titles. VideoNet is conducting a trial with British Telecom offering VOD and other interactive services to non-paying customers. Hongkong Telecom began offering commercial interactive services, including VOD, in March 1998 and has gained over 100,000 paying subscribers. Other companies internationally and domestically have also announced plans to provide VOD services which vary in degree of commercial viability. There can be no assurance that these or other companies will not provide equivalent or more attractive capabilities that could be more acceptable to cable operators and their subscribers. 18 It is also possible that such competitors may form new alliances, develop a competitive VOD service and rapidly acquire significant market share. Such competition would materially and adversely affect the Company's business, operating results and financial condition. Companies that are or may be capable of delivering VOD components include Concurrent Computer Corp, Celerity Systems Inc., Mitsubishi Electronics America, Nippon Electric Corp., nCube, SeaChange International, Inc., Silicon Graphics Inc., Unisys, Scientific-Atlanta, Sony Corporation, Vivid Technology Inc. and FreeLinQ Communications Corporation. Some of these competitors have developed VOD products that have undergone tests or trials and may succeed in obtaining market acceptance of their products more rapidly than the Company. In addition, several major cable operators, including Time Warner Inc. and Cox Communications, previously field tested integrated system solutions utilizing components from a number of the aforementioned entities. These trials have since been terminated. Notwithstanding termination of its field trial in Orlando, Time Warner Inc. has solicited proposals from industry suppliers for elements that might be used in designing and integrating a next generation VOD system solution for an initial deployment in 1999. Cablevision continues to operate a limited trial of an in-house VOD solution despite the fact that certain component vendors are no longer supporting the project. The Company believes Cablevision has no current plans to extend the deployment of this in- house system solution, but the Company believes Cablevision intends to conduct a second limited field trial of a different VOD system, based on components supplied by a third party server supplier. The Company's competitors or potential competitors may develop affiliations with cable operators or alternative distribution providers or develop services or technologies that are better or more cost effective than the Company's VOD service. In addition, certain of these potential competitors are either directly or indirectly affiliated with content providers and cable operators and could therefore materially impact the Company's ability to sign long-term services contracts with such cable operators and obtain content from such providers. The Company may also face competition from cable operators or other organizations, including but not limited to the telephone companies, providers of DBS, PPV and NVOD, cable programmers and Internet service providers, who could provide VOD-like services through cable and alternative delivery platforms, including the Internet, telephone lines and satellite. For example, DIVA could encounter competition from companies such as Microsoft/WebTV Plus and @Home that in the future may be able to deliver movies over the Internet via the television, or from consumer use of purchased or rented digital video discs or variants thereof. In addition, the competitive environment in which the Company will operate may inhibit its ability to offer DIVA's VOD service to cable operators and other types of operators that compete with one another in the same territory. A cable operator may require DIVA to provide its VOD service exclusively to such cable operator in a particular territory. Further, cable operators themselves may offer competing services, including increased NVOD offerings, or may be unwilling to use DIVA's VOD service exclusively. The Company will also face competition for viewers from providers of home video rentals, which are increasingly entering into revenue sharing arrangements with content providers for new releases. These arrangements have resulted in a significant increase in the number of copies available for rental at major video chains and, accordingly, have made home video rentals more attractive to consumers. Many of the Company's competitors and potential competitors have longer operating histories, greater name recognition, and significantly greater financial, technical and marketing resources than the Company. As a result, they may be able to respond to new or emerging technologies and changes in customer requirements or to devote greater resources to the development, promotion and sale of their products and services more effectively than the Company. There can be no assurance that the Company will be able to compete successfully against current or future competitors or that competitive pressures faced by the Company will not materially adversely affect its business, operating results and financial condition and its ability to achieve sufficient cash flow to service its indebtedness, including the New Notes. HOLDING COMPANY STRUCTURE; DEPENDENCE OF COMPANY ON SUBSIDIARIES FOR REPAYMENT OF NOTES The Notes will be obligations of the Company exclusively. Although the Company currently has only one subsidiary, the Company anticipates that in the future a substantial portion of its operations will be conducted 19 through direct and indirect subsidiaries. The Company's cash flow and, consequently, its ability to service its indebtedness, including the New Notes, will therefore depend upon the cash flow of its subsidiaries and the payment of funds by those subsidiaries to the Company in the form of loans, dividends or otherwise. The subsidiaries are separate and distinct legal entities and have no obligation, contingent or otherwise, to pay any amounts due pursuant to the Notes or to make any funds available therefor, whether in the form of loans, dividends or otherwise. In addition, the Company's subsidiaries are likely to become parties to financing arrangements, including secured financing arrangements, as the Company expects that a substantial portion of its future financing will be at the subsidiary level on a project basis, and such financing arrangements may contain limitations on the ability of such subsidiaries to pay dividends or to make loans or advances to the Company. Because the Company's subsidiaries are not expected to guarantee the payment of the principal or interest on the Notes, any right of the Company to receive assets of any of its subsidiaries upon liquidation or reorganization (and the consequent right of holders of the Notes to participate in the distribution or realize proceeds from those assets) will be effectively subordinated to the claims of the creditors of any such subsidiary (including trade creditors and holders of indebtedness, including subordinated indebtedness, of such subsidiary), except if and to the extent the Company is itself recognized as a creditor of such subsidiary, in which case the claims of the Company would nonetheless be effectively subordinated to any security interests in the assets of such subsidiary held by other creditors and may under certain circumstances be subordinate to the general unsecured obligations of such subsidiary. The Indenture permits the incurrence of substantial additional indebtedness by the Company's subsidiaries. The New Notes are unsecured and therefore will be effectively subordinated to any secured indebtedness of the Company with respect to the assets securing such indebtedness. The Indenture permits the Company and its subsidiaries to incur secured indebtedness to finance, among other things, the acquisition of equipment, inventory and network assets and to finance and support working capital and capital expenditures for its VOD business. In the event of a bankruptcy, liquidation, dissolution, reorganization or similar proceedings with respect to the Company, the holders of secured indebtedness will be entitled to proceed against the collateral that secures such indebtedness, and to receive proceeds from the sale and other distributions in respect of such collateral, and such collateral will not be available for satisfaction of any amounts owed under the New Notes. In addition, to the extent such assets do not satisfy in full the secured indebtedness, the holders of such indebtedness would have a claim for any shortfall that would be pari passu (or effectively senior if the indebtedness were issued by a subsidiary) with the New Notes. Accordingly, there may only be limited assets remaining to satisfy any claims of the Holders of the New Notes upon an acceleration of the New Notes. In addition, in the event of any distribution or payment of the assets of the Company in any foreclosure, dissolution, winding-up, liquidation or reorganization, holders of any secured indebtedness will have a secured claim to the assets of the Company that constitute their collateral, prior to the satisfaction of any unsecured claim from such assets. In the event of a bankruptcy, liquidation or reorganization of the Company, holders of the New Notes will be entitled to payment from the remaining assets of the Company only after payment of, or provision to, all senior and secured indebtedness. In any of the foregoing events, there can be no assurance that there would be sufficient assets to pay amounts due on the New Notes. In the event of default under the Indenture, any holders of secured indebtedness of the Company and its subsidiaries would have certain rights to repossess, foreclose upon and sell the assets securing such indebtedness. Any such circumstances would materially adversely affect the market value of the New Notes and the Company's ability to pay principal, premium, if any, and interest on the New Notes. ORIGINAL ISSUE DISCOUNT The New Notes will be treated as issued with substantial original issue discount for U.S. federal income tax purposes. Consequently, purchasers of the New Notes generally will be required to include amounts in gross income for U.S. federal income tax purposes in advance of receipt of the cash payments to which the income is attributable. Furthermore, the New Notes may be subject to the high yield discount obligation rules, which will defer and may, in part, eliminate the Company's ability to deduct for U.S. federal income tax purposes the 20 original issue discount attributable to the New Notes. Accordingly, the Company's after-tax cash flow might be less than if the original issue discount on the New Notes was deductible when it accrued. See "Certain Federal Income Tax Considerations" for a more detailed discussion of the U.S. federal income tax consequences for the Company and the beneficial owners resulting from their purchase, ownership and disposition of the New Notes. If a bankruptcy case were commenced by or against the Company under the Bankruptcy Code of 1978, as amended (the "Bankruptcy Code"), after the issuance of the New Notes, the claim of a holder with respect to the principal amount thereof may be limited to an amount equal to the sum of (i) the initial offering price and (ii) that portion of the original issue discount that is not deemed to constitute "unmatured interest" for purposes of the Bankruptcy Code. Any original issue discount that was not amortized as of the date of any such bankruptcy filing would constitute "unmatured interest." FRAUDULENT CONVEYANCE RISKS Under applicable provisions of the federal bankruptcy law or comparable provisions of state fraudulent transfer law, if the Company, at the time of issuance of, or making any payment in respect of, the New Notes, (a)(i) was or was rendered insolvent thereby, was engaged or about to engage in a business or transaction for which its assets constituted unreasonably small capital, or intended to incur, or believed that it would incur, debts beyond its ability to pay such debts as they matured and (ii) the Company received less than reasonably equivalent value or fair consideration for such issuance or (b) the Company issued the New Notes or made any payment thereunder with intent to hinder, defraud or delay any of its creditors, the obligations of the Company under some or all of the New Notes could be voided or held to be unenforceable by a court, the obligations of the Company under the New Notes could be subordinated to claims of other subordinated creditors, or the New Note Holders could be required to return payments already received. In particular, if the Company were to cause a subsidiary to pay a dividend in order to enable the Company to make payments in respect of the New Notes, and such transfer were deemed a fraudulent transfer, the New Note Holders could be required to return the payment. In any of the foregoing cases, there could be no assurance that the Holders would ultimately recover the amounts owing under the New Notes. The measure of insolvency for purposes of the foregoing will vary depending upon the law applied in any such case. Generally, however, the Company would be considered insolvent if the sum of its debts, including contingent liabilities, was greater than all of its assets at a fair valuation, if it had unreasonably small capital to conduct its business, or if the present fair salable value of its assets were less than the amount that would be required to pay the probable liability on its existing debts, including contingent liabilities, as they become absolute and matured. The Company believes that it will not be insolvent at the time of or as a result of the Exchange Offer, that it will not engage in a business or transaction for which its remaining assets constitute unreasonably small capital and that it did not and does not intend to incur or believe that it will incur debts beyond its ability to pay such debts as they mature. There can be no assurance, however, that a court passing on such questions would agree with the Company's analysis. The Indenture provides that, under certain circumstances, subsidiaries of the Company will be required to guarantee the obligations of the Company under the Indenture and the New Notes. In the event any subsidiary enters into such a guarantee, if bankruptcy or insolvency proceedings were initiated by or against that subsidiary within 90 days (or, possibly, one year) after that subsidiary issued a guarantee, or if that subsidiary incurred obligations under its guarantee in anticipation of insolvency, all or a portion of the guarantee could be avoided as a preferential transfer under federal bankruptcy or applicable state law. In addition, a court could require Holders of the New Notes to return all payments made within any such 90-day (or, possibly, one year) period as preferential transfers. DEPENDENCE ON KEY PERSONNEL The Company's performance is substantially dependent on the performance of its officers and key employees. Given the Company's early stage of development, the Company is dependent on its ability to retain 21 and motivate qualified personnel, especially its management. The Company does not have "key person" life insurance policies on any of its employees. There can be no assurance that key personnel will continue to be employed by the Company or that the Company will be able to attract and retain qualified personnel in the future. The Company's future success also depends on its ability to identify, hire, train and retain technical, sales, marketing and managerial personnel. Competition for such personnel is intense, and there can be no assurance that the Company will be able to attract, assimilate or retain such personnel in the future. The inability to attract and retain its officers and key employees and the necessary technical, sales, marketing and managerial personnel could have a material adverse effect upon the Company's business, operating results and financial condition and its ability to achieve sufficient cash flow to service its indebtedness, including the New Notes. See "Business -- Employees" and "Management." GOVERNMENT REGULATION The Federal Communications Commission ("FCC") has broad jurisdiction over the telecommunications and cable industries. The majority of FCC regulations, while not directly affecting DIVA, do affect cable companies, upon which DIVA will significantly rely for the marketing and distribution of its VOD service to customers. As such, the indirect effect of these regulations may adversely affect DIVA's business. The Communications Act of 1934, as significantly amended by Congress in 1992 and more recently by the Telecommunications Act of 1996 (as so amended, the "Act"), provides a significant regulatory framework for the operation of cable systems. Rules promulgated by the FCC under the Act impose restrictions and obligations that could affect how the cable operator offers or prices DIVA's VOD service; examples include (i) regulation of rates for certain tiers or packages of programming and for equipment (set- top boxes) used to deliver regulated tiers of service, (ii) prohibition of bundling equipment and service charges together into one charge to the customer, (iii) equipment rate averaging, (iv) prohibition of forced tier buy- through, and (v) imposition of various consumer protection, billing and disclosure requirements. None of these impose direct rate or service restrictions on the Company. In addition, certain FCC rules, and FCC rulemakings in process or required in the future under the Act could directly affect DIVA's DCU and related development efforts by imposing requirements that the DCU (i) be designed to be compatible with other consumer electronics equipment that is used to deliver services provided by cable companies, (ii) be commercially available to consumers from vendors other than cable operators, and (iii) not defeat or interfere with the national emergency alert system, closed captioning for the hearing impaired, or any "V" chip requirements that may be imposed. FCC rules to date have focused on analog equipment, rather than digital equipment such as DIVA's. However, it is anticipated that as digital equipment, transmission and services are deployed by cable operators, the FCC will extend analog rules to digital transmission, or craft rules specific to digital platforms. An example being discussed is digital "must carry" which would require cable operators to transmit on their systems not only the analog channels of local broadcast television stations in all markets, but the newly authorized digital broadcast channels as well. Digital "must carry" for local over-the-air broadcast licensees could consume a significant amount of the increased channel capacity being created by cable operators through their upgrades. There can be no assurance that the Company's VOD service will be successful in competing with other analog and digital services for access to cable operator transmission capacity that remains after implementation of digital "must carry" in any local market. Local franchising authorities retain certain statutory and general regulatory authority with respect to cable operators including the ability to regulate or exclude content that they deem inappropriate under local community standards. The Company's VOD service includes adult offerings and, because local community standards will vary, DIVA works closely with the local cable operator to determine the extent of adult content, which in some communities may be entirely excluded. DIVA's VOD system also enables individual subscribers to exclude entirely or restrict uses of such content. DIVA's operating results could be impacted by the decisions of local regulatory authorities and cable operators regarding such content. 22 Finally, the Act authorizes, but does not require, local franchising authorities to impose a fee of up to 5% on the gross revenues derived by third parties from the provision of cable service over a cable system. To the extent that DIVA provides its VOD service directly to cable subscribers (rather than providing it to cable operators for resale to cable subscribers) and the local franchise agreement has been amended or renewed and includes appropriate language, the Company could be required to pay a franchise fee of up to 5% of gross revenues derived from its VOD service in a specific franchise area to the local franchising authority. At present, only the Lenfest deployment uses this business model, and it will not be used in any other of the currently scheduled deployments. There are other rulemakings that have been and still are being undertaken by the FCC which will interpret and implement provisions of the Act. It is anticipated that the Act will stimulate increased competition generally in the telecommunications and cable industries, which may adversely impact the Company. No assurance can be given that changes in current or future laws or regulations, including those limiting or abrogating exclusive MSO contracts, in whole or in part, adopted by the FCC or other federal, state or local regulatory authorities would not have a material adverse effect on the Company's business. In addition, VOD services are licensed by the Canadian Radio and Telecommunications Commission, and DIVA is seeking to determine the basis on which it may offer its service in Canada, the extent of regulatory controls and the terms of any revenue arrangements that may be required as conditions to the deployment of DIVA's VOD service in Canada. DIVA may not be able to obtain distribution rights to movie titles in Canada under regulatory and financial arrangements acceptable to DIVA. See "Business -- Programming." CONTROL BY INSIDERS The Company's executive officers and directors, together with entities affiliated with such individuals, and Acorn Ventures, Inc. beneficially own approximately % of the Common Stock (assuming conversion of all outstanding Preferred Stock into Common Stock). Accordingly, these stockholders have significant influence over the affairs of the Company. This concentration of ownership could have the effect of delaying or preventing a change in control of the Company. See "Management" and "Principal Stockholders." CONSEQUENCES TO NON-TENDERING HOLDERS OF OLD NOTES Upon consummation of the Exchange Offer, the Company will have no further obligation to register the Old Notes. Thereafter, any Holder of Old Notes who does not tender its Old Notes in the Exchange Offer, including any Holder which is an "affiliate" (as that term is defined in Rule 405 of the Securities Act) of the Company which cannot tender its Old Notes in the Exchange Offer, will continue to hold restricted securities which may not be offered, sold or otherwise transferred, pledged or hypothecated except pursuant to Rule 144 and Rule 144A under the Securities Act or pursuant to any other exemption from registration under the Securities Act relating to the disposition of securities; provided, that an opinion of counsel is furnished to the Company that such an exemption is available. These restrictions may limit the trading market and price for the Old Notes. YEAR 2000 COMPLIANCE Certain organizations anticipate that they will experience operational difficulties at the beginning of the year 2000 as a result of computer programs being written using two digits rather than four to define the applicable year. The Company's plan to address the "Year 2000" issue calls for software compliance verification from the Company's external vendors; testing in-house engineering and manufacturing software tools; testing software in the Company's products for the Year 2000 compliance; and communication with significant suppliers to determine the readiness of third parties' remediation of their own Year 2000 issues. To date, the Company has not encountered any significant Year 2000 issues concerning its respective computer programs. The Company plans to complete its Year 2000 compliance research and testing by the end of fiscal 1999. All costs associated with carrying out the Company's plan for the Year 2000 problem are being expensed as incurred. The costs associated with preparation for the Year 2000 compliance are not expected to have a material adverse effect on 23 the Company's business, financial condition, and results of operations. Nevertheless, there is uncertainty concerning the potential costs and effect associated with any Year 2000 compliance. Any Year 2000 compliance problems of the Company, its customers or their respective suppliers could have a material adverse effect on the Company's business, financial condition, and results of operations. During the past three years, the Company completed an effort to convert its financial applications to commercial products that, according to its suppliers, are Year 2000 compliant. The Company has received confirmations from its primary suppliers indicating that they are either Year 2000 compliant or have plans in place to ensure readiness. As part of the Company's assessment, it is evaluating the level of validation it will require of third parties to ensure their Year 2000 readiness. ABSENCE OF A PUBLIC MARKET FOR THE NEW NOTES AND NO ASSURANCE OF ACTIVE TRADING MARKET The New Notes are being offered to the Holders of the Old Notes. Prior to this Exchange Offer, there was no existing trading market for the Old Notes and there were no existing New Notes. The Company does not intend to apply for listing of the New Notes on any securities exchange or on the Nasdaq National Market. Although the New Notes will be eligible for trading in the PORTAL Market, the New Notes may trade at a discount from their initial offering price, depending upon prevailing interest rates, the market for similar securities, the Company's performance and other factors. In connection with the issuance of the Old Notes, the Company was advised by the Initial Purchasers that they intended to make a market in the Old Notes following the issuance thereof; however, the Initial Purchasers are not obligated to do so and any such market-making activities may be discontinued at any time without notice. Therefore, there can be no assurance that an active market for the New Notes will develop, either prior to or after performance of the Company's obligations under the Registration Rights Agreement. In addition the market price of the Old Notes has significantly fluctuated since their original issuance, and the Company anticipates that the market for the New Notes may similarly fluctuate. See "Description of the Old Notes -- Registration Rights" and "Plan of Distribution." FORWARD-LOOKING STATEMENTS The statements contained in this Prospectus that are not historical facts are "forward-looking statements" (as such term is defined in Section 27A of the Securities Act and Section 21E of the Exchange Act), which can be identified by the use of forward-looking terminology such as "estimates," "projects," "anticipates," "expects," "intends," "believes," or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties; provided, however, that the safe harbor provisions of Section 27A and Section 21E are not applicable to any "forward-looking" statements made in connection with the initial issuance of New Notes pursuant to this Prospectus, although such provisions are applicable to such statements made in connection with the resales of New Notes. These forward-looking statements, including statements regarding market opportunity, deployment plans, market acceptance, the Company's business model of long-term revenue sharing contracts, capital requirements, anticipated net losses and negative cash flow, revenue growth, anticipated operating expenditures and product development plans are only estimates or predictions and cannot be relied upon. No assurance can be given that future results will be achieved; actual events or results may differ materially as a result of risks facing the Company or actual results differing from the assumptions underlying such statements. Such risks and assumptions include, but are not limited to, those discussed in this "Risk Factors" section, which could cause actual results to vary materially from the future results indicated, expressed or implied in such forward-looking statements. All written and oral forward-looking statements made in connection with this Prospectus which are attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the risk factors and other cautionary statements included in this Prospectus. The Company disclaims any obligation to update information contained in any forward-looking statement. 24 USE OF PROCEEDS This Exchange Offer is intended to satisfy certain of the Company's obligations under the Registration Rights Agreement. The Company will not receive any cash proceeds from the issuance of the New Notes offered in the Exchange Offer. In consideration for issuing the New Notes as contemplated in this Prospectus, the Company will receive in exchange Old Notes in like principal amount at maturity, the form and terms of which are the same in all material respects as the form and terms of the New Notes except that the New Notes (i) will have been registered under the Securities Act and therefore will not be subject to certain restrictions on transfer applicable to the Old Notes and (ii) will not be entitled to certain registration or other rights under the Registration Rights Agreement, including the provision in the Registration Rights Agreement that provides if the Exchange Offer is not consummated within the time period specified therein, additional interest will accrue on the Old Notes at a rate of 0.50% per annum (over the rate at which interest is then accruing) of the Accreted Value on the preceding Semi-Annual Accrual Date and be payable in cash semi-annually on March 1 and September 1 of each year, commencing September 1, 1999, until the Exchange Offer is consummated or a shelf registration statement is declared effective. The Old Notes surrendered in exchange for New Notes will be retired and canceled and cannot be reissued. Accordingly, issuance of the New Notes will not result in any increase in the Indebtedness of the Company. DIVIDEND POLICY The Company has not paid any dividends since its inception and does not intend to pay any dividends on its capital stock in the foreseeable future. The Company anticipates that it will retain all future earnings, if any, for use in its operations and expansion of the business. In addition, the terms of the Indenture restrict the Company's ability to pay dividends on, or make distributions in respect of, its Capital Stock. See "Description of the Old Notes -- Covenants." 25 CAPITALIZATION The following table sets forth the total cash, cash equivalents and short- term investments and capitalization of the Company as of June 30, 1998. This table should be read in conjunction with the consolidated financial statements and related notes thereto included elsewhere in this Prospectus.
AS OF JUNE 30, 1998 --------------------- (IN THOUSANDS, EXCEPT SHARE DATA) Cash, cash equivalents and short-term investments........ $197,564 ======== Debt: 12 5/8% Senior Discount Notes due 2008................. $242,973 Other.................................................. 58 -------- Total debt........................................... 243,031 -------- Stockholders' equity: Preferred stock, $0.001 par value, 30,000,000 shares authorized, 21,372,287 shares issued and outstanding (1)(2)................................................ 21 Common stock, $0.001 par value, 65,000,000 shares au- thorized, 17,200,178 shares issued and outstanding (1)(3)................................................ 17 Additional paid-in capital............................. 116,898 Deficit accumulated during the development stage....... (130,916) -------- Total stockholders' equity........................... (13,980) -------- Total capitalization............................... $229,051 ========
- -------- (1) Share numbers reflect an amendment and restatement of the Company's Certificate of Incorporation, filed in May 1998, which effected a two-for- one stock split, an increase in the authorized shares of Common Stock to 65,000,000 and an increase in the authorized shares of Preferred Stock to 30,000,000. (2) Excludes 1,073,906 shares of Series B Preferred Stock, and 750,000 shares of Series C Preferred Stock and 200,000 shares of Series D Preferred Stock reserved for issuance upon exercise of warrants and 255,676 shares of Series AA Preferred Stock reserved for issuance upon exercise of options outstanding at June 30, 1998. (3) Excludes 4,975,820 and 4,762,800 shares of Common Stock reserved for issuance upon exercise of options and warrants, respectively, outstanding at June 30, 1998. See Note 8 of Notes to Consolidated Financial Statements. 26 SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated statement of operations and consolidated balance sheet data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and related notes thereto included elsewhere in this Prospectus. The selected consolidated financial data as of June 30, 1998 and for each of the years in the three-year period ended June 30, 1998, and for the period from July 1, 1995 (inception) to June 30, 1998 have been derived from the audited Consolidated Financial Statements included elsewhere in this Prospectus. The information presented below under "Other Data" is unaudited. The selected consolidated financial data should be read in conjunction with the Consolidated Financial Statements as of and for the year ended June 30, 1998, the related notes thereto, and the related independent auditor's report. See "Risk Factors." Since its inception, the Company has engaged principally in development and start-up activities. Accordingly, the Company's results of operations are not necessarily indicative of, and should not be relied upon as an indicator of, the future performance of the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."
PERIOD FROM JULY 1, 1995 YEAR ENDED JUNE 30, (INCEPTION) ---------------------------- TO JUNE 30, 1996 1997 1998 1998 -------- -------- -------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenue.............................. $ -- $ -- $ 82 $ 82 -------- -------- -------- -------- Operating expenses: Research and development............. 8,451 17,539 28,278 54,268 Sales and marketing.................. 1,071 3,168 4,170 8,409 General and administrative........... 1,778 3,940 14,248 19,966 Acquired in-process research and development(1)...................... -- 4,061 18,656 22,717 -------- -------- -------- -------- Total operating expenses............. 11,300 28,708 65,352 105,360 -------- -------- -------- -------- Net operating loss................... 11,300 28,708 65,270 105,278 -------- -------- -------- -------- Other (income) expense, net: Equity in (income) loss of investee.. (357) 2,080 1,631 3,354 Interest income...................... (65) (410) (5,632) (6,107) Interest expense..................... 395 3,590 13,730 17,715 -------- -------- -------- -------- Total other (income) expense, net.... (27) 5,260 9,729 14,962 -------- -------- -------- -------- Net loss before extraordinary item... 11,273 33,968 74,999 120,240 Extraordinary -- loss early extinguishment of debt.............. -- -- 10,676 10,676 -------- -------- -------- -------- Net loss............................. $ 11,273 $ 33,968 $ 85,675 $130,916 ======== ======== ======== ======== Basic and diluted net loss per share: Loss before extraordinary item....... $ 1.04 $ 2.22 $ 4.56 $ 8.46 Extraordinary -- loss early extinguishment of debt.............. -- -- 0.65 0.75 -------- -------- -------- -------- Net loss............................. $ 1.04 $ 2.22 $ 5.21 $ 9.21 ======== ======== ======== ======== Shares used in per share computations........................ 10,895 15,316 16,447 14,219 ======== ======== ======== ======== OTHER DATA: Depreciation and amortization........ $ 31 $ 891 $ 5,778 $ 6,700 EBITDA(2)............................ (11,269) (27,817) (59,492) (98,578) Capital expenditures................. 2,568 6,044 13,364 21,976 Ratio of earnings to fixed charges(3).......................... -- -- -- --
27
AS OF JUNE 30, --------------------------- 1996 1997 1998 ------- -------- -------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Cash, cash equivalents, and short-term investments.................................... $ 4,004 $ 234 $197,564 Restricted cash................................. -- 3,588 -- Property and equipment, net..................... 2,537 7,063 19,349 Total assets.................................... 21,462 16,408 233,398 Long-term debt.................................. 25,156 28,440 243,031 Total stockholders' deficit..................... (7,624) (15,905) (13,980)
- -------- (1) In connection with the acquisition of Norstar Multimedia Inc. in July 1996 and SRTC in April 1998, the Company wrote off acquired in-process research and development of $4.1 million and $18.7 million, respectively, as a one- time charge to operations for the fiscal years ended June 30, 1997 and 1998, respectively. (2) EBITDA consists of net loss before equity in (income) loss of investee, net interest expense and income taxes, and depreciation and amortization. EBITDA is a commonly used measure in the media industry. It is not intended to represent cash flow or results of operations in accordance with GAAP for the periods indicated. (3) In calculating the ratio of earnings to fixed charges, "earnings" consist of net loss before income tax expense, fixed charges, and undistributed income or losses attributable to an entity less than 50% owned by the Company accounted for under the equity method, where there is no guarantee, directly or indirectly, to service the debt of such entity. Fixed charges consist of net interest expense, including such portion of rental expense that is attributed to interest. For the fiscal years ended June 30, 1996, 1997 and 1998, and for the period from July 1, 1995 (inception) to June 30, 1998, earnings were inadequate to cover fixed charges by $11.6 million, $31.9 million, $84.0 million and $127.6 million, respectively. 28 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the Consolidated Financial Statements and the notes thereto included elsewhere in this Prospectus. This discussion contains forward-looking statements that involve risks and uncertainties, including but not limited to, certain assumptions regarding increases in customers, revenues and certain expenses. Actual results will differ and some differences may be material. Important factors that could cause actual results to differ materially from the Company's forward-looking statements are set forth below and elsewhere in this Prospectus. See "Risk Factors." OVERVIEW DIVA provides a true VOD service over the cable television infrastructure. The Company's VOD service offers immediate in-home access to a diverse and continuously available selection of hundreds of movies with VCR functionality (i.e., pause, play, fast forward and rewind) and high quality digital picture and sound. DIVA's proprietary technology is designed to provide an economically viable turnkey digital VOD system that offers movies at prices comparable to those charged for videotape rentals, PPV and NVOD movies, but with greater convenience and functionality. The Company was founded in June 1995 and is still in the development stage. Since inception, the Company has devoted substantially all of its resources to developing its VOD system, establishing strategic relationships, negotiating deployment agreements, carrying out initial marketing activities and establishing the operations necessary to support the commercial launch of the Company's VOD service. Through June 30, 1998, the Company had generated minimal revenues, had incurred significant losses and had substantial negative cash flow, primarily due to the research and development and start-up costs required to develop its VOD service. Since inception through June 30, 1998, the Company had an accumulated deficit of $130.9 million. The Company currently intends to increase its operating expenses and its capital expenditures in order to continue to develop, deploy and market its VOD service. As a result, the Company expects to incur substantial additional net losses and negative cash flow for at least the next several years. Prior to April 1, 1998, the Company held approximately 40% of the stock of SRTC. On that date, the Company acquired the remaining 60% of the issued and outstanding stock of SRTC in exchange for 3,277,539 shares of Series AA Preferred Stock and the assumption of all outstanding SRTC stock options. The Company accounted for the merger as a purchase, and, accordingly, the operating results of SRTC have been included in the Company's Consolidated Financial Statements since the date of acquisition. Approximately $6.2 million of the purchase price was allocated to intangible assets and $18.7 million has been allocated to acquired in-process research and development for the fiscal year ended June 30, 1998. See "Results of Operations -- Operating Expenses -- Acquired In-process Research and Development Expenses" and Note 3 of Notes to Consolidated Financial Statements. RESULTS OF OPERATIONS Since its inception on July 1, 1995, the Company has engaged principally in technology development and activities related to the startup of business operations. Accordingly, the Company's historical revenues and expenditures are not necessarily indicative of, and should not be relied upon as an indicator of, revenues that may be attained or expenditures that may be incurred by the Company in future periods. REVENUES Revenues consist of per-movie viewing fees, monthly service fees and the sale of monthly subscription packages. The majority of revenues consist of per-movie viewing fees paid by customers to view movies on 29 demand. The Company initiated the commercial launch of its VOD service on September 29, 1997 and began accruing movie viewing revenues and monthly subscription fees in October 1997. As of June 30, 1998, the Company's VOD service was deployed commercially at four MSO locations. Revenue for the fiscal year ended June 30, 1998 was $82,000. DIVA expects to realize revenue pursuant to long-term revenue sharing agreements with MSOs. Generally, the timing and extent of deployment under each agreement is conditioned on a successful initial deployment phase, followed by a staged rollout in the applicable MSO system based on an agreed upon schedule. DIVA installs, owns and operates its VOD system for each MSO thereby enabling the MSO to avoid incremental capital expenditures and operating expenses related to implementing VOD. DIVA incurs the capital expenditures necessary to deploy its VOD system a substantial period of time prior to realizing any significant revenue. See "Risk Factors -- Long-Term Cable Operator Agreements Depend on Initial Commercial Deployment; Other Cable Operator Agreements," and "Business -- Deployment Agreements and Relationships." The Company recognizes revenues under its MSO agreements only when its VOD systems is successfully integrated and operating and customer billing commences. Accordingly, the recognition of revenues will lag the announcement of a new cable operator agreement by at least the time necessary to install the service and to achieve meaningful penetration or movie buy rates. In addition, the Company believes the extent and timing of such revenues may fluctuate based on a number of factors including the success and timing of deployment and the Company's success in obtaining and retaining customers. Revenues are expected to increase as the Company successfully deploys additional VOD systems and achieves higher DIVA customer penetration. OPERATING EXPENSES Research and Development Expenses. Research and development expenses primarily consist of salaries and consulting fees to support product development, ongoing system software and integration costs, deployment and operations, prototype manufacturing, content programming and product development charges. To date, the most substantial portion of the Company's operating expenses has been research and development expenses. Research and development expenses were $8.5 million, $17.5 million and $28.3 million for the fiscal years ended June 30, 1996 ("Fiscal 1996"), June 30, 1997 ("Fiscal 1997") and June 30, 1998 ("Fiscal 1998"), respectively. The increase in research and development expenses was attributable primarily to the hiring of additional engineering and research personnel in connection with the Company's development and refinement of its technology platform and significant increases in operations, manufacturing and program content personnel in preparation for and support of the Company's recent commercial deployments. Research and development and other personnel increased from four full-time employees at June 30, 1996 to 48 full-time employees at June 30, 1997 and to 182 full-time employees at June 30, 1998. Included in research and development expenses for Fiscal 1998 was approximately $11.5 million in prototype set-top box costs and server development expenses. Additional research and development expenses of $1.6 million in Fiscal 1998 were attributable to the consolidation of research and development expenditures from SRTC subsequent to completion of the acquisition of SRTC. The Company intends to increase research and development expenses to fund continued development and enhancements of its VOD service. The Company believes significant investments in research and development will be necessary to remain competitive and to respond to market pressures. Sales and Marketing Expenses. Sales and marketing expenses consist of the costs of marketing DIVA's VOD system to MSOs and their customers and include corporate salaries, travel expenses, trade shows, consulting fees and promotional costs. In addition, these expenses include direct costs related to acquiring customers, such as telemarketing, direct mailings, brochures and certain customer acquisition expenses, including targeted advertising and promotional campaigns. Sales and marketing expenses were $1.1 million, $3.2 million and $4.2 million for Fiscal 1996, Fiscal 1997 and Fiscal 1998, respectively. The primary items contributing to the increase in marketing expenses were the hiring of additional personnel, promotional expenditures in connection with the Company's recent commercial deployments and continued business development activities and product management costs. The Company expects sales and marketing expenses to continue to increase as the Company pursues and enters into new deployment agreements. 30 General and Administrative Expenses. General and administrative expenses consist primarily of salaries and related expenses of management and administrative personnel, professional fees, general corporate and administrative expenses and depreciation and amortization expenses, including depreciation of servers and related headend equipment. General and administrative expenses cover a broad range of the Company's operations including corporate functions such as executive administration, finance, legal, human resources and facilities. In addition, general and administrative expenses include significant costs associated with the development, support and expected growth of the Company's complex information system infrastructure. General and administrative expenses were $1.8 million, $3.9 million and $14.2 million for Fiscal 1996, Fiscal 1997 and Fiscal 1998, respectively. Included in general and administrative expenses were depreciation and amortization expenses of $31,000, $891,000 and $5.8 million for Fiscal 1996, Fiscal 1997 and Fiscal 1998, respectively. The increase in general and administrative expense between Fiscal 1996 and Fiscal 1997 relates primarily to increased personnel from two full-time employees at June 30, 1996 to 20 full-time employees at June 30, 1997 and to 35 full-time employees at June 30, 1998. In addition, general and administrative expenses increased as a result of the growth of operations for the development and commercial introduction of DIVA's VOD service in Fiscal 1998. General and administrative expenses are expected to increase substantially due to the addition of management personnel required to support expansion of the Company's business operations. Depreciation and amortization expenses are expected to continue to increase substantially due to planned expenditures for capital equipment and other capital costs associated with the deployment and expansion of the Company's business. Acquired In-Process Research and Development Expenses. During Fiscal 1997, the Company acquired Norstar for 857,370 shares of the Company's Class C Common Stock and cash consideration of $3.4 million. In connection with the Norstar acquisition, the Company wrote off acquired in-process research and development expenses of $4.1 million as a one-time charge to operations for Fiscal 1997. In April 1998, the Company acquired in a stock-for-stock acquisition the 60% of the issued and outstanding stock of SRTC not already owned by the Company. The Company issued 3,277,539 shares of Series AA Preferred Stock and assumed all outstanding SRTC stock options. The Company accounted for the merger as a purchase, and, accordingly, the operating results of SRTC have been included in the Company's Consolidated Financial Statements since April 1, 1998. As a result of the SRTC acquisition, the Company allocated $6.2 million to intangible assets and $18.7 million to acquired in-process research and development expenses as a one-time charge to operations for Fiscal 1998. In connection with the acquisition of SRTC, the Company obtained a third- party independent appraisal of the intangible assets acquired. As a result of this analysis three key intangibles, core technology, in-process research and development and existing assembled workforce, were identified. The method used to estimate the fair market value of these assets was the cost approach. This approach is based on the theory that a prudent investor would pay no more than the cost of constructing a similar asset of like utility at prices applicable at the time of appraisal. The cost approach is often used to value an early stage technology, or non income-generating asset. Given that the Sarnoff Server is in the early development stage, the cost approach was used to value these assets. With respect to the core technology and the in-process research and development, the appraiser used historical research and development costs to date, adjusted for inflation, to estimate the cost to reproduce these assets in their current state. This cost was adjusted by an efficiency factor, representing development savings based on the knowledge and experience of the acquired development personnel. Certain key elements of the core technology demonstrating technological feasibility were identified which could be leveraged into future server products. The appraiser estimated that the fair value of these elements based on the cost approach was approximately $5.7 million and the fair value of the in-process research and development was $18.7 million. 31 The Company retained substantially all of SRTC's existing personnel and as a result the appraiser valued the assembled workforce using the cost approach. This approach assigned costs to acquire and train the existing workforce on a fully burdened basis of approximately $500,000. OTHER INCOME AND EXPENSE Other income and expense primarily consists of interest income and interest expense and equity in income of SRTC. Interest income consists of earnings on cash, cash equivalents and short-term investments. Interest income was $65,000, $410,000 and $5.6 million for Fiscal 1996, Fiscal 1997 and Fiscal 1998, respectively. The increase in interest income is the result of increased cash and cash equivalents balances which are invested in short-term interest bearing accounts and an increase in short-term investments. Interest expense consisted primarily of accreted interest on the Company's outstanding debt. Interest expense increased substantially from $395,000 for Fiscal 1996 to $3.6 million for Fiscal 1997, and to $13.7 million in Fiscal 1998. The increase in interest expense for Fiscal 1997 was due to interest expense incurred for a full year on the Company's subordinated discount notes due 2006 (the "1996 Notes"), as compared to a partial year of interest expense incurred in Fiscal 1996. The increase in interest expense for Fiscal 1998 was due to the significant increase in the Company's outstanding debt as a result of the offering of the Old Notes. From inception through June 30, 1998, the Company has not made any cash interest payments on any of its discount notes. Interest expense will continue to consist primarily of interest on the Company's debt. Interest expense will increase significantly as a result of the issuance of the Old Notes. In February 1998, the Company's 1996 Notes were exchanged for a portion of the Old Notes. See "--Liquidity and Capital Resources." In connection with this exchange, the Company recorded an extraordinary loss of approximately $10.7 million ($0.65 per share). This one-time charge was included in the net loss for Fiscal 1998. In December 1995, the Company entered into an equity investment and license agreement with SRTC, whereby the Company acquired 8,067,074 shares of SRTC common stock, which represented approximately a 40% ownership interest in the equity of SRTC on an issued and outstanding basis, in exchange for 6,654,000 shares of Common Stock, plus two shares of Class B Common Stock. This transaction was recorded at the estimated fair value of the Common Stock and SRTC's common stock exchanged and had been accounted for using the equity method. The amount of the purchase price that exceeded the Company's percentage ownership of SRTC's net book value at the date of the acquisition is separately attributed to the Company's interest in in-process research and development being performed by SRTC. Such amount, $659,000, was expensed as a nonrecurring charge in determining the Company's equity in the results of operations of SRTC for Fiscal 1996. PROVISION FOR INCOME TAXES The Company has not provided for or paid federal income taxes due to the Company's net losses. As of June 30, 1998, the Company had net operating loss carryforwards of approximately $94.2 million to offset future income subject to federal income taxes and $70.4 million available to offset future California taxable income. As of June 30, 1998, the Company had $4.5 million in net operating losses to offset future New Jersey taxable income. The extent to which such loss carryforwards can be used to offset future taxable income may be limited because of ownership changes pursuant to Section 382 of the Internal Revenue Code of 1986, as amended (the "Code"). LIQUIDITY AND CAPITAL RESOURCES From inception through June 30, 1998, the Company has financed its operations primarily through the gross proceeds of private placements totaling approximately $76.2 million of equity and $250.0 million of high yield debt securities. As of June 30, 1998, the Company had cash and cash equivalents and short-term investments totaling $197.6 million. 32 In May 1996, the Company received $25.2 million in gross proceeds from the sale of 47,000 units, consisting of 1996 Notes with an aggregate principal amount at maturity of $47.0 million and warrants to purchase an aggregate of 1,898,800 shares of Common Stock. Aggregate proceeds of $285,000 were attributed to these warrants. In connection with the new offering of units described below, the Company subsequently retired all of the 1996 Notes in a debt exchange. In July and August 1996, the Company completed the sale of Series C Preferred Stock for approximately $25.9 million in gross proceeds. In August and September 1997, the Company completed the sale of Series D Preferred Stock for approximately $47.4 million in gross proceeds. On February 19, 1998, the Company received $250.0 million in gross proceeds from an offering of 463,000 units consisting of Old Notes with an aggregate principal amount at maturity of $463.0 million and warrants to purchase an aggregate of 2,778,000 shares of Common Stock. Of these units, an aggregate of 404,998 units were issued and sold for cash and an additional 58,002 units were exchanged for all the 1996 Notes. Each unit as originally issued consisted of one Old Note and three warrants, each exercisable to purchase one share of Common Stock at $0.01 per share. As a result of the Company's stock split, the units now consist of three warrants, each exercisable to purchase two shares of Common Stock at a price of $0.005 per share. The Old Notes are senior unsecured indebtedness of the Company, ranking pari passu with any future unsubordinated unsecured indebtedness. The Old Notes are senior to any future subordinated indebtedness of the Company, but effectively will be subordinated to any secured indebtedness of the Company. The Old Notes were issued at a substantial discount from their aggregate principal amount at maturity of $463.0 million. Although cash interest is not payable on the Old Notes prior to September 1, 2003, the Company's interest expense includes the accretion of such interest expense and the carrying amount of the Old Notes will accrete to face value by March 1, 2003. Beginning September 1, 2003, cash interest will be payable on the notes semi- annually in arrears on each March 1 and September 1 at the rate of 12 5/8% per annum. There are no principal payments due on the Old Notes prior to maturity on March 1, 2008. The gross proceeds to the Company from the issuance of the Old Notes were approximately $250.0 million. The Company allocated approximately $18.1 million of the proceeds of this offering to the warrants. In addition, the Company recorded an extraordinary loss of approximately $10.7 million resulting from the extinguishment of the 1996 Notes. The net proceeds from the offering of the Old Notes were approximately $200.0 million, after deducting placement fees and other offering costs, the extinguishment of the 1996 Notes and a one-time charge related to the extinguishment of the 1996 Notes. The Company believes that its cash, cash equivalents and short-term investments will be sufficient to satisfy the Company's liquidity needs for approximately 18 months. The Company expects to incur significant capital expenditures and operating expenses in the future. Capital expenditures include the Sarnoff Servers and related headend equipment, DCUs and general capital expenditures associated with the anticipated growth of the Company. The amount of capital expenditures will, in part, be driven by the rate at which cable operators introduce the Company's VOD service and the rate at which customers subscribe to the VOD service. In addition to capital expenditures, the Company anticipates expending a significant portion of its resources for sales and marketing, continued development and enhancement of existing technology, development of new consumer services and other expenses associated with the delivery of the Company's VOD service to customers. Actual capital requirements may vary from expectations and will depend on numerous future factors and conditions, many of which are outside of the Company's control, including, but not limited to (i) the ability of the Company to meet its development and deployment schedules; (ii) the accuracy of the Company's assumptions regarding the rate and extent of commercial deployment and market acceptance by cable operators and customers; (iii) the extent that cable operators choose to deploy industry standard, DIVA- compatible set-top boxes; (iv) the number of customers choosing DIVA's VOD service and their buying patterns; (v) the nature and penetration of new services to be offered by the Company; (vi) unanticipated costs; and (vii) the need to respond to competitive pressures and technological changes. The Company may consider issuance of other debt or equity securities. The Company has no present commitments or arrangements assuring it of any future equity or debt financing, 33 and there can be no assurance that the Company will be able to obtain any such equity or debt financing on favorable terms or at all. In the event that the Company is unable to obtain such additional capital, the Company will be required to delay the expansion of its business or take other actions that could have a material adverse effect on the Company's business, operating results and financial condition and its ability to achieve sufficient cash flow to service its indebtedness, including the New Notes. To the extent the Company raises additional cash by issuing equity securities, existing stockholders of the Company will be diluted. See "Risk Factors -- Substantial Future Capital Requirements" and "-- Development Stage Company; Limited Revenues; History of Losses." YEAR 2000 COMPLIANCE Certain organizations anticipate that they will experience operational difficulties at the beginning of the year 2000 as a result of computer programs being written using two digits rather than four to define the applicable year. The Company's plan to address the "Year 2000" issue calls for software compliance verification from the Company's external vendors; testing in-house engineering and manufacturing software tools; testing software in the Company's products for the Year 2000 compliance; and communication with significant suppliers to determine the readiness of third parties' remediation of their own Year 2000 issues. To date, the Company has not encountered any significant Year 2000 issues concerning its respective computer programs. The Company plans to complete its Year 2000 compliance research and testing by the end of Fiscal 1999. All costs associated with carrying out the Company's plan for the Year 2000 problem are being expensed as incurred. The costs associated with preparation for the Year 2000 compliance are not expected to have a material adverse effect on the Company's business, financial condition, and results of operations. Nevertheless, there is uncertainty concerning the potential costs and effect associated with any Year 2000 compliance. Any Year 2000 compliance problems of the Company, its customers or their respective suppliers could have a material adverse effect on the Company's business, financial condition, and results of operations. During the past three years, the Company completed an effort to convert its financial applications to commercial products that, according to its suppliers, are Year 2000 compliant. The Company has received confirmations from its primary suppliers indicating that they are either Year 2000 compliant or have plans in place to ensure readiness. As part of the Company's assessment, it is evaluating the level of validation it will require of third parties to ensure their Year 2000 readiness. 34 BUSINESS INDUSTRY OVERVIEW The growth in the home video entertainment market over the past ten years can be primarily attributed to the growth of cable television, home video and DBS. The cable television industry initially capitalized on the rapidly growing market for home entertainment by providing basic cable television services that offer consumers new programming in addition to the limited number of programs offered by network television. Basic cable services offer subscribers a wide variety of general and special purpose television programming for a monthly fee. Basic cable subscription revenues increased from approximately $5.3 billion in 1986 to approximately $18.6 billion in 1996, representing the largest portion of total cable television industry revenues. The cable television industry continued to expand its product offerings with the introduction of premium or pay cable services, and more recently with PPV. Premium or pay cable services provide individual channels, such as HBO and Showtime, that offer popular movie releases, original programming and exclusive sporting events not offered as part of a basic cable subscription. Premium or pay cable revenues increased from approximately $3.9 billion in 1986 to approximately $5.2 billion in 1996. PPV allows cable subscribers to purchase a specific movie or event, such as a boxing match, at a preset start time by calling a special telephone number or by using a remote control to activate access through the set-top box. Movie choices offered by PPV services generally provide a limited selection of movies at any given time, and start times generally are set at two to four hour intervals. Movies and events are typically offered on PPV 30 to 60 days after release to the home video market. NVOD is enhanced PPV with more titles and start times staggered by as little as 15 minutes. This service is offered by DBS providers such as DIRECTV. In order to compete more effectively with DBS, cable operators are exploring digital programming, which permits them to offer a broader range of programming choices, including an increased number of NVOD movies. PPV and NVOD movie revenues totaled approximately $655 million in 1996. Following the growth of cable television, providers of home video rentals and sales capitalized on the growing trend of consumer preference for home entertainment alternatives. According to Adams Media Research, during 1996 there were approximately 79 million U.S. households with VCRs averaging 3.9 tape rentals per month and purchasing over 7.6 tapes over the course of the year. In 1996, home video industry revenues were approximately $16.5 billion. DBS is a recent service offering subscription television services in the home video entertainment market via satellite. Using a high-powered satellite to transmit digitally compressed broadcast signals to a consumer's home, DBS offers consumers a wider variety of home video entertainment. The consumer receives the signal through an 18-inch or 36-inch dish antenna that is either purchased or leased. DBS service packages currently provide up to 200 channels with extensive sports, movie, cable channel and music offerings. In the U.S., DBS services are currently offered by DIRECTV/USSB, PrimeStar and EchoStar. DBS has been one of the fastest selling consumer electronics products in U.S. history. According to Adams Media Research, as of June 30, 1997, DBS, which was introduced in the U.S. in 1994, had approximately 5.2 million subscribers nationwide. Due to technological constraints, DBS service providers cannot currently offer VOD but, as a result of higher channel capacity, are able to offer NVOD. The Company believes that one of the next phases in the evolution of the home video entertainment market will be the delivery of truly interactive VOD. VOD combines the best features of home video rentals, PPV services and NVOD. COMPANY OVERVIEW DIVA provides a true VOD service over the cable television infrastructure. The Company's VOD service offers immediate in-home access to a diverse and continuously available selection of hundreds of movies with VCR functionality (i.e., pause, play, fast forward and rewind) and high quality digital picture and sound. 35 DIVA's proprietary technology is designed to provide an economically viable turnkey digital VOD system that offers movies at prices comparable to those charged for videotape rentals, PPV and NVOD movies, but with greater convenience and functionality. In order to shorten the time to market for the Company's VOD service, DIVA provides a turnkey solution for cable operators that combines a technology platform with programming content and marketing and billing services. The technology foundation of the Company's VOD system is its proprietary, scalable and modular video server, a massively parallel processing computer capable of storing hundreds of movie titles, any of which can be simultaneously delivered to multiple customers. Even though only one copy of each movie title is resident on the system, customers may view and interact (i.e., pause, play, fast forward and rewind) independently with the same or different movie titles at any time. In contrast to PPV services and NVOD, which require continuous broadcasting of programming content to all homes in a cable system, the Company's technology delivers programming content to viewers on a "pointcast" basis, as requested by individual customers. DIVA's solution results in lower bandwidth requirements for cable operators, while increasing convenience and variety for cable operators' customers. DIVA believes that its VOD service offers significant advantages to cable operators, who face increased competition for subscribers from DBS companies, the telecommunications industry and other video delivery services. To date, DIVA has entered into discussions for deployment of its VOD system with a number of MSOs in the United States that have upgraded or have begun the process of upgrading to two-way capable HFC plant. DIVA has deployed its VOD service in a single headend location in cable systems owned by Lenfest, Adelphia, Cablevision and Rifkin. The Company has obtained the rights to provide a broad array of entertainment content through license arrangements with Warner Bros. (including New Line Cinema, Turner and WarnerVision), Sony Pictures, (including Columbia, Tristar and Sony Classics), Universal Pictures, Polygram, Walt Disney Pictures, Twentieth Century Fox, MGM, HBO and other specialized programmers. Under these arrangements, the Company has rights to over 3,000 video titles for its initial deployments, including new releases, library titles and classics, special interest videos, children's videos and adult- content movies. The Company is seeking to expand its license arrangements to include additional studios and specialized programmers and is pursuing distribution rights for new entertainment offerings, including on-demand music videos and educational, instructional and other content. The Company was founded in June 1995 when it acquired certain exclusive rights for consumer applications of the Sarnoff Server from SRTC, a company formed as a spin-off from Sarnoff, formerly RCA Labs, which was responsible for inventing color television. Sarnoff, a premier visual image laboratory, played a key role in developing the DIRECTV satellite system and the HDTV standard. DIVA acquired SRTC in April 1998. HOME VIDEO ENTERTAINMENT MARKET Overview. The home video entertainment market has experienced dramatic growth from the proliferation of home video rentals and sales, cable television and DBS, including PPV services and NVOD. Total U.S. consumer spending on home video entertainment increased from less than $15 billion in 1987 to more than $43 billion in 1996 and is expected to exceed $59 billion by 2000. The Company believes that this growth is driven by several factors, including: (i) greater viewing selection resulting from increased channel capacity; (ii) better quality audio and video signals provided from upgraded and digitally compressed cable and DBS services; (iii) increased production and marketing of feature films and television programming; and (iv) the growth of higher quality and more affordable home entertainment systems. Home Video Rental Market. According to Adams Media Research, U.S. home video market revenues, which experienced a 14% compound annual growth rate from 1986 to 1996, were approximately $16.5 billion in 1996, and consisted of approximately $9.2 billion in video rentals and $7.3 billion in video sales. There were 36 approximately 79 million households with VCRs in the U.S. in 1996, with video rentals averaging 3.9 per month. Of these households, the top 30% of VCR households, or approximately 24 million homes, rented more than six videotapes per month. Cable PPV Market. Cable PPV movie revenues totaled approximately $358 million in 1996. Approximately 25.4 million cable households had access to PPV in the U.S. in 1996. Based on industry sources, PPV buy rates averaged 0.27 buys per PPV-capable home per month. Cable operators typically offer subscribers three to nine PPV movies in a given month. PPV services generally utilize two to four channels of capacity and typically offer viewers a choice of up to four movie titles with a new film starting every one to two hours. DBS NVOD Market. DBS NVOD movie revenues totaled approximately $297 million in 1996. As of the end of 1996, approximately 5.6 million households in the U.S. had access to NVOD, offered through DBS and other wireless technologies. In 1996, based on DBS industry statistics, NVOD buy rates averaged 1.3 buys per subscriber per month. DBS providers generally offer subscribers up to 80 titles in a given month. In 1998, SKYReports estimated monthly buy rates of 1.5 to 2.0 titles per subscriber for DIRECTV, the largest DBS operator and provider of NVOD movies. DIRECTV devotes up to 61 channels to NVOD and offers viewers a choice of 10 to 20 titles starting in a given hour, some starting as frequently as every 30 minutes. MSOs are utilizing digital compression technology, which allows them to provide NVOD similar to that provided by DBS companies. DIVA'S OPPORTUNITY The Company believes that its VOD service will capture significant revenues from the home video entertainment market by combining the best features of video rentals, PPV services and NVOD. In contrast to the video rental market, DIVA's VOD service provides assured availability of popular movie titles, facilitates impulse buying and eliminates inconvenient trips to the video store, late return fees and tape rewind charges. In contrast to PPV services and NVOD, the Company's VOD service provides instant in-home access to hundreds of movie titles with VCR functionality (i.e., pause, play, fast forward and rewind). Additionally, DIVA's VOD service offers movies at prices comparable to video rentals, PPV services and NVOD. As a result of the selection, convenience and functionality of its VOD service, the Company expects to achieve higher movie buy rates and higher revenues than existing PPV services and NVOD. BUSINESS STRATEGY DIVA seeks to become the leading provider of VOD services to the cable television industry. The Company's strategy includes the following key elements: Establish Long-Term Agreements with MSOs. DIVA's strategy is to build relationships with a number of MSOs to demonstrate its technology and operating capabilities, build a platform for future customer growth and capitalize on being first to market with an economically viable VOD service. DIVA offers its VOD service to cable operators through long-term, revenue sharing agreements. DIVA has designed its VOD service to enable MSOs, through their existing infrastructures, to attract and retain customers and increase revenues with minimal incremental cost. DIVA owns, installs and operates its VOD system, thereby allowing MSOs to avoid the capital expenditures and operating expenses necessary to implement VOD. By providing cable operators' subscribers with its interactive VOD service, the Company believes it offers an incremental source of revenues, a differentiated product offering and a competitive advantage to cable operators. Drive Subscriber Penetration by Providing a Superior Service. DIVA's strategy is to maximize subscriber penetration by offering a valuable home video entertainment service that provides consumers immediate access to hundreds of movies with VCR functionality (i.e., pause, play, fast forward and rewind) at prices comparable to those charged for video rentals, PPV and NVOD movies. Using DIVA's VOD service, the customer can avoid trips to a video rental store, late return fees and tape rewind charges. DIVA's VOD service provides its customers complete flexibility in choosing when to start viewing a movie, in contrast to the preset starting times 37 offered by PPV services and NVOD. DIVA's VOD service also offers customers packages with unlimited viewing access to multiple special interest titles, such as selections of children's videos, for a fixed monthly fee. Additionally, DIVA's VOD service enables customers to preview movies and search for titles alphabetically, by star or by genre with assured availability of titles. Develop Relationships with Content Providers. DIVA has entered into arrangements with a large number of content providers, including most of the major studios, and intends to expand and develop additional relationships to provide popular programming that appeals to broad segments of viewers. In developing these relationships, DIVA believes it offers several advantages. First, content provider revenues will be based on per view buy rates rather than one-time tape sales. Second, the Company believes that the convenience, ease of use and VCR functionality of DIVA's VOD service will lead to higher viewership of new releases as compared to PPV services and NVOD. Third, the Company believes that the packaging options that the Company is pursuing to promote its VOD service to customers will lead to increased consumer viewership of library titles. Fourth, consumer exposure to certain content, such as music and instructional videos, may lead to increased sales of related merchandise, such as recorded music, offered by the content providers. Fifth, the DIVA system will generate information about the viewing patterns of individual households that the Company believes will be of significant value to content providers. Create a Brand Identity. The Company believes that the creation of a brand identity among cable subscribers is crucial to its strategy to become the preferred provider of VOD services to the cable television industry. By creating consumer awareness and educating cable subscribers about DIVA's features, the Company believes it will accelerate penetration within geographic markets and increase the pace at which cable operators recognize the economic and service benefits of DIVA's VOD service. DIVA has invested considerable resources in developing the on-screen look of the DIVA brand. Develop Additional Digital and Interactive Services. In the future, the installed DIVA system will be a digital platform that should allow DIVA and cable operators to provide customers with access to an expanded array of broadcast and interactive services, such as on-demand music videos and additional video packages. DIVA is also exploring the possibility of "time shifting" sports, news and popular programming, which involves encoding and storing broadcast programs and offering them for subsequent viewing at the customer's convenience. BENEFITS OF DIVA'S VOD SERVICE DIVA's VOD service has been designed to provide distinct benefits to the Company's three core constituencies: customers, cable operators and content providers. CUSTOMERS Title Selection and Availability. DIVA's VOD service provides customers with assured availability of hundreds of movies, more than are currently available through PPV services and NVOD. Each month certain movies will be added or deleted from DIVA's VOD service. Customers also have complete flexibility in choosing when to start a movie in contrast to the preset starting times offered by PPV services and NVOD. In addition, DIVA's guaranteed access to its movie selections solves the common problem of out-of-stock titles at video rental stores. VCR Functionality. DIVA's VOD service allows viewers to pause, fast forward and rewind movies and enables viewers to stop and resume movie playback. Viewers have full access to the movie until midnight of the following day. These features are not currently available with PPV services or NVOD. Convenience and Quality. DIVA's VOD service offers customers the ability to preview all movies and search for videos by title, genre or star, through an on-screen, fully interactive user-friendly menu. Customers can make their content selections in private, which is not typically possible in video rental stores. Additionally, 38 customers can avoid trips to the video store, late fees and rewind fees. DIVA's VOD service also delivers movies with a high quality digital picture and CD-quality sound at prices comparable to those charged for PPV services and tape rentals. Customized Access and Usage Limits. DIVA's VOD service allows customers to establish access and usage limits for individual household members through the use of personal identification numbers ("PIN"). Access limits are based on the standard Motion Picture Association of America movie ratings system, and usage limits are based on monthly spending limits established by the customer for each individual PIN. In contrast, PPV services and NVOD, as well as video rental stores, currently do not offer these features with the same degree of flexibility and certainty as DIVA's VOD service. CABLE OPERATORS Access the Home Video Rental Market. In contrast to PPV services, which generated approximately $358 million of movie revenues in 1996, the home video rental market generated over $9.2 billion in revenues in 1996. By providing assured availability and instant access to hundreds of popular movie titles without inconvenient trips to the video store, late return fees and movie rewind charges, the Company believes that subscribers will choose to view movies using the Company's VOD service instead of renting a videotape. Maximize Revenues. The Company believes that cable operators offering DIVA's VOD service will generate higher revenues than those offering existing PPV services and NVOD. As a result of the selection, convenience and functionality of its VOD service, the Company expects to achieve higher movie buy rates than existing PPV services and NVOD. Respond to Competitive Pressures. DIVA's VOD service enables cable operators to address the competitive pressures created by alternative distribution technologies, such as DBS, which offer customers digital picture and sound, as well as more channels and programming selection than cable. The Company believes that DIVA's VOD service will be an important component in the cable operator's efforts to retain existing subscribers and attract new subscribers, due to the unique benefits that DIVA's VOD service offers customers. Offer New Services with Limited Capital Expenditures. Since DIVA provides all hardware and software components in the headend for its VOD system, cable operators with upgraded two-way capable HFC plant will not require significant capital expenditures to offer true VOD services to their subscribers. Benefit From Turnkey VOD Solution. DIVA provides cable operators with a turnkey system. Other VOD systems that have been under trial by certain cable operators required the operator to select components provided by different vendors and integrate the components into a fully functional VOD system. Historically, integration of components from different vendors has proved challenging. In addition to providing interactive technology and content, DIVA will provide the software applications for diagnostic, network management, billing and viewing data collection systems necessary to offer VOD. Improve Bandwidth Efficiency. Because DIVA can direct a dedicated digital stream to a specific customer on the cable system, DIVA can offer hundreds of movie titles to customers using as few as two 6 MHz cable channels in cable systems designed with 500 homes per node. In contrast, the delivery of PPV services or NVOD using multiplexing at a rate of 12:1 and offering six movie titles with 30 minute-interval start times would also require two 6 MHz cable channels. CONTENT PROVIDERS Increase Revenues. DIVA's business model contemplates that content providers will receive a share of revenues generated by DIVA customers on a per-view basis. The Company believes that the advantages and ease of use of DIVA's VOD service relative to PPV services, NVOD and video rental stores are likely to lead to increased viewing of studio content and a broader subscriber base. In addition, the DIVA system will provide 39 an additional distribution channel for programming other than feature films, including music and instructional videos. Leverage Library Titles. DIVA plans to implement marketing and pricing strategies that promote older titles with new releases. The Company's programming strategies will allow DIVA and content providers to generate increased revenues from library titles. Enhance Merchandise Sales. The Company believes that airing certain content, such as music and instructional videos, may enhance sales of related merchandise by the content providers. Music companies have generally considered music videos to be part of their marketing efforts. Information. The Company believes DIVA's VOD service will generate important information for content providers, including household demographics and viewing patterns. DEPLOYMENT AGREEMENTS AND RELATIONSHIPS DIVA has deployed its VOD service in a limited number of cable systems owned by Lenfest, Adelphia, Cablevision and Rifkin. The Company's agreements with each of Lenfest, Adelphia, Cablevision and Rifkin are conditioned upon the successful completion of an initial commercial deployment phase which is designed to allow both parties to verify the business viability of DIVA's VOD service, in accordance with certain criteria set forth in the agreements. The Company is currently in the initial commercial deployment phase with each of these cable operators. Following the initial commercial deployment phase, if any such cable operator is satisfied that DIVA's VOD service meets its business and operational expectations, DIVA will continue the existing deployment and commence commercial deployment in certain of such cable operators' cable systems on an agreed-to schedule. If DIVA's VOD service does not demonstrate business viability or if the cable operator otherwise determines that such service does not meet its business or operational expectations, none of Lenfest, Adelphia, Cablevision or Rifkin are obligated to deploy DIVA's VOD service. Following the initial commercial deployment, the term of each agreement is seven years (ten years in the case of Rifkin) per "cluster" from the date a certain minimum number of customers is achieved, where a "cluster" is an area serving a specified minimum number of homes passed. See "Risk Factors--Long-Term Cable Operator Agreement Dependent on Initial Commercial Deployment." DIVA's VOD service requires cable systems with upgraded HFC plant and an activated return path. These MSOs, and other MSOs in discussions with DIVA, are actively upgrading additional systems with HFC plant. According to the Cablevision Blue Book, the number of U.S. cable homes upgraded to HFC plant as a percent of total U.S. homes passed by cable is estimated to have grown from 40% at the end of 1996 to 60% at the end of 1997, although not all of such HFC plant has an activated return path. PROGRAMMING DIVA has entered into license arrangements for its initial deployments with Warner Bros. (including New Line Cinema, Turner and WarnerVision), Sony Pictures (including Columbia, Tristar and Sony Classics), Universal Pictures, Polygram, Walt Disney Pictures, Twentieth Century Fox, MGM, HBO, Nelvana Entertainment, Artisan Entertainment, National Geographic and other studios and content providers to license new releases, library titles, and special interest programming on terms no less favorable than those available to PPV services. License arrangements for VOD titles currently are negotiated on a title-by-title and geographical basis. The Company believes it will be able to obtain license arrangements for additional markets and with additional content providers on terms similar to current license arrangements. 40 DIVA licenses titles from content providers on the following terms: New Releases. DIVA currently has commitments from the above studios to receive new product releases in the same window as DBS and PPV services, typically 30 to 60 days after release to the home video market, for its initial deployments. The Company believes it can obtain similar terms for future deployments. Major studios typically release an aggregate of 15 to 25 new titles to the PPV market per month. Library Titles. DIVA acquires rights to library titles which, in most cases, have been previously aired on PPV and/or pay or broadcast television, typically no less than 13 months after the title's first run movie release. In general, DIVA's rights to air such titles extend beyond one year. Children's Programming and Other Content. Subject to availability in DIVA's target markets, the Company expects studios and other content providers to provide DIVA with additional children's and special interest titles from their respective libraries. Music Videos. DIVA has had preliminary discussions with a number of music labels and believes that it will be able to develop a viable on-demand music video service. The Company believes that its VOD service will be attractive to music labels because it can promote new talent and genres that currently receive limited air time and also generate sales of related merchandise. Time Shifting. DIVA is exploring "time shifting," a new interactive service, which may include providing television programming on demand. In this case, the customer could order TV programs such as sports, news or other popular programming that could be retrieved at a convenient time and watched with VCR functionality. Another example of time shifting is a service that time shifts programming available on an existing pay channel, which would enable the consumer to obtain that program via DIVA. DIVA is in the early stage of considering these services from a licensing, business model and technology perspective. OPERATIONS DIVA offers its VOD service in partnership with cable operators. DIVA provides a technology platform with programming, marketing and billing services and facilitates customer handling processes by utilizing existing cable infrastructure and personnel. The cable operator provides installation of set-top boxes and certain customer service functions. Manufacturing. DIVA currently outsources the manufacturing of its major system components to specialized manufacturing organizations. The Company has subcontracted manufacturing of the Sarnoff Server and other components to third-party manufacturers. DIVA's in-house system development and manufacturing operations performs system engineering, writes software applications and provides quality assurance, integration, final assembly and testing for its turnkey VOD system. DIVA has an arrangement with one of the largest contract electronic manufacturers in the world to manufacture DCUs for the Company to its specifications. The purpose of this outsourcing is intended to enable DIVA to rapidly increase the output of its set-top box, if necessary. Headend Equipment Installation and Management. DIVA assumes responsibility for the provision, installation, monitoring and ongoing maintenance of the Sarnoff Server and related headend equipment. DIVA believes that the initial installation and integration of its headend equipment can be accomplished in less than a week with up to an additional week of testing and integration. DIVA has established an automated remote monitoring system with centralized maintenance capabilities for the installed turnkey system. Employees in DIVA's regional operations centers make use of this advanced system in monitoring the operations of the Company's VOD service in local areas. DCU Installations. The procedures and time requirements for DIVA installations are similar to cable industry installations, except for customer education. To date, DIVA has provided the DCUs and the hand-held 41 remote controls for customers of its VOD service and utilizes an MSO's experienced installers to perform the DCU installations. DIVA trains an MSO's installers in all facets of the installation process, including customer education on the use of the remote control in navigating through the Director, DIVA's on-screen interactive video guide. DIVA expects to continue to provide such MSO installer training even after the DIVA platform migrates to utilize an industry standard set-top box. DIVA expects a typical installation will require one installer and have a duration of one to two hours. Customer Service. DIVA leverages an MSO's existing customer service infrastructure and personnel. The Company has developed training programs which enable an MSO's existing customer service representatives to handle all calls relating to new DIVA orders, billing questions and other customer inquiries or requests for guidance. DIVA provides certain technical assistance, including responding to certain customer telephone inquiries, to the MSOs. New DIVA orders are processed by the customer service representative and scheduled and assigned by an MSO's technical operations group. Billing and Management Information Systems. DIVA has developed its own real- time billing and management information system to interface with the billing systems of the cable operator. DIVA's billing system supports deployment of DIVA's VOD service with the majority of current billing systems and permits DIVA to bill customers separately or on an integrated basis as part of the cable operator's bill. The Company expects its management information system to play a major role in collecting, analyzing, and reporting usage, revenue, churn, migration and other key performance measures of DIVA's VOD service. The Company believes that this information will be valuable in determining its own programming selections, as well as providing demographic information for the cable companies and the studios. MARKETING Marketing to MSOs. The Company's initial marketing efforts were focused on demonstrating the capabilities of its VOD service to mid-tier MSOs. More recently, some of the larger MSOs have expressed interest in DIVA's VOD service, and the Company has expanded its marketing focus accordingly. In order to fully demonstrate its capabilities, the Company has built a mobile demonstration unit featuring DIVA's fully functioning, turnkey VOD system. The demonstration unit has allowed representatives of targeted MSOs to experience DIVA's VOD service at their corporate headquarters. Marketing to Customers. DIVA's multimedia marketing strategy combines traditional direct response elements with support elements that create awareness for its VOD service and help attract new customers. The traditional direct response approach could include a telemarketing and direct-mail campaign targeting specific households and local newspaper advertisements. Support elements include: (i) a commercial promoting DIVA's VOD service on heavily viewed cable channels; (ii) an "infomercial" running on a specially dedicated cable barker channel available to all subscribers; and (iii) marketing materials that promote DIVA's VOD service accompanying MSOs cable bills. The Company has also developed training programs to enable customer service representatives to reinforce the selling points of DIVA's VOD service to prospective customers who call to inquire further about the service. Finally, DIVA has built numerous promotional features into its on-screen interactive guide, the Director, in an effort to secure customer loyalty and increase customer retention. TECHNOLOGY THE CABLE ENVIRONMENT Historically, cable operators delivered video signals in analog form to their subscribers using one-way, broadcast transmission. As the number of local television stations, television "superstations" and cable programming services increased, however, traditional cable plant and system architecture did not provide sufficient capacity to enable cable operators to expand and carry these new entertainment sources. Cable operators have chosen one of two principal methods to increase channel capacity: (i) deliver some or all of the video signals in digital form using existing cable distribution plant, or (ii) replace and/or upgrade the cable 42 distribution plant itself using higher capacity cable. Each method requires significant capital expenditures by the cable operator. HFC is a cable system architecture that generally utilizes fiber optic cable between the headend and the nodes and coaxial cable from the nodes to individual homes. HFC has several advantages over coaxial cable alone for cable operators that have elected to replace or upgrade cable plant: the fiber optic cable "backbone" is more reliable and more economical to operate and maintain, and the node configuration of HFC architecture enables efficient two-way activation of the cable system. Two-way activation gives the operator the option of providing data modem, Internet and telephony services as well as true, interactive VOD. THE DIVA SYSTEM SOLUTION DIVA's system solution offers cable operators an opportunity to provide substantially more movie titles while utilizing significantly less channel capacity than analog or digital broadcast PPV or NVOD offerings. In contrast to these one-way PPV and NVOD service offerings, DIVA's system solution provides its broad content choices in a true, interactive format, whenever the cable subscriber chooses to access the service and with VCR functionality. DIVA's system requires upgraded HFC plant and delivers video content in digital form using pointcast (as opposed to broadcast) transmission. Upgraded HFC plant is also required to deliver high-speed cable modem access and telephony. Each of these applications requires an activated return path, i.e. "two-way" cable plant capable of sending signals from the home to the headend. DIVA's system solution capitalizes on the node architecture used for upgraded HFC plant. Very high capacity fiber optic cable connects the cable headend (and Sarnoff Server) to a number of fiber nodes. From each node, lower capacity coaxial cable is used to connect the node to subscriber homes. DIVA's pointcast approach utilizes only part of a cable channel to deliver each video stream, and then only when a particular home has ordered a program. Cable channels, particularly on the lower capacity coaxial cable portion of the HFC plant, are therefore used only when needed. In contrast to DIVA's technology, conventional, one-way broadcast (whether analog or digital) transmission requires that all programming be continuously available over the entire cable system, even if none of the television sets in the homes in a particular node are turned on or tuned to a particular programming channel. Use of channel capacity only when it is requested by a particular subscriber allows any unutilized capacity to be used by other subscribers. THE DIVA SYSTEM COMPONENTS DIVA's digital VOD system is an integrated, turnkey group of hardware and software elements comprising (i) an operating platform, including the Sarnoff Server, image vaults, storage capacity, network communications and customer management systems, and operating and billing systems; (ii) a DCU or a DIVA- compatible set-top box into which elements of DIVA's proprietary software are downloaded; and (iii) video programming content accessed through the DIVA Director, an on-screen interactive interface. Operating Platform. The critical characteristic of DIVA's technology that enables the delivery of low-cost VOD is the concentration of computing power in the Sarnoff Server, which reduces the memory and processing requirements of the DIVA-compatible set-top box. Unlike most competing servers, the Sarnoff Server permits customers to simultaneously view and interact independently with the same or different movie titles at any time, even though only one copy of each movie is resident on the system. The software and hardware system responsible for coordinating all upstream and downstream communication to and from the customers is known as the Video Session Manager ("VSM"). It formats for transport and controls the Sarnoff Server's content, as well as all other potential digital programming content intended for viewers. DIVA's Customer Management Systems ("CMS") manages the network itself, as well as customer account activity and data concerning the acquisition, processing and use of each video title. The billing component of the CMS enables DIVA to prepare separate customer bills or interfaces via a standard communications protocol directly with the cable operator's billing system so that charges for DIVA's video content are included on the cable operator's bill. 43 Set-top Box. The DIVA system requires a set-top box, which converts digital signals to analog form, and a remote control. DIVA's DCU is designed with minimal components, relying on most of the system's functionality and intelligence being located at the headend in the Sarnoff Server. This design capitalizes on the architecture and performance of the Sarnoff Server to allow true VOD at minimal cost. Because the set-top box is the component of a VOD system which must be deployed in large numbers, cost savings focused on the set-top box compound rapidly and have a significant impact on overall cost savings for delivery of VOD service under DIVA's system architecture. Further, with computing power and content centered in the server and headend components, the look, feel, content and functionality of VOD service offerings and the DIVA Director can be upgraded at the headend and implemented by software downloads without having to send a technician to the subscriber's home to replace the set-top box or install new functionality. DIVA Director. Users control their VOD service through the DIVA Director, which is an audio and visual interactive interface displayed on a viewer's television. The Director allows a customer, using a simple remote control, to move through on-screen information, to order video titles, and to control the pause, play, rewind and fast forward features when viewing a movie or other title. RESEARCH AND DEVELOPMENT ACTIVITY The Company's research and development activities focus on platform and product development and related engineering efforts to enhance DIVA's VOD system and service offerings. These activities currently include: (i) migrating DIVA's VOD platform to meet evolving industry standards, (ii) porting Director software and VOD service command and control functionality to third-party digital set-top boxes, including those manufactured by General Instrument and Scientific-Atlanta, (iii) expanding stream capacity of the Sarnoff Server, (iv) implementing secondary storage as an adjunct to the Sarnoff Server, (v) migrating to MPEG 2 video encoding standards, (vi) reducing the physical size of VOD system components located in cable headends, (vii) integrating NMS billing and usage information with systems supplied by third-party cable industry billing vendors, (viii) reducing the cost of various VOD system components, (ix) adding system functionality to support new services such as music videos and time shifting, and (x) investigating alternative methods of distributing encoded content to headends, including satellite delivery. The Company's product development and engineering efforts focus on the development and enhancement of DIVA's VOD system. The Company's research development and engineering expenses for the period from July 1, 1995 (inception) to June 30, 1998 and the years ended June 30, 1996, 1997 and 1998 were $54.3 million, $8.5 million, $17.5 million and $28.3 million, respectively. COMPETITION FOR VOD SERVICES The market for in-home video entertainment services is intensely competitive, rapidly evolving and subject to rapid technological change. The Company expects competition in the market for VOD services to intensify and increase in the future. A number of companies have announced an intention to introduce a VOD service or deliver VOD components that might be deployed by a video service provider. Intertainer, a company funded by Comcast, Intel, Sony Corp. of America and NBC, is currently conducting trials with Comcast and US West to provide VOD and other services over high speed networks such as ADSL and cable modems primarily to the personal computer, but plans to provide services to television sets in the future. It is possible that companies currently operating overseas will adapt their technology and offer it through high-speed networks in the U.S. Elmsdale Media is currently conducting a trial for a VOD system in Cardiff, Wales for its cable partner, NTL, and has announced an intention to extend such trial to cover 2,000 homes. Elmsdale Media's service is slated to provide 24-hour consumer access to up to 300 movie titles. VideoNet is conducting a trial with British Telecom offering VOD and other interactive services to non-paying customers. Hongkong Telecom began offering commercial interactive services, including VOD, in March 1998 and has gained over 100,000 paying subscribers. Other companies internationally and domestically have also announced plans to provide VOD services which vary in degree of commercial viability. There can be no assurance that these or other companies will not provide equivalent or more attractive capabilities that could be more acceptable to cable operators and their subscribers. 44 It is also possible that such competitors may form new alliances, develop a competitive VOD service and rapidly acquire significant market share. Such competition would materially and adversely affect the Company's business, operating results and financial condition. Companies that are or may be capable of delivering VOD components include Concurrent Computer Corp, Celerity Systems Inc., Mitsubishi Electronics America, Nippon Electric Corp., nCube, SeaChange International, Inc., Silicon Graphics Inc., Unisys, Scientific-Atlanta, Sony Corporation, Vivid Technology Inc. and FreeLinQ Communications Corporation. Some of these competitors have developed VOD products that have undergone tests or trials and may succeed in obtaining market acceptance of their products more rapidly than the Company. In addition, several major cable operators, including Time Warner Inc. and Cox Communications, have previously field-tested integrated system solutions utilizing components from a number of the aforementioned entities. These trials have since been terminated. Notwithstanding termination of its field trial in Orlando, Time Warner Inc. has solicited proposals from industry suppliers for elements that might be used in designing and integrating a next generation VOD system solution for an initial deployment in 1999. Cablevision continues to operate a limited trial of an in-house VOD solution despite the fact that certain component vendors are no longer supporting the project. The Company believes Cablevision has no current plans to extend the deployment of this in-house system solution, but the Company believes Cablevision intends to conduct a second limited field trial of a different VOD system, based on components supplied by a third party server supplier. The Company's competitors or potential competitors may develop affiliations with cable operators or alternative distribution providers or develop services or technologies that are better or more cost effective than the Company's VOD service. In addition, certain of these potential competitors are either directly or indirectly affiliated with content providers and cable operators and could therefore materially impact the Company's ability to sign long-term services contracts with such cable operators and obtain content from such providers. The Company may also face competition from cable operators or other organizations, including but not limited to the telephone companies, providers of DBS, PPV and NVOD, cable programmers and Internet service providers, who could provide VOD-like services through cable and alternative delivery platforms, including the Internet, telephone lines and satellite. For example, DIVA could encounter competition from companies such as Microsoft/WebTV Plus and @Home that in the future may be able to deliver movies over the Internet via the television, or from consumer use of purchased or rented digital video discs or variants thereof. In addition, the competitive environment in which the Company will operate may inhibit its ability to offer DIVA's VOD service to cable operators and other types of operators that compete with one another in the same territory. A cable operator may require DIVA to provide its VOD service exclusively to such cable operator in a particular territory. Further, cable operators themselves may offer competing services, including increased NVOD offerings, or may be unwilling to use DIVA's VOD service exclusively. The Company will also face competition for viewers from providers of home video rentals, which are increasingly entering into revenue sharing arrangements with content providers for new releases. These arrangements have resulted in a significant increase in the number of copies available for rental at major video chains and, accordingly, have made home video rentals more attractive to consumers. Many of the Company's competitors and potential competitors have longer operating histories, greater name recognition, and significantly greater financial, technical and marketing resources than the Company. As a result, they may be able to respond to new or emerging technologies and changes in customer requirements or to devote greater resources to the development, promotion and sale of their products and services more effectively than the Company. There can be no assurance that the Company will be able to compete successfully against current or future competitors or that competitive pressures faced by the Company will not materially adversely affect its business, operating results and financial condition and its ability to achieve sufficient cash flow to service its indebtedness, including the New Notes. INTELLECTUAL PROPERTY The Company's future success depends, in part, on its ability to protect its intellectual property and maintain the proprietary nature of its technology through a combination of patents, licenses and other intellectual property 45 arrangements. The Company has licensed rights to the Sarnoff Server and the DCU initially developed by Sarnoff. Sarnoff and the Company have filed applications and intend to file additional applications for patents covering the Sarnoff Server. Sarnoff and the Company have filed applications for patents covering the DCU, and the Company has filed patent applications, and intends to file additional and derivative patent applications covering the interactive service and its technology. There can be no assurance, however, that any patents issued to Sarnoff or the Company will not be challenged, invalidated or circumvented, or that the rights granted thereunder will provide proprietary protection to the Company. Despite the efforts of Sarnoff and the Company to safeguard and maintain these proprietary rights, there can be no assurance that the Company will be successful in doing so or that the Company's competitors will not independently develop or patent technologies that are substantially equivalent or superior to the Company's technologies. On August 18, 1998, the Company received a notice from a third party licensing company stating that it has acquired rights in two U.S. patents and that the Company's VOD system and process are described in the claims of these patents. The Company and outside patent counsel are conducting a preliminary analysis of these third party patents. The Company has filed trademark applications on certain marks and logos. In July 1996, DIVA received a notice from a third party claiming that the Company's use of one of its trademarks infringes a trademark right held by such party. DIVA responded to the letter in late July 1996, asserting that the use of the trademark does not infringe on the trademark right that the party holds. The Company has received no further response. In August 1998, the Company received a notice from a third party, which provides integrated circuits for digital multimedia applications, claiming that such third party's trademark application gives it priority over the Company's use of the "DIVA" mark. The Company is in the process of preparing its response to this letter. DIVA could encounter similar challenges to its trademarks in the future. Since patent applications in the U.S. are not publicly disclosed until the patent has been issued, applications may have been filed which, if issued as patents, would relate to the Company's products. In addition, the Company has not conducted a comprehensive patent search relating to the technology used in the Sarnoff Server or the Company's VOD system. The Company is subject to the risk of claims and litigation alleging infringement of the intellectual property rights of others. There can be no assurance that third parties will not assert infringement claims against the Company in the future based on patents or trade secrets or that such claims will not be successful. Parties making such claims may be able to obtain injunctive or other equitable relief which could effectively block the Company's ability to provide its VOD service in the U.S. and internationally, and could result in an award of substantial damages. In the event of a successful claim of infringement, the Company, its MSOs and other end users may be required to obtain one or more licenses from third parties. There can be no assurance that the Company or its customers could obtain necessary licenses from third parties at a reasonable cost or at all. The defense of any lawsuit could result in time consuming and expensive litigation regardless of the merits of such claims, and damages, license fees, royalty payments and restrictions on the Company's ability to provide its VOD service, any of which could have a material adverse effect on the Company's business, operating results and financial condition and its ability to achieve sufficient cash flow to service its indebtedness, including the New Notes. EMPLOYEES As of June 30, 1998, DIVA had 242 employees, including 21 in sales and marketing, 127 in product development and programming, 35 in administrative and 59 in operations and manufacturing. None of DIVA's employees are currently represented by a labor union. DIVA believes that its relationship with its employees is good. PROPERTIES The Company's principal facilities are located in Menlo Park, California, where the Company currently leases approximately 50,000 square feet and has an option to lease an additional 18,000 square feet. The term of this lease will run through April 30, 1999 with renewal options. In addition, the Company currently leases 4,433 square feet of office space in King of Prussia, Pennsylvania, which directly supports the Philadelphia 46 operations. This lease expires in December 1999. DIVA also leases 22,600 square feet of office space in Princeton, New Jersey. The term of the lease runs through November 1, 2001 with two five-year renewal options. The Company believes that suitable additional or alternative space adequate to serve the Company's foreseeable needs would be available on commercially reasonable terms, if necessary. LEGAL PROCEEDINGS The Company is not a party to any material litigation at the present time. 47 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS Set forth below are the names, ages as of August 31, 1998, and positions of the directors and executive officers of the Company. All directors hold office until their successors are duly elected and qualified and all executive officers hold office at the pleasure of the Board of Directors.
NAME AGE POSITION ---- --- -------- Paul M. Cook................ 74 Chairman of the Board, Chief Executive Officer and Founder Alan H. Bushell............. 51 President, Chief Operating Officer, Chief Financial Officer, Assistant Secretary, Director and Founder Christopher W. Goode........ 46 Senior Vice President, Development and Chief Technical Officer David S. Hanson............. 54 Senior Vice President, Business Development F. Ray McDevitt............. 54 Senior Vice President, Marketing and Product Management James H. Miller............. 49 Senior Vice President, Programming Tim N. Rea.................. 43 Senior Vice President, Operations Stephanie A Storms.......... 48 Vice President, General Counsel and Secretary John W. Goddard............. 57 Director Jules Haimovitz............. 47 Director John A. Rollwagen........... 56 Director Barry E. Taylor............. 50 Director and Assistant Secretary
Paul M. Cook founded the Company in 1995 and has served as its Chairman of the Board and Chief Executive Officer since that time. Mr. Cook was Chairman of the Board of SRI, one of the world's largest contract research firms, from December 1993 to July 1998 and has served as a member of its Board of Directors since 1987. Mr. Cook is also Chairman of Sarnoff and a director of SRTC. Mr. Cook founded Raychem Corporation ("Raychem"), a Fortune 300 company, in 1957 to develop commercial applications for radiation chemistry. Mr. Cook served as Chief Executive Officer of Raychem for 33 years before retiring in 1990 and served on its Board of Directors until 1996. From 1990 to 1994, Mr. Cook served as Chairman of the Board and Chief Executive Officer of CellNet Data Systems ("CellNet") a provider of wireless data communications services. Mr. Cook retired as Chief Executive Officer of CellNet in September 1994 and retired as Chairman of the Board in November 1997, but remains on the Board of Directors of CellNet. Alan H. Bushell, who founded the Company with Mr. Cook in 1995, has served as its President and Chief Operating Officer and as a Director since that time. Prior to founding DIVA, Mr. Bushell served as Senior Vice President, Chief Operating Officer and Chief Financial Officer of CellNet. Prior to joining CellNet, Mr. Bushell held various management positions with private and public technology-based companies, including President of Advanced Polymer Systems, Inc., Vice President of Operations at Everex Systems, Inc., President of Zymogenetics Inc. and various strategic planning and product management positions with Raychem. During the 1970s, he was also a consultant in the Amsterdam office of McKinsey & Co. Christopher W. Goode has served as Senior Vice President, Development, and Chief Technical Officer of the Company since October 1995. Prior to joining DIVA, he was Executive Vice President, Research and Development at Raynet Corporation, a developer of fiber-to-the-curb networks, where he guided research and development efforts as the company grew from a prototype and field trial organization to volume manufacturer, and assisted in developing product strategy, especially in the broadband access area. Prior to joining Raynet, Mr. Goode held senior technical positions at Alcatel and ITT Corporation over a 16-year period. At Alcatel, Mr. Goode served as Vice President of Research and Development -- North America, where he was responsible 48 for directing the development of Sonet and fiber-in-the-loop products. Mr. Goode was also the Chief Engineer at Shanghai Bell Telephone Equipment Manufacturing Co., an Alcatel joint venture, where he was responsible for digital switching system development, installation and testing during the start-up phase. Prior to that, he held technical management positions with ITT Corporation and Standard Telephones & Cables. David S. Hanson has served as Senior Vice President, Business Development, of the Company since November 1995. Prior to joining the Company, Mr. Hanson founded Hanson & Associates, a consulting firm specializing in the financing, merger, acquisition and divestiture of cable television companies where he worked from March 1981 to November 1995. From 1969 to 1979, Mr. Hanson served in various positions at Viacom, Inc., including Vice President of New Market Development and Vice President of Marketing. He helped in the development of Showtime Entertainment Network, was responsible for the initial marketing of Showtime to senior executives in the cable television industry and directed Showtime's introduction to the network's first 500,000 customers. Mr. Hanson was a founding member of the Board of Directors of CTAM, one of the cable television industry's largest trade organization, as well as a member of the Board of Directors of the National Satellite Cable Television Association. F. Ray McDevitt has served as Senior Vice President, Marketing and Product Management, since September 1995. From December 1992 to September 1995, Mr. McDevitt held various positions at Ericsson Raynet, including Vice President of Product Line Management and Marketing and Vice President of Broadband Research, where he designed the early HFC networks with NYNEX as part of the video dial tone service developed during the period from 1993 to 1995. Prior to joining Ericsson Raynet, Mr. McDevitt served as Director of Broadband Development at Alcatel, with responsibilities including fiber-in-the-loop access product development and management for the telecommunications industry. While at Alcatel, Mr. McDevitt project managed and activated the Perryopolis field trial with Bell Atlantic in 1989. Mr. McDevitt also has three years of experience as President of FiberLan, a startup company that developed broadband fiber optics private networks for industrial parks and campus environments. During the rapid cable television buildout period of 1981 to 1985, Mr. McDevitt was the Vice President of Technical Operations for Warner Amex, where his responsibilities included the design and technical operations of the two-way addressable QUBE systems for cities such as Dallas, Pittsburgh and Cincinnati. By 1984, Mr. McDevitt designed and oversaw operations of over 4,000 two-way interactive QUBE subscribers deployed in six major systems across the United States. James H. Miller has served as Senior Vice President, Programming, of the Company since August 1997. From 1995 to 1997, Mr. Miller worked as an independent consultant for various entertainment clients including ITC Entertainment Group, Rainbow Programming, Orion Pictures Corporation and the National Football League. From 1979 to 1995 Mr. Miller served in various programming roles for Showtime Networks, Inc. including Executive Vice President of Programming in which he was responsible for all programming activities, including acquisitions, scheduling, original programming, and creative services. From 1970 to 1979, Mr. Miller served in various posts at Teleprompter Corporation, the then-largest cable company in America, including Director of Marketing and Programming for the Manhattan system. Tim N. Rea has served as Senior Vice President, Operations, of the Company since August 1996. Prior to joining DIVA, from December 1981 to July 1996, Mr. Rea served in various marketing, operations and general management positions with Viacom Cable, most recently as Senior Vice President/General Manager for Viacom's Northwest region, which included 875 employees and served 500,000 customers. Mr. Rea was responsible for consolidating stand alone cable systems into regional centers to prepare for competition, and readying plant facilities and management for entry into the telephony, data access and digital television businesses. Stephanie A. Storms has served as Vice President, General Counsel of the Company since December 1996, and was appointed Secretary in March 1998. Prior to joining DIVA, she was Deputy General Counsel of Viacom Inc. and Vice President of Viacom Cable, a division of Viacom Inc. Ms. Storms held positions with various cable industry trade groups in conjunction with her employment with Viacom; she served on the Board of Directors of the California Cable Television Association and was a member of its legal committee and of the 49 legal committee of the National Cable Television Association. Prior to joining Viacom Cable in 1987, Ms. Storms was Vice President and Assistant General Counsel of American Television and Communications Corp., the cable television subsidiary of Time Inc. which was then one of the top two largest MSOs. Before that, she was an attorney with the law firm of Adams, Duque & Hazeltine in Los Angeles, California. John W. Goddard has served as a member of the Company's Board of Directors since January 1997. From 1980 to July 1996, he held the positions of President and Chief Executive Officer of Viacom Cable, a division of Viacom, Inc. From 1966 to 1980, Mr. Goddard held various management positions at Tele-Vue Systems, Viacom Cable's predecessor, and then at Viacom Cable. Mr. Goddard has held various cable television industry positions as an officer, including Chairman of the National Cable Television Association and President of the California Cable Television Association, and currently serves as a director of CableLabs, TCI Satellite Entertainment, Inc. and the Walter Kaitz Foundation. Jules Haimovitz has served as a Director of the Company since December 1996 and currently serves as a consultant to the Company. From June 1997 to July 1998, Mr. Haimovitz has served as President and Chief Operating Officer of King World Productions. Prior to that he was President and Chief Executive Officer of ITC Entertainment Group. Mr. Haimovitz has served on the Board of Directors of Video Jukebox Network and Orion Pictures Corporation. From 1987 to 1992, Mr. Haimovitz served as President and Chief Operating Officer of Spelling Entertainment Inc. and a member of its Board of Directors. From 1976 to 1987, Mr. Haimovitz served in various senior executive positions with Viacom, Inc., including President of the Viacom Network Group with responsibility for Showtime/The Movie Channel Inc., the MTV Networks Inc., Lifetime Cable Channel and Viewers Choice, its satellite pay-per-view network, and President of the Viacom Entertainment Group. Mr. Haimovitz joined Viacom, Inc. in 1976 and subsequently served as Director, Planning and Administration for Pay Television, in which capacity he was instrumental in the creation of Showtime, and held a number of senior management posts with Showtime, including Senior Vice President for Programming and Operations. John A. Rollwagen was the Chairman of SRTC prior to its acquisition by the Company and has served as a Director of the Company since December 1995. Mr. Rollwagen is an investor and business advisor specializing in information technology and serves as senior advisor to St. Paul Venture Capital, LLC. From 1981 to 1993 Mr. Rollwagen served as Chairman and Chief Executive Officer of Cray Research, Inc., a supplier of supercomputers worldwide. From 1977 to 1981, Mr. Rollwagen served as Cray Research's President. Mr. Rollwagen serves as Chairman of Computer Network Technology, Inc., a supplier of high performance computer networking hardware and software, and serves as a director of several public and private companies. Barry E. Taylor has served as a Director of the Company since July 1995. Mr. Taylor has been a member of the law firm of Wilson Sonsini Goodrich & Rosati, P.C., Palo Alto, California, since 1984. DIRECTOR COMPENSATION Except for grants of stock options, directors of the Company generally do not receive compensation for services provided as a director, for committee participation or for special assignment of the Board of Directors. The Company reimburses expenses incurred in attending Board and committee meetings. 50 EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE The following table sets forth, for the fiscal year ended June 30, 1998, the compensation paid to the Company's Chief Executive Officer and the five other most highly compensated executive officers who were serving as executive officers as of June 30, 1998 and whose total cash compensation exceeded $100,000 during such fiscal year (collectively, the "Named Executive Officers").
LONG-TERM COMPENSATION ANNUAL --------------------- COMPENSATION AWARDS ------------ --------------------- NAME AND PRINCIPAL SECURITIES UNDERLYING POSITION SALARY ($) OPTIONS/SARS(#)(1) - ------------------ ------------ --------------------- Paul M. Cook................................ $231,250 -- Chairman of the Board and Chief Executive Officer Alan H. Bushell............................. 231,250 -- President, Chief Operating Officer and Chief Financial Officer Stephanie A. Storms......................... 222,242 11,200 Vice President, General Counsel and Secretary F. Ray McDevitt............................. 199,375 22,400 Senior Vice President, Marketing and Product Management Christopher W. Goode........................ 199,168 22,400 Senior Vice President, Development, and Chief Technical Officer
- -------- (1) No SARs were granted during the fiscal year. OPTION GRANTS IN LAST FISCAL YEAR The following table sets forth information with respect to stock options granted by the Company to the Named Executive Officers during fiscal year 1998 pursuant to the 1995 Stock Plan.
PERCENT OF POTENTIAL REALIZABLE VALUE AT NUMBER OF TOTAL OPTIONS/ ASSUMED ANNUAL RATES OF SECURITIES SARS GRANTED STOCK PRICE APPRECIATION UNDERLYING TO EMPLOYEES EXERCISEOR FOR OPTION TERM($)(3) OPTIONS/SARS IN FISCAL BASE PRICE EXPIRATION ------------------------------ NAME GRANT(#)(1) YEAR(2) ($/SH) DATE 5% 10% ---- ------------ -------------- ---------- ---------- -------------- --------------- Paul M. Cook............ -- -- -- -- -- -- Alan H. Bushell......... -- -- -- -- -- -- Stephanie A. Storms..... 11,200 * $1.25 9/3/07 $ 8,805 $22,312 F. Ray McDevitt......... 22,400 * 1.25 9/3/07 17,609 44,625 Christopher W. Goode.... 22,400 * 1.25 9/3/07 17,609 44,625
- -------- * Less than 1% (1) Options granted under the 1995 Stock Plan generally become exercisable at a rate of 10% of the shares subject to the option at the end of the first six months and 5% of the shares subject to the option at the end of each three-month period thereafter, so long as the individual is employed by the Company. (2) The Company granted options to purchase 2,507,983 shares of Common Stock during fiscal year 1998. (3) Potential realizable value is based on the assumption that the price of the Common Stock appreciates at the annual rate shown, compounded annually, from the date of grant until the end of the ten-year option term. The values are calculated in accordance with rules promulgated by the Securities and Exchange Commission and do not reflect the Company's estimate of future stock price appreciation. 51 AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION VALUES The following table sets forth certain information regarding options to purchase the Company's Common Stock held by the Named Executive Officers at the end of fiscal 1998.
NUMBER OF SECURITIES VALUE OF UNEXERCISED SHARES UNDERLYING OPTIONS/SARS IN-THE-MONEYOPTIONS/SARS AT ACQUIRED ON VALUE AT FISCAL YEAR-END (#) FISCAL YEAR-END ($) NAME EXERCISE(#) REALIZED($)(1) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE(2) ---- ----------- -------------- ------------------------- ---------------------------- Paul M. Cook............ -- -- -- /-- -- /-- Alan H. Bushell......... -- -- 21,000 / 39,000 $ 50,925 / $118,950 Stephanie A. Storms..... -- -- 26,680 / 84,520 63,649 / 257,786 F. Ray McDevitt......... 50,000 $117,500 75,160 / 85,240 211,788 / 259,982 Christopher W. Goode.... -- -- 65,860 / 86,540 182,361 / 263,947
- -------- (1) Based on the fair market value of the Company's Common Stock on the date of exercise, $2.40 per share (as determined by the Company's Board of Directors) less the exercise price payable for such shares. (2) Based on the fair market value of the Company's Common stock at fiscal year end, $3.05 per share (as determined by the Company's Board of Directors), less the exercise price payable for such shares. EMPLOYMENT AGREEMENTS AND CHANGE-IN-CONTROL ARRANGEMENTS Pursuant to the terms of a written employment agreement with Mr. Bushell, DIVA has agreed to employ Mr. Bushell as President and Chief Operating Officer at a salary of $200,000 per year, subject to periodic increases by the Board of Directors. In connection with his employment in August 1995, Mr. Bushell was granted an option to purchase 270,000 shares of Common Stock at an exercise price of $0.005 per share, which shares vest quarterly over a five- year period, subject to acceleration upon a "Change of Control" of the Company (as defined in the agreement). Mr. Bushell exercised such options, subject to a right of repurchase by the Company with respect to the unvested shares. In the event either (i) the Company terminates Mr. Bushell's employment other than for "Cause" (as defined in the agreement) or (ii) Mr. Bushell voluntarily resigns under certain specified circumstances, then Mr. Bushell shall be entitled to receive payment of his then-current salary and his shares shall continue to vest for 12 months from the date of such employment termination. With respect to all options granted under the Company's 1995 Stock Plan, in the event of a "Change of Control" (as defined in the option agreements), the vesting of such options will be accelerated (i) as of the date immediately preceding such "Change of Control" in the event the option agreement is or will be terminated or canceled (except by mutual consent) or any successor to the Company fails to assume and agree to perform all obligations under the agreement at or prior to such time as any such person becomes a successor to the Company; or (ii) as of the date immediately preceding such "Change of Control" or at any time thereafter in the event the optionee does not or will not receive upon exercise of the optionee's stock purchase rights under the option agreement the same identical securities and/or other consideration as is received by all other stockholders in any merger, consolidation, sale, exchange or similar transaction occurring upon or after such "Change of Control"; or (iii) as of the date immediately preceding any "Involuntary Termination" (as defined in the option agreements) of the optionee occurring upon or after any such "Change of Control"; or (iv) as of the date six months following the first such "Change of Control," provided that the optionee shall have remained an employee of the Company continuously throughout such six- month period, whichever shall first occur. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Company currently has a Compensation Committee which consists of two outside directors, Mr. Goddard and Mr. Taylor. The Compensation Committee reviews the salaries of the executive officers and makes recommendations regarding such salaries to the Board of Directors. No executive officer of the Company serves as a member of the Board of Directors or compensation committee of any entity that has one or more executive officers serving as a member of the Company's Board of Directors. 52 1995 STOCK PLAN As of June 30, 1998, the Company had reserved 8,200,000 shares for issuance pursuant to its 1995 Stock Plan, which has been approved by the Company's Board of Directors and stockholders. The 1995 Stock Plan provides for the granting to employees (including officers and directors) of qualified "incentive stock options" within the meaning of Section 422 of the Code, and for the granting to employees (including officers) and consultants of nonqualified stock options. The 1995 Stock Plan also provides for the granting of restricted stock. As of June 30, 1998, options to purchase an aggregate of 4,975,820 shares were outstanding and 2,074,897 shares remained available for future grants. The 1995 Stock Plan is administered by the Board of Directors or a committee appointed by the Board. Options granted generally vest at a rate of 10% of the shares subject to the option at the end of the first six months and 5% of the shares subject to the option at the end of each three-month period thereafter and generally expire ten years from the date of grant. Options granted to outside directors of the Company vest at the rate of 25% of the shares at the end of the first year and 6.25% of the shares at the end of each month thereafter. Options granted to outside directors and certain other employees of the Company are immediately exercisable, subject to a repurchase right held by the Company that lapses in accordance with the vesting schedule of the options. In the event of a merger of the Company with or into another corporation or the sale of substantially all of the assets of the Company, all outstanding options shall be assumed or an equivalent option substituted by the successor corporation. In the event a successor corporation refuses to assume or substitute for the options, the exercisability of shares subject to options under the 1995 Stock Plan shall be accelerated. In such event, the Company shall notify the holders of outstanding options that such options are fully exercisable, and all options not exercised will then terminate 15 days after the date of such notice. See "-- Employment Agreements and Change-in-Control Arrangements." The exercise price of incentive stock options granted under the 1995 Stock Plan must be at least equal to the fair market value of the Company's Common Stock on the date of grant. The exercise price of options to an optionee who owns more than 10% of the Company's outstanding voting securities must equal at least 110% of the fair value of the Common Stock on the date of grant. LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS The Company's Certificate of Incorporation limits the liability of directors to the maximum extent permitted by Delaware law, and the Company's Bylaws provide that the Company shall indemnify its directors and officers and may indemnify its other employees and agents to the fullest extent permitted by law. The Company has also entered into agreements to indemnify its directors and executive officers. The Company believes that these provisions and agreements are necessary to attract and retain qualified directors and executive officers. At present, there is no pending litigation or proceeding involving any director, officer, employee or agent of the Company where indemnification will be required or permitted. The Company is not aware of any threatened litigation or proceeding that might result in a claim for such indemnification. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling the Company pursuant to the foregoing provisions, the Company has been informed that, in the opinion of the Commission, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. 53 CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS On August 29, 1995, the Company entered into a consulting agreement with Acorn, a five percent stockholder, pursuant to which Rufus W. Lumry, its President, agreed to provide advisory services to the Company. Between August 29, 1995 and October 19, 1995, Acorn purchased an aggregate of 2,192,400 shares of Common Stock from the Company at purchase prices ranging from $0.005 to $0.05 per share. In addition, Acorn purchased 35,600 shares of Series A Preferred Stock of the Company at a purchase price of $0.50 per share. On September 3, 1997, the Company granted an option to purchase 40,000 shares of Common Stock to Acorn at an exercise price of $1.25 per share, which option vests at a rate of 25% one year from the date of grant and 6.25% each three- month period thereafter. In August 1995, Paul M. Cook, the Company's Chairman of the Board and Chief Executive Officer, purchased 7,000,000 shares of Common Stock at a purchase price of $0.005 per share, 140,000 shares of Series A Preferred Stock at a purchase price of $0.50 per share and was granted an option to purchase 384,000 shares of Common Stock pursuant to the 1995 Stock Plan for $0.005 per share. In addition, Alan H. Bushell, the Company's President, Chief Operating Officer, Chief Financial Officer and Assistant Secretary purchased 1,200,000 shares of Common Stock at a purchase price of $0.005 per share, 24,000 shares of the Company's Series A Preferred Stock at a purchase price of $0.50 per share and was granted an option to purchase 270,000 shares of Common Stock pursuant to the 1995 Stock Plan at an exercise price of $0.005 per share. In addition, in August 1995, each of Mr. Cook and Mr. Bushell exercised options to purchase 384,000 and 270,000 shares of Common Stock, respectively, all of which were subject to repurchase by the Company. On October 23, 1995 and December 26, 1995, the Company issued an aggregate of 3,419,842 shares of Series B Preferred Stock at a purchase price of $0.855 per share, 2,343,976 shares of which were purchased by the following executive officers, directors and Board advisors of the Company and holders of more than five percent of the Common Stock or Preferred Stock.
NAME SHARES ---- --------- Acorn and affiliates............................................ 1,783,540 Paul M. Cook.................................................... 423,264 John A. Rollwagen............................................... 125,472 Barry E. Taylor and affiliates.................................. 11,700 --------- 2,343,976 =========
In 1996, DIVA contracted with Sarnoff, a holder of more than five percent of the Common Stock, to assist in the development and initial production of the prototype of the DCU. Under the terms of the development contract, while Sarnoff will own the intellectual property arising from the development, DIVA has a 20-year, fully paid worldwide exclusive license to all the development work done under the contract, after which DIVA's rights shall be non- exclusive. From June 15, 1995 through August 7, 1997 on various dates, Mr. Cook and Acorn loaned money to the Company. All of the promissory notes issued pursuant to these loans have been repaid or converted into stock or bonds described in the transactions above and below. On July 10, 1996 and August 22, 1996, the Company issued an aggregate of 6,168,600 shares of Series C Preferred Stock at a purchase price of $4.205 per share, 3,367,600 shares of which were purchased by the following executive officers, directors and Board advisors of the Company and holders of more than five percent of the Common Stock or Preferred Stock.
NAME SHARES ---- --------- Acorn and affiliates............................................. 119,000 Paul M. Cook..................................................... 59,500 Merrill Lynch Global Allocation Fund, Inc........................ 2,000,000 Putnam Funds and Accounts........................................ 1,189,100 --------- 3,367,600 =========
54 In April 1996, Sarnoff, a holder of more than five percent of the Common Stock, received 2,284,401 shares of Series AA Preferred Stock (571,100 of which were placed in escrow) in connection with the acquisition of SRTC by the Company. Prior to the acquisition of SRTC, the Company and SRTC were parties to a license and purchase agreement for Sarnoff Servers. See Note 3 of Notes to the Consolidated Financial Statements. From June 15, 1995 through June 30, 1998 the Company issued options and/or stock purchase rights to purchase an aggregate of 794,000 shares of Common Stock to Mr. Bushell and Mr. Cook, 734,000 shares of which have been exercised and 313,600 of which are subject to repurchase by the Company as of June 30, 1998. On May 30, 1996, the Company completed an offering of 47,000 units at $1,000 per unit, each unit consisting of one 1996 Note and one warrant to purchase 40.4 shares of Common Stock at an exercise price of $0.005 per share. Mr. Cook and Acorn each purchased 3,150 units in the offering. On August 7, 1997 and September 4, 1997, the Company issued an aggregate of 8,279,590 shares of Series D Preferred Stock at a purchase price of $5.72 per share, 4,626,750 shares of which were purchased by the following executive officers, directors and Board advisors of the Company and holders of more than five percent of the Common Stock or Preferred Stock.
NAME SHARES ---- --------- Acorn and affiliates............................................. 437,064 Paul M. Cook..................................................... 437,064 Merrill Lynch Global Allocation Fund, Inc........................ 2,000,000 Putnam Funds and Accounts........................................ 1,748,252 Barry E. Taylor and affiliates................................... 4,370 --------- 4,626,750 =========
In addition to acting as Chairman of the DIVA Board of Directors, Mr. Cook is also Chairman of the Board of Directors of Sarnoff. As of June 30, 1998, Mr. Cook beneficially owned 7,938,628 shares of voting securities (20.58% of the outstanding voting securities) of DIVA and holds no shares of Sarnoff. Conflicts of interest could arise as a result of Mr. Cook's position as a director of Sarnoff; however, Mr. Cook abstains from voting on matters which involve the relationships between the Company and Sarnoff. Further, Mr. Cook has a number of responsibilities regarding this and other entities and consequently does not devote all of his time to matters concerning DIVA. Barry E. Taylor, a director of the Company, is a member of Wilson Sonsini Goodrich & Rosati, P.C., which has performed legal services for the Company since its inception. The Company has from time to time granted options to purchase shares of Common Stock to certain executive officers and directors. See "Management -- Executive Compensation" and "Principal Stockholders." 55 PRINCIPAL STOCKHOLDERS The following table sets forth certain information regarding beneficial ownership of the Company's Common and Preferred Stock as of June 30, 1998 by (i) each of the Company's directors, (ii) each Named Executive Officer of the Company, (iii) each person who beneficially owns more than 5% of the Common Stock or the Preferred Stock and (iv) all directors and executive officers as a group.
NUMBER OF SHARES PERCENT NUMBER OF PERCENT PERCENT OF OWNERSHIP SHARES OF OWNERSHIP OWNERSHIP COMMON OF COMMON PREFERRED OF PREFERRED OF TOTAL BENEFICIAL OWNER STOCK STOCK(1) STOCK STOCK(1) VOTING STOCK(1) ---------------- ------ --------- --------- ------------ --------------- Paul M. Cook(2) ........ c/o DIVA Systems Corporation 333 Ravenswood Avenue Building 205 Menlo Park, CA 94025 Acorn Ventures, Inc.(3). 1309 114th Avenue, S.E. Suite 200 Bellevue, WA 98004 Merrill Lynch Global Allocation Fund, Inc. . 800 Scudder's Mill Road Plainsboro, NJ 08530 Putnam Funds and Accounts(4)............ One Post Office Square Boston, MA 02109 Sarnoff Corporation..... 201 Washington Road CN 5300 Princeton, NJ 08543- 5300 Alan H. Bushell(5)...... Stephanie A. Storms(6).. F. Ray McDevitt(7)...... Christopher W. Goode(8). John W. Goddard(9)...... Jules Haimovitz(10)..... John A. Rollwagen(11)... Barry E. Taylor(12)..... All directors and executive officers as a group (12 persons)(13).......
- -------- * Less than 1%. (1) Based on 17,200,178 shares of Common Stock and 21,372,287 shares of Preferred Stock outstanding as of June 30, 1998. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of Common Stock subject to options or warrants held by that person that are currently exercisable or exercisable within 60 days of June 30, 1998 are deemed outstanding. Such shares, however, are not deemed outstanding for the purposes of computing the 56 percentage ownership of each other person. Except as indicated in the footnotes to this table and pursuant to applicable community property laws, the stockholder named in the table has sole voting and investment power with respect to the shares set forth opposite such stockholder's name. (2) Includes (i) shares of Common Stock beneficially owned by the Paul and Marcia Cook Living Trust dated April 21, 1992 (the "Cook Trust"), of which the Company can repurchase at cost, which rights lapse based on continued performance of services, (ii) shares of Common Stock beneficially owned by two trusts of which Mr. Cook is trustee and (iii) shares of Series B Preferred Stock issuable upon the exercise of warrants held by the Cook Trust and exercisable within 60 days of June 30, 1998. (3) Includes shares of Series B Preferred Stock issuable upon the exercise of warrants held by Acorn and exercisable within 60 days of June 30, 1998. (4) shares of Series C Preferred Stock and shares of Series D Preferred Stock held by funds or accounts managed by Putnam Investment Management, Inc., the Putnam Advisory Company, Inc., and Putnam Fidelity Trust Company. Voting and dispositive power is shared between each such fund or account and its respective advisor. (5) Includes (i) shares of Common Stock that the Company can repurchase at cost, which rights lapse based on continued performance of services, and (ii) options to purchase shares of Common Stock exercisable within 60 days of June 30, 1998. The shares are held on record by a trust for the benefit of Mr. Bushell. (6) Includes options to purchase shares of Common Stock exercisable within 60 days of June 30, 1998. (7) Includes options to purchase shares of Common Stock exercisable within 60 days of June 30, 1998. (8) Includes options to purchase shares of Common Stock exercisable within 60 days of June 30, 1998. (9) Includes options to purchase shares of Common Stock exercisable within 60 days of June 30, 1998. (10) Includes (i) warrants to purchase shares of Series C Preferred Stock exercisable within 60 days of June 30, 1998. (11) Includes (i) shares of Series B Preferred Stock held in the name of Norwest Bank Minnesota, N.A., as trustee of the John A. Rollwagen Self-Directed IRA and (ii) shares of Common Stock that the Company can repurchase at cost, which rights lapse based on continued performance of services. (12) Includes (i) shares of Common Stock that the Company can repurchase at cost, which rights lapse based on continued performance of services by Mr. Taylor, (ii) shares of Common Stock, shares of Series A Preferred Stock and shares of Series B Preferred Stock held by an investment partnership of which Mr. Taylor is a general partner and with which he shares beneficial ownership, and (iii) shares of Series D Preferred Stock held in the name of Trustee, WSGR Retirement Plan FBO Barry E. Taylor. (13) Includes options to purchase shares of Common Stock, warrants to purchase shares of Series B Preferred Stock and warrants to purchase shares of Series C Preferred Stock exercisable within 60 days of June 30, 1998. 57 THE EXCHANGE OFFER PURPOSES OF THE EXCHANGE OFFER The Old Notes were sold by the Company to the Initial Purchasers, who subsequently resold the Old Notes to "qualified institutional buyers" (as defined in Rule 144A under the Securities Act) and non-U.S. persons pursuant to offers and rates that occurred outside the U.S. pursuant to Regulation S. In connection with the issuance of the Old Notes, the Company agreed to use its best efforts to cause to become effective within the time period specified in the Registration Rights Agreement, a registration statement with respect to the Exchange Offer (the "Exchange Offer Registration Statement"). However, if applicable laws, including regulations and interpretations of the Staff of the SEC do not permit the Company to effect the Exchange Offer, or under certain other circumstances, the Company shall, at its cost, use its best efforts to cause to become effective a shelf registration statement (the "Shelf Registration Statement") with respect to resales of the Old Notes by the Holders thereof who satisfy certain conditions relating to the provision of information in connection with the Shelf Registration Statement and to keep such Shelf Registration Statement effective until two years after the issuance of the Old Notes, or such shorter period that will terminate when all Old Notes covered by the Shelf Registration Statement have been sold pursuant to the Shelf Registration Statement. The Exchange Offer is being made by the Company to satisfy its obligations pursuant to the Registration Rights Agreement. Once the Exchange Offer is consummated, the Company will have no further obligation to register any of the Old Notes not tendered by the Holders thereof for exchange. See "Risk Factors -- Consequences to Non-Tendering Holders of Old Notes." A copy of the Registration Rights Agreement has been filed as an exhibit to the Registration Statement of which this Prospectus is a part. Based on an interpretation by the Staff of the SEC set forth in the Staff's Exxon Capital Holdings Corp. SEC No-Action Letter (available April 13, 1989), Morgan Stanley & Co., Inc. SEC No-Action Letter (available June 5, 1991), Shearman & Sterling SEC No-Action Letter (available July 7, 1993), and other no-action letters issued to third parties, the Company believes that New Notes issued pursuant to the Exchange Offer in exchange for Old Notes may be offered for resale, resold and otherwise transferred by Holders thereof without compliance with the registration and prospectus delivery provisions of the Securities Act. However, any Holder who is an "affiliate" of the Company or who intends to participate in the Exchange Offer for the purpose of distributing the New Notes (i) cannot rely on the interpretation by the Staff of the SEC set forth in the above referenced no-action letters, (ii) cannot tender its Old Notes in the Exchange Offer, and (iii) must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any sale or transfer of the Old Notes, unless such sale or transfer is made pursuant to an exemption from such requirements. See "Risk Factors -- Consequences to Non-Tendering Holders of Old Notes." In addition, each Participating Broker-Dealer that receives New Notes for its own account in exchange for Old Notes not acquired directly from the Company must acknowledge that it will deliver a prospectus in connection with any resale of such New Notes. See "Plan of Distribution." Except as aforesaid, this Prospectus may not be used for an offer to resell, resale or other transfer of New Notes. TERMS OF THE EXCHANGE OFFER General. Upon the terms and subject to the conditions of the Exchange Offer set forth in this Prospectus and the Letter of Transmittal, the Company will accept any and all Old Notes validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on the Expiration Date. The Company will issue $1,000 principal amount at maturity of New Notes in exchange for each $1,000 principal amount at maturity of outstanding Old Notes accepted in the Exchange Offer. Holders may tender some or all of their Old Notes pursuant to the Exchange Offer; provided, that Old Notes may be tendered only in integral multiples of $1,000 principal amount at maturity. 58 As of September 28, 1998, there was $463,000,000 of aggregate principal amount at maturity of the Old Notes outstanding and as of , 199 , registered Holders of Old Notes. This Prospectus, together with the Letter of Transmittal, is being sent to such registered Holder(s) as of , 199 . In connection with the issuance of the Old Notes, the Company arranged for the Old Notes to be issued and transferable in book-entry form through the facilities of DTC, acting as depositary. The New Notes will be issued and transferable in book-entry form through DTC. See "-- Book-Entry Transfer; Delivery and Form." The Company shall be deemed to have accepted validly tendered Old Notes when, as and if the Company has given oral or written notice thereof to the Exchange Agent. The Exchange Agent will act as agent for the tendering Holders of Old Notes for the purpose of receiving the New Notes from the Company. If any tendered Old Notes are not accepted for exchange because of an invalid tender, the occurrence of certain other events set forth herein or otherwise, the certificates for any such unaccepted Old Notes will be returned, without expense, to the tendering Holder thereof or the appropriate book-entry transfer will be made, in each case, as promptly as practicable after the Expiration Date. Holders of Old Notes who tender in the Exchange Offer will not be required to pay brokerage commissions or fees or, subject to the instructions in the Letter of Transmittal, transfer taxes with respect to the exchange of Old Notes pursuant to the Exchange Offer. The Company will pay the expenses, other than certain applicable taxes, of the Exchange Offer. See "-- Fees and Expenses." NEITHER THE BOARD OF DIRECTORS OF THE COMPANY NOR THE COMPANY MAKES ANY RECOMMENDATION TO HOLDERS OF OLD NOTES AS TO WHETHER TO TENDER OR REFRAIN FROM TENDERING ALL OR ANY PORTION OF THEIR OLD NOTES PURSUANT TO THE EXCHANGE OFFER. IN ADDITION, NO ONE HAS BEEN AUTHORIZED TO MAKE ANY SUCH RECOMMENDATION. HOLDERS OF OLD NOTES MUST MAKE THEIR OWN DECISION WHETHER TO TENDER PURSUANT TO THE EXCHANGE OFFER AND, IF SO, THE AGGREGATE AMOUNT OF OLD NOTES TO TENDER AFTER READING THIS PROSPECTUS AND THE LETTER OF TRANSMITTAL AND CONSULTING WITH THEIR ADVISERS, IF ANY, BASED ON THEIR OWN FINANCIAL POSITION AND REQUIREMENTS. Expiration Date; Extensions; Amendments. The term "Expiration Date" shall mean , 199 , unless the Company in its sole discretion, extends the Exchange Offer, in which case the term "Expiration Date" shall mean the latest date to which the Exchange Offer is extended. In order to extend the Expiration Date, the Company will notify the Exchange Agent and the record Holders of Old Notes of any extension by oral (followed by written) notice, each prior to 9:00 a.m., New York City time, on the business day following the previously scheduled Expiration Date. Such notice may state that the Company is extending the Exchange Offer for a specified period of time or on a daily basis until 5:00 p.m., New York City time, on the date on which a specified percentage of Old Notes are tendered. The Company reserves the right to delay accepting any Old Notes, to extend the Exchange Offer, to amend the Exchange Offer or to terminate the Exchange Offer and not accept Old Notes not previously accepted if any of the conditions set forth herein under "-- Conditions" shall have occurred and shall not have been waived by the Company by giving oral or written notice of such delay, extension, amendment or termination to the Exchange Agent as promptly as practicable. If the Exchange Offer is amended in a manner determined by the Company to constitute a material change, the Company will promptly disclose such amendment in a manner reasonably calculated to inform the Holders of such amendment and the Company will extend the Exchange Offer for a period of five to ten business days, depending upon the significance of the amendment and the manner of disclosure to Holders of the Old Notes, if the Exchange Offer would otherwise expire during such five to ten business day period. Without limiting the manner in which the Company may choose to make public announcement of any delay, extension, amendment or termination of the Exchange Offer, the Company shall have no obligation to publish, 59 advertise, or otherwise communicate any such public announcement, other than by making a timely release to the Dow Jones News Service. ACCRETION OF THE NEW NOTES AND THE OLD NOTES; INTEREST The Old Notes will continue to accrete in principal amount through (but not including) the date of issuance of the New Notes. Any Old Notes not tendered or accepted for exchange will continue to accrete in principal amount at the rate of 12 5/8% per annum in accordance with its terms. From and after the date of issuance of the New Notes, the New Notes shall accrete in principal amount at the rate of 12 5/8% per annum, but no cash interest will accrue or be payable in respect of the New Notes prior to March 1, 2003. Thereafter, the New Notes will bear interest at a rate equal to 12 5/8% per annum. Interest on the New Notes will be payable semi-annually in arrears on March 1 and September 1 of each year, commencing on September 1, 2003. PROCEDURES FOR TENDERING To tender in the Exchange Offer, a Holder of certificated Old Notes must complete, sign and date the Letter of Transmittal, or a facsimile thereof, have the signatures thereon guaranteed if required by Instruction 3 of the Letter of Transmittal, and mail or otherwise deliver such Letter of Transmittal or such facsimile, together with the Old Notes and any other required documents, to the Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration Date. If delivery of the Old Notes is to be made through book-entry transfer into the Exchange Agent's account at DTC, tenders of the Old Notes must be effected in accordance with DTC's Automated Tender Offer Program ("ATOP") procedures. See "-- Book-Entry Transfer; Delivery and Form." The tender by a Holder of Old Notes will constitute an agreement between such Holder and the Company in accordance with the terms and subject to the conditions set forth herein and in the Letter of Transmittal. Delivery of all documents must be made to the Exchange Agent at its address set forth below. Holders of Old Notes may also request their respective brokers, dealers, commercial banks, trust companies or nominees to effect the above transactions for such Holders. THE METHOD OF DELIVERY OF CERTIFICATES, THE LETTER OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS, IS AT THE OPTION AND SOLE RISK OF THE TENDERING HOLDER, AND DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE EXCHANGE AGENT. IF DELIVERY IS BY MAIL, REGISTERED MAIL, RETURN RECEIPT REQUESTED, PROPERLY INSURED, OR AN OVERNIGHT DELIVERY SERVICE IS RECOMMENDED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO INSURE TIMELY DELIVERY. Only a Holder of Old Notes may tender such Old Notes in the Exchange Offer. The term "Holder" with respect to the Exchange Offer means any person in whose name Old Notes are registered on the books of the Company or any other person who has obtained a properly completed bond power from the registered Holder. Any beneficial Holder whose Old Notes are registered in the name of its broker, dealer, commercial bank, trust company or other nominee and who wishes to tender should contact such registered Holder promptly and instruct such registered Holder to tender on its behalf. If such beneficial Holder wishes to tender on its own behalf, such beneficial Holder must, prior to completing and executing the Letter of Transmittal and delivering its Old Notes, either make appropriate arrangements to register ownership of the Old Notes in such Holder's name or obtain a properly completed bond power from the registered Holder. The transfer of record ownership may take considerable time. Signatures on a Letter of Transmittal or notice of withdrawal, as the case may be, must be guaranteed by a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc., or a commercial bank or trust company having an office or correspondent in the U.S. (an "Eligible Institution") unless the Old Notes tendered pursuant thereto are tendered (i) by a registered Holder who has not 60 completed the box entitled "Special Payment Instructions" or "Special Delivery Instructions" on the Letter of Transmittal or (ii) for the account of an Eligible Institution. In the event that signatures on a Letter of Transmittal or a notice of withdrawal, as the case may be, are required to be guaranteed, such guarantee must be by an Eligible Institution. If the Letter of Transmittal is signed by a person other than the registered Holder of any Old Notes listed therein, such Old Notes must be endorsed or accompanied by appropriate bond powers signed as the name of the registered Holder or Holders appears on the Old Notes. If the Letter of Transmittal or any Old Notes or bond powers are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, such persons shall so indicate when signing and, unless waived by the Company, evidence satisfactory to the Company of their authority to so act must be submitted with the Letter of Transmittal. All questions as to the validity, form, eligibility (including time of receipt) and acceptance of tendered Old Notes and withdrawal of tendered Old Notes will be determined by the Company in its sole discretion, which determination will be final and binding. The Company reserves the absolute right to reject any and all Old Notes not properly tendered or any Old Notes the Company's acceptance of which would, in the opinion of counsel for the Company, be unlawful. The Company also reserves the right to waive any defects, irregularities or conditions of tender as to particular Old Notes. The Company's interpretation of the terms and conditions of the Exchange Offer (including the instructions in the Letter of Transmittal) will be final and binding on all parties. Unless waived, any defects or irregularities in connection with tenders of Old Notes must be cured within such time as the Company shall determine. Neither the Company, the Exchange Agent nor any other person shall be under any duty to give notification of defects or irregularities with respect to tenders of Old Notes, nor shall any of them incur any liability for failure to give such notification. Tenders of Old Notes will not be deemed to have been made until such irregularities have been cured or waived. Any Old Notes received by the Exchange Agent that are not properly tendered and as to which the defects or irregularities have not been cured or waived will be returned by the Exchange Agent to the tendering Holders of Old Notes, unless otherwise provided in the Letter of Transmittal, as soon as practicable following the Expiration Date. In addition, the Company reserves the right in its sole discretion to purchase or make offers for any Old Notes that remain outstanding subsequent to the Expiration Date or, as set forth under "-- Conditions," to terminate the Exchange Offer and, to the extent permitted by applicable law, purchase Old Notes in the open market, in privately negotiated transactions or otherwise. The terms of any such purchases or offers could differ from the terms of the Exchange Offer. By tendering, each Holder will represent to the Company that, among other things, the New Notes acquired pursuant to the Exchange Offer are being obtained in the ordinary course of such Holder's business, that such Holder has no arrangement with any person to participate in the distribution of such New Notes, and that such Holder is not an "affiliate," as defined under Rule 405 of the Securities Act, of the Company. If the Holder is a Participating Broker-Dealer that will receive New Notes for its own account in exchange for Old Notes that were not acquired directly from the Company, such Holder by tendering will acknowledge that it will deliver a prospectus in connection with any resale of such New Notes. See "Plan of Distribution." BOOK-ENTRY TRANSFER; DELIVERY AND FORM The Old Notes were initially represented (i) in the case of Old Notes initially purchased by "qualified institutional buyers" (as such term is defined in Rule 144A under the Securities Act), by four global Old Notes in fully registered form, all registered in the name of a nominee of the DTC, and (ii) in the case of Old Notes initially purchased by persons other than U.S. persons in reliance upon Regulation S under the Securities Act, by four global Regulation S Old Note in fully registered form, all registered in the name of a nominee of DTC for the accounts of Euroclear and Cedel Bank. The New Notes exchanged for the Old Notes represented by the global Old Notes and the global Regulation S Old Notes will both be represented (a) in the case of "qualified institutional buyers", by one global New Note in fully registered form, registered in the name of the nominee of DTC, and (b) in the case of persons outside of the U.S., by one global Regulation S New Note in fully registered 61 form, registered in the name of the nominee of DTC for the accounts of Euroclear and Cedel Bank. The global New Note and global Regulation S New Note will be exchangeable for definitive New Notes in registered form, in denominations of $1,000 principal amount at maturity and integral multiples thereof. The New Notes in global form will trade in The Depository Trust Company's Same-Day Funds Settlement System, and secondary market trading activity in such New Notes will therefore settle in immediately available funds. The Company understands that the Exchange Agent will make a request promptly after the date of this Prospectus to establish an account with respect to the Old Notes at DTC for the purpose of facilitating the Exchange Offer, and subject to the establishment thereof, any financial institution that is a participant in DTC's system may make book-entry delivery of Old Notes by causing DTC to transfer such Old Notes into the Exchange Agent's account with respect to the Old Notes in accordance with DTC's ATOP procedures for such book-entry transfers. Although delivery of the Old Notes may be effected through book-entry transfer into the Exchange Agent's account at DTC, the exchange for Old Notes so tendered will only be made after timely confirmation (a "Book-Entry Confirmation") of such book-entry transfer of the Old Notes into the Exchange Agent's account, and timely receipt by the Exchange Agent of a Book-Entry Confirmation with a message, transmitted by DTC and received by the Exchange Agent and forming part of the Book-Entry Confirmation, which states that DTC has received express acknowledgment from a participant tendering Old Notes that such participant has received and agrees to be bound by the terms of the Letter of Transmittal, and that such agreement may be enforced against such participant. GUARANTEED DELIVERY PROCEDURES Holders who wish to tender their Old Notes and (i) whose Old Notes are not immediately available, or (ii) who cannot deliver their Old Notes, the Letter of Transmittal or any other required documents to the Exchange Agent prior to the Expiration Date, may effect a tender if: (a) The tender is made through an Eligible Institution; (b) Prior to the Expiration Date, the Exchange Agent receives from such Eligible Institution a properly completed and duly executed Notice of Guaranteed Delivery (by facsimile transmission, mail or hand delivery) setting forth the name and address of the Holder of the Old Notes, the certificate number or numbers of such Old Notes and the principal amount at maturity of Old Notes tendered, stating that the tender is being made thereby and guaranteeing that, within three New York Stock Exchange trading days after the Expiration Date, the Letter of Transmittal (or facsimile thereof) together with the certificate(s) representing the Old Notes to be tendered in proper form for transfer and any other documents required by the Letter of Transmittal, or a Book-Entry Confirmation, as the case may be, will be delivered by the Eligible Institution to the Exchange Agent; and (c) Such properly completed and executed Letter of Transmittal (or facsimile thereof), as well as the certificate(s) representing all tendered Old Notes in proper form for transfer and all other documents required by the Letter of Transmittal, or a Book-Entry Confirmation, as the case may be, are received by the Exchange Agent within three New York Stock Exchange trading days after the Expiration Date. Upon request of the Exchange Agent, a Notice of Guaranteed Delivery will be sent to Holders who wish to tender their Old Notes according to the guaranteed delivery procedures set forth above. WITHDRAWAL OF TENDERS Except as otherwise provided herein, tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. To withdraw a tender of Old Notes in the Exchange Offer, a written or facsimile transmission notice of withdrawal must be received by the Exchange Agent at its address set forth herein prior to 5:00 p.m., New York City time, on the Expiration Date. Any such notice of withdrawal must (i) specify the name of the person having deposited the Old Notes to be withdrawn (the "Depositor"), (ii) identify the Old Notes to be withdrawn (including the certificate number or numbers and principal amount at maturity of such Old Notes), (iii) be signed by the Holder in the same manner as the original signature on the 62 Letter of Transmittal by which such Old Notes were tendered (including any required signature guarantees) or be accompanied by documents of transfer sufficient to have the Trustee with respect to the Old Notes register the transfer of such Old Notes into the name of the person withdrawing the tender, and (iv) specify the name in which any such Old Notes are to be registered, if different from that of the Depositor. All questions as to the validity, form and eligibility (including time of receipt) of such notices will be determined by the Company, whose determination shall be final and binding on all parties. Any Old Notes so withdrawn will be deemed not to have been validly tendered for purposes of the Exchange Offer and no New Notes will be issued with respect thereto unless the Old Notes so withdrawn are validly retendered. Any Old Notes which have been tendered but which are not accepted for exchange will be returned to the Holder thereof without cost to such Holder as soon as practicable after withdrawal, rejection of tender or termination of the Exchange Offer. Properly withdrawn Old Notes may be retendered by following one of the procedures, described above under " -- Procedures for Tendering" at any time prior to the Expiration Date. CONDITIONS Notwithstanding any other term of the Exchange Offer, the Company will not be required to accept for exchange, or exchange New Notes for, any Old Notes not theretofore accepted for exchange, and may terminate or amend the Exchange Offer as provided herein before the acceptance of such Old Notes, if any of the following conditions exist: (a) the Exchange Offer, or the making of any exchange by a Holder, violates applicable law or any applicable interpretation of the SEC; (b) any action or proceeding is instituted or threatened in any court or by or before any governmental agency with respect to the Exchange Offer which, in the sole judgment of the Company, might impair the ability of the Company to proceed with the Exchange Offer; (c) any law, statute, rule or regulation is adopted or enacted which, in the sole judgment of the Company, might materially impair the ability of the Company to proceed with the Exchange Offer; (d) a banking moratorium is declared by U.S. federal or California or New York state authorities which, in the Company's judgment, would reasonably be expected to impair the ability of the Company to proceed with the Exchange Offer; (e) trading on the New York Stock Exchange or generally in the U.S. over- the-counter market is suspended by order of the SEC or any other governmental authority which, in the Company's judgment, would reasonably be expected to impair the ability of the Company to proceed with the Exchange Offer; or (f) a stop order is issued by the SEC or any state securities authority suspending the effectiveness of the Registration Statement or proceedings are initiated or, to the knowledge of the Company, threatened for that purpose. If any such conditions exist, the Company may (i) refuse to accept any Old Notes and return all tendered Old Notes to exchanging Holders, (ii) extend the Exchange Offer and retain all Old Notes tendered prior to the expiration of the Exchange Offer, subject, however, to the rights of Holders to withdraw such Old Notes (See " -- Withdrawal of Tenders") or (iii) waive certain of such conditions with respect to the Exchange Offer and accept all properly tendered Old Notes which have not been withdrawn or revoked. If such waiver constitutes a material change to the Exchange Offer, the Company will promptly disclose such waiver in a manner reasonably calculated to inform Holders of Old Notes of such waiver. The foregoing conditions are for the sole benefit of the Company and may be asserted by the Company regardless of the circumstances giving rise to any such condition or may be waived by the Company in whole or in part at any time and from time to time in its sole discretion. The failure by the Company at any time to exercise any of the foregoing rights shall not be deemed a waiver of any such right and each such right shall be deemed an ongoing right which may be asserted at any time and from time to time. 63 EXCHANGE AGENT The Bank of New York has been appointed as Exchange Agent for the Exchange Offer. Letters of Transmittal and Notices of Guaranteed Delivery should be directed to the Exchange Agent addressed as follows: By Registered or Certified Mail: By Overnight Courier: Attention: Attention: Reorganization Section Reorganization Section The Bank of New York The Bank of New York 101 Barclay Street, Floor 7E 101 Barclay Street New York, New York 10286 Corporate Trust Services Window Ground Floor New York, New York 10286 By Hand: By Facsimile Attention: (212) 815- Reorganization Section Attention: The Bank of New York Reorganization Section 101 Barclay Street Confirm by telephone: Corporate Trust Services Window (212) 815- Ground Floor New York, New York 10286
FEES AND EXPENSES The expenses of soliciting tenders will be borne by the Company. The principal solicitation is being made by mail; however, additional solicitation may be made by telegraph, telephone or in person by officers and regular employees of the Company and its affiliates. The Company will not make any payments to brokers, dealers or others soliciting acceptances of the Exchange Offer. The Company, however, will pay the Exchange Agent reasonable and customary fees for its services and will reimburse it for its reasonable out-of-pocket expenses in connection therewith. The Company may also pay brokerage houses and other custodians, nominees and fiduciaries the reasonable out-of-pocket expenses incurred by them in forwarding copies of this Prospectus and related documents to the beneficial owners of the Old Notes, and in handling or forwarding tenders for exchange. The cash expenses to be incurred in connection with the Exchange Offer will be paid by the Company, are estimated in the aggregate to be approximately $ and include fees and expenses of the Exchange Agent and the Trustee under the Indenture and accounting and legal fees. The Company will pay all transfer taxes, if any, applicable to the exchange of Old Notes pursuant to the Exchange Offer. If, however, certificates representing New Notes or Old Notes for principal amounts at maturity not tendered or accepted for exchange are to be delivered to, or are to be registered or issued in the name of, any person other than the registered Holder of the Old Notes tendered, or if tendered Old Notes are registered in the name of any person other than the person signing the Letter of Transmittal, or if a transfer tax is imposed for any reason other than the exchange of Old Notes pursuant to the Exchange Offer, then the amount of any such transfer taxes (whether imposed on the registered Holder or any other persons) will be payable by the tendering Holder. If satisfactory evidence of payment of such taxes or exception therefrom is not submitted with the Letter of Transmittal, the amount of such transfer taxes will be billed directly to such tendering Holder. ACCOUNTING TREATMENT The New Notes will be recorded at the same carrying value as the Old Notes, which is face value as reflected in the Company's accounting records on the date of the Exchange Offer. Accordingly, no gain or loss for accounting purposes will be recognized upon consummation of the Exchange Offer. The issuance costs incurred in connection with the Exchange Offer will be capitalized and amortized over the term of the New Notes. 64 DESCRIPTION OF THE OLD NOTES The Old Notes were issued under an Indenture between the Company, as issuer, and The Bank of New York, as trustee (the "Trustee"). A copy of the Indenture has been filed as an exhibit to the Registration Statement to which this Prospectus is a part. The following summary of certain provisions of the Indenture does not purport to be complete and is subject to, and is qualified in its entirety by reference to, all the provisions of the Indenture, including the definitions of certain terms therein and those terms made a part thereof by the Trust Indenture Act of 1939, as amended. Whenever particular defined terms of the Indenture not otherwise defined herein are referred to, such defined terms are incorporated herein by reference. For definitions of certain capitalized terms used in the following summary, See "-- Certain Definitions." GENERAL The Old Notes are unsecured unsubordinated obligations of the Company, initially limited to $463.0 million aggregate principal amount at maturity, and mature on March 1, 2008. Although for U.S. federal income tax purposes a significant amount of original issue discount, taxable as ordinary income, is recognized by a Holder as such discount accrues from the issue date of the Old Notes, no interest is payable on the Old Notes prior to September 1, 2003. Commencing March 1, 2003, interest on the Old Notes will accrue at the rate of 12 5/8% per annum from March 1, 2003 or from the most recent Interest Payment Date to which interest has been paid or provided for, payable semiannually in arrears (to Holders of record at the close of business on February 15 or August 15 immediately preceding the Interest Payment Date) on March 1 and September 1 of each year, commencing September 1, 2003. Interest will be computed on the basis of a 360-day year of twelve 30-day months. If by February 19, 1999, the Company has not consummated the Exchange Offer for the Old Notes or caused a Shelf Registration Statement with respect to resales of the Notes to be declared effective, interest on the Old Notes (in addition to interest otherwise accruing on the Old Notes after March 1, 2003) will accrue at the rate of 0.5% per annum of the Accreted Value on the preceding Semi-Annual Accrual Date and be payable in cash semiannually in arrears on March 1 and September 1 of each year, commencing September 1, 1999, until the consummation of a registered exchange offer or the effectiveness of a Shelf Registration Statement. See "-- Registration Rights." Principal of, premium, if any, and interest on the Old Notes is payable and the Old Notes may be exchanged or transferred at the office of the Trustee in New York, New York; provided that, at the option of the Company, payment of interest may be made by check mailed to the Holders at their addresses as they appear in the Security Register. The Old Notes were issued only in fully registered form, without coupons, in denominations of $1,000 of principal amount at maturity and any integral multiple thereof. See "Description of the Units -- Book-Entry; Delivery and Form." No service charge will be made for any registration of transfer or exchange of Old Notes, but the Company may require payment of a sum sufficient to cover any transfer tax or other similar governmental charge payable in connection therewith. Subject to the covenants described below under "Covenants" and applicable law, the Company may issue additional Notes under the Indenture. The Old Notes and any additional Notes subsequently issued would be treated as a single class for all purposes under the Indenture. OPTIONAL REDEMPTION The Old Notes are redeemable, at the Company's option, in whole or in part, at any time or from time to time, on or after March 1, 2003 and prior to maturity, upon not less than 30 nor more than 60 days' prior notice mailed by first class mail to each Holder's last address as it appears in the Security Register, at the following Redemption Prices (expressed in percentages of principal amount at maturity), plus accrued and unpaid interest, 65 if any, to the Redemption Date (subject to the right of Holders of record on the relevant Regular Record Date that is on or prior to the Redemption Date to receive interest due on an Interest Payment Date), if redeemed during the 12- month period commencing March 1, of the years set forth below:
YEAR PERCENTAGE ---- ---------- 2003............................................................ 106.31% 2004............................................................ 104.20 2005............................................................ 102.10 2006 and thereafter............................................. 100.00
In addition, at any time prior to March 1, 2001, the Company may redeem up to 35% of the Accreted Value of the Old Notes with the proceeds of one or more sales of Capital Stock (other than Disqualified Stock) of the Company, at any time or from time to time in part, at a Redemption Price (expressed as a percentage of Accreted Value on the Redemption Date) of 112.625%; provided that Old Notes representing at least $301.0 million aggregate principal amount at maturity remain outstanding after each such redemption. In the case of any partial redemption, selection of the Old Notes for redemption will be made by the Trustee in compliance with the requirements of the principal national securities exchange, if any, on which the Old Notes are listed or, if the Old Notes are not listed on a national securities exchange, by lot or by such other method as the Trustee in its sole discretion shall deem to be fair and appropriate; provided that no Old Note of $1,000 in principal amount at maturity or less shall be redeemed in part. If any Old Note is to be redeemed in part only, the notice of redemption relating to such Old Note shall state the portion of the principal amount at maturity thereof to be redeemed. A new Note in principal amount at maturity equal to the unredeemed portion thereof will be issued in the name of the Holder thereof upon cancellation of the original Old Note. SINKING FUND There is no sinking fund payments for the Notes. REGISTRATION RIGHTS The Company agreed with the Initial Purchasers, for the benefit of the Holders, that the Company will use its best efforts, at its cost, to file and cause to become effective a registration statement with respect to a registered offer (the "Exchange Offer") to exchange the Old Notes for an issue of unsubordinated notes of the Company (the "Exchange Notes") with terms identical to the Old Notes (except that the Exchange Notes will not bear legends restricting the transfer thereof or provide for registration rights or additional interest). Upon such registration statement being declared effective, the Company shall offer the Exchange Notes in return for surrender of the Old Notes. Such offer shall remain open for not less than 20 business days after the date notice of the Exchange Offer is mailed to Holders. For each Old Note surrendered to the Company under the Exchange Offer, the Holder will receive an Exchange Note of equal principal amount at maturity. The accreted value of each Exchange Note shall be identical to, and shall be determined in the same manner as, the Accreted Value of the Old Notes so surrendered and exchanged therefor. Interest on each Exchange Note shall accrue from the last Interest Payment Date on which interest was paid on the Old Notes so surrendered or, if no interest has been paid on such Old Notes, from March 1, 2003. In the event that applicable laws, including regulations and interpretations of the Staff of the Commission do not permit the Company to effect the Exchange Offer, or under certain other circumstances, the Company shall, at its cost, use its best efforts to cause to become effective a shelf registration statement (the "Shelf Registration Statement") with respect to resales of the Old Notes and to keep such Shelf Registration Statement effective until two years after the Closing Date, or such shorter period that will terminate when all Old Notes covered by the Shelf Registration Statement have been sold pursuant to the Shelf Registration Statement. The Company shall, in the event of such a shelf registration, provide to each Holder copies of the prospectus, notify each Holder when the Shelf Registration Statement for the Old Notes has become effective and take certain other actions as are required to permit resales of the Old Notes. A Holder that sells its Old Notes pursuant to the Shelf Registration Statement generally will be required to be named as a 66 selling security holder in the related prospectus and to deliver a prospectus to purchasers, will be subject to certain of the civil liability provisions under the Securities Act in connection with such sales and will be bound by the provisions of the Registration Rights Agreement that are applicable to such a Holder (including certain indemnification obligations). In the event that the Exchange Offer is not consummated and a Shelf Registration Statement is not declared effective on or prior to the date that is one year after the Closing Date, interest on the Notes (in addition to interest otherwise due on the Notes after March 1, 2003) will accrue at the rate of 0.5% per annum of the Accreted Value on the preceding Semi-Annual Accrual Date and be payable in cash semiannually on March 1 and September 1 of each year, commencing September 1, 1999, until the Exchange Offer is consummated or the Shelf Registration Statement is declared effective. If the Company effects the Exchange Offer, the Company will be entitled to close the Exchange Offer 20 business days after the commencement thereof, provided that it has accepted all Old Notes theretofore validly surrendered in accordance with the terms of the Exchange Offer. Old Notes not tendered in the Exchange Offer shall continue to accrue original issue discount during the period ending March 1, 2003 and shall thereafter bear interest at the rate of 12 5/8% per annum and be subject to all of the terms and conditions specified in the Indenture and to the transfer restrictions described in "Notice to Investors." This summary of certain provisions of the Registration Rights Agreement does not purport to be complete and is subject to, and is qualified in its entirety by reference to, all the provisions of the Registration Rights Agreement, a copy of which has been filed as an exhibit to the Registration Statement of which this Prospectus is a part. RANKING The Indebtedness evidenced by the Old Notes ranks pari passu in right of payment with all existing and future unsubordinated indebtedness of the Company and senior in right of payment to all existing and future subordinated indebtedness of the Company. As of June 30, 1998, the Company had $261.7 of Indebtedness outstanding. See "Capitalization." In addition, all existing and future liabilities (including trade payables and indebtedness, including any subordinated Indebtedness) of the Company's subsidiaries are effectively senior to the Old Notes. The Indenture permits the Company and its subsidiaries to incur additional indebtedness to finance the acquisition of equipment, inventory and network assets and to finance or support working capital and capital expenditures for its VOD Business and to secure such indebtedness. See "Risk Factors -- Substantial Leverage; Ability to Service Indebtedness; Restrictive Covenants" and "-- Holding Company Structure; Dependence of Company on Subsidiaries for Repayment of Old Notes." CERTAIN DEFINITIONS Set forth below is a summary of certain of the defined terms used in the covenants and other provisions of the Indenture. Reference is made to the Indenture for the definition of any other capitalized term used herein for which no definition is provided. 67 "Accreted Value" is defined to mean, for any Specified Date, the amount calculated pursuant to (i), (ii), (iii) or (iv) for each $1,000 of principal amount at maturity of Old Notes: (i) if the Specified Date occurs on one or more of the following dates (each a "Semi-Annual Accrual Date"), the Accreted Value will equal the amount set forth below for such Semi-Annual Accrual Date:
SEMI-ANNUAL ACCRETED ACCRUAL DATE VALUE ------------ -------- Issue Date........................................................ 540.00 March 1, 1998..................................................... 542.20 September 1, 1998................................................. 576.42 March 1, 1999..................................................... 612.81 September 1, 1999................................................. 651.49 March 1, 2000..................................................... 692.62 September 1, 2000................................................. 736.34 March 1, 2001..................................................... 782.82 September 1, 2001................................................. 832.24 March 1, 2002..................................................... 884.77 September 1, 2002................................................. 940.62 March 1, 2003..................................................... 1,000.00
(ii) if the Specified Date occurs before the first Semi-Annual Accrual Date, the Accreted Value will equal the sum of (a) $540.00 and (b) an amount equal to the product of (1) the Accreted Value for the first Semi- Annual Accrual Date less $540.00 multiplied by (2) a fraction, the numerator of which is the number of days from the issue date of the Old Notes to the Specified Date, using a 360-day year of twelve 30-day months, and the denominator of which is the number of days elapsed from the issue date of the Old Notes to the first Semi-Annual Accrual Date, using a 360- day year of twelve 30-day months; (iii) if the Specified Date occurs between two Semi-Annual Accrual Dates, the Accreted Value will equal the sum of (a) the Accreted Value for the Semi-Annual Accrual Date immediately preceding such Specified Date and (b) an amount equal to the product of (1) the Accreted Value for the immediately following Semi-Annual Accrual Date less the Accreted Value for the immediately preceding Semi-Annual Accrual Date multiplied by (2) a fraction, the numerator of which is the number of days from the immediately preceding Semi-Annual Accrual Date to the Specified Date, using a 360-day year of twelve 30-day months, and the denominator of which is 180; or (iv) if the Specified Date occurs after the last Semi-Annual Accrual Date, the Accreted Value will equal $1,000. "Acquired Indebtedness" means Indebtedness of a Person existing at the time such Person becomes a Restricted Subsidiary or assumed in connection with an Asset Acquisition by a Restricted Subsidiary and not Incurred in connection with, or in anticipation of, such Person becoming a Restricted Subsidiary or such Asset Acquisition; provided that Indebtedness of such Person which is redeemed, defused, retired or otherwise repaid at the time of or immediately after consummation of the transactions by which such Person becomes a Restricted Subsidiary or such Asset Acquisition shall not be Acquired Indebtedness. "Adjusted Consolidated Net Income" means, for any period, the aggregate net income (or loss) of the Company and its Restricted Subsidiaries for such period determined in conformity with GAAP; provided that the following items shall be excluded in computing Adjusted Consolidated Net Income (without duplication): (i) the net income of any Person that is not a Restricted Subsidiary, except to the extent of the amount of dividends or other distributions actually paid to the Company or any of its Restricted Subsidiaries by such Person during such period; (ii) solely for the purposes of calculating the amount of Restricted Payments that may be made pursuant to clause (C) of the first paragraph of the "Limitation on Restricted Payments" covenant described below (and in such case, except to the extent inculpable pursuant to clause (i) above), the net income (or loss) of any Person accrued prior to the date it becomes a Restricted Subsidiary or is merged into or 68 consolidated with the Company or any of its Restricted Subsidiaries or all or substantially all of the property and assets of such Person are acquired by the Company or any of its Restricted Subsidiaries; (iii) the net income of any Restricted Subsidiary to the extent that the declaration or payment of dividends or similar distributions by such Restricted Subsidiary of such net income is not at the time permitted by the operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to such Restricted Subsidiary, except to the extent that such net income could be paid to the Company or a Restricted Subsidiary by loans, advances, intercompany transfers, principal repayments or otherwise; (iv) any gains or losses (on an after-tax basis) attributable to Asset Sales; (v) except for purposes of calculating the amount of Restricted Payments that may be made pursuant to clause (C) of the first paragraph of the "Limitation on Restricted Payments" covenant described below, any amount paid or accrued as dividends on Preferred Stock of the Company or any Restricted Subsidiary owned by Persons other than the Company and any of its Restricted Subsidiaries; and (vi) all extraordinary gains and extraordinary losses. "Adjusted Consolidated Net Tangible Assets" means the total amount of assets of the Company and its Restricted Subsidiaries (less applicable depreciation, amortization and other valuation reserves), except to the extent resulting from write-ups of capital assets (excluding write-ups in connection with accounting for acquisitions in conformity with GAAP), after deducting therefrom (i) all current liabilities of the Company and its Restricted Subsidiaries (excluding intercompany items) and (ii) all goodwill, trade names, trademarks, patents, unamortized debt discount and expense and other like intangibles, all as set forth on the most recent quarterly or annual consolidated balance sheet of the Company and its Restricted Subsidiaries, prepared in conformity with GAAP and filed with the Commission or provided to the Trustee pursuant to the "Commission Reports and Reports to Holders" covenant. "Affiliate" means, as applied to any Person, any other Person directly or indirectly controlling, controlled by, or under direct or indirect common control with, such Person. For purposes of this definition, "control" (including, with correlative meanings, the terms "controlling," "controlled by" and "under common control with"), as applied to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise. "Asset Acquisition" means (i) an Investment by the Company or any of its Restricted Subsidiaries in any other Person pursuant to which such Person shall become a Restricted Subsidiary or shall be merged into or consolidated with the Company or any of its Restricted Subsidiaries; provided that such Person's primary business is related, ancillary or complementary to the businesses of the Company and its Restricted Subsidiaries on the date of such Investment or (ii) an acquisition by the Company or any of its Restricted Subsidiaries of the property and assets of any Person other than the Company or any of its Restricted Subsidiaries that constitute substantially all of such Person or of a division or line of business of such Person; provided that the property and assets acquired are related, ancillary or complementary to the businesses of the Company and its Restricted Subsidiaries on the date of such acquisition. "Asset Disposition" means the sale or other disposition by the Company or any of its Restricted Subsidiaries (other than to the Company or another Restricted Subsidiary) of (i) all or substantially all of the Capital Stock of any Restricted Subsidiary or (ii) all or substantially all of the assets that constitute a division or line of business of the Company or any of its Restricted Subsidiaries. "Asset Sale" means any sale, transfer or other disposition (including by way of merger, consolidation or sale-leaseback transaction) in one transaction or a series of related transactions by the Company or any of its Restricted Subsidiaries to any Person other than the Company or any of its Restricted Subsidiaries of (i) all or any of the Capital Stock of any Restricted Subsidiary, (ii) all or substantially all of the property and assets of an operating unit or business of the Company or any of its Restricted Subsidiaries or (iii) any other property and assets (other than the Capital Stock or other Investment in an Unrestricted Subsidiary) of the Company or any of its Restricted Subsidiaries outside the ordinary course of business of the Company or such Restricted Subsidiary and, in each case, that is not governed by the provisions of the Indenture applicable to mergers, consolidations 69 and sales of all or substantially all of the assets of the Company; provided that "Asset Sale" shall not include (a) sales or other dispositions of inventory, receivables and other current assets, (b) sales or other dispositions of assets for consideration at least equal to the fair market value of the assets sold or disposed of, to the extent that the consideration received would constitute property or assets of the kinds described in clause (ii)(B) of the "Limitation on Asset Sales" covenant, (c) sales, transfers or other dispositions of assets constituting Restricted Payments permitted to be made under the "Limitation on Restricted Payments" covenant or (d) transfers consisting of granting of Liens permitted under the "Limitation on Liens" covenant and dispositions of such assets in accordance with such Liens. "Attributable Debt" means, with respect to an operating lease included in any Sale and Leaseback Transaction at the time of determination, the present value (discounted at the interest rate implicit in the lease or, if not known, at the Company's incremental borrowing rate) of the obligations of the lessee of the property subject to such lease for rental payments during the remaining term of the lease included in such transaction, including any period for which such lease has been extended or may, at the option of the lessor, be extended, or until the earliest date on which the lessee may terminate such lease without penalty or upon payment of penalty (in which case the rental payments shall include such penalty), after excluding from such rental payments all amounts required to be paid on account of maintenance and repairs, insurance, taxes, assessments, water, utilities and similar charges. "Average Life" means, at any date of determination with respect to any debt security, the quotient obtained by dividing (i) the sum of the products of (a) the number of years from such date of determination to the dates of each successive scheduled principal payment of such debt security and (b) the amount of such principal payment by (ii) the sum of all such principal payments. "Capital Stock" means, with respect to any Person, any and all shares, interests, participations or other equivalents (however designated, whether voting or non-voting) in the equity of such Person, whether outstanding on the Closing Date or issued thereafter, including, without limitation, all Common Stock and Preferred Stock. "Capitalized Lease" means, as applied to any Person, any lease of any property (whether real, personal or mixed) of which the discounted present value of the rental obligations of such Person as lessee, in conformity with GAAP, is required to be capitalized on the balance sheet of such Person. "Capitalized Lease Obligations" means the discounted present value of the rental obligations under a Capitalized Lease. "Change of Control" means such time as (i) (a) prior to the occurrence of a Public Market, a "person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act) becomes the ultimate "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of Voting Stock representing a greater percentage of the total voting power of the Voting Stock of the Company, on a fully diluted basis, than is held by the Existing Stockholders on such date and (b) after the occurrence of a Public Market, a "person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act) becomes the ultimate "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of more than 35% of the total voting power of the Voting Stock of the Company on a fully diluted basis, and such ownership is greater than the percentage of the total voting power of the Voting Stock of the Company, on a fully diluted basis, than is held by the Existing Stockholders on such date; or (ii) individuals who on the Closing Date constitute the Board of Directors (together with any new directors whose election by the Board of Directors or whose nomination by the Board of Directors for election by the Company's stockholders was approved by a vote of at least two-thirds of the members of the Board of Directors then in office who either were members of the Board of Directors on the Closing Date or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the members of the Board of Directors then in office. "Closing Date" means the date on which the Old Notes are originally issued under the Indenture. 70 "Consolidated EBITDA" means, for any period, Adjusted Consolidated Net Income for such period plus, to the extent such amount was deducted in calculating such Adjusted Consolidated Net Income, (i) Consolidated Interest Expense, (ii) income taxes (other than income taxes (either positive or negative) attributable to extraordinary and non-recurring gains or losses or sales of assets), (iii) depreciation expense, (iv) amortization expense and (v) all other non-cash items reducing Adjusted Consolidated Net Income (other than items that will require cash payments and for which an accrual or reserve is, or is required by GAAP to be, made), less all non-cash items increasing Adjusted Consolidated Net Income, all as determined on a consolidated basis for the Company and its Restricted Subsidiaries in conformity with GAAP; provided that, if any Restricted Subsidiary is not a Wholly Owned Restricted Subsidiary, Consolidated EBITDA shall be reduced (to the extent not otherwise reduced in the calculation of Adjusted Consolidated Net Income) by an amount equal to (A) the amount of the Adjusted Consolidated Net Income attributable to such Restricted Subsidiary multiplied by (B) the percentage ownership interest in the income of such Restricted Subsidiary not owned on the last day of such period by the Company or any of its Restricted Subsidiaries. "Consolidated Interest Expense" means, for any period, the aggregate amount of interest in respect of Indebtedness (including, without limitation, amortization of original issue discount on any Indebtedness and the interest portion of any deferred payment obligation, calculated in accordance with the effective interest method of accounting; all commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing; the net costs associated with Interest Rate Agreements; and Indebtedness that is Guaranteed or secured by the Company or any of its Restricted Subsidiaries) and all but the principal component of rentals in respect of Capitalized Lease Obligations paid, accrued or scheduled to be paid or to be accrued by the Company and its Restricted Subsidiaries during such period; excluding, however, (i) any amount of such interest of any Restricted Subsidiary if the net income of such Restricted Subsidiary is excluded in the calculation of Adjusted Consolidated Net Income pursuant to clause (iii) of the definition thereof (but only in the same proportion as the net income of such Restricted Subsidiary is excluded from the calculation of Adjusted Consolidated Net Income pursuant to clause (iii) of the definition thereof) and (ii) any premiums, fees and expenses (and any amortization thereof) payable in connection with the offering of the Old Notes, all as determined on a consolidated basis (without taking into account Unrestricted Subsidiaries) in conformity with GAAP. "Consolidated Leverage Ratio" means, on any Transaction Date, the ratio of (i) the aggregate amount of Indebtedness of the Company and its Restricted Subsidiaries on a consolidated basis outstanding on such Transaction Date to (ii) the aggregate amount of Consolidated EBITDA for the then most recent fiscal quarter for which financial statements of the Company have been filed with the Commission or provided to the Trustee pursuant to the "Commission Reports and Reports to Holders" covenant described below (such fiscal quarter period being the "Quarter") multiplied by four; provided that, in making the foregoing calculation, (A) pro forma effect shall be given to any Indebtedness to be Incurred or repaid on the Transaction Date; (B) pro forma effect shall be given to Asset Dispositions and Asset Acquisitions (including giving pro forma effect to the application of proceeds of any Asset Disposition) that occur from the beginning of the Quarter through the Transaction Date (the "Reference Period"), as if they had occurred and such proceeds had been applied on the first day of such Reference Period; and (C) pro forma effect shall be given to asset dispositions and asset acquisitions (including giving pro forma effect to the application of proceeds of any asset disposition) that have been made by any Person that has become a Restricted Subsidiary or has been merged with or into the Company or any Restricted Subsidiary during such Reference Period and that would have constituted Asset Dispositions or Asset Acquisitions had such transactions occurred when such Person was a Restricted Subsidiary as if such asset dispositions or asset acquisitions were Asset Dispositions or Asset Acquisitions that occurred on the first day of such Reference Period; provided that to the extent that clause (B) or (C) of this sentence requires that pro forma effect be given to an Asset Acquisition or Asset Disposition, such pro forma calculation shall be based upon the full fiscal quarter immediately preceding the Transaction Date of the Person, or division or line of business of the Person, that is acquired or disposed of for which financial information is available. 71 "Consolidated Net Worth" means, at any date of determination, stockholders' equity as set forth on the most recently available quarterly or annual consolidated balance sheet of the Company and its Restricted Subsidiaries (which shall be as of a date not more than 90 days prior to the date of such computation, and which shall not take into account Unrestricted Subsidiaries), less any amounts attributable to Disqualified Stock or any equity security convertible into or exchangeable for Indebtedness, the cost of treasury stock and the principal amount of any promissory notes receivable from the sale of the Capital Stock of the Company or any of its Restricted Subsidiaries, each item to be determined in conformity with GAAP (excluding the effects of foreign currency exchange adjustments under Financial Accounting Standards Board Statement of Financial Accounting Standards No. 52). "Currency Agreement" means any foreign exchange contract, currency swap agreement, currency option or other similar agreement or arrangement. "Debt Securities" means any Indebtedness (including any Guarantee) issued in connection with a public offering (whether or not underwritten) or a private placement (provided such private placement is underwritten for resale pursuant to Rule 144A, Regulation S or otherwise under the Securities Act or sold on an agency basis by a broker-dealer or one of its Affiliates to 10 or more beneficial holders); it being understood that "Debt Securities" shall not include commercial bank borrowings or similar borrowings, recourse transfers of financial assets, capital leases or other types of borrowings incurred in a manner not customarily viewed as a "securities offering" or Guarantees in respect of the foregoing. "Default" means any event that is, or after notice or passage of time or both would be, an Event of Default. "Disqualified Stock" means any class or series of Capital Stock of any Person that by its terms or otherwise is (i) required to be redeemed prior to the Stated Maturity of the Old Notes, (ii) redeemable at the option of the holder of such class or series of Capital Stock at any time prior to the Stated Maturity of the Old Notes or (iii) convertible into or exchangeable for Capital Stock referred to in clause (i) or (ii) above or Indebtedness having a scheduled maturity prior to the Stated Maturity of the Old Notes; provided that any Capital Stock that would not constitute Disqualified Stock but for provisions thereof giving holders thereof the right to require such Person to repurchase or redeem such Capital Stock upon the occurrence of an "asset sale" or "change of control" occurring prior to the Stated Maturity of the Old Notes shall not constitute Disqualified Stock if the "asset sale" or "change of control" provisions applicable to such Capital Stock are no more favorable to the holders of such Capital Stock than the provisions contained in "Limitation on Asset Sales" and "Repurchase of Old Notes upon a Change of Control" covenants described below and such Capital Stock specifically provides that such Person will not repurchase or redeem any such stock pursuant to such provision prior to the Company's repurchase of such Old Notes as are required to be repurchased pursuant to the "Limitation on Asset Sales" and "Repurchase of Old Notes upon a Change of Control" covenants described below. "Existing Stockholders" means Alan H. Bushell, Paul M. Cook, John A. Rollwagen, Acorn (so long as there has been no change of control of Acorn) and Sarnoff Corporation. "Fair market value" means the price that would be paid in an arm's-length transaction between an informed and willing seller under no compulsion to sell and an informed and willing buyer under no compulsion to buy, as determined in good faith by the Board of Directors, whose determination shall be conclusive if evidenced by a Board Resolution; provided that for purposes of clause (viii) of the second paragraph of the "Limitation on Indebtedness" covenant, (x) the fair market value of any security registered under the Exchange Act shall be the average of the closing prices, regular way, of such security for the 20 consecutive trading days immediately preceding the sale of Capital Stock and (y) in the event the aggregate fair market value of any other property (other than cash or cash equivalents) received by the Company exceeds $10 million, the fair market value of such property shall be determined by a nationally recognized investment banking firm and set forth in their written opinion which shall be delivered to the Trustee. 72 "GAAP" means generally accepted accounting principles in the United States of America as in effect as of the Closing Date, including, without limitation, those set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as approved by a significant segment of the accounting profession. All ratios and computations contained or referred to in the Indenture shall be computed in conformity with GAAP applied on a consistent basis, except that calculations made for purposes of determining compliance with the terms of the covenants and with other provisions of the Indenture shall be made without giving effect to (i) the amortization of any expenses incurred in connection with the offering of the Old Notes and (ii) except as otherwise provided, the amortization of any amounts required or permitted by Accounting Principles Board Opinion Nos. 16 and 17. "Guarantee" means any obligation, contingent or otherwise, of any Person directly or indirectly guaranteeing any Indebtedness of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness of such other Person (whether arising by virtue of partnership arrangements, or by agreements to keep-well, to purchase assets, goods, securities or services (unless such purchase arrangements are on arm's-length terms and are entered into in the ordinary course of business), to take-or-pay, or to maintain financial statement conditions or otherwise) or (ii) entered into for purposes of assuring in any other manner the obligee of such Indebtedness of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part); provided that the term "Guarantee" shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. "Incur" means, with respect to any Indebtedness, to incur, create, issue, assume, Guarantee or otherwise become liable for or with respect to, or become responsible for, the payment of, contingently or otherwise, such Indebtedness, including an "Incurrence" of Acquired Indebtedness; provided that neither the accrual of interest nor the accretion of original issue discount shall be considered an Incurrence of Indebtedness. "Indebtedness" means, with respect to any Person at any date of determination (without duplication), (i) all indebtedness of such Person for borrowed money, (ii) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) all obligations of such Person in respect of letters of credit or other similar instruments (including reimbursement obligations with respect thereto), (iv) all obligations of such Person to pay the deferred and unpaid purchase price of property or services, which purchase price is due more than six months after the date of placing such property in service or taking delivery and title thereto or the completion of such services, except Trade Payables, (v) all Capitalized Lease Obligations of such Person, (vi) all Attributable Debt of such Person with respect to any Sale and Leaseback Transaction to which such Person is a lessee; (vii) the maximum fixed redemption or repurchase price of Disqualified Stock of such Person at the date of determination; (viii) all Indebtedness of other Persons secured by a Lien on any asset of such Person, whether or not such Indebtedness is assumed by such Person; provided that the amount of such Indebtedness shall be the lesser of (A) the fair market value of such asset at such date of determination and (B) the amount of such Indebtedness, (ix) all Indebtedness of other Persons Guaranteed by such Person to the extent such Indebtedness is Guaranteed by such Person and (x) to the extent not otherwise included in this definition, net obligations under Currency Agreements and Interest Rate Agreements. For purposes of the preceding sentence, the maximum fixed repurchase price of any Disqualified Stock that does not have a fixed repurchase price shall be calculated in accordance with the terms of such Disqualified Stock as if such Disqualified Stock were repurchased on any date on which Indebtedness shall be required to be determined pursuant to the Indenture; provided that if such Disqualified Stock is not then permitted to be repurchased, the repurchase price shall be the book value of such Disqualified Stock. The amount of Indebtedness of any Person at any date shall be the outstanding balance at such date of all unconditional obligations as described above and, with respect to contingent obligations, the maximum liability upon the occurrence of the contingency giving rise to the obligation, provided that (A) the amount outstanding at any time of any Indebtedness issued with original issue discount is the face amount of such Indebtedness less the remaining unamortized portion of the original issue discount of such Indebtedness at 73 the time of its issuance as determined in conformity with GAAP, (B) money borrowed and set aside at the time of the Incurrence of any Indebtedness in order to prefund the payment of the interest on such Indebtedness shall not be deemed to be "Indebtedness" and (C) Indebtedness shall not include any liability for federal, state, local or other taxes. "Interest Rate Agreement" means any interest rate protection agreement, interest rate future agreement, interest rate option agreement, interest rate swap agreement, interest rate cap agreement, interest rate collar agreement, interest rate hedge agreement, option or future contract or other similar agreement or arrangement. "Investment" in any Person means any direct or indirect advance, loan or other extension of credit (including, without limitation, by way of Guarantee or similar arrangement; but excluding (x) advances to customers (including distributors) in the ordinary course of business that are, in conformity with GAAP, recorded as accounts receivable on the balance sheet of the Company or its Restricted Subsidiaries, (y) advances to suppliers in the ordinary course of business that are, in conformity with GAAP, recorded as prepaid expenses on the balance sheet of the Company or its Restricted Subsidiaries and (z) advances or prepayments to SRTC in connection with the acquisition of SRTC), or capital contribution to (by means of any transfer of cash or other property to others or any payment for property or services for the account or use of others), or any purchase or acquisition of Capital Stock, bonds, notes, debentures or other similar instruments issued by, such Person and shall include (i) the designation of a Restricted Subsidiary as an Unrestricted Subsidiary and (ii) the fair market value of the Capital Stock (or any other Investment), held by the Company or any of its Restricted Subsidiaries, of (or in) any Person that has ceased to be a Restricted Subsidiary, including without limitation, by reason of any transaction permitted by clause (iii) of the "Limitation on the Issuance and Sale of Capital Stock of Restricted Subsidiaries" covenant; provided that the fair market value of the Investment remaining in any Person that has ceased to be a Restricted Subsidiary shall not exceed the aggregate amount of Investments previously made in such Person valued at the time such Investments were made less the net reduction of such Investments. For purposes of the definition of "Unrestricted Subsidiary" and the "Limitation on Restricted Payments" covenant described below, (i)"Investment" shall include the fair market value of the assets (net of liabilities (other than liabilities to the Company or any of its Restricted Subsidiaries)) of any Restricted Subsidiary at the time that such Restricted Subsidiary is designated an Unrestricted Subsidiary, (ii) the fair market value of the assets (net of liabilities (other than liabilities to the Company or any of its Restricted Subsidiaries)) of any Unrestricted Subsidiary at the time that such Unrestricted Subsidiary is designated a Restricted Subsidiary shall be considered a reduction in outstanding Investments and (iii) any property transferred to or from an Unrestricted Subsidiary shall be valued at its fair market value at the time of such transfer. "Lien" means any mortgage, pledge, security interest, encumbrance, lien or charge of any kind (including, without limitation, any conditional sale or other title retention agreement or lease in the nature thereof or any agreement to give any security interest). "Moody's" means Moody's Investors Service, Inc. and its successors. "Net Cash Proceeds" means, (a) with respect to any Asset Sale, the proceeds of such Asset Sale in the form of cash or cash equivalents, including payments in respect of deferred payment obligations (to the extent corresponding to the principal, but not interest, component thereof) when received in the form of cash or cash equivalents (except to the extent such obligations are financed or sold with recourse to the Company or any Restricted Subsidiary) and proceeds from the conversion of other property received when converted to cash or cash equivalents, net of (i) brokerage commissions and other fees and expenses (including fees and expenses of counsel, accountants and investment bankers and other professionals) related to such Asset Sale, (ii) provisions for all taxes (whether or not such taxes will actually be paid or are payable) as a result of such Asset Sale without regard to the consolidated results of operations of the Company and its Restricted Subsidiaries, taken as a whole, (iii) payments made to repay Indebtedness or any other obligation outstanding at the time of such Asset Sale that either (A) is secured by a Lien on the property or assets sold or (B) is required to be paid as a result of such sale and (iv) appropriate amounts to be provided by the Company or any Restricted Subsidiary as a reserve against any liabilities associated with such Asset Sale, including, without limitation, pension and other post-employment 74 benefit liabilities, liabilities related to environmental matters and liabilities under any indemnification obligations associated with such Asset Sale, all as determined in conformity with GAAP and (b) with respect to any issuance or sale of Capital Stock, the proceeds of such issuance or sale in the form of cash or cash equivalents, including payments in respect of deferred payment obligations (to the extent corresponding to the principal, but not interest, component thereof) when received in the form of cash or cash equivalents (except to the extent such obligations are financed or sold with recourse to the Company or any Restricted Subsidiary) and proceeds from the conversion of other property received when converted to cash or cash equivalents, net of attorney's fees, accountants' fees, underwriters' or placement agents' fees, discounts or commissions and brokerage, consultant and other fees incurred in connection with such issuance or sale and net of taxes paid or payable as a result thereof. "Offer to Purchase" means an offer to purchase Old Notes by the Company from the Holders commenced by mailing a notice to the Trustee and each Holder stating: (i) the covenant pursuant to which the offer is being made and that all Old Notes validly tendered in accordance with the terms of the Offer to Purchase will be accepted for payment on a pro rata basis; (ii) the purchase price and the date of purchase (which shall be a Business Day no earlier than 30 days nor later than 60 days from the date such notice is mailed) (the "Payment Date"); (iii) that any Old Note not tendered will continue to accrue interest (or original issue discount) pursuant to its terms; (iv) that, unless the Company defaults in the payment of the purchase price, any Old Note accepted for payment pursuant to the Offer to Purchase shall cease to accrue interest (or original issue discount) on and after the Payment Date; (v) that Holders electing to have an Old Note purchased pursuant to the Offer to Purchase will be required to deliver the Old Note, together with the form entitled "Option of the Holder to Elect Purchase" on the reverse side of the Old Note completed, to the Paying Agent at the address specified in the notice prior to the close of business on the Business Day immediately preceding the Payment Date; (vi) that Holders will be entitled to withdraw their election if the Paying Agent receives, not later than the close of business on the third Business Day immediately preceding the Payment Date, a telegram, facsimile transmission or letter setting forth the name of such Holder, the principal amount at maturity of Old Notes delivered for purchase and a statement that such Holder is withdrawing its election to have such Old Notes purchased; and (vii) that Holders whose Old Notes are being purchased only in part will be issued new Notes equal in principal amount to the unpurchased portion of the Old Notes surrendered; provided that each Old Note purchased and each new Note issued shall be in a principal amount at maturity of $1,000 or integral multiples thereof. On or prior to the Payment Date, the Company shall (i) accept for payment on a pro rata basis Old Notes or portions thereof tendered pursuant to an Offer to Purchase; (ii) deposit with the Paying Agent money sufficient to pay the purchase price of all Old Notes or portions thereof so accepted; and (iii) deliver, or cause to be delivered, to the Trustee all Old Notes or portions thereof so accepted together with an Officers' Certificate specifying the Old Notes or portions thereof accepted for payment by the Company. The Paying Agent shall promptly mail to the Holders of Old Notes so accepted payment in an amount equal to the purchase price, and the Trustee shall promptly authenticate and mail to such Holders a new Note equal in principal amount at maturity to any unpurchased portion of the Old Note surrendered; provided that each Old Note purchased and each new Note issued shall be in a principal amount at maturity of $1,000 or integral multiples thereof. The Company will publicly announce the results of an Offer to Purchase as soon as practicable after the Payment Date. The Trustee shall act as the Paying Agent for an Offer to Purchase. The Company will comply with Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable, in the event that the Company is required to repurchase Old Notes pursuant to an Offer to Purchase. "Permitted Investment" means (i) an Investment in the Company or a Restricted Subsidiary or a Person which will, upon the making of such Investment, become a Restricted Subsidiary or be merged or consolidated with or into or transfer or convey all or substantially all its assets to, the Company or a Restricted Subsidiary; provided that such person's primary business is related, ancillary or complementary to the businesses of the Company and its Restricted Subsidiaries on the date of such Investment; (ii) Temporary Cash Investments; (iii) payroll, travel, relocation and similar advances to cover matters that are expected at the time of such advances ultimately to be treated as expenses in accordance with GAAP; (iv) loans or advances to employees 75 made in the ordinary course of business that do not in the aggregate exceed $500,000 at any time outstanding; (v) Investments in Unrestricted Subsidiaries in an aggregate amount not to exceed $5 million; provided each such Unrestricted Subsidiary's primary business is related, ancillary or complementary to the businesses of the Company and its Restricted Subsidiaries on the dates of such Investments; and (vi) Investments received in satisfaction of judgments or as part of or in connection with the bankruptcy, winding up or liquidation of a Person, except if such Investment is received in consideration for an Investment made in such Person in connection with or in anticipation of such bankruptcy, winding up or liquidation. "Permitted Liens" means (i) Liens for taxes, assessments, governmental charges or claims that are being contested in good faith by appropriate legal proceedings promptly instituted and diligently conducted and for which a reserve or other appropriate provision, if any, as shall be required in conformity with GAAP shall have been made; (ii) statutory and common law Liens of landlords and carriers, warehousemen, mechanics, suppliers, materialmen, repairmen or other similar Liens arising in the ordinary course of business and with respect to amounts not yet delinquent or being contested in good faith by appropriate legal proceedings promptly instituted and diligently conducted and for which a reserve or other appropriate provision, if any, as shall be required in conformity with GAAP shall have been made; (iii) Liens incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security; (iv) Liens incurred or deposits made to secure the performance of tenders, bids, leases, statutory or regulatory obligations, bankers' acceptances, surety and appeal bonds, government contracts, performance and return-of-money bonds and other obligations of a similar nature incurred in the ordinary course of business (exclusive of obligations for the payment of borrowed money); (v) easements, rights-of-way, municipal and zoning ordinances and similar charges, encumbrances, title defects or other irregularities that do not materially interfere with the ordinary course of business of the Company or any of its Restricted Subsidiaries; (vi) Liens (including extensions and renewals thereof) upon real or personal property acquired after the Closing Date; provided that (a) such Lien is created solely for the purpose of securing Indebtedness Incurred, in accordance with the "Limitation on Indebtedness" covenant described below, to finance the cost (including, without limitation, the cost of design, development, construction, acquisition, transportation, installation, improvement or integration) of the real or personal property subject thereto and such Lien is created prior to, at the time of or within six months after the later of the acquisition, the completion of construction or the commencement of full operation of such property, (b) the principal amount of the Indebtedness secured by such Lien does not exceed 100% of such cost and (c) any such Lien shall not extend to or cover any property other than such item of property and any improvements on such property and any proceeds (including insurance proceeds) and products thereof and attachments and accessions thereto; (vii) leases or subleases granted to others that do not materially interfere with the ordinary course of business of the Company and its Restricted Subsidiaries, taken as a whole; (viii) Liens encumbering property or assets under construction arising from progress or partial payments by a customer of the Company or its Restricted Subsidiaries relating to such property or assets; (ix) any interest or title of a lessor in the property subject to any Capitalized Lease or operating lease; (x) Liens arising from filing Uniform Commercial Code financing statements regarding leases or other Uniform Commercial Code financing statements for precautionary purposes relating to arrangements not constituting Indebtedness; (xi) Liens on property of, or on shares of Capital Stock or Indebtedness of, any Person existing at the time such Person becomes, or becomes a part of, any Restricted Subsidiary; provided that such Liens do not extend to or cover any property or assets of the Company or any Restricted Subsidiary other than the property or assets acquired and any proceeds (including insurance proceeds) and products thereof and attachments and accessions thereto; (xii) Liens in favor of the Company or any Restricted Subsidiary; (xiii) Liens arising from the rendering of a final judgment or order against the Company or any Restricted Subsidiary that does not give rise to an Event of Default; (xiv) Liens securing reimbursement obligations with respect to letters of credit that encumber documents and other property relating to such letters of credit and the products and proceeds thereof; (xv) Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of customs duties in connection with the importation of goods; (xvi) Liens encumbering customary initial deposits and margin deposits, and other Liens that are within the general parameters customary in the industry and incurred in the ordinary course of business, in each case, securing Indebtedness under Interest Rate Agreements and Currency Agreements and forward contracts, options, future contracts, futures options or similar agreements or arrangements designed solely to protect the Company 76 or any of its Restricted Subsidiaries from fluctuations in interest rates, currencies or the price of commodities; (xvii) Liens arising out of conditional sale, title retention, consignment or similar arrangements for the sale of goods entered into by the Company or any of its Restricted Subsidiaries in the ordinary course of business in accordance with the past practices of the Company and its Restricted Subsidiaries prior to the Closing Date; (xviii) Liens on or sales of receivables; (xix) any interest or title of licensor in the property subject to a license; and (xx) Liens on the Capital Stock of Unrestricted Subsidiaries. "Public Equity Offering" means an underwritten primary public offering of Common Stock of the Company pursuant to an effective registration statement under the Securities Act. A "Public Market" shall be deemed to exist if (i) a Public Equity Offering has been consummated and (ii) at least 15% of the total issued and outstanding Common Stock of the Company has been distributed by means of an effective registration statement under the Securities Act or sales pursuant to Rule 144 under the Securities Act. "Restricted Subsidiary" means any Subsidiary of the Company other than an Unrestricted Subsidiary. "Sale and Leaseback Transaction" means any direct or indirect arrangement pursuant to which the Company or any of its Restricted Subsidiaries sells or transfers any of its assets or properties (whether owned on the Closing Date or acquired thereafter) and then or thereafter leases such assets or properties or any part thereof or any other assets or properties which the Company or its Restricted Subsidiaries intends to use for substantially the same purpose or purposes as the assets or properties sold or transferred. "Significant Subsidiary" means, at any date of determination, any Restricted Subsidiary that, together with its Subsidiaries, (i) for the most recent fiscal year of the Company, accounted for more than 10% of the consolidated revenues of the Company and its Restricted Subsidiaries or (ii) as of the end of such fiscal year, was the owner of more than 10% of the consolidated assets of the Company and its Restricted Subsidiaries, all as set forth on the most recently available consolidated financial statements of the Company for such fiscal year. "Specified Date" means any Redemption Date, any Payment Date for an Offer to Purchase or any date on which the Old Notes first become due and payable after an Event of Default. "S&P" means Standard & Poor's Ratings Services, a division of The McGraw- Hill Companies, Inc. and its successors. "Stated Maturity" means, (i) with respect to any debt security, the date specified in such debt security as the fixed date on which the final installment of principal of such debt security is due and payable and (ii) with respect to any scheduled installment of principal of or interest on any debt security, the date specified in such debt security as the fixed date on which such installment is due and payable. "Strategic Subordinated Indebtedness" means Indebtedness of the Company Incurred to finance the acquisition of a Person engaged in the VOD Business that by its terms, or by the terms of any agreement or instrument pursuant to which such Indebtedness is Incurred, (i) is expressly made subordinate in right of payment to the Old Notes pursuant to the terms of a subordinated note substantially in the form attached to the Indenture; provided that the Company shall have received an opinion of counsel as to the validity and enforceability of such subordinated note and (ii) provides that no payment of principal, premium or interest on, or any other payment with respect to, such Indebtedness may be made prior to the payment in full of all of the Company's obligations under the Old Notes; provided that such Indebtedness may provide for and be repaid at any time from the proceeds of the sale of Capital Stock (other than Disqualified Stock) of the Company after the Incurrence of such Indebtedness. "Subsidiary" means, with respect to any Person, any corporation, association or other business entity of which more than 50% of the voting power of the outstanding Voting Stock is owned, directly or indirectly, by such Person and one or more other Subsidiaries of such Person. 77 "Temporary Cash Investment" means any of the following: (i) direct obligations of the United States of America or any agency thereof or obligations fully and unconditionally guaranteed by the United States of America or any agency thereof, (ii) time deposit accounts, certificates of deposit and money market deposits maturing within 180 days of the date of acquisition thereof issued by a bank or trust company which is organized under the laws of the United States of America, any state thereof or any foreign country recognized by the United States of America, and which bank or trust company has capital, surplus and undivided profits aggregating in excess of $50 million (or the foreign currency equivalent thereof) and has outstanding debt which is rated "A" (or such similar equivalent rating) or higher by at least one nationally recognized statistical rating organization (as defined in Rule 436 under the Securities Act) or any money-market fund sponsored by a registered broker dealer or mutual fund distributor, (iii) repurchase obligations with a term of not more than 30 days for underlying securities of the types described in clause (i) above entered into with a bank meeting the qualifications described in clause (ii) above, (iv) commercial paper, maturing not more than 270 days after the date of acquisition, issued by a corporation (other than an Affiliate of the Company) organized and in existence under the laws of the United States of America, any state thereof or any foreign country recognized by the United States of America with a rating at the time as of which any investment therein is made of "P-1" (or higher) according to Moody's or "A-1" (or higher) according to S&P, (v) auction-rate preferred stocks of any corporation maturing not later than 45 days after the acquisition thereof, with a rating at the time of acquisition of not less than "AAA" according to S&P or "Aaa" according to Moody's, (vi) corporate debt obligations maturing within 12 months after the date of acquisition, with a rating on the date of acquisition not less than "AAA" or "A-1" according to S&P or "Aaa" or "P-1" according to Moody's, and (vii) securities with maturities of six months or less from the date of acquisition issued or fully and unconditionally guaranteed by any state, commonwealth or territory of the United States of America, or by any political subdivision or taxing authority thereof, and rated at least "A" by S&P or Moody's. "Trade Payables" means, with respect to any Person, any accounts payable or any other indebtedness or monetary obligation to trade creditors created, assumed or Guaranteed by such Person or any of its Subsidiaries arising in the ordinary course of business in connection with the acquisition of goods or services. "Transaction Date" means, with respect to the Incurrence of any Indebtedness by the Company or any of its Restricted Subsidiaries, the date such Indebtedness is to be Incurred and, with respect to any Restricted Payment, the date such Restricted Payment is to be made. "Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at the time of determination shall be designated an Unrestricted Subsidiary by the Board of Directors in the manner provided below; and (ii) any Subsidiary of an Unrestricted Subsidiary. The Board of Directors may designate any Restricted Subsidiary (including any newly acquired or newly formed Subsidiary of the Company) to be an Unrestricted Subsidiary unless such Subsidiary owns any Capital Stock of, or owns or holds any Lien on any property of, the Company or any Restricted Subsidiary; provided that (A) any Guarantee by the Company or any Restricted Subsidiary of any Indebtedness of the Subsidiary being so designated shall be deemed an "Incurrence" of such Indebtedness and an "Investment" by the Company or such Restricted Subsidiary (or both, if applicable) at the time of such designation; (B) either (I) the Subsidiary to be so designated has total assets of $1,000 or less or (II) if such Subsidiary has assets greater than $1,000, such designation would be permitted under the "Limitation on Restricted Payments" covenant described below and (C) if applicable, the Incurrence of Indebtedness and the Investment referred to in clause (A) of this proviso would be permitted under the "Limitation on Indebtedness" and "Limitation on Restricted Payments" covenants described below. The Board of Directors may designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided that (i) no Default or Event of Default shall have occurred and be continuing at the time of or after giving effect to such designation and (ii) all Liens and Indebtedness of such Unrestricted Subsidiary outstanding immediately after such designation would, if Incurred at such time, have been permitted to be Incurred (and shall be deemed to have been Incurred) for all purposes of the Indenture. Any such designation by the Board of Directors shall be evidenced to the Trustee by promptly filing with the Trustee a copy of the Board Resolution giving effect to such designation and an Officers' Certificate certifying that such designation complied with the foregoing provisions. 78 "VOD Business" means the development, ownership or operation of video-on- demand systems or the provision of video-on-demand services and any related, ancillary or complementary business. "Voting Stock" means with respect to any Person, Capital Stock of any class or kind ordinarily having the power to vote for the election of directors, managers or other voting members of the governing body of such Person. "Wholly Owned" means, with respect to any Subsidiary of any Person, the ownership of all of the outstanding Capital Stock of such Subsidiary (other than any director's qualifying shares or Investments by foreign nationals mandated by applicable law) by such Person or one or more Wholly Owned Subsidiaries of such Person. COVENANTS Limitation on Indebtedness. (a) The Company will not, and will not permit any of its Restricted Subsidiaries to, Incur any Indebtedness (other than the Old Notes and Indebtedness existing on the Closing Date); provided that the Company may Incur Indebtedness, and any Restricted Subsidiary may Incur Acquired Indebtedness, if, after giving effect to the Incurrence of such Indebtedness and the receipt and application of the proceeds therefrom, the Consolidated Leverage Ratio would be greater than zero and less than 6:1. Notwithstanding the foregoing, the Company and any Restricted Subsidiary (except as specified below) may Incur each and all of the following: (i) Indebtedness outstanding at any time in an aggregate principal amount not to exceed $25 million, less any amount of such Indebtedness permanently repaid as provided under the "Limitation on Asset Sales" covenant described below; (ii) Indebtedness owed (A) to the Company evidenced by a promissory note or (B) to any Restricted Subsidiary; provided that any event which results in any such Restricted Subsidiary ceasing to be a Restricted Subsidiary or any subsequent transfer of such Indebtedness (other than to the Company or another Restricted Subsidiary) shall be deemed, in each case, to constitute an Incurrence of such Indebtedness not permitted by this clause (ii); (iii) Indebtedness issued in exchange for, or the net proceeds of which are used to refinance or refund, then outstanding Indebtedness (other than Indebtedness Incurred under clause (i), (ii), (iv), (vi), (ix), (x) or (xi) of this paragraph) and any refinancings thereof in an amount not to exceed the amount so refinanced or refunded (plus premiums, accrued interest, fees and expenses); provided that Indebtedness the proceeds of which are used to refinance or refund the Old Notes or Indebtedness that is pari passu with, or subordinated in right of payment to, the Old Notes shall only be permitted under this clause (iii) if (A) in case the Old Notes are refinanced in part or the Indebtedness to be refinanced is pari passu with the Old Notes, such new Indebtedness, by its terms or by the terms of any agreement or instrument pursuant to which such new Indebtedness is outstanding, is expressly made pari passu with, or subordinate in right of payment to, the remaining Old Notes, (B) in case the Indebtedness to be refinanced is subordinated in right of payment to the Old Notes, such new Indebtedness, by its terms or by the terms of any agreement or instrument pursuant to which such new Indebtedness is issued or remains outstanding, is expressly made subordinate in right of payment to the Old Notes at least to the extent that the Indebtedness to be refinanced is subordinated to the Old Notes and (C) such new Indebtedness, determined as of the date of Incurrence of such new Indebtedness, does not mature prior to the Stated Maturity of the Indebtedness to be refinanced or refunded, and the Average Life of such new Indebtedness is at least equal to the remaining Average Life of the Indebtedness to be refinanced or refunded; and provided further that in no event may Indebtedness of the Company be refinanced by means of any Indebtedness of any Restricted Subsidiary pursuant to this clause (iii); (iv) Indebtedness (A) in respect of performance, surety or appeal bonds provided in the ordinary course of business, (B) under Currency Agreements and Interest Rate Agreements; provided that such agreements (a) are designed solely to protect the Company or its Restricted Subsidiaries against fluctuations in foreign currency exchange rates or interest rates and (b) do not increase the Indebtedness of the obligor outstanding at any time other than as a result of fluctuations in foreign currency exchange rates or interest rates or by reason of fees, indemnities and compensation payable thereunder; and (C) arising from agreements providing for indemnification, adjustment of purchase price or similar obligations, or from Guarantees or letters of credit, surety bonds or performance bonds securing any obligations of the Company or any of its Restricted Subsidiaries pursuant to such agreements, in 79 any case Incurred in connection with the disposition of any business, assets or Restricted Subsidiary (other than Guarantees of Indebtedness Incurred by any Person acquiring all or any portion of such business, assets or Restricted Subsidiary for the purpose of financing such acquisition), in a principal amount not to exceed the gross proceeds actually received by the Company or any Restricted Subsidiary in connection with such disposition; (v) Indebtedness of the Company, to the extent the net proceeds thereof are promptly (A) used to purchase Old Notes tendered in an Offer to Purchase made as a result of a Change in Control or (B) deposited to defease the Old Notes as described below under "Defeasance"; (vi) Guarantees of the Old Notes and Guarantees of Indebtedness of the Company by any Restricted Subsidiary provided the Guarantee of such Indebtedness is permitted by and made in accordance with the "Limitation on Issuance of Guarantees by Restricted Subsidiaries" covenant described below; (vii) Indebtedness Incurred to finance the cost (including the cost of design, development, acquisition, construction, installation, improvement, transportation or integration) to acquire equipment, inventory or network assets (including acquisitions by way of Capitalized Lease and acquisitions of the Capital Stock of a Person that becomes a Restricted Subsidiary to the extent of the fair market value of the equipment, inventory or network assets so acquired) by the Company or a Restricted Subsidiary after the Closing Date or to finance or support working capital or capital expenditures for the VOD Business; (viii) Indebtedness of the Company not to exceed, at any one time outstanding, two times (A) the Net Cash Proceeds received by the Company after the Closing Date from the issuance and sale of its Capital Stock (other than Disqualified Stock) to a Person that is not a Subsidiary of the Company, to the extent such Net Cash Proceeds have not been used pursuant to clause (C)(2) of the first paragraph or clause (iii), (iv) or (vi) of the second paragraph of the "Limitation on Restricted Payments" covenant described below to make a Restricted Payment and (B) 80% of the fair market value of property (other than cash and cash equivalents) received by the Company after the Closing Date from the sale of its Capital Stock (other than Disqualified Stock) to a Person that is not a Subsidiary of the Company, to the extent such sale of Capital Stock has not been used pursuant to clause (iii), (iv) or (vii) of the second paragraph of the "Limitation on Restricted Payments" covenant described below to make a Restricted Payment; provided that such Indebtedness does not mature prior to the Stated Maturity of the Old Notes and has an Average Life longer than the Old Notes; (ix) Indebtedness of the Company, in an aggregate principal amount outstanding at any time not to exceed $1 million, Incurred in connection with the repurchase of shares of Capital Stock of the Company, options on any such shares or related stock appreciation rights held by employees, former employees, directors or former directors (or their estates or beneficiaries under their estates), upon death, disability, retirement or termination of employment; provided that such Indebtedness, by its terms, (A) is expressly made subordinate in right of payment to the Old Notes, and (B) provides that no payments of principal (including by way of sinking fund, mandatory redemption or otherwise (including defeasance)), may be made while any of the Old Notes are outstanding; (x) Strategic Subordinated Indebtedness; and (xi) Indebtedness of the Company (in addition to Indebtedness permitted under clauses (i) through (x) above) in an aggregate principal amount outstanding at any time not to exceed $15 million, less any amount of such Indebtedness permanently repaid as provided under the "Limitation on Asset Sales" covenant described below. (b) Notwithstanding any other provision of this "Limitation on Indebtedness" covenant, the maximum amount of Indebtedness that the Company or a Restricted Subsidiary may Incur pursuant to this "Limitation on Indebtedness" covenant shall not be deemed to be exceeded, with respect to any outstanding Indebtedness due solely to the result of fluctuations in the exchange rates of currencies. (c) For purposes of determining any particular amount of Indebtedness under this "Limitation on Indebtedness" covenant, (1) Guarantees, Liens or obligations with respect to letters of credit supporting Indebtedness otherwise included in the determination of such particular amount shall not be included and (2) any Liens granted pursuant to the equal and ratable provisions referred to in the "Limitation on Liens" covenant described below shall not be treated as Indebtedness. For purposes of determining compliance with this "Limitation on Indebtedness" covenant, in the event that an item of Indebtedness meets the criteria of more than one of the types of Indebtedness described in the above clauses, the Company, in its sole discretion, shall classify and may, from time to time, reclassify, such item of Indebtedness and only be required to include the amount and type of such Indebtedness in one of such clauses. 80 Limitation on Restricted Payments. The Company will not, and will not permit any Restricted Subsidiary to, directly or indirectly, (i) declare or pay any dividend or make any distribution on or with respect to its Capital Stock (other than (x) dividends or distributions payable solely in shares of its Capital Stock (other than Disqualified Stock) or in options, warrants or other rights to acquire shares of such Capital Stock and (y) pro rata dividends or distributions on Common Stock of Restricted Subsidiaries held by minority stockholders) held by Persons other than the Company or any of its Restricted Subsidiaries, (ii) purchase, redeem, retire or otherwise acquire for value any shares of Capital Stock of (A) the Company or an Unrestricted Subsidiary (including options, warrants or other rights to acquire such shares of Capital Stock) held by any Person or (B) a Restricted Subsidiary (including options, warrants or other rights to acquire such shares of Capital Stock) held by any Affiliate of the Company (other than a Wholly Owned Restricted Subsidiary) or any holder (or any Affiliate of such holder) of 5% or more of the Capital Stock of the Company, (iii) make any voluntary or optional principal payment, or voluntary or optional redemption, repurchase, defeasance, or other acquisition or retirement for value, of Indebtedness of the Company that is subordinated in right of payment to the Old Notes or (iv) make any Investment, other than a Permitted Investment, in any Person (such payments or any other actions described in clauses (i) through (iv) above being collectively "Restricted Payments") if, at the time of, and after giving effect to, the proposed Restricted Payment: (A) a Default or Event of Default shall have occurred and be continuing, (B) the Company could not Incur at least $1.00 of Indebtedness under the first paragraph of the "Limitation on Indebtedness" covenant or (C) the aggregate amount of all Restricted Payments (the amount, if other than in cash, to be determined in good faith by the Board of Directors, whose determination shall be conclusive and evidenced by a Board Resolution) made after the Closing Date shall exceed the sum of (1) the aggregate amount of the Consolidated EBITDA (or, if Consolidated EBITDA is negative, minus the amount by which Consolidated EBITDA is less than zero) less 1.5 times Consolidated Interest Expense, in each case accrued on a cumulative basis during the period (taken as one accounting period) beginning on the first day of the fiscal quarter immediately following the Closing Date and ending on the last day of the last fiscal quarter preceding the Transaction Date for which reports have been filed with the Commission or provided to the Trustee pursuant to the "Commission Reports and Reports to Holders" covenant plus (2) the aggregate Net Cash Proceeds received by the Company after the Closing Date from the issuance and sale permitted by the Indenture of its Capital Stock (other than Disqualified Stock) to a Person who is not a Subsidiary of the Company, including an issuance or sale permitted by the Indenture of Indebtedness of the Company for cash subsequent to the Closing Date upon the conversion of such Indebtedness into Capital Stock (other than Disqualified Stock) of the Company, or from the issuance to a Person who is not a Subsidiary of the Company of any options, warrants or other rights to acquire Capital Stock of the Company (in each case, exclusive of any Disqualified Stock or any options, warrants or other rights that are redeemable at the option of the holder, or are required to be redeemed, prior to the Stated Maturity of the Old Notes), in each case except to the extent such Net Cash Proceeds are used to Incur Indebtedness pursuant to clause (viii) of the second paragraph under the "Limitation on Indebtedness" covenant plus (3) an amount equal to the net reduction in Investments (other than reductions in Permitted Investments) in any Person resulting from payments of interest on Indebtedness, dividends, distributions, repayments of loans or advances, or other transfers of assets, in each case to the Company or any Restricted Subsidiary or from the Net Cash Proceeds from the sale of any such Investment (except, in each case, to the extent any such payment or proceeds are included in the calculation of Adjusted Consolidated Net Income), or from redesignations of Unrestricted Subsidiaries as Restricted Subsidiaries (valued in each case as provided in the definition of "Investments"), not to exceed, in each case, the amount of Investments previously made by the Company or any Restricted Subsidiary in such Person or Unrestricted Subsidiary. The foregoing provision shall not be violated by reason of: (i) the payment of any dividend within 60 days after the date of declaration thereof if, at said date of declaration, such payment would comply with the foregoing paragraph; (ii) the redemption, repurchase, defeasance or other acquisition or retirement for value of Indebtedness that is subordinated in right of payment to the Old Notes, including premium, if any, and accrued and unpaid interest, with the proceeds of, or in exchange for, Indebtedness Incurred under clause (iii) of the second paragraph of part (a) of the "Limitation on Indebtedness" covenant; (iii) the repurchase, redemption or other acquisition of Capital Stock of the Company or an Unrestricted Subsidiary (or options, warrants or other rights to acquire such Capital Stock) in exchange for, or out of the proceeds of a substantially concurrent offering of, shares of Capital 81 Stock (other than Disqualified Stock) of the Company (or options, warrants or other rights to acquire such Capital Stock); (iv) the making of any principal payment or the repurchase, redemption, retirement, defeasance or other acquisition for value of Indebtedness of the Company which is subordinated in right of payment to the Old Notes in exchange for, or out of the proceeds of a substantially concurrent offering of shares of the Capital Stock (other than Disqualified Stock) of the Company (or options, warrants or other rights to acquire such Capital Stock); (v) payments or distributions to dissenting stockholders pursuant to applicable law, pursuant to or in connection with a consolidation, merger or transfer of assets that complies with the provisions of the Indenture applicable to mergers, consolidations and transfers of all or substantially all of the property and assets of the Company; (vi) Investments in any Person the primary business of which is related, ancillary or complementary to the business of the Company and its Restricted Subsidiaries on the date of such Investments; provided that the aggregate amount of Investments made pursuant to this clause (vi) does not exceed the sum of (x) $30 million plus (y) the amount of Net Cash Proceeds received by the Company after the Closing Date from the sale of its Capital Stock (other than Disqualified Stock) to a Person who is not a Subsidiary of the Company, except to the extent such Net Cash Proceeds are used to Incur Indebtedness pursuant to clause (viii) under the "Limitation on Indebtedness" covenant or to make Restricted Payments pursuant to clause (C)(2) of the first paragraph, or clause (iii) or (iv) of this paragraph, of this "Limitation on Restricted Payments" covenant, plus (z) the net reduction in Investments made pursuant to this clause (vi) resulting from distributions on or repayments of such Investments or from the Net Cash Proceeds from the sale of any such Investment (except in each case to the extent any such payment or proceeds is included in the calculation of Consolidated EBITDA) or from such Person becoming a Restricted Subsidiary (valued in each case as provided in the definition of "Investments"); provided that the net reduction in any Investment shall not exceed the amount of such Investment; (vii) Investments acquired in exchange for Capital Stock (other than Disqualified Stock) of the Company; (viii) the declaration or payment of dividends on the Common Stock of the Company following a Public Equity Offering of such Common Stock, of up to 6% per annum of the Net Cash Proceeds received by the Company in such Public Equity Offering; (ix) repurchases of Warrants pursuant to a Repurchase Offer; (x) any purchase of any fractional share of Common Stock of the Company in connection with an exercise of the Warrants; (xi) Investments in any Person the primary business of which is located outside the United States and is related, ancillary or complementary to the business of the Company and its Restricted Subsidiaries on the date of such Investments; provided that the aggregate amount of Investments pursuant to this clause (xi) does not exceed (x) $5 million plus (y) the net reduction in Investments made pursuant to this clause (xi) resulting from distributions on or repayments of such Investments or from the Net Cash Proceeds from the sale of any such Investment (except in each case to the extent any such payment or proceeds is included in the calculation of Consolidated EBITDA) or from such Person becoming a Restricted Subsidiary (valued in each case as provided in the definition of "Investments"), provided that the net reduction in any Investment shall not exceed the amount of such Investment; or (xii) repurchases of Capital Stock of the Company from employees, former employees, directors or former directors of the Company (or their estates or beneficiaries under their estates); upon their death, disability, retirement, or termination of employment; provided that the aggregate amount of such repurchases shall not exceed $500,000 in any calendar year or $3 million in the aggregate; provided that, except in the case of clauses (i) and (iii), no Default or Event of Default shall have occurred and be continuing or occur as a consequence of the actions or payments set forth therein. Each Restricted Payment permitted pursuant to the preceding paragraph (other than the Restricted Payment referred to in clause (ii) thereof, an exchange of Capital Stock for Capital Stock or Indebtedness referred to in clause (iii) or (iv) thereof and an Investment referred to in clause (vi) thereof), and the Net Cash Proceeds from any issuance of Capital Stock referred to in clauses (iii) and (iv) thereof, shall be included in calculating whether the conditions of clause (C) of the first paragraph of this "Limitation on Restricted Payments" covenant have been met with respect to any subsequent Restricted Payments. In the event the proceeds of an issuance of Capital Stock of the Company are used for the redemption, repurchase or other acquisition of the Old Notes, or Indebtedness that is pari passu with the Old Notes, then the Net Cash Proceeds of such issuance shall be included in clause (C) of the first paragraph of this "Limitation on Restricted Payments" covenant only to the extent such proceeds are not used for such redemption, repurchase or other acquisition of Indebtedness. 82 Limitation on Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries. The Company will not, and will not permit any Restricted Subsidiary to, create or otherwise cause or suffer to exist or become effective any consensual encumbrance or restriction of any kind on the ability of any Restricted Subsidiary to (i) pay dividends or make any other distributions permitted by applicable law on any Capital Stock of such Restricted Subsidiary owned by the Company or any other Restricted Subsidiary, (ii) pay any Indebtedness owed to the Company or any other Restricted Subsidiary, (iii) make loans or advances to the Company or any other Restricted Subsidiary or (iv) transfer any of its property or assets to the Company or any other Restricted Subsidiary. The foregoing provisions shall not restrict any encumbrances or restrictions: (i) existing on the Closing Date in the Indenture or any other agreements in effect on the Closing Date, and any extensions, refinancings, renewals or replacements of such agreements; provided that the encumbrances and restrictions in any such extensions, refinancings, renewals or replacements are no less favorable in any material respect to the Holders than those encumbrances or restrictions that are then in effect and that are being extended, refinanced, renewed or replaced; (ii) existing under or by reason of applicable law; (iii) existing with respect to any Person or the property or assets of such Person acquired by the Company or any Restricted Subsidiary, existing at the time of such acquisition and not incurred in contemplation thereof, which encumbrances or restrictions are not applicable to any Person or the property or assets of any Person other than such Person or the property or assets of such Person so acquired; (iv) in the case of clause (iv) of the first paragraph of this "Limitation on Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries" covenant, (A) that restrict in a customary manner the subletting, assignment or transfer of any property or asset that is a lease, license, conveyance or contract or similar property or asset, (B) existing by virtue of any transfer of, agreement to transfer, option or right with respect to, or Lien on, any property or assets of the Company or any Restricted Subsidiary not otherwise prohibited by the Indenture or (C) arising or agreed to in the ordinary course of business, not relating to any Indebtedness, and that do not, individually or in the aggregate, detract from the value of property or assets of the Company or any Restricted Subsidiary in any manner material to the Company or any Restricted Subsidiary; (v) with respect to a Restricted Subsidiary and imposed pursuant to an agreement that has been entered into for the sale or disposition of all or substantially all of the Capital Stock of, or property and assets of, such Restricted Subsidiary; or (vi) contained in the terms of any Indebtedness or any agreement pursuant to which such Indebtedness was issued if (A) the encumbrance or restriction is not materially more disadvantageous to the Holders of the Old Notes than is customary in comparable financings (as determined by the Company) and (B) the Company determines that any such encumbrance or restriction is not reasonably expected to materially affect the Company's ability to make principal or interest payments on the Old Notes. Nothing contained in this "Limitation on Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries" covenant shall prevent the Company or any Restricted Subsidiary from (1) creating, incurring, assuming or suffering to exist any Liens otherwise permitted in the "Limitation on Liens" covenant or (2) restricting the sale or other disposition of property or assets of the Company or any of its Restricted Subsidiaries that secure Indebtedness of the Company or any of its Restricted Subsidiaries. Limitation on the Issuance and Sale of Capital Stock of Restricted Subsidiaries. The Company will not sell, and will not permit any Restricted Subsidiary, directly or indirectly, to issue or sell, any shares of Capital Stock of a Restricted Subsidiary (including options, warrants or other rights to purchase shares of such Capital Stock) except (i) to the Company or a Wholly Owned Restricted Subsidiary; (ii) issuances of director's qualifying shares or sales to foreign nationals of shares of Capital Stock of foreign Restricted Subsidiaries, to the extent required by applicable law; (iii) if, immediately after giving effect to such issuance or sale, such Restricted Subsidiary would no longer constitute a Restricted Subsidiary and any Investment in such Person remaining after giving effect to such issuance or sale would have been permitted to be made under the "Limitation on Restricted Payments" covenant if made on the date of such issuance or sale or (iv) issuances or sales of Common Stock of a Restricted Subsidiary; provided that the Company or such Restricted Subsidiary applies the Net Cash Proceeds, if any, of any such sale in accordance with clause (A) or (B) of the "Limitation on Asset Sales" covenant described below. 83 Limitation on Issuance of Guarantees by Restricted Subsidiaries. The Company will not permit any Restricted Subsidiary to (x) directly or indirectly, Guarantee any Indebtedness of the Company which is pari passu with or subordinate in right of payment to the Old Notes ("Guaranteed Indebtedness") or (y) issue any Debt Securities, unless (i) such Restricted Subsidiary simultaneously executes and delivers a supplemental indenture to the Indenture providing for a Guarantee (a "Subsidiary Guarantee") of payment of the Old Notes by such Restricted Subsidiary and (ii) such Restricted Subsidiary waives and will not in any manner whatsoever claim or take the benefit or advantage of, any rights of reimbursement, indemnity or subrogation or any other rights against the Company or any other Restricted Subsidiary as a result of any payment by such Restricted Subsidiary under its Subsidiary Guarantee; provided that this paragraph shall not be applicable to any Guarantee of any Restricted Subsidiary that existed at the time such Person became a Restricted Subsidiary and was not Incurred in connection with, or in contemplation of, such Person becoming a Restricted Subsidiary. If the Guaranteed Indebtedness is (A) pari passu with the Old Notes, then the Guarantee of such Guaranteed Indebtedness shall be pari passu with, or subordinated to, the Subsidiary Guarantee or (B) subordinated to the Old Notes, then the Guarantee of such Guaranteed Indebtedness shall be subordinated to the Subsidiary Guarantee at least to the extent that the Guaranteed Indebtedness is subordinated to the Old Notes. Notwithstanding the foregoing, any Subsidiary Guarantee by a Restricted Subsidiary may provide by its terms that it shall be automatically and unconditionally released and discharged upon (i) any sale, exchange or transfer, to any Person not an Affiliate of the Company, of all of the Company's and each Restricted Subsidiary's Capital Stock in, or all or substantially all the assets of, such Restricted Subsidiary (which sale, exchange or transfer is not prohibited by the Indenture) or (ii) the release or discharge of the Guarantee which resulted in the creation of such Subsidiary Guarantee, except a discharge or release by or as a result of payment under such Guarantee. Limitation on Transactions with Shareholders and Affiliates. The Company will not, and will not permit any Restricted Subsidiary to, directly or indirectly, enter into, renew or extend any transaction (including, without limitation, the purchase, sale, lease or exchange of property or assets, or the rendering of any service) with any holder (or any Affiliate of such holder) of 5% or more of any class of Capital Stock of the Company or with any Affiliate of the Company or any Restricted Subsidiary, except upon fair and reasonable terms no less favorable to the Company or such Restricted Subsidiary than could be obtained, at the time of such transaction or, if such transaction is pursuant to a written agreement, at the time of the execution of the agreement providing therefor, in a comparable arm's-length transaction with a Person that is not such a holder or an Affiliate. The foregoing limitation does not limit, and shall not apply to (i) transactions (A) approved by a majority of the disinterested members of the Board of Directors or (B) for which the Company or a Restricted Subsidiary delivers to the Trustee a written opinion of a nationally recognized investment banking firm stating that the transaction is fair to the Company or such Restricted Subsidiary from a financial point of view; (ii) any transaction solely between the Company and any of its Wholly Owned Restricted Subsidiaries or solely between Wholly Owned Restricted Subsidiaries; (iii) the payment of reasonable and customary regular fees to directors of the Company who are not employees of the Company; (iv) any payments or other transactions pursuant to any tax-sharing agreement between the Company and any other Person with which the Company files a consolidated tax return or with which the Company is part of a consolidated group for tax purposes; (v) transactions arising under the SRTC Transaction (as defined), including certain payments, advances and prepayments of the Company to SRTC contemplated thereby, the Exclusive Purchase and Sale and Technology License Agreement dated as of November 21, 1995, by and between Sarnoff Real Time Corporation and the Company or the Agreement dated October 30, 1995, between Sarnoff Corporation and the Company; (vi) transactions between the Company or any of its Restricted Subsidiaries and a non-Wholly Owned Restricted Subsidiary or an Unrestricted Subsidiary on a cost, rather than fair market value, basis, or on other terms of the kind customarily employed to allocate charges among members of a consolidated group of entities, in any such case that are fair and reasonable to the Company or such Restricted Subsidiary; provided that the aggregate fair market value of the consideration subject to such transactions does not exceed $1 million in any calendar year; (vii) the licensing or sublicensing of use of any intellectual property by the Company or any Restricted Subsidiary to any Person for use of such intellectual property outside the United States; provided such licensing 84 or sublicensing of such intellectual property shall not adversely affect the Company's and its Restricted Subsidiaries' access to such intellectual property for the conduct of their respective businesses or (viii) any Restricted Payments not prohibited by the "Limitation on Restricted Payments" covenant. Notwithstanding the foregoing, any transaction or series of related transactions covered by the first paragraph of this "Limitation on Transactions with Shareholders and Affiliates" covenant and not covered by clauses (ii) through (viii) of this paragraph, (a) the aggregate amount of which exceeds $2 million in value, must be approved or determined to be fair in the manner provided for in clause (i)(A) or (B) above and (b) the aggregate amount of which exceeds $10 million in value, must be determined to be fair in the manner provided for in clause (i)(B) above. Limitation on Liens. The Company will not, and will not permit any Restricted Subsidiary to, create, incur, assume or suffer to exist any Lien on any of its assets or properties of any character, or any shares of Capital Stock or Indebtedness of any Restricted Subsidiary, without making effective provision for all of the Old Notes and all other amounts due under the Indenture to be directly secured equally and ratably with (or, if the obligation or liability to be secured by such Lien is subordinated in right of payment to the Old Notes, prior to) the obligation or liability secured by such Lien. The foregoing limitation does not apply to (i) Liens existing on the Closing Date; (ii) Liens granted after the Closing Date on any assets or Capital Stock of the Company or its Restricted Subsidiaries created in favor of the Holders; (iii) Liens with respect to the assets of a Restricted Subsidiary granted by such Restricted Subsidiary to the Company or a Wholly Owned Restricted Subsidiary to secure Indebtedness owing to the Company or such other Restricted Subsidiary; (iv) Liens securing Indebtedness which is Incurred to refinance secured Indebtedness which is permitted to be Incurred under clause (iii) of the second paragraph of the "Limitation on Indebtedness" covenant; provided that such Liens do not extend to or cover any property or assets of the Company or any Restricted Subsidiary other than the property or assets securing the Indebtedness being refinanced; (v) Liens on the Capital Stock of, or any property or assets of, a Restricted Subsidiary securing Indebtedness of such Restricted Subsidiary permitted under the "Limitation on Indebtedness" covenant; (vi) Liens securing obligations under revolving credit, working capital or similar facilities Incurred under clause (i), or Indebtedness under clause (vii), of the second paragraph of the "Limitation on Indebtedness" covenant; or (vii) Permitted Liens. Limitation on Sale and Leaseback Transactions. The Company will not, and will not permit any Restricted Subsidiary to, enter into any Sale and Leaseback Transaction. The foregoing restriction does not apply to any Sale and Leaseback Transaction if (i) the lease is for a period, including renewal rights, of not in excess of three years; (ii) the lease secures or relates to industrial revenue or pollution control bonds; (iii) the transaction is solely between the Company and any Wholly Owned Restricted Subsidiary or solely between Wholly Owned Restricted Subsidiaries; or (iv) the Company or such Restricted Subsidiary, within 12 months after the sale or transfer of any assets or properties is completed, applies an amount not less than the net proceeds received from such sale in accordance with clause (A) or (B) of the first paragraph of the "Limitation on Asset Sales" covenant described below. Limitation on Asset Sales. The Company will not, and will not permit any Restricted Subsidiary to, consummate any Asset Sale, unless (i) the consideration received by the Company or such Restricted Subsidiary is at least equal to the fair market value of the assets sold or disposed of and (ii) at least 85% of the consideration received consists of cash or Temporary Cash Investments. In the event and to the extent that the Net Cash Proceeds received by the Company or any of its Restricted Subsidiaries from one or more Asset Sales occurring on or after the Closing Date in any period of 12 consecutive months exceed 10% of Adjusted Consolidated Net Tangible Assets (determined as of the date closest to the commencement of such 12-month period for which a consolidated balance sheet of the Company and its Subsidiaries has been filed with the Commission or provided to the Trustee pursuant to the "Commission Reports and Reports to Holders" covenant), then the Company shall or shall cause the relevant Restricted Subsidiary to (i) within 12 months after the date Net Cash Proceeds so received exceed 10% of Adjusted Consolidated Net Tangible Assets (A) apply an amount equal to such excess Net Cash Proceeds to permanently repay unsubordinated Indebtedness of the Company, or any Restricted 85 Subsidiary providing a Subsidiary Guarantee pursuant to the "Limitation on Issuances of Guarantees by Restricted Subsidiaries" covenant described above or Indebtedness of any other Restricted Subsidiary, in each case owing to a Person other than the Company or any of its Restricted Subsidiaries or (B) invest an equal amount, or the amount not so applied pursuant to clause (A) (or enter into a definitive agreement committing to so invest within 12 months after the date of such agreement), in property or assets (other than current assets) of a nature or type or that are used in a business (or in a Person having property and assets of a nature or type, or engaged in a business) similar or related to the nature or type of the property and assets of, or the business of, the Company and its Restricted Subsidiaries existing on the date of such investment and (ii) apply (no later than the end of the 12-month period referred to in clause (i)) such excess Net Cash Proceeds (to the extent not applied (or committed to be applied) pursuant to clause (i)) as provided in the following paragraph of this "Limitation on Asset Sales" covenant. The amount of such excess Net Cash Proceeds required to be applied (or to be committed to be applied) during such 12-month period as set forth in clause (i) of the preceding sentence and not applied as so required by the end of such period shall constitute "Excess Proceeds." If, as of the first day of any calendar month, the aggregate amount of Excess Proceeds not theretofore subject to an Offer to Purchase pursuant to this "Limitation on Asset Sales" covenant totals at least $5 million, the Company must commence, not later than the fifteenth Business Day of such month, and consummate an Offer to Purchase from the Holders on a pro rata basis an aggregate Accreted Value of Old Notes equal to the Excess Proceeds on such date, at a purchase price equal to 100% of the Accreted Value of the Old Notes on the relevant Payment Date, plus, in each case, accrued interest, if any, to the Payment Date. Repurchase of Old Notes upon a Change of Control. The Company must commence, within 30 days after the occurrence of a Change of Control, and thereafter consummate an Offer to Purchase for all Old Notes then outstanding, at a purchase price equal to 101% of the Accreted Value thereof on the relevant Payment Date, plus accrued interest, if any, to the Payment Date. There can be no assurance that the Company will have sufficient funds available at the time of any Change of Control to make any debt payment (including repurchases of Old Notes) required by the foregoing covenant (as well as may be contained in other securities of the Company which might be outstanding at the time). The above covenant requiring the Company to repurchase the Old Notes will, unless consents are obtained, require the Company to repay all indebtedness then outstanding which by its terms would prohibit such Old Note repurchase, either prior to or concurrently with such Old Note repurchase. Commission Reports and Reports to Holders. At all times from and after the earlier of (i) the date of the commencement of an Exchange Offer or the effectiveness of the Shelf Registration Statement (the "Registration") and (ii) February 19, 1999, in either case, whether or not the Company is then required to file reports with the Commission, the Company shall file with the Commission all such reports and other information as it would be required to file with the Commission by Section 13(a) or 15(d) under the Exchange Act if it were subject thereto. The Company shall supply the Trustee and each Holder or shall supply to the Trustee for forwarding to each such Holder, without cost to such Holder, copies of such reports and other information. At all times prior to the earlier of the date of the Registration and the date that is one year after the Closing Date, the Company shall, at its cost, deliver to each Holder (or to the Trustee, for forwarding to such Holder) quarterly and annual reports substantially equivalent to those which would be required by the Exchange Act. In addition, at all times prior to the Registration, upon the request of any Holder or any prospective purchaser of the Old Notes designated by a Holder, the Company shall supply to such Holder or such prospective purchaser the information required under Rule 144A under the Securities Act. EVENTS OF DEFAULT The following events are defined as "Events of Default" in the Indenture: (a) default in the payment of principal of (or premium, if any, on) any Old Note when the same becomes due and payable at maturity, upon acceleration, redemption or otherwise; (b) default in the payment of interest on any Old Note when the same becomes due and payable, and such default continues for a period of 30 days; (c) default in the performance or 86 breach of the provisions of the Indenture applicable to mergers, consolidations and transfers of all or substantially all of the assets of the Company or the failure to make or consummate an Offer to Purchase in accordance with the "Limitation on Asset Sales" or "Repurchase of Old Notes upon a Change of Control" covenant; (d) the Company defaults in the performance of or breaches any other covenant or agreement of the Company in the Indenture or under the Old Notes (other than a default specified in clause (a), (b) or (c) above) and such default or breach continues for a period of 30 consecutive days after written notice by the Trustee or the Holders of 25% or more in aggregate principal amount at maturity of the Old Notes; (e) there occurs with respect to any issue or issues of Indebtedness of the Company or any Significant Subsidiary having an outstanding principal amount of $10 million or more in the aggregate for all such issues of all such Persons, whether such Indebtedness now exists or shall hereafter be created, (I) an event of default that has caused the holder thereof to declare such Indebtedness to be due and payable prior to its Stated Maturity and such Indebtedness has not been discharged in full or such acceleration has not been rescinded or annulled within 30 days of such acceleration and/or (II) the failure to make a principal payment at the final (but not any interim) fixed maturity and such defaulted payment shall not have been made, waived or extended within 30 days of such payment default; (f) any final judgment or order (not covered by insurance) for the payment of money in excess of $10 million in the aggregate for all such final judgments or orders against all such Persons (treating any deductibles, self-insurance or retention as not so covered) shall be rendered against the Company or any Significant Subsidiary and shall not be paid or discharged, and there shall be any period of 30 consecutive days following entry of the final judgment or order that causes the aggregate amount for all such final judgments or orders outstanding and not paid or discharged against all such Persons to exceed $10 million during which a stay of enforcement of such final judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; (g) a court having jurisdiction in the premises enters a decree or order for (A) relief in respect of the Company or any Significant Subsidiary in an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, (B) appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official of the Company or any Significant Subsidiary or for all or substantially all of the property and assets of the Company or any Significant Subsidiary or (C) the winding up or liquidation of the affairs of the Company or any Significant Subsidiary and, in each case, such decree or order shall remain unstayed and in effect for a period of 60 consecutive days; or (h) the Company or any Significant Subsidiary (A) commences a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or consents to the entry of an order for relief in an involuntary case under any such law, (B) consents to the appointment of or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official of the Company or any Significant Subsidiary or for all or substantially all of the property and assets of the Company or any Significant Subsidiary or (C) effects any general assignment for the benefit of creditors. If an Event of Default (other than an Event of Default specified in clause (g) or (h) above that occurs with respect to the Company) occurs and is continuing under the Indenture, the Trustee or the Holders of at least 25% in aggregate principal amount of the Old Notes then outstanding, by written notice to the Company (and to the Trustee if such notice is given by the Holders), may, and the Trustee at the request of such Holders shall, declare the Accreted Value, premium, if any, and accrued interest on the Old Notes to be immediately due and payable. Upon a declaration of acceleration, such Accreted Value premium, if any, and accrued interest shall be immediately due and payable. In the event of a declaration of acceleration because an Event of Default set forth in clause (e) above has occurred and is continuing, such declaration of acceleration shall be automatically rescinded and annulled if the event of default triggering such Event of Default pursuant to clause (e) shall be remedied or cured by the Company or the relevant Significant Subsidiary or waived by the holders of the relevant Indebtedness within 60 days after the declaration of acceleration with respect thereto. If an Event of Default specified in clause (g) or (h) above occurs with respect to the Company, the Accreted Value of, premium, if any, and accrued interest on the Old Notes then outstanding shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Holder. The Holders of at least a majority in aggregate principal amount at maturity of the outstanding Old Notes, by written notice to the Company and to the Trustee, may waive all past defaults and rescind and annul a declaration of acceleration and its consequences if (i) all existing Events of Default, other than the nonpayment of the Accreted Value of, premium, if any, and interest on the Old Notes that have become due solely by such declaration of acceleration, 87 have been cured or waived and (ii) the rescission would not conflict with any judgment or decree of a court of competent jurisdiction. For information as to the waiver of defaults, See "-- Modification and Waiver." The Holders of at least a majority in aggregate principal amount at maturity of the outstanding Old Notes may direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on the Trustee. However, the Trustee may refuse to follow any direction that conflicts with law or the Indenture, that may involve the Trustee in personal liability, or that the Trustee determines in good faith may be unduly prejudicial to the rights of Holders of Old Notes not joining in the giving of such direction and may take any other action it deems proper that is not inconsistent with any such direction received from Holders of Old Notes. A Holder may not pursue any remedy with respect to the Indenture or the Old Notes unless: (i) the Holder gives the Trustee written notice of a continuing Event of Default; (ii) the Holders of at least 25% in aggregate principal amount at maturity of outstanding Old Notes make a written request to the Trustee to pursue the remedy; (iii) such Holder or Holders offer the Trustee indemnity satisfactory to the Trustee against any costs, liability or expense; (iv) the Trustee does not comply with the request within 60 days after receipt of the request and the offer of indemnity; and (v) during such 60-day period, the Holders of a majority in aggregate principal amount at maturity of the outstanding Old Notes do not give the Trustee a direction that is inconsistent with the request. However, such limitations do not apply to the right of any Holder of an Old Note to receive payment of the Accreted Value of, premium, if any, or interest on, such Old Note or to bring suit for the enforcement of any such payment, on or after the due date expressed in the Old Notes, which right shall not be impaired or affected without the consent of the Holder. The Indenture requires certain officers of the Company to certify, on or before a date not more than 90 days after the end of each fiscal year, that a review has been conducted of the activities of the Company and its Restricted Subsidiaries and the Company's and its Restricted Subsidiaries' performance under the Indenture and that the Company has fulfilled all obligations thereunder, or, if there has been a default in the fulfillment of any such obligation, specifying each such default and the nature and status thereof. The Company is obligated to notify the Trustee of any default or defaults in the performance of any covenants or agreements under the Indenture. CONSOLIDATION, MERGER AND SALE OF ASSETS The Company will not consolidate with, merge with or into, or sell, convey, transfer, lease or otherwise dispose of all or substantially all of its property and assets (as an entirety or substantially an entirety in one transaction or a series of related transactions) to, any Person or permit any Person to merge with or into the Company unless: (i) the Company shall be the continuing Person, or the Person (if other than the Company) formed by such consolidation or into which the Company is merged or that acquired or leased such property and assets of the Company shall be a corporation organized and validly existing under the laws of the United States of America or any jurisdiction thereof and shall expressly assume, by a supplemental indenture, executed and delivered to the Trustee, all of the obligations of the Company on all of the Old Notes and under the Indenture; (ii) immediately after giving effect to such transaction, no Default or Event of Default shall have occurred and be continuing; (iii) immediately after giving effect to such transaction on a pro forma basis, the Company or any Person becoming the successor obligor of the Old Notes shall have a Consolidated Net Worth equal to or greater than the Consolidated Net Worth of the Company immediately prior to such transaction; (iv) immediately after giving effect to such transaction on a pro forma basis, the Company, or any Person becoming the successor obligor of the Old Notes, as the case may be, shall have a Consolidated Leverage Ratio not greater than the Consolidated Leverage Ratio of the Company immediately prior to the transaction; provided that this clause (iv) shall not apply to a consolidation or merger with or into a Wholly Owned Restricted Subsidiary with a positive net worth; provided further that, in connection with any such merger or consolidation, no consideration (other than Capital Stock (other than Disqualified Stock) in the surviving Person or the Company) shall be issued or distributed to the stockholders of the Company; and (v) the Company delivers to the Trustee an Officers' Certificate (attaching the arithmetic computations to demonstrate compliance with clauses (iii) and (iv) above) and an Opinion of Counsel, in each case stating that such consolidation, merger or transfer and such supplemental indenture comply with this provision and that all conditions precedent provided for herein relating to such 88 transaction have been complied with; provided, however, that clauses (iii) and (iv) above do not apply if, in the good faith determination of the Board of Directors of the Company, whose determination shall be evidenced by a Board Resolution, the principal purpose of such transaction is to change the state of incorporation of the Company; and provided further that any such transaction shall not have as one of its purposes the evasion of the foregoing limitations. DEFEASANCE Defeasance and Discharge. The Indenture provides that the Company will be deemed to have paid and will be discharged from any and all obligations in respect of the Old Notes on the 123rd day after the deposit referred to below, and the provisions of the Indenture will no longer be in effect with respect to the Old Notes (except for, among other matters, certain obligations to register the transfer or exchange of the Old Notes, to replace stolen, lost or mutilated Old Notes, to maintain paying agencies and to hold monies for payment in trust) if, among other things, (A) the Company has deposited with the Trustee, in trust, money and/or U.S. Government Obligations that through the payment of interest and principal in respect thereof in accordance with their terms will provide money in an amount sufficient to pay the principal of, premium, if any, and accrued interest on the Old Notes on the Stated Maturity of such payments in accordance with the terms of the Indenture and the Old Notes, (B) the Company has delivered to the Trustee (i) either (x) an Opinion of Counsel to the effect that Holders will not recognize income, gain or loss for federal income tax purposes as a result of the Company's exercise of its option under this "Defeasance" provision and will be subject to federal income tax on the same amount and in the same manner and at the same times as would have been the case if such deposit, defeasance and discharge had not occurred, which Opinion of Counsel must be based upon (and accompanied by a copy of) a ruling of the Internal Revenue Service to the same effect unless there has been a change in applicable federal income tax law after the Closing Date such that a ruling is no longer required or (y) a ruling directed to the Trustee received from the Internal Revenue Service to the same effect as the aforementioned Opinion of Counsel and (ii) an Opinion of Counsel to the effect that the creation of the defeasance trust does not violate the Investment Company Act of 1940 and after the passage of 123 days following the deposit, the trust fund will not be subject to the effect of Section 547 of the United States Bankruptcy Code or Section 15 of the New York Debtor and Creditor Law, (C) immediately after giving effect to such deposit on a pro forma basis, no Event of Default, or event that after the giving of notice or lapse of time or both would become an Event of Default, shall have occurred and be continuing on the date of such deposit or during the period ending on the 123rd day after the date of such deposit, and such deposit shall not result in a breach or violation of, or constitute a default under, any other agreement or instrument to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries is bound and (D) if at such time the Old Notes are listed on a national securities exchange, the Company has delivered to the Trustee an Opinion of Counsel to the effect that the Notes will not be delisted as a result of such deposit, defeasance and discharge. Defeasance of Certain Covenants and Certain Events of Default. The Indenture further provides that the provisions of the Indenture will no longer be in effect with respect to clauses (iii) and (iv) under "Consolidation, Merger and Sale of Assets" and all the covenants described herein under "Covenants," clause (c) under "Events of Default" with respect to such clauses (iii) and (iv) under "Consolidation, Merger and Sale of Assets," clause (d) under "Events of Default" with respect to such other covenants and clauses (e) and (f) under "Events of Default" shall be deemed not to be Events of Default upon, among other things, the deposit with the Trustee, in trust, of money and/or U.S. Government Obligations that through the payment of interest and principal in respect thereof in accordance with their terms will provide money in an amount sufficient to pay the principal of, premium, if any, and accrued interest on the Old Notes on the Stated Maturity of such payments in accordance with the terms of the Indenture and the Old Notes, the satisfaction of the provisions described in clauses (B)(ii), (C) and (D) of the preceding paragraph and the delivery by the Company to the Trustee of an Opinion of Counsel to the effect that, among other things, the Holders will not recognize income, gain or loss for federal income tax purposes as a result of such deposit and defeasance of certain covenants and Events of Default and will be subject to federal income tax on the same amount and in the same manner and at the same times as would have been the case if such deposit and defeasance had not occurred. 89 Defeasance and Certain Other Events of Default. In the event the Company exercises its option to omit compliance with certain covenants and provisions of the Indenture with respect to the Old Notes as described in the immediately preceding paragraph and the Old Notes are declared due and payable because of the occurrence of an Event of Default that remains applicable, the amount of money and/or U.S. Government Obligations on deposit with the Trustee will be sufficient to pay amounts due on the Old Notes at the time of their Stated Maturity but may not be sufficient to pay amounts due on the Old Notes at the time of the acceleration resulting from such Event of Default. However, the Company will remain liable for such payments. MODIFICATION AND WAIVER Modifications and amendments of the Indenture may be made by the Company and the Trustee with the consent of the Holders of not less than a majority in aggregate principal amount at maturity of the outstanding Old Notes; provided, however, that no such modification or amendment may, without the consent of each Holder affected thereby, (i) change the Stated Maturity of the principal of, or any installment of interest on, any Old Note, (ii) reduce the Accreted Value or principal amount of, or premium, if any, or interest on, any Old Note, (iii) change the place or currency of payment of principal of, or premium, if any, or interest on, any Old Note, (iv) impair the right to institute suit for the enforcement of any payment on or after the Stated Maturity (or, in the case of a redemption, on or after the Redemption Date) of any Old Note, (v) reduce the above-stated percentage of outstanding Old Notes the consent of whose Holders is necessary to modify or amend the Indenture, (vi) waive a default in the payment of principal of, premium, if any, or interest on the Old Notes or (vii) reduce the percentage or aggregate principal amount of outstanding Old Notes the consent of whose Holders is necessary for waiver of compliance with certain provisions of the Indenture or for waiver of certain defaults. NO PERSONAL LIABILITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS, DIRECTORS, OR EMPLOYEES The Indenture provides that no recourse for the payment of the principal of, premium, if any, or interest on any of the Old Notes or for any claim based thereon or otherwise in respect thereof, and no recourse under or upon any obligation, covenant or agreement of the Company in the Indenture, or in any of the Old Notes or because of the creation of any Indebtedness represented thereby, shall be had against any incorporator, stockholder, officer, director, employee or controlling person of the Company or of any successor Person thereof. Each Holder, by accepting the Old Notes, waives and releases all such liability. CONCERNING THE TRUSTEE The Indenture provides that, except during the continuance of a Default, the Trustee will not be liable, except for the performance of such duties as are specifically set forth in such Indenture. If an Event of Default has occurred and is continuing, the Trustee will use the same degree of care and skill in its exercise of the rights and powers invested in it under the Indenture as a prudent person would exercise under the circumstances in the conduct of such person's own affairs. The Indenture and provisions of the Trust Indenture Act of 1939, as amended, incorporated by reference therein contain limitations on the rights of the Trustee, should it become a creditor of the Company, to obtain payment of claims in certain cases or to realize on certain property received by it in respect of any such claims, as security or otherwise. The Trustee is permitted to engage in other transactions; provided, however, that if it acquires any conflicting interest, it must eliminate such conflict or resign. DESCRIPTION OF THE NEW NOTES The terms of the New Notes will be identical in all material respects to those of the Old Notes, except that the New Notes (i) will have been registered under the Securities Act and therefore will not be subject to certain restrictions on transfer applicable to the Old Notes and (ii) will not be entitled to certain registration rights under the Registration Rights Agreement, including the provision for Additional Interest of up to 2.0% on the Old Notes. Holders of Old Notes should review the information set forth under "Prospectus Summary -- Certain Consequences of a Failure to Exchange Old Notes" and "-- Terms of New Notes." 90 DESCRIPTION OF CAPITAL STOCK The following summary of the terms of the Company's capital stock does not purport to be complete and is qualified in its entirety by reference to the actual terms of the capital stock contained in the Company's Amended and Restated Certificate of Incorporation. The Company's Amended and Restated Certificate of Incorporation (the "Certificate of Incorporation") authorizes the issuance of 65,000,000 shares of Common Stock and 30,000,000 shares of Preferred Stock. The following series of Common Stock have been designated in the Certificate of Incorporation: Class B Common Stock ("Class B Common") and Class C Common Stock ("Class C Common"). No shares of Class B Common are outstanding and none will be issued in the future. The following series of Preferred Stock have been designated in the Certificate of Incorporation: Series A Preferred Stock (the "Series A Preferred"), Series B Preferred Stock (the "Series B Preferred"), Series C Preferred Stock (the "Series C Preferred"), Series D Preferred Stock (the "Series D Preferred") and Series AA Preferred Stock (the "Series AA Preferred"). The Series A Preferred, Series B Preferred, Series C Preferred and Series D Preferred are collectively referred to herein as the "Preferred Stock." As of June 30, 1998, there were approximately 180 holders of record of Common Stock and 181 holders of record of Preferred Stock. The Common Stock and Preferred Stock each have a par value of $0.001 per share. The following table sets forth, with respect to each series of Preferred Stock and Common Stock as of June 30, 1998, the number of shares designated, the number of shares outstanding, the number of shares subject to outstanding options and warrants and the total fully diluted capitalization of the Company:
SHARES COMMON STOCK ISSUABLE OUTSTANDING ON A AUTHORIZED OUTSTANDING UNDER OPTIONS FULLY DILUTED, CLASS/SERIES SHARES SHARES AND WARRANTS(1) AS CONVERTED BASIS(2) ------------ ---------- ----------- --------------- --------------------- Preferred Stock Series A Preferred.... 205,600 205,600 -- 205,600 Series B Preferred.... 4,493,748 3,419,842 1,073,906 4,493,748 Series C Preferred.... 6,918,600 6,168,600 750,000 6,918,600 Series D Preferred.... 8,517,352 8,279,590 200,000 8,479,590 Series AA Preferred... 3,750,000 3,298,655 255,676 3,554,331 ---------- ---------- ---------- Total Preferred Stock.............. 21,372,287 2,279,582 23,651,869 ---------- ---------- ---------- Common Stock Common Stock.......... 59,142,628 16,342,808 11,813,517 28,156,325 Class B Common........ 2 -- -- -- Class C Common........ 857,370 857,370 -- 857,370 ---------- ---------- ---------- Total Common Stock.. 17,200,178 11,813,517 29,013,695 ---------- ---------- ---------- Total............. 38,572,465 14,093,099 52,665,564
- -------- (1) Preferred Stock total includes warrants to purchase Series B, Series C and Series D Preferred Stock at weighted average exercise prices of $1.45, $4.21 and $5.72, respectively. Common Stock total includes 4,762,800 shares issuable in connection with warrants at a weighted average exercise price of $0.04 per share, 4,975,820 shares issuable in connection with outstanding options under the 1995 Stock Plan at a weighted average exercise price of $1.14 per share and 2,074,897 shares available for future grant under the 1995 Stock Plan. (2) All shares of Preferred Stock are currently convertible into Common Stock on a one-for-one basis. 91 COMMON STOCK The holders of the Company's Common Stock are entitled to receive dividends when and if declared by the Board of Directors, provided that no dividend or distribution may be declared or paid on any shares of common stock unless dividends have been paid in an amount equal to or greater than the aggregate amount of such dividends for all shares of Common Stock into which the Preferred Stock is convertible and all dividend preferences of the Preferred Stock have been declared and set aside or paid. Upon liquidation, dissolution, merger or sale of all or substantially all of the assets of the Company (collectively, a "Liquidation"), subject to the prior rights of the Preferred Stock, the holders of Class C Common are entitled to be paid out of the assets available for distribution an amount equal to $0.82 per share plus all declared but unpaid dividends. Thereafter, the holders of the Common Stock are entitled to be paid out of the assets available for distribution an amount equal to $0.025 per share plus all declared but unpaid dividends, and thereafter the holders of Class B Common are entitled to be paid out of the assets available for distribution an amount equal to $5.00 per share. Thereafter, all remaining assets will be distributed ratably among the holders of Preferred and Common Stock based upon the number of shares of Common Stock then held by each holder on an as-converted basis. The holders of the Company's Common Stock are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders. The Company's common stock has no preemptive or other subscription rights, and there are no redemption or sinking fund provisions applicable to the Common Stock. No common stock other than the Class C Common has conversion rights. All outstanding shares of the Company's common stock are fully paid and non- assessable. The Class C Common is convertible by the holder at any time into Common Stock at an initial conversion price of $0.82 per share. The conversion price of the Class C Common is subject to adjustment for stock splits, stock dividends, consolidations, combinations, reclassifications, and other like events. The Class C Common is convertible into such number of shares of Common Stock as is determined by dividing $0.82 by the conversion price in effect at the time of conversion and multiplying the results by the number of shares to be converted. The Class C Common is automatically convertible into Common Stock in the event of the closing of a registered public offering of Common Stock at a price per share of at least $2.00 with aggregate proceeds of at least $10 million. PREFERRED STOCK The holders of Series A Preferred, Series B Preferred, Series C Preferred and Series D Preferred (the "Senior Preferred") are entitled to receive dividends in preference to the Company's common stock at a rate of $0.03, $0.055, $0.25 and $0.345 per share, respectively, per annum when and if declared by the Company's Board of Directors. Dividends on the Preferred Stock are not cumulative. Dividends or other distributions if paid must be paid in full to each series of Preferred in the following order of priority: Series D Preferred and Series C Preferred (on a pari passu basis), Series B Preferred and then Series A Preferred. Upon a Liquidation, the holders of Series A Preferred, Series B Preferred, Series C Preferred and Series D Preferred are entitled to receive in preference to the holders of common stock an amount equal to $0.50, $0.855, $4.205 and $5.72 per share, respectively, plus any declared but unpaid dividends. Payments made pursuant to a Liquidation must be made in full to each series of Preferred Stock in the following order of preference: Series D Preferred and Series C Preferred (on a pari passu basis), Series B Preferred and then Series A Preferred. Thereafter, subject to the liquidation rights of the Class C Common as described above, any remaining assets shall be distributed ratably among the holders of common stock and Preferred Stock on an as-converted basis. The Senior Preferred is convertible by the holder at any time into common stock at the rate of its initial conversion price divided by the conversion price then in effect. The initial conversion prices of the Series A Preferred, Series B Preferred, Series C Preferred and Series D Preferred are $0.50, $0.855, $4.205 and $5.72 per share, respectively. The conversion price of the Senior Preferred is subject to adjustment for stock splits, stock dividends, consolidations, combinations, reclassifications and other like events. The conversion prices of the Series B Preferred, Series C Preferred and Series D Preferred Stock may also be subject to adjustment for certain dilutive issues of stock at a price per share below the applicable conversion price of such respective series of 92 Preferred Stock, based on the weighted average dilution to such series. The Series A Preferred and Series B Preferred are automatically convertible into Common Stock in the event of the closing of a registered public offering of Common Stock at a price per share of at least $2.00 per share with aggregate net proceeds of at least $10 million, the Series C Preferred is automatically convertible into Common Stock at a price per share of at least $5.00 per share with aggregate net proceeds of at least $15 million and the Series D Preferred is automatically convertible into Common Stock at a price per share of at least $6.80 per share with aggregate net proceeds of at least $15 million. The Series AA Preferred ranks junior to the Senior Preferred with respect to dividends and liquidation preference. The holders of Series AA Preferred are entitled to receive dividends in preference to Common Stock at a rate of $0.39 per share per annum when and if declared by the Company's Board of Directors, provided that no dividend or distribution may be declared or paid on any shares of Series AA Preferred unless dividends have been paid in an amount equal to or greater than the aggregate amount of such dividends for all shares of Common Stock in which the Senior Preferred is convertible and all dividend preferences of the Senior Preferred have been declared and set aside or paid. Upon a Liquidation, the holders of Series AA Preferred will be entitled to receive in preference to the holders of Common Stock an amount equal to $6.50 plus any declared but unpaid dividends, provided that the liquidation preferences of the Senior Preferred have been paid in full to each series. The Series AA Preferred is convertible into Common Stock at the rate of its initial conversion price divided by the conversion price then in effect. The initial conversion price of the Series AA Preferred is $6.50. The conversion price of the Series AA Preferred is subject to adjustment for stock splits, stock dividends, consolidations, combinations, reclassifications and other like events. The Series AA Preferred is automatically convertible into Common Stock in the event of the closing of a registered public offering of Common Stock with aggregate net proceeds of at least $15 million. The Series AA Preferred is subject to restrictions contained in the Certificate of Incorporation. Until the earlier of (i) three years from the date of first share of Series AA Preferred is issued and (ii) the date of any sale, conveyance or disposition of all or substantially all of the assets of the Company or the effectuation by the Company of a transaction or series of related transactions in which more than 50% of the voting power of the Company is transferred (the "Non-Transferability Period"), the Series AA Preferred may not be sold or otherwise transferred in any manner by any holder of Series AA Preferred (a "Series AA Holder") other than (A) by will or intestacy to the Series AA Holder's Immediate Family, (B) with the prior written consent of the company, or (C) to a trust for the benefit of the Series AA Holder or the Series AA Holder's Immediate Family. "Immediate Family" as used herein shall mean spouse, lineal descendant or antecedent, father, mother, brother or sister. In addition, after the expiration of the Non-Transferability Period, before any Series AA Preferred held by a Series AA Holder or any transferee may be sold or otherwise transferred (including transfer by gift or operation of law), the Company or its assignee(s) shall have rights of first refusal to purchase the shares. Each share of Series AA Preferred is convertible, at the option of the holder thereof, at any time after the earlier of (i) the third anniversary of the date of issuance of such share and (ii) a sale, conveyance or disposition of all or substantially all of the assets of the Company or the effectuation by the Company of a transaction or series of related transactions in which more than 50% of the voting power of the Company is transferred (or earlier with the prior written consent of the Company) into an equal number of shares of Common Stock (subject to adjustments for stock splits, combinations and similar events). The holders of Preferred Stock are entitled to notice of any stockholders' meeting in accordance with the bylaws of the Company and are entitled to vote together with the holders of Common Stock as a class. The holders of Preferred Stock are entitled to the number of votes equal to the number of shares of Common Stock into which such shares are convertible. The Certificate of Incorporation does not contain any restriction on the purchase or redemption of shares by the Company while there is an arrearage in the payment of dividends. There are no sinking fund provisions applicable to the Preferred Stock. 93 UNDESIGNATED PREFERRED STOCK The Company is authorized to issue additional Preferred Stock with such designations, rights and preferences as may be determined from time to time by the Board of Directors; provided, however that any such Preferred Stock must be subordinate to the Series A Preferred, Series B Preferred, Series C Preferred and Series D Preferred. In the event of issuance, such Preferred Stock could be used, under certain circumstances, as a method of discouraging, delaying or preventing a change in control of the Company. REGISTRATION RIGHTS Pursuant to the Stockholder Rights Agreement, certain holders of outstanding shares of Common Stock and Preferred Stock holding an aggregate of shares of Common Stock on an as-converted basis (collectively, the "Holders") are entitled to certain rights with respect to the registration of the Common Stock issuable upon conversion of their shares ("Conversion Stock") under the Securities Act. If the Company proposes to register any of its securities under the Securities Act, the Holders are entitled to notice of such proposed registration and the opportunity to include shares of Conversion Stock therein; provided, however, that the Company and the underwriter of any such offering have the right to limit or completely exclude shares proposed to be registered in an initial public offering and to limit such shares to 25% of such registration thereafter. At any time, if the Holders of at least 40% of the Conversion Stock request that the Company file a registration statement, the Company is required to use its best efforts to cause such shares to be registered, subject to certain conditions and limitations. Holders are limited to two such demand registrations. In the event of any limitation by the underwriter, the number of securities that may be included in such registration will be allocated on a pro rata basis. Further, the Holders may require the Company to register all or a portion of their Conversion Stock on Form S-3 when such form becomes available to the Company, provided that the aggregate proceeds of each such registration exceeds $1,000,000 and subject to certain other conditions and limitations. All registration rights will terminate as to any Holder upon the later to occur of (i) one year after the Company's initial public offering, (ii) such time as such Holder may sell all his or her Conversion Stock under Rule 144(k), or (iii) such time as a Holder has less than 600,000 shares of common stock; provided, in no event will such registration rights terminate later than the fifth anniversary of the Company's initial public offering. Holders of warrants to purchase 1,898,800 shares of Common Stock issued in connection with the 1996 Notes and Holders of warrants to purchase 2,429,988 shares of Common Stock issued in connection with the Old Notes are also entitled to certain demand and piggyback registration rights with respect to the shares of Common Stock issuable upon exercise of their warrants. RIGHT OF FIRST REFUSAL AND CO-SALE RIGHTS Under the Stockholder Rights Agreement, the holders of at least 17,000 shares of Senior Preferred Stock or 0.25% of the outstanding shares of common stock ("Major Stockholders") who are accredited investors have the right of first refusal to purchase their pro rata portion of certain issues of Preferred or common stock of the Company on the same terms and conditions as the Company offers such securities to other investors, subject to certain conditions and limitations. In the event any holder of shares of Preferred or Common Stock proposes to sell such shares to a third party (other than to an affiliate), the Company has a right of first refusal to acquire some or all such shares from such selling holder under the same terms and conditions. If the Company does elect to exercise such right of first refusal, the remaining Major Stockholders may purchase their pro rata portion of such shares from the selling holder under the same terms and conditions. Subject to the right of first refusal described above and except in certain circumstances, in the event that any holder intends to transfer at least 1% of the outstanding shares of the Company's voting securities, assuming conversion of all Preferred Stock to a third party (other than to an affiliate), the remaining holders will have the right to sell a pro rata portion of their shares of Preferred or common stock to the buyer in such transaction. The right of first refusal and co-sale right of all holders terminates upon the closing of a registered public offering of the Common Stock. 94 OTHER RIGHTS The holders of 17,000 shares of Senior Preferred Stock or 0.25% of the outstanding Common Stock on an as-converted basis are entitled to certain annual and quarterly financial information from the Company, and also have certain rights of access and inspection. The information rights terminate upon the earlier of (i) a registered public offering of the Company's Common Stock, or (ii) an acquisition of the Company where the surviving corporation is subject to the reporting requirements of the Exchange Act. 95 CERTAIN FEDERAL INCOME TAX CONSIDERATIONS The following discussion is a general summary of the material U.S. federal income tax considerations relating to the Exchange Offer and to the purchase, ownership and disposition of the New Notes and has been reviewed by counsel to the Company. The tax consequences of these transactions are uncertain. The discussion of the federal income tax consequences set forth below is based upon the Internal Revenue Code of 1986, as amended (the "Code"), and judicial decisions and administrative interpretations thereunder, as of the date hereof, and such authorities may be repealed, revoked or modified so as to result in federal income tax consequences different from those discussed below. There can be no assurance that the Internal Revenue Service (the "IRS") will not successfully challenge one or more of the tax consequences described herein, and the Company has not obtained, nor does it intend to obtain, a ruling from the IRS with respect to the U.S. federal income tax consequences of acquiring or holding New Notes. The discussion below pertains only to U.S. Holders, except as described below under the caption "Tax Treatment of the Ownership and Disposition of New Notes by Non-U.S. Holders." As used herein, a U.S. Holder means (i) citizens or residents (within the meaning of Section 7701(b) of the Code) of the U.S., (ii) corporations, partnerships or other entities created in or under the laws of the U.S. or any political subdivision thereof, (iii) estates the income of which is subject to U.S. federal income taxation regardless of its source, (iv) trusts subject to the primary supervision of a court within the U.S. and the control of a U.S. person as described in Section 7701(a)(30) of the Code, and (v) any other person whose income or gain is effectively connected with the conduct of a U.S. trade or business. This discussion does not purport to deal with all aspects of U.S. federal income taxation that may be relevant to a particular Holder in light of the Holder's circumstances (for example, persons subject to the alternative minimum tax provisions of the Code). Also, it is not intended to be wholly applicable to all categories of investors, some of which (such as dealers in securities, banks, insurance companies, tax-exempt organizations, and persons holding New Notes as part of a hedging or conversion transaction or straddle or persons deemed to sell New Notes under the constructive sale provisions of the Code) may be subject to special rules. The discussion below is premised upon the assumption that the New Notes and Old Notes are held (or would be held if acquired) as capital assets within the meaning of Section 1221 of the Code and constitute indebtedness for tax purposes. This summary does not discuss the tax considerations applicable to subsequent purchasers. The discussion also does not discuss any aspect of state, local or foreign law. EACH HOLDER OR PROSPECTIVE HOLDER OF NEW NOTES IS STRONGLY URGED TO CONSULT ITS OWN TAX ADVISOR WITH RESPECT TO ITS PARTICULAR TAX SITUATION INCLUDING THE TAX EFFECTS OF ANY STATE, LOCAL, FOREIGN, OR OTHER TAX LAWS AND POSSIBLE CHANGES IN THE TAX LAWS. EXCHANGE OF NOTES The exchange of Old Notes for New Notes pursuant to the Exchange Offer should not be a taxable exchange for U.S. federal income tax purposes. Accordingly, a Holder should have the same adjusted issue price, adjusted basis and holding period in the New Notes as it had in the Old Notes immediately before the exchange. THE NEW NOTES Original Issue Discount The New Notes will be treated as issued with original issue discount, and each Holder will be required to include in its gross income original issue discount income as described below. Except as provided below in the section entitled "Applicable High-Yield Discount Obligations," a Holder must include original issue discount (to the extent there is not offsetting acquisition or bond premium) in income as ordinary interest income as it accrues on the basis of a constant yield to maturity. Generally, original issue discount must be included in income in advance of the receipt of cash representing such income. 96 The stated redemption price at maturity of a New Note will equal the sum of all payments other than any "qualified stated interest" payments. Qualified stated interest is stated interest that is unconditionally payable in cash or in property (other than debt instrument of the issuer) at least annually at a single fixed rate. Because interest on the New Notes will not be payable prior to March 15, 2003, none of the payments on the New Notes will constitute qualified stated interest. Accordingly, all payments on the New Notes will be treated as part of their stated redemption price at maturity. Because the Old Notes were issued as part of an investment unit, the issue price of each investment unit was allocated between the Old Note and the warrant constituting an investment unit based on their relative fair market values on the issue date. Although the Company's allocation is not binding on the IRS, a holder of a unit must use the Company's allocation unless the holder discloses on its federal income tax return for the year in which the unit was acquired that it plans to use an allocation that is inconsistent with the Company's allocation. A Holder must include in gross income, for all days during its taxable year in which it holds such New Note, the sum of the "daily portions" of original issue discount. The "daily portions" are determined by allocating to each day in an "accrual period" (generally the period between interest payments or compounding dates) a pro rata portion of the original issue discount that accrued during such accrual period. The amount of original issue discount that will accrue during an accrual period is the product of the "adjusted issue price" of the New Note at the beginning of the accrual period and its yield to maturity (determined on the basis of compounding at the end of each accrual period and properly adjusted for the length of the particular accrual period). The adjusted issue price of a New Note is the sum of the issue price of an Old Note, plus prior accruals of original issue discount, reduced by the total payments made with respect to such New Note in all prior periods and on the first day of the current accrual period. Each payment on a New Note will be treated as a payment of original issue discount to the extent that original issue discount has accrued as of the date such payment is due and has not been allocated to prior payments, and any excess will be treated as a payment of principal. There are several circumstances under which the Company could make a payment on a New Note which would affect the yield to maturity of a New Note, including the redemption or repurchase of a New Note (as described under "Description of the Old Notes"). According to Treasury Regulations, the possibility of a change in the yield will not be treated as affecting the amount of interest income (including original issue discount) recognized by a holder (or the timing of such recognition) if the likelihood of the change, as of the date of the debt obligations are issued, is remote. The Company intends to report on the basis that the likelihood of any change in the yield on the New Notes is remote. The Company is required to furnish certain information to the IRS, and will furnish annually to record Holders of a New Note, information with respect to original issue discount accruing during the calendar year. That information will be based upon the adjusted issue price of the New Note as if the Holder were the original Holder of the New Note. Election to Treat All Interest as Original Issue Discount A Holder may elect to treat all "interest" on any New Note as original issue discount and calculate the amount includable in gross income under the method described above. For this purpose, "interest" includes stated and unstated interest, original issue discount, acquisition discount, market discount and de minimis market discount, as adjusted by any acquisition premium. The election is to be made for the taxable year in which the Holder acquired the note and may not be revoked without the consent of the IRS. Acquisition Premium To the extent a Holder had acquisition premium with respect to an Old Note, the Holder generally will have acquisition premium with respect to a New Note. A Holder will reduce the original issue discount otherwise includable for each accrual period by an amount equal to the product of (i) the amount of such original issue discount otherwise includable for such period, and (ii) a fraction, the numerator of which is the acquisition premium and the denominator of which is the excess of the amounts payable on the New Note after the purchase date over the adjusted issue price. 97 Market Discount To the extent a Holder had market discount with respect to an Old Note, the Holder generally will have market discount with respect to a New Note. Any principal payment or gain realized by a Holder on disposition or retirement of a New Note will be treated as ordinary income to the extent that there is accrued market discount on the New Note. Unless a Holder elects to accrue under a constant-interest method, accrued market discount is the total market discount multiplied by a fraction, the numerator of which is the number of days the Holder has held the obligation and the denominator of which is the number of days from the date the Holder acquired the obligation until its maturity. A Holder may be required to defer a portion of its interest deductions for the taxable year attributable to any indebtedness incurred or continued to purchase or carry a New Note purchased with market discount. Any such deferred interest expense would not exceed the market discount that accrues during such taxable year and is, in general, allowed as a deduction not later than the year in which such market discount is includable in income. If the Holder elects to include market discount in income currently as it accrues on all market discount instruments acquired by the Holder in that taxable year or thereafter, the interest deferral rule described above will not apply. Sale, Exchange or Retirement of the New Notes Upon the sale, exchange or retirement of a New Note, the Holder generally will recognize gain or loss equal to the difference between the amount realized on the sale, exchange or retirement (which does not include any amount attributable to accrued but unpaid interest) and the Holder's adjusted tax basis in the New Note. A Holder's adjusted tax basis in the New Note will equal the Holder's cost for the Old Note exchanged therefor increased by any original issue discount included in income by such Holder with respect to such New Note and decreased by any payments received thereon other than qualified stated interest. Gain or loss realized on the sale, exchange or retirement of a New Note will be capital, and will be long-term if at the time of sale, exchange or retirement the New Note has been held for more than one year. The maximum rate of tax on long-term capital gains on most capital assets held by an individual for more than 18 months is 20%, and gain on most capital assets held by an individual more than one year and up to 18 months is subject to tax at a maximum rate of 28%. The deductibility of capital losses is subject to limitations. Applicable High-Yield Discount Obligations The New Notes will be subject to the "applicable high yield discount obligation" provisions of the Code. Because the yield of the New Notes is at least five percentage points above the applicable federal rate and the New Notes are issued with "significant original issue discount," otherwise deductible interest and original issue discount will not be deductible with respect thereto until such interest is actually paid. In addition, because the yield of the New Notes is more than six percentage points above the applicable federal rate, (i) a portion of such interest corresponding to the yield in excess of six percentage points above the applicable federal rate will not be deductible by the Company at any time, and (ii) a corporate Holder may be entitled to treat the portion of the interest that is not deductible by the Company as a dividend for purposes of qualifying for the dividends received deduction provided for by the Code, subject to applicable limitations. In such event, corporate Holders should consult with their own tax advisors as to the applicability of the dividends received deduction. TAX TREATMENT OF THE OWNERSHIP AND DISPOSITION OF NEW NOTES BY NON-U.S. HOLDERS The following discussion is a general summary of certain U.S. federal income and estate tax considerations of the ownership and disposition of New Notes by Non-U.S. Holders. As used herein, a Non-U.S. Holder means any Holder other than a U.S. Holder. Withholding Tax on Payments of Principal and Interest on New Notes The payment of principal and interest on a New Note to a Non-U.S. Holder will not be subject to U.S. federal withholding tax pursuant to the "portfolio interest exception," provided that (i) the Non-U.S. Holder 98 does not actually or constructively own 10% or more of the total voting power of all voting stock of the Company and is not a controlled foreign corporation that is related to the Company within the meaning of the Code and (ii) the beneficial owner of the New Notes certifies to the Company or its agent, under penalties of perjury, that it is not a U.S. Holder and provides its name and address on U.S. Treasury Form W-8 (or a suitable substitute form) or a securities clearing organization, bank or other financial institution that holds customers' securities in the ordinary course of its trade or business (a "financial institution") and holds the debenture certificates under penalties of perjury that such a Form W-8 (or suitable substitute form) has been received from the beneficial owner by it or by a financial institution between it and the beneficial owner and furnishes the payor with a copy thereof. Treasury Regulations that will be effective January 1, 2000 (the "Withholding Regulations") provide alternative methods for satisfying the certification requirement described in (ii) above. The Withholding Regulations will generally require, in the case of New Notes held by a foreign partnership, that the certificate described in (ii) above be provided by the partners rather that by the foreign partnership, and that the partnership provide certain information including a U.S. tax identification number. Gain on Disposition of the Notes Non-U.S. Holders generally will not be subject to U.S. federal income tax on gain realized on the sale, exchange or redemption of New Notes, unless in the case of an individual Non-U.S. Holder such Holder is present in the U.S. for 183 days or more in the year of such sale, exchange or redemption and certain other conditions are met. INFORMATION REPORTING AND BACKUP WITHHOLDING In general, information reporting requirements will apply to payments of principal and interest on a New Note and payments on the proceeds of the sale of a New Note to certain noncorporate U.S. Holders, and a 31% backup withholding tax may apply to such payments if the Holder (i) fails to furnish or certify its correct taxpayer identification number to the payor in the manner required, (ii) is notified by the IRS that it has failed to report payments of interest and dividends properly, or (iii) under certain circumstances, fails to certify that it has not been notified by the IRS that it is subject to backup withholding for failure to report interest and dividend payments. Certain Holders (including, among others, all corporations) are not subject to the backup withholding and reporting requirements. The Company must report annually to the IRS and to each Non-U.S. Holder any interest that is subject to withholding, or that is exempt from U.S. withholding tax pursuant to a tax treaty, or interest that is exempt from U.S. tax under the portfolio interest exception. Copies of these information returns may also be made available under the provisions of a specific treaty or agreement to the tax authorities of the country in which the Non-U.S. Holder resides. Treasury Regulations provide that backup withholding and additional information reporting will not apply to payments of principal on the New Notes by the Company to a Non-U.S. Holder if the Holder certifies as to its Non-U.S. status under penalties of perjury or otherwise establishes an exemption (provided that neither the Company nor its Paying Agent has actual knowledge that the Holder is a U.S. person or that the conditions of any other exception are not, in fact, satisfied). The payment of the proceeds from the disposition of New Notes to or through the U.S. office of any broker, U.S. or foreign, will be subject to information reporting and possible backup withholding unless the owner certifies as to its Non-U.S. Holder status under penalty of perjury or otherwise establishes an exemption, provided that the broker does not have actual knowledge that the Holder is a U.S. person or that the conditions of any other exemption are not, in fact, satisfied. The payment of the proceeds from the disposition of a New Note to or through a non-U.S. office of a broker that is either a U.S. person or a U.S. related person will be subject to information reporting (but currently not backup withholding) unless the broker has documentary evidence in the files that the owner is a Non-U.S. Holder and the broker has no knowledge to the contrary. Backup withholding and information reporting will not apply to payments made through foreign offices of a broker that is not a 99 U.S. person or a U.S. related person (absent actual knowledge that the payee is U.S. person). For purposes of this paragraph, a "U.S. related person" is (i) a "controlled foreign corporation" for U.S. federal income tax purposes, (ii) a foreign person 50% or more of whose gross income from all sources for the three-year period ending with the close of its taxable year preceding the payment (or for such part of the period that the broker has been in existence) is derived from activities that are effectively connected with the conduct of a U.S. trade or business, or (iii) with respect to payments made after December 31, 1999, a foreign partnership that, at any time during its taxable year, is 50% or more (by income or capital interest) owned by U.S. persons or is engaged in the conduct of a U.S. trade or business. The Withholding Regulations provide certain presumptions under which a Non-U.S. Holder will be subject to backup withholding and information reporting unless the Non-U.S. Holder provides a certification as to its Non-U.S. Holder status. Any amounts withheld under the backup withholding rules from a payment to a U.S. or Non-U.S. Holder will be allowed as a refund or a credit against such Holder's U.S. federal income tax liability, provided that the requisite procedures are followed. 100 PLAN OF DISTRIBUTION Each Participating Broker-Dealer that receives New Notes for its own account in connection with the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such New Notes. This Prospectus may be used by Participating Broker-Dealers during the period referred to below in connection with resales of the New Notes received in exchange for Old Notes if such Old Notes were acquired by such Participating Broker-Dealers for their own accounts. The Company has agreed that this Prospectus may be used by a Participating Broker-Dealer in connection with resales of such New Notes for a period ending 150 days after the effective date of the Registration Statement (subject to extension under certain limited circumstances described herein) or, if earlier, when all such New Notes have been disposed of by such Participating Broker-Dealer. See "The Exchange Offer -- Terms of the Exchange Offer." The Company will not receive any cash proceeds from the issuance of the New Notes offered hereby. New Notes received by Participating Broker-Dealers for their own accounts in connection with the Exchange Offer may be sold from time to time in one or more transactions in the over-the-counter market, in negotiated transactions, through the writing of options on the New Notes or a combination of such methods of resale, at market prices prevailing at the time of resale, at prices related to such prevailing market prices or at negotiated prices. Any such resale may be made directly to purchasers or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from any such broker-dealer and/or the purchasers of any such New Notes. Any Participating Broker-Dealer that resells New Notes that were received by it for its own account in connection with the Exchange Offer and any broker or dealer that participates in a distribution of such New Notes may be deemed to be an "underwriter" within the meaning of the Securities Act, and any profit on any such resale of New Notes and any commissions or concessions received by any such persons may be deemed to be underwriting compensation under the Securities Act. The Letter of Transmittal states that by acknowledging that it will deliver and by delivering a prospectus, a Participating Broker-Dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. LEGAL MATTERS The validity of the New Notes offered hereby will be passed upon for the Company by Wilson Sonsini Goodrich & Rosati, P.C., Palo Alto, California. Barry E. Taylor, a member of WSGR, is a director of the Company. Mr. Taylor beneficially owns 2,800 shares of Common Stock and 4,370 shares of Series D Preferred Stock held by a retirement plan for the benefit of Mr. Taylor. An investment partnership consisting of members of WSGR, including Mr. Taylor, owns 75,200 shares of Common Stock, 1,000 shares of Series A Preferred Stock and 11,700 shares of Series B Preferred Stock. EXPERTS The consolidated financial statements of DIVA Systems Corporation as of June 30, 1997 and 1998, and for each of the years in the three-year period ended June 30, 1998, and for the period from July 1, 1995 (inception) to June 30, 1998, and the financial statements of SRTC as of December 31, 1996 and 1997, and for each of the years in the two-year period ended December 31, 1997, and for the period from May 21, 1993 (date of inception) to December 31, 1997, have been included herein and in the registration statement in reliance upon the reports of KPMG Peat Marwick LLP, independent auditors, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. 101 DIVA SYSTEMS CORPORATION (A DEVELOPMENT STAGE COMPANY) INDEX TO FINANCIAL STATEMENTS
PAGE ---- DIVA Systems Corporation: Report of KPMG Peat Marwick LLP, Independent Auditors.................. F-2 Consolidated Balance Sheets............................................ F-3 Consolidated Statements of Operations.................................. F-4 Consolidated Statements of Stockholders' Deficit....................... F-5 Consolidated Statements of Cash Flows.................................. F-6 Notes to Consolidated Financial Statements............................. F-7 Sarnoff Real Time Corporation for the years ended 1996 and 1997: Report of KPMG Peat Marwick LLP, Independent Auditors.................. F-21 Balance Sheets......................................................... F-22 Statements of Operations............................................... F-23 Statements of Stockholders' Deficit.................................... F-24 Statements of Cash Flows............................................... F-25 Notes to Financial Statements.......................................... F-26 Sarnoff Real Time Corporation for the three month period ended March 31, 1998: Balance Sheets......................................................... F-34 Statements of Operations............................................... F-35 Statements of Cash Flows............................................... F-36 Notes to Interim Financial Statements.................................. F-37
F-1 INDEPENDENT AUDITORS' REPORT The Board of Directors DIVA Systems Corporation: We have audited the accompanying consolidated balance sheets of DIVA Systems Corporation (the Company), a development stage company, as of June 30, 1997 and 1998, and the related consolidated statements of operations, stockholders' deficit, and cash flows for each of the years in the three-year period ended June 30, 1998, and for the period from July 1, 1995 (inception) to June 30, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of DIVA Systems Corporation (a development stage company) as of June 30, 1997 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 1998, and for the period from July 1, 1995 (inception) to June 30, 1998, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Mountain View, California August 8, 1998 F-2 DIVA SYSTEMS CORPORATION (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) ASSETS
JUNE 30, ------------------- 1997 1998 -------- --------- Current assets: Cash and cash equivalents................................ $ 234 $ 167,549 Short-term investments................................... -- 30,015 Restricted cash.......................................... 3,588 -- Prepaid expenses and other current assets................ -- 694 -------- --------- Total current assets.................................. 3,822 198,258 Property and equipment, net............................... 7,063 19,349 Debt issuance costs, net.................................. 1,090 9,524 Prepaid licenses.......................................... 250 230 Deposits and other assets................................. 4,183 354 Intangible assets, net.................................... -- 5,683 -------- --------- Total assets.......................................... $ 16,408 $ 233,398 ======== ========= LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable......................................... $ 3,079 $ 3,047 Other current liabilities................................. 794 1,300 -------- --------- Total current liabilities............................. 3,873 4,347 Notes payable............................................. 28,440 243,031 -------- --------- Total liabilities..................................... 32,313 247,378 -------- --------- Commitments and contingencies Stockholders' deficit: Preferred stock, $0.001 par value; 20,000,000 and 30,000,000 shares authorized in 1997 and 1998, respec- tively; 9,794,042 and 21,372,287 shares issued and out- standing in 1997 and 1998, respectively (liquidation preference of $28,966 and $97,766 in 1997 and 1998, re- spectively)............................................. 10 21 Common stock, $0.001 par value; 50,000,000 and 65,000,000 shares authorized in 1997 and 1998, respectively; 16,549,874 and 17,200,178 shares issued and outstanding in 1997 and 1998, respectively.......................... 16 17 Additional paid-in capital............................... 29,310 116,898 Deficit accumulated during the development stage......... (45,241) (130,916) -------- --------- Total stockholders' deficit........................... (15,905) (13,980) -------- --------- Total liabilities and stockholders' deficit........... $ 16,408 $ 233,398 ======== =========
See accompanying notes to consolidated financial statements. F-3 DIVA SYSTEMS CORPORATION (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
PERIOD FROM JULY 1, 1995 YEARS ENDED JUNE 30, (INCEPTION) ---------------------------- TO 1996 1997 1998 JUNE 30, 1998 -------- -------- -------- ------------- Revenue............................ $ -- $ -- $ 82 $ 82 -------- -------- -------- --------- Operating expenses: Research and development.......... 8,451 17,539 28,278 54,268 Sales and marketing............... 1,071 3,168 4,170 8,409 General and administrative........ 1,778 3,940 14,248 19,966 Acquired in-process research and development...................... -- 4,061 18,656 22,717 -------- -------- -------- --------- Total operating expenses....... 11,300 28,708 65,352 105,360 -------- -------- -------- --------- Net operating loss............. (11,300) (28,708) (65,270) (105,278) -------- -------- -------- --------- Other (income) expense, net: Equity in (income) loss of investee......................... (357) 2,080 1,631 3,354 Interest income................... (65) (410) (5,632) (6,107) Interest expense.................. 395 3,590 13,730 17,715 -------- -------- -------- --------- Total other (income) expense, net........................... (27) 5,260 9,729 14,962 -------- -------- -------- --------- Loss before extraordinary item. (11,273) (33,968) (74,999) (120,240) Extraordinary loss -- early extin- guishment of debt................. -- -- 10,676 10,676 -------- -------- -------- --------- Net loss....................... $(11,273) $(33,968) $(85,675) $(130,916) ======== ======== ======== ========= Basic and diluted net loss per share: Loss before extraordinary item.... $ 1.04 $ 2.22 $ 4.56 $ 8.46 Extraordinary loss -- early extinguishment of debt........... -- -- 0.65 0.75 -------- -------- -------- --------- Net loss per share............. $ 1.04 $ 2.22 $ 5.21 $ 9.21 ======== ======== ======== ========= Shares used in per share computa- tion.............................. 10,895 15,316 16,447 14,219 ======== ======== ======== =========
See accompanying notes to consolidated financial statements. F-4 DIVA SYSTEMS CORPORATION (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT PERIOD FROM JULY 1, 1995 (INCEPTION) TO JUNE 30, 1998 (IN THOUSANDS, EXCEPT SHARE DATA)
DEFICIT ACCUMULATED ADDITIONAL DURING THE TOTAL PAID-IN DEVELOPMENT STOCKHOLDERS' SHARES AMOUNT SHARES AMOUNT CAPITAL STAGE DEFICIT ---------- ------ ---------- ------ ---------- ----------- ------------- Sale of common stock in August 1995 at $0.005 per share............... -- $-- 10,640,000 $10 43 -- 53 Exercise of common stock options in August 1995 at $0.005 per share..... -- -- 654,000 -- 3 -- 3 Sale of Series A preferred stock in August and September 1995 at $0.50 per share. 205,600 -- -- -- 103 -- 103 Sale of Series B preferred stock in October 1995 at $0.855 per share, net of issuance costs of $22... 2,403,842 3 -- -- 2,030 -- 2,033 Sale of common stock in October 1995 at $0.05 per share............... -- -- 52,400 -- 3 -- 3 Sale of Series B preferred stock in December 1995 at $0.855 per share, net of issuance costs of $4.... 1,016,000 1 -- -- 864 -- 865 Issuance of common stock in exchange for investment in affiliate in December 1995 at $0.075 per share........ -- -- 6,654,000 6 493 -- 499 Issuance of Class B common stock in exchange for investment in affiliate in December 1995 at $5.00 per share. -- -- 2 -- -- -- -- Dividend of DIVA common stock received from affiliate in February 1996 at $0.075 per share................... -- -- (2,618,898) (2) (194) -- (196) Issuance of common stock warrants in conjunction with notes payable issued in May 1996...... -- -- -- -- 285 -- 285 Exercise of common stock options in June 1996 at $0.10 per share......... -- -- 10,000 -- 1 -- 1 Net loss................ -- -- -- -- -- (11,273) (11,273) ---------- --- ---------- --- ------- -------- ------- Balance as of June 30, 1996.................... 3,625,442 4 15,391,504 14 3,631 (11,273) (7,624) Issuance of Class C common stock in August 1996 at $0.82 per share in conjunction with Norstar purchase........ -- -- 857,370 -- 703 -- 703 Sale of Series C preferred stock in August 1996 at $4.205 per share, net of issuance costs of $1,060.................. 6,168,600 6 -- -- 24,873 -- 24,879 Exercise of common stock options................. -- -- 301,000 2 103 -- 105 Net loss................ -- -- -- -- -- (33,968) (33,968) ---------- --- ---------- --- ------- -------- ------- Balances at June 30, 1997.................... 9,794,042 10 16,549,874 16 29,310 (45,241) (15,905) Sales of Series D preferred stock in August and September 1997 at $5.72 per share, net of issuance costs of $1,379.................. 8,279,590 8 -- -- 45,972 -- 45,980 Issuance of common stock warrants in connection with notes payable issued in February 1998. -- -- -- -- 18,057 -- 18,057 Issuance of Series AA preferred stock at $6.50 per share and issuance of Series AA preferred stock options in April 1998 in connection with SRTC purchase........... 3,277,539 3 -- -- 23,046 -- 23,049 Exercise of Series AA preferred stock options associated with SRTC purchase................ 21,116 -- -- -- 3 -- 3 Exercise of common stock options................. -- -- 565,050 1 270 -- 271 Class A and B common stock assumed in connection with SRTC purchase................ -- -- (14,746) -- -- -- -- Issuance of common stock in May 1998 at $2.40 per share in connection with research and development arrangement............. -- -- 100,000 -- 240 -- 240 Net loss................ -- -- -- -- (85,675) (85,675) ---------- --- ---------- --- ------- -------- ------- Balances as of June 30, 1998.................... 21,372,287 $21 17,200,178 $17 116,898 (130,916) (13,980) ========== === ========== === ======= ======== =======
See accompanying notes to consolidated financial statements. F-5 DIVA SYSTEMS CORPORATION (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
PERIOD FROM JULY 1, 1995 YEARS ENDED JUNE 30, (INCEPTION) ---------------------------- TO 1996 1997 1998 JUNE 30, 1998 -------- -------- -------- ------------- Cash flows from operating activities: Net loss.......................... $(11,273) $(33,968) $(85,675) $(130,916) Adjustments to reconcile net loss to net cash used in operating activities: Acquired in-process research and development...................... -- 4,061 18,656 22,717 Depreciation and amortization..... 31 891 5,778 6,700 Equity in loss of investee........ (357) 2,080 1,631 3,354 Amortization of debt issuance costs and accretion of discount on notes payable................. 286 3,472 13,902 17,660 Issuance of stock for research and development.................. -- -- 240 240 Extraordinary loss................ -- -- 10,676 10,676 Changes in operating assets and liabilities: Prepaid expenses and other current assets.................. (253) 3 (610) (860) Accounts payable................. 1,534 1,545 (2,659) 420 Payable to related party......... 2,183 (2,183) -- -- Other current liabilities........ 213 223 864 1,300 -------- -------- -------- --------- Net cash used in operating activities..................... (7,636) (23,876) (37,197) (68,709) -------- -------- -------- --------- Cash flows from investing activities: Purchases of property and equipment........................ (2,568) (6,044) (13,364) (21,976) Deposits on property and equipment........................ -- (4,976) (1,631) (6,607) Purchase of short-term investments...................... -- -- (30,015) (30,015) Cash acquired in business combination...................... -- -- 402 402 Purchase of Norstar............... -- (3,358) -- (3,358) Restricted cash released.......... 5,500 9,500 3,230 18,230 -------- -------- -------- --------- Net cash provided by (used in) investing activities........... 2,932 (4,878) (41,378) (43,324) -------- -------- -------- --------- Cash flows from financing activities: Issuance of preferred stock....... 3,001 24,879 45,980 73,860 Exercise of stock options......... 4 105 274 383 Issuance of common stock.......... 56 -- -- 56 Proceeds from notes payable, net of issuance costs................ 5,647 -- 199,655 205,302 Payments on notes payable......... -- -- (19) (19) -------- -------- -------- --------- Net cash provided by financing activities..................... 8,708 24,984 245,890 279,582 -------- -------- -------- --------- Net increase (decrease) in cash and cash equivalents.................. 4,004 (3,770) 167,315 167,549 Cash and cash equivalents at beginning of period............... -- 4,004 234 -- -------- -------- -------- --------- Cash and cash equivalents at end of period............................ $ 4,004 $ 234 $167,549 $ 167,549 ======== ======== ======== ========= Supplemental disclosures of cash flow information: Cash paid during the period for interest......................... $ 109 $ 118 $ 7 $ 234 ======== ======== ======== ========= Noncash investing and financing activities: Issuance of common stock in exchange for investment in affiliate........................ $ 499 $ -- $ 23,049 $ 23,548 ======== ======== ======== ========= Receipt of DIVA stock dividend from affiliate................... $ 196 $ -- $ -- $ 196 ======== ======== ======== ========= Issuance of warrants in connection with notes payable............... $ 285 $ -- $ 18,057 $ 18,342 ======== ======== ======== ========= Restricted cash received in connection with issuance of notes payable.......................... $ 18,230 $ -- $ -- $ 18,230 ======== ======== ======== ========= Issuance of common stock in conjunction with purchase of Norstar.......................... $ -- $ 703 $ -- $ 703 ======== ======== ======== =========
See accompanying notes to consolidated financial statements. F-6 DIVA SYSTEMS CORPORATION AND SUBSIDIARY (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997 AND 1998 (1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Description of Business DIVA Systems Corporation (the "Company") provides a true video-on-demand (VOD) service over the cable television infrastructure. The Company is in the development stage, and its primary activities to date have included raising capital, performing research and development activities, developing strategic alliances, identifying markets, and operationally testing its first field deployed system and service. (b) Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and a wholly owned subsidiary. There were no intercompany transactions. (c) Cash, Cash Equivalents, and Short-Term Investments Cash and cash equivalents consist of cash and highly liquid investments such as money market funds and commercial paper with maturities at date of purchase of less than 90 days. Management determines the appropriate classification of investment securities at the time of purchase and reevaluates such designation as of each balance sheet date. As of June 30, 1998, all investment securities were designated as "available-for-sale." Available-for-sale securities are carried at fair value based on quoted market prices, with unrealized gains and losses, net of related deferred income taxes, reported as a separate component of stockholders' equity. Realized gains and losses and declines in value judged to be other than temporary on available-for-sale securities are included in the consolidated statement of operations. There have been no declines in value judged to be other than temporary through June 30, 1998. The cost of securities is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in interest income. (d) Restricted Cash Restricted cash consisted of cash equivalents held in escrow to be released incrementally to the Company upon presentation of certificates as to completion of certain performance milestones pursuant to the notes payable. (e) Property and Equipment Property and equipment are recorded at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the respective assets, generally three to five years. Leasehold improvements are amortized over the shorter of the estimated useful life or the related lease term. (f) Debt Issuance Costs Underwriting, legal, and accounting fees associated with the issuance of the notes payable are being amortized to interest expense using the effective interest method over the anticipated term of the notes. F-7 DIVA SYSTEMS CORPORATION AND SUBSIDIARY (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997 AND 1998 (1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Amortization expense in 1996, 1997, and 1998 and for the period from July 1, 1995 (inception) to June 30, 1998, was $16,000, $188,000, $609,000, and $813,000, respectively. (g) Intangible Assets Intangible assets consist principally of core technology and assembled workforce. Intangible assets are amortized on a straight-line basis over 3 years. The Company's policy is to evaluate the excess of cost over the net assets of businesses acquired based on an evaluation of such factors as the occurrence of a significant adverse event or change in the environment in which the business operates or if the expected future net cash flows (undiscounted and without interest) would become less than the carrying amount of the asset. An impairment loss would be recorded in the period such determination is made based on the fair value of the related business. Accumulated amortization as of June 30, 1998, was $517,000. (h) Impairment of Long-Lived Assets The Company evaluates its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset might not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. (i) Stock-Based Compensation The Company uses the intrinsic value-based method to account for all of its employee stock-based compensation plans. (j) Basic and Diluted Net Loss Per Share Basic and diluted net loss per share is computed using net loss and the weighted-average number of outstanding shares of common stock. Potentially dilutive securities have been excluded from the computation of diluted net loss per share because the effect of the inclusion would be antidilutive. Notes 6 and 7 of notes to consolidated financial statements set forth information regarding potentially dilutive securities. (k) Stock Split In March 1998, the Company effected a two-for-one stock split. All applicable share and per share data have been adjusted for the stock split. (l) Revenue Recognition Monthly customer subscription revenues and access revenues are recognized in the period in which the services are provided. F-8 DIVA SYSTEMS CORPORATION AND SUBSIDIARY (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997 AND 1998 (1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (m) Use of Estimates The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (n) Income Taxes The Company accounts for income taxes using an asset and liability approach that results in the recognition of deferred tax assets and liabilities for the expected future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The measurement of deferred tax assets is reduced, if necessary, by a valuation allowance for any tax benefits whose future realization is uncertain. (o) Fair Value of Financial Instruments The carrying amount of financial instruments, including cash, cash equivalents, and short-term investment cash, approximated fair values as of June 30, 1998, due to the relatively short maturity of these instruments. The Company's notes payable are held by a number of financial institutions and are not publicly traded. The Company estimates that the fair value of the notes payable as of June 30, 1998, based on limited dealer-to-dealer transactions, approximated $227,000,000. (p) Recent Accounting Pronouncements The Financial Accounting Standards Board (FASB) recently issued Statement of Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income. SFAS No. 130 establishes standards for reporting and displaying comprehensive income and its components in financial statements. It does not, however, require a specific format, but requires the Company to display an amount representing total comprehensive income for the period in its consolidated financial statements. The Company is in the process of determining its preferred format. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. The FASB also recently issued SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. SFAS No. 131 establishes standards for the way public business enterprises are to report information about operating segments in annual financial statements and requires those enterprises to report selected information about operating segments in interim financial reports. SFAS No. 131 is effective for financial statements for fiscal years beginning after December 15, 1997. The Company has determined that it does not have any separately reportable business segments. F-9 DIVA SYSTEMS CORPORATION AND SUBSIDIARY (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997 AND 1998 (q) Year 2000 Certain organizations anticipate that they will experience operational difficulties at the beginning of the year 2000 as a result of computer programs being written using two digits rather than four to define the applicable year. The Company's plan to address the "Year 2000" issue calls for software compliance verification from the Company's external vendors; testing in-house engineering and manufacturing software tools; testing software in the Company's products for the Year 2000 compliance; and communication with significant suppliers to determine the readiness of third parties' remediation of their own Year 2000 issues. To date, the Company has not encountered any significant Year 2000 issues concerning its respective computer programs. The Company plans to complete its Year 2000 compliance research and testing by the end of fiscal 1999. All costs associated with carrying out the Company's plan for the Year 2000 problem are being expensed as incurred. The costs associated with preparation for the Year 2000 compliance are not expected to have a material adverse effect on the Company's business, financial condition, and results of operations. Nevertheless, there is uncertainty concerning the potential costs and effect associated with any Year 2000 compliance. Any Year 2000 compliance problems of the Company, its customers or their respective suppliers could have a material adverse effect on the Company's business, financial condition, and results of operations. During the past three years, the Company completed an effort to convert its financial applications to commercial products that, according to its suppliers, are Year 2000 compliant. The Company has received confirmations from its primary suppliers indicating that they are either Year 2000 compliant or have plans in place to ensure readiness. As part of the Company's assessment, it is evaluating the level of validation it will require of third parties to ensure their Year 2000 readiness. (2) FINANCIAL STATEMENT DETAILS (a) Property and Equipment A summary of property and equipment follows (in thousands):
JUNE 30, --------------- 1997 1998 ------ ------- Furniture and fixtures................................... $ 217 $ 653 Office equipment......................................... 2,150 2,771 VOD systems.............................................. 5,040 20,351 Leasehold improvements................................... 578 1,242 Construction-in-progress................................. -- 515 ------ ------- 7,985 25,532 Accumulated depreciation and amortization................ (922) (6,183) ------ ------- $7,063 $19,349 ====== =======
(b) Other Current Liabilities A summary of other current liabilities follows (in thousands):
JUNE 30, ----------- 1997 1998 ---- ------ Accrued compensation......................................... $237 $ 644 Deferred interest income on restricted cash.................. 417 -- Other accrued liabilities.................................... 140 656 ---- ------ $794 $1,300 ==== ======
F-10 DIVA SYSTEMS CORPORATION AND SUBSIDIARY (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997 AND 1998 (3) AFFILIATE TRANSACTIONS In December 1995, the Company entered into a joint equity investment and license agreement (the License Agreement) with Sarnoff Real Time Corporation (SRTC), whereby the Company acquired 8,067,074 shares of SRTC common stock, representing approximately 40% ownership interest in the equity of SRTC on a fully diluted basis, in exchange for 6,654,000 shares of the Company's common stock, plus two shares of Class B common stock. This transaction was recorded at the estimated fair values of the Company's and SRTC's stock exchanged. This investment was accounted for using the equity method. The amount of the purchase price that exceeded the Company's percentage ownership of SRTC's net book value at the date of the acquisition is separately attributed to the Company's interest in in-process research and development being performed by SRTC. Such amount, $659,000, was expensed in determining the Company's equity in the results of operations of SRTC for the year ended June 30, 1996. There was no comparable expense for the years ended June 30, 1997 and 1998. In February 1996, SRTC effected a pro rata dividend distribution to its stockholders of substantially all the Company's common stock held by SRTC. Accordingly, 2,618,898 shares were received by the Company in conjunction with this distribution, which was accounted for as a retirement of common stock. The License Agreement provided the Company with exclusive rights to purchase SRTC servers for use in the Company's business in certain markets. During the years ended June 30, 1996 and 1997, the Company purchased server components and related spare parts from SRTC totaling approximately $2,265,000 and $6,152,944, respectively, which are included as VOD systems in property and equipment and deposits and other assets on the accompanying consolidated balance sheets. Pursuant to the terms of the License Agreement, the Company also agreed to pay an aggregate amount of $8,000,000 through December 1996 to support SRTC's research and development efforts. For the years ended June 30, 1996 and 1997, the Company paid $4,850,000 and $3,150,000, respectively, for research and development efforts under the terms of the License Agreement. During the years ended June 30, 1996 and 1997, the Company paid SRTC $154,500 and $89,000, respectively, for administrative and marketing services rendered on behalf of the Company. On January 15, 1998, the Company and SRTC executed an Agreement and Plan of Reorganization setting forth their agreement to merge SRTC into the Company, with the Company as the surviving corporation (the "SRTC Transaction"). On that date, the Company held approximately 40% of the outstanding capital stock of SRTC. In exchange for the remaining approximately 60% of the issued and outstanding stock of SRTC, the Company issued 3,277,539 shares of Series AA preferred stock valued at $6.50 per share. In addition, the Company reserved 276,792 shares of its Series AA preferred stock for issuance upon exercise of options valued at $1,745,000 assumed by the Company in the transaction and reserved 380,767 shares of its common stock for use in connection with the future issuance of options to SRTC employees (see Note 8). The Company completed the SRTC Transaction in April 1998. The Company accounted for the merger as a purchase, and, accordingly, the operating results of SRTC have been included in the Company's consolidated financial statements since the date of acquisition. Pro forma results of operations for the SRTC transaction have not been presented because the results of operations for SRTC to date have not been significant. The purchase price of $23,049,000 has been allocated as follows: $6,015,000 to the fair value of acquired assets; $7,822,000 to assumed liabilities; $6,200,000 to core technology and assumed work force; and $18,656,000 to acquired in-process research and development. F-11 DIVA SYSTEMS CORPORATION AND SUBSIDIARY (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997 AND 1998 (4) NOTES PAYABLE Notes payable as of June 30, 1997, were comprised of $47,000,000 of Subordinated Discount Notes (the "1996 Notes") due May 15, 2006, issued as 47,000 units of one note and one warrant to purchase 40.4 shares of common stock at $0.005 per share. The 1996 Notes were subordinated to all existing and future indebtedness of the Company. Pursuant to the 1996 Notes, approximately $18,000,000 of restricted cash was deposited in an escrow account during 1996, subject to completion of specified performance milestones. In the event milestones were not achieved, the Company would have been required to retire the 1996 Notes up to the amount of the remaining restricted cash. As of June 30, 1997 and 1998, approximately $15,000,000 and $18,230,000, respectively, of restricted cash had been released. The 1996 Notes were initially zero coupon, with an original issue discount that accreted to interest expense at an effective rate of 13.8% per annum, compounded semiannually. Commencing November 15, 2001, cash interest would have been payable on the 1996 Notes semiannually in arrears on each May 15 and November 15 at the rate of 13% per annum. Under certain provisions of the indenture, the interest rate could have been increased to 15% per annum in May 1999. In connection with the Company's February 1998 debt offering discussed below, all the outstanding 1996 Notes were exchanged. For the year ended June 30, 1998, the Company recorded an extraordinary loss of $10,676,000 resulting from the exchange of the 1996 Notes. On February 19, 1998, the Company completed a debt offering for $463,000,000 of 12 5/8% Senior Discount Notes (the "1998 Notes") due March 1, 2008. The 1998 Notes consist of 463,000 units, of which 404,998 were offered for sale and 58,002 were offered in exchange for all of the 1996 Notes. Each unit consists of one 1998 Note due 2008 and three warrants each to purchase two shares of the Company's common stock at $0.005 per share. The 1998 Notes are senior unsecured indebtedness of the Company and rank pari passu with any future unsubordinated unsecured indebtedness and will be senior to any future subordinated indebtedness of the Company. The 1998 Notes are initially zero coupon with an original issue discount of $212,980,000. Commencing March 1, 2003, cash interest will be payable on the notes semiannually in arrears on each March 1 and September 1 at the rate of 12 5/8% per annum. Under certain provisions of the indenture, the interest rate could be increased. The gross proceeds to the Company from the debt offering were $250,020,000. In connection with the offering, the Company recorded $18,057,000 in additional paid-in capital representing the value assigned to the warrants. In addition, the Company recorded an extraordinary loss of $10,676,000 resulting from the exchange of the 1996 Notes. The effective interest rate of the 1998 Notes, reflecting the allocation for warrants and costs associated with the debt offering, is 14.1%. The 1998 Notes are callable at a declining premium after March 1, 2003, after which the Company may redeem in whole or in part the 1998 Notes prior to March 1, 2003, by paying a specified premium over the F-12 DIVA SYSTEMS CORPORATION AND SUBSIDIARY (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997 AND 1998 (4) NOTES PAYABLE (CONTINUED) accreted principal value. The redemption premiums are as follows, during the period commencing March 1 of such year:
YEAR PERCENTAGE ---- ---------- 2001......................................................... 106.31% 2002......................................................... 104.20% 2003......................................................... 102.10% 2004 and thereafter.......................................... 100.00%
In addition, at any time prior to March 1, 2001, the Company may redeem up to 35% of the accreted value of the 1998 Notes with the proceeds of one or more sales of the Company's stock, at any time or from time to time in part, at a redemption price of 112.625% of the accreted value plus accrued and unpaid interest provided that the 1998 Notes, representing at least $301,000,000 aggregate principal amount at maturity, remain outstanding after each such redemption. (5) INCOME TAXES Total income tax benefit differs from expected tax benefit (computed by multiplying the U.S. income statutory rate of 34% by loss before income tax) as a result of the following (in thousands):
JUNE 30, --------------------------- 1997 1997 1998 ------- -------- -------- Expected tax benefit........................ $(3,832) $(11,549) $(31,062) Net operating losses and temporary differ- ences for which no benefit was recognized.. 3,827 11,134 22,455 Research credit adjustment.................. -- 388 8,451 Other permanent differences................. 5 27 156 ------- -------- -------- Accumulated depreciation and amortization........................... $ -- $ -- $ -- ======= ======== ========
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities are as follows (in thousands):
JUNE 30, ------------------ 1997 1998 -------- -------- Deferred tax assets: Loss carryovers and deferred start-up expenditures... $ 14,655 $ 39,891 Technology asset..................................... 1,871 1,683 Equity in losses of investee......................... 469 -- State tax credit carryforwards....................... 1,595 2,130 Debt financing costs................................. 1,515 4,568 Accruals, reserves, and other........................ 90 364 Fixed assets......................................... 41 47 -------- -------- Total gross deferred tax assets................... 20,236 48,683 Valuation allowance.................................. (20,236) (48,683) -------- -------- Deferred tax assets, net of valuation allowance... $ -- $ -- ======== ========
F-13 DIVA SYSTEMS CORPORATION AND SUBSIDIARY (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997 AND 1998 (5) INCOME TAXES (CONTINUED) Because the Company has incurred significant net losses and the realization of its deferred tax assets is dependent upon the Company's ability to successfully develop and market its video-on-demand service, a valuation allowance has been recorded against such deferred tax assets. As of June 30, 1998, the Company has cumulative federal net operating losses of approximately $94,227,000, which can be used to offset future income subject to federal income taxes. The federal tax loss carryforwards will expire beginning in 2011 through 2012. As of June 30, 1998, the Company has cumulative California net operating losses of approximately $70,360,000, which can be used to offset future income subject to California taxes. The California tax loss carryforwards will expire in 2004. As of June 30, 1998, the Company has cumulative New Jersey net operating losses of approximately $4,500,000, which can be used to offset future income subject to New Jersey taxes. The New Jersey tax loss carryforwards will expire beginning in 2000 through 2004. As of June 30, 1998, the Company has federal research tax credit carryforwards for income tax return purposes of approximately $1,486,000 available to reduce future income subject to income taxes. The federal research credit carryforwards expire in 2012. As of June 30, 1998, the Company has unused California research and development tax credits of approximately $644,000; these research credits will carryforward indefinitely until utilized. Federal and state tax laws impose restrictions on the utilization of net operating loss and tax credit carryforwards in the event of an "ownership change" as defined by the Internal Revenue code. The Company has not yet determined to what extent these provisions will restrict its ability to utilize its net operating loss and tax credit carryforwards pursuant to these provisions. (6) PREFERRED STOCK The Company has authorized 30,000,000 shares of preferred stock as of June 30, 1998, of which the following are designated as issued and outstanding:
SHARES SHARES ISSUED AND SERIES DESIGNATED OUTSTANDING ------ ---------- ----------- AA................................................. 3,750,000 3,298,655 A.................................................. 205,600 205,600 B.................................................. 4,493,748 3,419,842 C.................................................. 6,918,600 6,168,600 D.................................................. 8,517,352 8,279,590 ---------- ---------- 23,885,300 21,372,287 ========== ==========
The rights, preferences, and privileges of these series of preferred stock are explained below. (a) Conversion Each share of preferred stock is convertible into common stock at the option of the holder at a rate of one share of common stock for each share of preferred stock, subject to adjustment to protect against dilution. F-14 DIVA SYSTEMS CORPORATION AND SUBSIDIARY (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997 AND 1998 (6) PREFERRED STOCK (CONTINUED) Each share of Series D preferred stock shall automatically be converted into shares of common stock immediately prior to the closing of an underwritten public offering of at least $6.80 per share and an aggregate offering price of not less than $15,000,000. Each share of Series C preferred stock shall automatically be converted into shares of common stock immediately prior to the closing of an underwritten public offering of at least $5.00 per share and an aggregate offering price of not less than $15,000,000. Each share of Series A and B preferred stock shall automatically be converted into shares of common stock immediately prior to the closing of an underwritten public offering of at least $2.00 per share and an aggregate offering price of not less than $10,000,000. Each share of Series AA preferred stock shall automatically be converted into shares of common stock immediately prior to the closing of an underwritten public offering with an aggregate offering price of not less than $15,000,000. The Company has reserved 23,651,896 shares of common stock in the event of conversion. (b) Liquidation Preferences In the event of liquidation or sale of the Company, distributions to the Company's stockholders shall be made in the following manner: first, $5.72 per share for Series D preferred stock and $4.205 per share for Series C preferred stock; then $0.855 per share for Series B preferred stock; then $0.50 per share for Series A preferred stock; and then $6.50 per share for Series AA preferred stock. The holders of preferred stock are further entitled to any remaining assets which will be distributed ratably among the holders of Class C common stock (see Note 7), common stock, and preferred stock on an "as if converted" basis after payment of preferential amounts to the holders of Class C common stock, common stock, and Class B common stock. (c) Voting Holders of preferred stock are entitled to one vote for each share of common stock into which such shares can be converted. (d) Dividends In any fiscal year, the Company's Board of Directors may declare noncumulative cash dividends out of legally available assets at the rates of $0.03, $0.055, $0.25, $0.345, and $0.39 per share for Series A, B, C, D, and AA preferred stock, respectively. If declared, such dividends must be paid before any dividends on common stock. The holders of Series D and C preferred stock have preference and priority to any payment of any dividend on Series A, B, and AA preferred stock and common stock. The holders of Series B preferred stock have preference and priority to any payment of any dividend on Series A and AA preferred stock and common stock. The holders of Series A preferred stock have preference and priority to any payment of any dividend on Series AA preferred stock and common stock. The holders of Series AA preferred stock have preference and priority to any payment of any dividend on common stock. As of June 30, 1997 and 1998, no dividends had been declared. (7) COMMON STOCK The Company has authorized 65,000,000 shares of common stock as of June 30, 1998, of which two shares have been designated Class B common stock and 857,370 shares have been designated Class C common stock. As of June 30, 1998, 16,342,808 shares of common stock and 857,370 shares of Class C common stock were issued and outstanding. F-15 DIVA SYSTEMS CORPORATION AND SUBSIDIARY (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997 AND 1998 (7) COMMON STOCK (CONTINUED) The relative designations, rights, preferences, and restrictions of the Class B and C common stock are as follows: (a) Conversion Each share of Class C common stock is convertible into common stock at the option of the holder at a rate of one share of common stock for each share of Class C common stock, subject to adjustment to protect against dilution. Each share of Class C common stock shall automatically be converted into shares of common stock immediately prior to the closing of an underwritten public offering of at least $2.00 per share and an aggregate offering price of not less than $10,000,000. (b) Liquidation Preferences In the event of any liquidation and after payment to all holders of preferred stock of their full preferential amounts, the holders of Class C common stock shall be paid $0.82 per share. If there are insufficient funds to distribute among all holders of Class C common stock, then the entire remaining assets shall be distributed among the holders of Class C common stock on a pro rata basis. After payment to the holders of Class C common stock, then the holders of common stock shall be entitled to $0.025 per share. After payment to the holders of common stock, the holders of Class B common stock shall be entitled to $5.00 per share. Any remaining assets shall be distributed to all holders of Series A, B, and C preferred stock, Class C common stock, and common stock on a pro rata basis, based on the number of shares of common stock on an "as if converted" basis. (c) Dividends No dividends shall be paid on any share of common stock unless a dividend is paid on shares of Series A, B, C, D, and AA preferred stock. In August and October 1995, in connection with a consulting agreement, 647,000 shares of the Company's common stock were sold subject to repurchase options. The Company's repurchase option lapses through October 1997 for 180,000 shares. The repurchase option on the remaining 467,000 shares lapses based on the Company's ability to secure financing. As of June 30, 1997 and 1998, 301,800 and -0- shares, respectively, were subject to repurchase. (8) OPTIONS AND WARRANTS (a) Warrants In connection with the issuance of the 1996 Notes (see Note 4), $285,000 of the proceeds has been allocated to the common stock warrants. Each warrant entitles the holder to purchase 40.4 shares of common stock for $0.005 per share. The warrants expire on the earlier of an exercise event, as defined, or 10 years from the date of issuance. Warrants to purchase 1,073,906 shares of Series B preferred stock at $0.855 and $1.50 per share were issued in October 1995 and May 1996, respectively, in connection with bridge financings that were repaid in October F-16 DIVA SYSTEMS CORPORATION AND SUBSIDIARY (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997 AND 1998 (8) OPTIONS AND WARRANTS (CONTINUED) 1995 and June 1996, respectively. The term of these warrants is five years from date of issue. The fair value of these warrants was not material. In June 1996, the Company's Board of Directors granted warrants to key contractors to purchase 71,000 shares of the Company's common stock at a price of $2.00 per share. The term of these warrants is 10 years, and these warrants only become exercisable upon the earlier of 5 years from the date of grant or upon the closing of an initial public offering of the Company's stock or an acquisition of the Company. The fair value of these warrants was not material. During the year ended June 30, 1998, warrants to purchase 5,000 shares of the Company's common stock were canceled. In October 1996, the Company issued warrants to purchase 750,000 shares of Series C preferred stock at $4.21 per share. The terms of these warrants are 5 and 10 years from date of issue. The fair value of these warrants was not material. In October 1997, the Company issued warrants to purchase 200,000 shares of Series D preferred stock at $5.72 per share. The warrants are immediately exercisable and expire 5 years from date of issue. The fair value of these warrants was not material. In connection with the issuance of the 1998 Notes (see Note 4), $18,057,000 of the proceeds has been allocated to the common stock warrants. Such amount has been included in debt discount and is being amortized to interest expense using the effective interest method over the period that the 1998 Notes are outstanding. Each warrant entitles the holder to purchase two shares of common stock for $0.005 per share for an aggregate of 2,778,000 shares of common stock. The warrants are exercisable beginning one year after the closing date of the 1998 Notes and expire upon maturity of the 1998 Notes. In May 1998, the Company's Board of Directors granted warrants to consultants to purchase 20,000 shares of the Company's common stock at a price of $4.00 per share. The term of these warrants is 10 years, and these warrants only become exercisable upon the earlier of 5 years from the date of grant or upon the closing of an initial public offering of Company's common stock or an acquisition of the Company. The fair value of these warrants is not material. (b) Stock Plans In August 1995, the Company adopted the 1995 Stock Plan (the 1995 Plan) under which incentive stock options and nonstatutory stock options may be granted to employees and consultants of the Company. The exercise price for incentive stock options is at least 100% of the fair market value on the date of grant for employees owning less than 10% of the voting power of all classes of stock and at least 110% of the fair market value on the date of grant for employees owning more than 10% of the voting power of all classes of stock. For nonstatutory stock options, the exercise price is at least 110% of the fair market value on the date of grant for employees owning more than 10% of the voting power of all classes of stock and at least 85% for employees owning less than 10% of the voting power of all classes of stock. Options generally expire in 10 years; however, they may be limited to 5 years if the optionee owns stock representing more than 10% of the Company. Vesting periods are determined by the Company's Board of Directors and generally provide for ratable vesting over 4 to 5 years. F-17 DIVA SYSTEMS CORPORATION AND SUBSIDIARY (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997 AND 1998 (8) OPTIONS AND WARRANTS (CONTINUED) In August 1995, the Company granted immediately exercisable nonstatutory stock options to the founders of the Company, subject to repurchase by the Company at a rate equivalent to the vesting schedule of each option. As of June 30, 1997 and 1998, 392,400 and 261,600 shares, respectively, were subject to repurchase. In April 1998, in connection with the merger of SRTC, the Company adopted the 1998 Stock Plan (the "1998 Plan") whereby the Company reserved 380,767 shares of its common stock for issuance through incentive stock options and nonstatutory stock options to employees, directors, and consultants of SRTC. In April 1998, all options under the 1998 Plan were granted at an exercise price of $2.40. The options expire 10 years from the vesting commencement date, generally the hire date. The options are exercisable in accordance with the following vesting schedule: 10% of the shares subject to option shall vest 6 months after the vesting commencement date and 5% of the shares subject to option shall vest each 3-month period thereafter. However, in the event that the option holder is no longer a service provider to the Company prior to October 1, 1998, no shares subject to the option shall vest. In April 1998, in connection with the merger of SRTC, the Company reserved 276,792 shares of its Series AA preferred stock for issuance upon exercise of options to purchase common stock of SRTC, which were assumed by the Company. Each option assumed by the Company continues to be subject to the terms and conditions, including vesting, set forth in the original SRTC option plan. All stock options have 10 year terms and vest ratably over 4 years from the date of grant. During the year ended June 30, 1998, 21,116 options were exercised. As of June 30, 1998, 110,312 shares were vested. (c) Accounting for Stock-Based Compensation The Company uses the intrinsic value method in accounting for its common stock option plans. Although the exercise price of each option was generally higher than the fair value of the underlying common stock as of the grant date for options granted during 1998, compensation cost was not recorded because it was immaterial. Compensation cost related to grants to nonemployees in 1997 and 1998 was not material. Had compensation cost for the Company's stock- based compensation plan been determined consistent with SFAS No. 123, the Company's pro forma net loss would have been increased to approximately $11,296,000, $34,022,000, $85,767,000, and $131,085,000 for the years ended June 30, 1996, 1997, and 1998, and for the period from July 1, 1995 (inception) to June 30, 1998, respectively. Pro forma net loss reflects only options granted in 1996, 1997, and 1998. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net loss amounts presented above because compensation cost is reflected over the options' vesting period of five years and compensation cost for options granted prior to July 31, 1996, is not considered. F-18 DIVA SYSTEMS CORPORATION AND SUBSIDIARY (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997 AND 1998 (8) OPTIONS AND WARRANTS (CONTINUED) The fair value of each option is estimated on the date of grant using the minimum value method with the following weighted-average assumptions:
JUNE 30, -------------------------------- 1997 1997 1998 ---------- ---------- ---------- Dividends................................ -- -- -- Volatility............................... -- -- -- Expected life............................ 2.42 years 3.52 years 3.18 years Risk-free interest rate.................. 5.68% 6.21% 5.64%
A summary of the status of the Company's common stock option plans follows:
1996 1997 1998 -------------------- -------------------- -------------------- WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE --------- --------- --------- --------- --------- --------- Outstanding at beginning of year................ -- $ -- 841,000 $0.13 3,105,500 $0.52 Granted................ 1,625,000 0.08 2,608,000 0.63 2,901,750 1.63 Exercised.............. (664,000) 0.01 (301,000) 0.35 (565,050) 0.47 Canceled............... (120,000) 0.10 (42,500) 0.51 (466,380) 0.77 --------- --------- --------- Outstanding at end of year................... 841,000 0.13 3,105,500 0.52 4,975,820 1.14 ========= ========= ========= Options exercisable at end of year............ 179,750 0.09 895,600 0.25 912,738 0.63 ========= ========= ========= Weighted-average fair value of options granted during the year at market.............. 1,625,000 0.02 2,608,000 0.12 2,901,750 0.26 ========= ========= =========
The following table summarizes information about common stock options outstanding as of June 30, 1998:
OUTSTANDING EXERCISABLE ------------------------------------ ----------------- WEIGHTED- AVERAGE WEIGHTED- WEIGHTED- REMAINING AVERAGE AVERAGE RANGE OF CONTRACTUAL LIFE EXERCISE EXERCISE EXERCISE PRICE SHARES (YEARS) PRICE SHARES PRICE -------------- --------- ---------------- --------- ------- --------- $0.005 -- 0.372 404,500 7.37 $0.07 197,200 $0.07 0.73 -- 0.625 2,104,350 8.55 0.62 552,250 0.63 1.25 1,360,020 9.30 1.25 154,690 1.25 2.40 1,106,950 9.82 2.40 8,598 2.40 --------- ---- ----- ------- ----- 4,975,820 8.94 1.14 912,738 0.63 ========= ==== ===== ======= =====
(9) RELATIONSHIP WITH SYSTEMS INTEGRATOR The Company has a license agreement with a systems integrator (the "Integrator") whose primary market is the U.S. Federal Government, under which the Company granted the Integrator exclusive rights to the U.S. Government Intelligence and Surveillance market sectors. Commencing January 1, 2000, the Integrator shall pay the Company a running royalty of 5% of gross sales by the Integrator with a minimum of $500,000 per year. The Integrator may cancel this agreement upon 180 days written notice to the Company. The Company may cancel this agreement upon the occurrence of certain events. F-19 DIVA SYSTEMS CORPORATION AND SUBSIDIARY (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 1997 AND 1998 (10) ACQUISITION OF NORSTAR MULTIMEDIA, INC. On July 22, 1996, the Company acquired Norstar Multimedia, Inc. in a business combination accounted for by the purchase method. The purchase price of $4,061,000 was paid in the form of $3,358,000 in cash and 857,370 shares of Class C common stock at $0.82 per share. The entire purchase price of $4,061,000 was allocated to the acquisition of in-process research and development and was charged to expense during the year ended June 30, 1997. (11) COMMITMENTS AND CONTINGENCIES (a) Leases The Company leases its facilities under operating leases that expire through 2001. The future minimum lease payments pursuant to these leases are as follows (in thousands):
YEAR ENDING JUNE 30, -------------------- 1999................................................. $1,021 2000................................................. 477 2001................................................. 398 ------ $1,896 ======
Total rent expense for the years ended June 30, 1996, 1997, and 1998, and for the period from July 1, 1995 (inception) to June 30, 1998, was $36,000, $223,000, $597,000, and $856,000, respectively. (b) Litigation The Company is a party to certain claims arising out of the normal conduct of its business. While the ultimate resolution of such claims against the Company cannot be predicted with certainty, management expects that these matters will not have a material adverse effect on the consolidated financial position, results of operations, or cash flows of the Company. F-20 INDEPENDENT AUDITORS' REPORT The Board of Directors Sarnoff Real Time Corporation: We have audited the accompanying balance sheets of Sarnoff Real Time Corporation (a development stage company) as of December 31, 1996 and 1997, and the related statements of operations, stockholders' (deficit) equity and cash flows for each of the years in the two-year period ended December 31, 1997, and for the period from May 21, 1993 (date of inception) to December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Sarnoff Real Time Corporation (a development stage company) as of December 31, 1996 and 1997, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 1997, and for the period from May 21, 1993 (date of inception) to December 31, 1997, in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company is in the development stage and has incurred net losses and negative operating cash flows since inception that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. KPMG Peat Marwick LLP Short Hills, New Jersey February 11, 1998 F-21 SARNOFF REAL TIME CORPORATION (A DEVELOPMENT STAGE COMPANY) BALANCE SHEETS ASSETS
DECEMBER 31, ---------------------- 1996 1997 ---------- ---------- (IN THOUSANDS, EXCEPT SHARE DATA) Current assets: Cash and cash equivalents............................. $ 2,547 $ 460 Accounts receivable -- affiliated company............. 770 -- Inventory............................................. 3,055 1,889 Prepaid and other current assets...................... 52 74 ---------- ---------- Total current assets............................... 6,424 2,423 ---------- ---------- Fixed assets, net of accumulated depreciation.......... 1,098 1,162 Security deposit....................................... 250 250 ---------- ---------- Total assets....................................... $ 7,772 $ 3,835 ========== ========== LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY Current liabilities: Accounts payable and accrued expenses................. $ 4,209 $ 2,014 Customer deposits -- affiliated company............... 2,044 4,809 Unearned revenue...................................... 787 -- ---------- ---------- Total current liabilities.......................... 7,040 6,823 ---------- ---------- Stockholders' (deficit) equity: Preferred stock, $0.01 par value; 20,000,000 shares authorized: Series A, convertible, 7,430,344 shares issued and outstanding in 1996 and 1997 (liquidation preference $6,811)............................................. 74 74 Series B, 1 share issued and outstanding............. -- -- Common stock, $0.01 par value; 30,000,000 shares authorized, issued and outstanding 12,364,319 shares in 1996 and 12,804,849 shares in 1997................ 124 128 Additional paid-in capital............................ 6,653 6,666 Deficit accumulated during the development stage...... (6,119) (9,856) ---------- ---------- Total stockholders' (deficit) equity............... 732 (2,988) ---------- ---------- Total liabilities and stockholders' (deficit) equity............................................ $ 7,772 $ 3,835 ========== ==========
See accompanying notes to financial statements. F-22 SARNOFF REAL TIME CORPORATION (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF OPERATIONS
PERIOD FROM INCEPTION YEARS ENDED (MAY 21, DECEMBER 31, 1993) TO -------------- DECEMBER 31, 1996 1997 1997 ------ ------- ------------ (IN THOUSANDS) Revenue: Sales -- affiliated company....................... $3,219 $ 5,407 $ 8,626 Sales -- other.................................... 651 -- 717 Research and development contract................. 5,763 2,837 10,050 Licensing agreement............................... 150 -- 1,800 ------ ------- ------- Total revenue.................................. 9,783 8,244 21,193 ------ ------- ------- Costs and expenses: Cost of sales..................................... 2,530 2,843 5,388 Research and development.......................... 5,758 7,884 20,444 General and administrative........................ 1,452 1,357 4,995 ------ ------- ------- Total costs and expenses....................... 9,740 12,084 30,827 ------ ------- ------- Earnings (loss) from operations.................... 43 (3,840) (9,634) Interest income (expense).......................... 107 103 (222) ------ ------- ------- Net earnings (loss)................................ $ 150 $(3,737) $(9,856) ====== ======= =======
See accompanying notes to financial statements. F-23 SARNOFF REAL TIME CORPORATION (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY FOR THE PERIOD FROM MAY 21, 1993 (INCEPTION) TO DECEMBER 31, 1997
DEFICIT ACCUMULATED PREFERRED STOCK COMMON STOCK ADDITIONAL DURING THE ---------------- ------------------ PAID-IN DEVELOPMENT SHARES AMOUNT SHARES AMOUNT CAPITAL STAGE TOTAL --------- ------ ---------- ------ ---------- ----------- ------- (IN THOUSANDS, EXCEPT SHARE DATA) Issuance of shares of common stock upon incorporation (May 21, 1993).................. -- $-- 100 $ -- $ -- $ -- $ -- --------- --- ---------- ---- ------ ------- ------- Balance, December 31, 1993................... -- -- 100 -- -- -- -- Issuance of common stock................. -- -- 17 -- 23 -- 23 20,000 for 1 common stock split........... -- -- 2,329,883 23 (23) -- -- Exercise of options.... -- -- 670,000 7 -- -- 7 Net loss............... -- -- -- -- -- (5,001) (5,001) --------- --- ---------- ---- ------ ------- ------- Balance, December 31, 1994................... -- -- 3,000,000 30 -- (5,001) (4,971) Repurchase and retirement of common stock................. -- -- (40,000) -- (20) -- (20) Exercise of options.... -- -- 631,250 6 -- -- 6 Issuance of preferred stock upon debt conversion............ 7,430,344 74 -- -- 6,737 -- 6,811 Issuance of common stock in exchange for common stock of affiliate............. 1 -- 8,067,074 81 418 -- 499 Net loss............... -- -- -- -- -- (1,268) (1,268) --------- --- ---------- ---- ------ ------- ------- Balance, December 31, 1995................... 7,430,345 74 11,658,324 117 7,135 (6,269) 1,057 Distribution of common stock of affiliate.... -- -- -- -- (482) -- (482) Exercise of options.... -- -- 705,995 7 -- -- 7 Net earnings........... -- -- -- -- -- 150 150 --------- --- ---------- ---- ------ ------- ------- Balance, December 31, 1996................... 7,430,345 74 12,364,319 124 6,653 (6,119) 732 Distribution of common stock of affiliate.... -- -- 478,551 4 13 -- 17 Exercise of options.... -- -- (38,021) -- -- -- -- Net earnings........... -- -- -- -- -- (3,737) (3,737) --------- --- ---------- ---- ------ ------- ------- Balance, December 31, 1997................... 7,430,345 $74 12,804,849 $128 $6,666 $(9,856) $(2,988) ========= === ========== ==== ====== ======= =======
See accompanying notes to financial statements. F-24 SARNOFF REAL TIME CORPORATION (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF CASH FLOWS
PERIOD FROM INCEPTION YEARS ENDED (MAY 21, DECEMBER 31, 1993) TO ---------------- DECEMBER 31, 1996 1997 1997 ------- ------- ------------ (IN THOUSANDS) Cash flows from operating activities: Net earnings (loss)............................ $ 150 $(3,737) $(9,856) Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: Depreciation.................................. 60 274 340 Changes in net assets and liabilities: Accounts receivable and other current assets. (770) 770 -- Inventory.................................... (2,775) 1,166 (1,889) Prepaid and other current assets............. (4) (22) (74) Accounts payable and accrued expenses........ 3,627 (2,195) 2,014 Customer deposits -- affiliated company...... 2,044 2,765 4,809 Unearned revenue............................. 646 (787) -- ------- ------- ------- Net cash provided by (used in) operating activities................................. 2,978 (1,766) (4,656) ------- ------- ------- Cash flows from investing activities: Security deposit............................... (250) -- (250) Capital expenditures........................... (1,100) (338) (1,502) Employee purchase of securities................ 17 -- 17 ------- ------- ------- Net cash used in investing activities....... (1,333) (338) (1,735) ------- ------- ------- Cash flows from financing activities: Issuance of common stock....................... -- -- 23 Repurchase of common stock..................... -- -- (20) Exercise of options............................ 7 17 37 Proceeds from convertible debt................. -- -- 6,811 ------- ------- ------- Net cash provided by financing activities... 7 17 6,851 ------- ------- ------- Net increase in cash and cash equivalents....... 1,652 (2,087) 460 Cash and cash equivalents, beginning of period.. 895 2,547 -- ------- ------- ------- Cash and cash equivalents, end of period........ $ 2,547 $ 460 $ 460 ======= ======= ======= Supplemental disclosures of cash flow information: Noncash financing and investing activities: Issuance of common stock in exchange for affiliate stock............................... $ -- $ -- $ 499 ======= ======= ======= Distribution of affiliate stock................ $ 482 $ -- $ 482 ======= ======= ======= Issuance of preferred stock upon debt conversion.................................... $ -- $ -- $ 6,811 ======= ======= =======
See accompanying notes to financial statements. F-25 SARNOFF REAL TIME CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE DATA) (1) PENDING MERGER On January 15, 1998, Sarnoff Real Time Corporation (the Company) and DIVA Systems Corporation (DIVA) entered into an Agreement and Plan of Reorganization, pursuant to which the Company will merge with and into DIVA, with DIVA as the surviving entity. DIVA currently owns approximately 40% of the issued and outstanding capital stock of the Company. In exchange for the remaining 60% of the issued and outstanding capital stock of the Company, DIVA will issue approximately 1,634,700 shares of Series AA Preferred Stock to Company stockholders, other than DIVA. Consummation of the merger is subject to, among other things, receipt of a permit from the California Department of Corporations, the approval of the Company's and DIVA's stockholders, and other conditions customary for transactions of this type. See note 4 for further details on the Company's relationship with DIVA. (2) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES Description of Business The Company, a Delaware corporation, was formed in May 1993 (inception) to develop high performance digital processing systems. The Company's systems are video servers for the distribution of content on networks and as a tool for the development of digital components and content (e.g., video system simulators and encoders). Substantially all of the Company's revenues are derived through its relationship with an affiliated company (note 4). The Company achieves its performance attributes through operating, application, and program software that exploit a proprietary computing platform designed at the Sarnoff Corporation (Sarnoff), a video system developer. All rights to this platform held by Sarnoff have been licensed to the Company on an exclusive, perpetual and royalty-free basis. As of December 31, 1997, Sarnoff holds approximately a 42.0% interest in the outstanding capital stock of the Company (39.9% on a fully diluted basis). Since inception, the Company has been preparing this platform for commercialization, hiring engineers and executive personnel, developing software, and meeting with prospective customers and strategic partners. In 1995, the Company tested alpha systems. Sales of beta units began in January 1996. To date, these beta systems have been used in laboratories and test development sites, but they have not been deployed commercially. The Company anticipates continuing beta testing through the middle of 1998. The Company has incurred cumulative net losses and negative operating cash flows since inception that raise substantial doubt about its ability to continue as a going concern. The accompanying financial statements have been prepared contemplating the Company continuing in existence as a going concern. Should the merger discussed in note 1 not be consummated, continuation of the Company as a going concern will be dependent upon management's ability to obtain additional financing and the successful development and marketing of its products. There is no assurance that additional financing will be available. Cash and Cash Equivalents Cash and cash equivalents consist of cash and highly liquid investments such as commercial paper with maturities of less than 90 days. Inventories Inventories are stated at the lower of cost or market, using the first-in, first-out (FIFO) method, and consist of work-in-process. F-26 SARNOFF REAL TIME CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE DATA) (2) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED) Fixed Assets Fixed assets consist of lab, computer and office equipment and office furniture. Fixed assets are stated at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the respective assets, generally five years. Repairs and maintenance are charged to expense as incurred. Revenue Recognition The Company recognizes revenue from sales of systems when the systems are accepted at customer sites. The Company recognizes revenue under research and development arrangements with DIVA as the Company incurs research and development expenses for the video-on-demand application. Research and Development Research and development costs include costs incurred in the design and development of the Company's configured video servers. Research and development costs are expensed as incurred. Income Taxes Income taxes are accounted for under the asset and liability method. Deferred income taxes reflect the net tax effects of temporary differences between the carrying value of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred income taxes are measured using the enacted tax rates and laws that are anticipated to be in effect when the temporary differences are expected to be recovered or settled. Stock Option Plan The Company accounts for its stock option plan using the intrinsic value method as prescribed by APB Opinion No. 25, and related interpretations and provides the pro-forma disclosures as if the fair value method defined in SFAS 123 had been applied. Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. F-27 SARNOFF REAL TIME CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE DATA) (2) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED) Fair Value of Financial Instruments The carrying value of financial instruments, including cash and cash equivalents, accounts payable and accrued expenses and customer deposits -- affiliated companies approximated fair value as of December 31, 1997, due to the relatively short maturities of these instruments. (3) FIXED ASSETS The following is a summary of fixed assets at cost, less accumulated depreciation at December 31, 1996 and 1997:
1996 1997 ------ ----- Research and development equipment.......................... $ 414 685 Furniture and fixtures and other equipment.................. 750 817 ------ ----- 1,164 1,502 Less accumulated depreciation............................... (66) (340) ------ ----- Equipment, net.......................................... $1,098 1,162 ====== =====
Depreciation expense charged to operations was $60 in 1996, $274 in 1997, and $340 since inception. (4) RELATIONSHIP WITH DIVA In December 1995, the Company entered into a joint equity investment and license agreement (the License Agreement) with DIVA, whereby the Company acquired 3,327,000 shares of DIVA's common stock, representing a 37.5% ownership interest in the equity of DIVA on a fully diluted basis, plus one share of Class B common stock in exchange for 8,067,074 shares of the Company's common stock representing a 37.5% ownership in the Company on a fully diluted basis, plus one share of Series B preferred stock. This transaction was recorded at the estimated fair values of the Company's and DIVA's common and preferred stock exchanged. In February 1996, the Company effected a pro rata dividend distribution to its shareholders and granted option holders the rights to purchase DIVA common shares at cost ($0.15 per share) on a pro rata basis. Substantially all of the DIVA common stock held by the Company was distributed through these transactions. Under the License Agreement the Company grants to DIVA the exclusive right to purchase the Company's servers for use in DIVA's business for all consumer video, audio, and data applications in the Americas and Europe. During the years ended December 31, 1996 and 1997, the Company sold to DIVA server components and related spare parts totaling $3,219 and $5,407, respectively and $8,626 inception to date. No amounts were sold to DIVA prior to 1996. The License Agreement also provides for advance payments, guaranteed gross margins and minimum volumes upon full commercial deployment of the Company's products. Pursuant to the terms of the License Agreement, DIVA also agreed to pay the Company an aggregate amount of $8,000 to support the Company's research and development efforts. The Company received $1,450 in 1995 and $6,550 in 1996, and $8,000 inception to date under this research and development arrangement. A portion of the development funds were unearned as of December 31, 1996. The Company has received all research and development funding due under the License Agreement. F-28 SARNOFF REAL TIME CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE DATA) (4) RELATIONSHIP WITH DIVA (CONTINUED) On December 4, 1997, the Company and DIVA entered into a Development Services Agreement. The Development Services Agreement requires DIVA to pay the Company $4,900 in development fees and $2,300 as advance deposits on servers in exchange for the Company's continued development of the Sarnoff Server for DIVA's video-on-demand application. In 1997, the Company received $3,000 under this agreement. The Company recorded $2,050 as research and development contract revenue in 1997 and inception to date and $950 as server deposits. The Company also received reimbursement from DIVA totaling $149 in 1996 and $210 from inception to date for certain administrative and marketing services rendered by the Company on their behalf. The Company did not receive any such reimbursement in 1997. Accounts receivable due from DIVA were $760 at December 31, 1996. No amounts are outstanding as of December 31, 1997. (5) RELATIONSHIP WITH SARNOFF CORPORATION As discussed in note 2, Sarnoff developed the underlying technology being commercialized by the Company. Subsequent to the Company's formation, Sarnoff provided additional funding of $6,811 (including interest of $474 from inception to November 1995) for the Company's continuing research and development efforts through a borrowing arrangement. In November 1995, Sarnoff and the Company agreed to convert the indebtedness into equity. Sarnoff received 7,430,344 shares of the Company's Series A convertible preferred stock (see note 9) in satisfaction of the outstanding indebtedness. Prior to November 1996, the Company rented space and equipment and utilized administrative services from Sarnoff. In November 1996, the Company moved outside Sarnoff to rented research and office space, but continues to rent equipment from Sarnoff. Payments to Sarnoff for the aforementioned services were $373 in 1996, $203 in 1997, and $854 since inception. (6) RELATIONSHIP WITH SYSTEMS INTEGRATOR The Company has a license agreement with a systems integrator (the Integrator) whose primary market is the U.S. Federal Government, under which the Company granted the Integrator exclusive rights to the U.S. Government Intelligence and Surveillance market sectors. Commencing January 1, 2000, the integrator shall pay the Company a running royalty of 5% of gross sales by the Integrator with a minimum of $500 per year. In lieu of running royalty payments from the effective date to December 31, 1999, the Integrator paid the Company a non-refundable prepaid royalty of $1,800. In 1996, the Company sold $651 of beta systems to this Integrator. No systems were sold to this Integrator in 1997 and prior to 1996. The Integrator may cancel this agreement upon 180 days written notice to the Company. The Company may cancel this agreement upon the occurrence of certain events. In September 1995, the Company entered into a cancelable Purchase Agreement with the contract manufacturing division of the same Integrator (the Contract Manufacturer). Under this agreement, the Contract Manufacturer agreed to produce the Company's system hardware requirements for a three-year period, and the Company has agreed to purchase all of its production requirements from the Contract Manufacturer. The Purchase Agreement does not contain any minimum purchase requirements. F-29 SARNOFF REAL TIME CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE DATA) (7) COMMITMENTS The Company leases office facilities and computer equipment under non- cancelable operating leases. Minimum rental commitments are as follows:
AMOUNT ------ 1998..................................... $ 477 1999..................................... 469 2000..................................... 463 2001..................................... 386 ------ $1,795 ======
Rent expense under operating leases during 1996 and 1997 was $482 and $690, respectively, and $1,642 since inception. The office facility lessor requires the Company to maintain a letter of credit for $500 in favor of the lessor. As security for the letter of credit the bank requires the Company to establish and maintain a cash collateral account in the amount of $250 which is included in security deposit on the accompanying balance sheets. Drawings on the letter of credit, if any, will bear interest at the bank's prime rate (8.50% at December 31, 1997) plus 3%. No amounts have been drawn as of December 31, 1997. (8) INCOME TAXES Income tax expense (benefit) differed from the amounts computed by applying the U.S. Federal income tax rate of 34% to pretax earnings (loss) as a result of the following:
PERIOD FROM INCEPTION YEAR ENDED (MAY 21, DECEMBER 31, 1993) TO -------------- DECEMBER 31, 1996 1997 1997 ------ ------- ------------ Computed tax expense (benefit) at 34%....... $ 51 (1,271) (3,351) Permanent differences at 34%................ 4 8 16 (Decrease) increase in valuation allowance for Federal deferred tax assets................ (55) 1,263 3,335 ----- ------- ------ $ -- -- -- ===== ======= ======
F-30 SARNOFF REAL TIME CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE DATA) (8) INCOME TAXES (CONTINUED) The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1996 and 1997 are presented below:
1996 1997 ------- ------ Deferred tax assets: Federal and state net operating loss carryforward........ $ 2,348 3,884 Non-deductible accruals.................................. 165 140 Other.................................................... 73 70 ------- ------ Total gross deferred tax assets....................... 2,586 4,094 Less valuation allowance................................. (2,562) (4,001) ------- ------ 24 93 Deferred tax liabilities: Book vs. tax basis accumulated depreciation.............. (24) 93 ------- ------ Net deferred tax assets............................... $ -- -- ======= ======
The Company has provided a valuation allowance of $2,562 and $4,001 at December 31, 1996 and 1997, respectively, against its deferred tax assets since management believes that sufficient uncertainty exists as to whether the deferred tax assets will be realized. The net change in the total valuation allowance for the years ended December 31, 1996 and 1997 was a decrease of $65 and an increase of $1,439, respectively. As of December 31, 1997, the Company has cumulative federal net operating losses of approximately $9,806 which can be used to offset future income subject to federal taxes. The federal tax loss carryforwards will expire beginning 2008 through 2012. The Company has cumulative state net operating losses of approximately $9,271, which can be used to offset future income subject to New Jersey taxes. The New Jersey tax loss carryforwards will expire beginning 2000 through 2004. The Tax Reform Act of 1986 imposes restrictions on the utilization of net operating loss carryforwards in the event of an "ownership change" as defined by the Internal Revenue Code. If an "ownership change," as defined, has occurred or may occur as a result of the pending merger described in note 1, the Company's ability to utilize its net operating loss may be limited. (9) PREFERRED AND COMMON STOCK The Company was incorporated in 1993 with the issuance of 100 shares of common stock. In December 1994, the Company increased the number of common shares authorized from 3,000 to 20,000,000. On December 16, 1994, the Company effected a stock split, whereby stockholders of record were entitled to 20,000 common shares for each common share held. In 1996, the Company increased the number of common stock authorized to 30,000,000. Also in December 1994, the Company authorized 20,000,000 shares of preferred stock. The common and preferred shares contain certain registration an first refusal rights as defined in their respective agreements. The preferred stock issued has been designated into two classes: Series A Convertible, and Series B. The Series A stock is convertible at any time into common stock on a one share per one share basis; the Series B stock is not convertible, but is redeemable (in certain circumstances) at a price of ten dollars a share at the option of the Company. There are 7,430,344 shares of common stock reserved for the Series A conversion. The Company can not pay dividends on the common stock unless it simultaneously pays an equal dividend on the F-31 SARNOFF REAL TIME CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE DATA) (9) PREFERRED AND COMMON STOCK (CONTINUED) Series A preferred stock; Series B stock pays no dividends. The Series A shares have liquidation preference up to $6,811 and the Series B share has a preference up to ten dollars. Beyond these amounts, Series A shares can participate in any remaining distribution on a pro rata basis once the common shareholders have also received $6,811. The Series B share is not entitled to participate beyond the ten dollars. With regard to voting rights, the Series A stockholder is entitled to the number of votes equal to the number of shares of common stock into which it is convertible; the Series B stockholder is not entitled to vote on any matter. Both Series A and Series B shareholders, voting as separate classes, are each entitled to elect one member of the Board of Directors and any successor thereto. (10) STOCK OPTION PLAN The Company has a stock option plan (the "Plan") pursuant to which the Company's Board of Directors may grant stock options to officers and employees. The Plan authorizes grants of options to purchase up to 3,500,000 shares of authorized but unissued common stock. Accordingly, 3,500,000 shares of the Company's common stock have been reserved. Stock options are granted with an option price equal to the stock's fair market value as determined by the Board of Directors at the date of grant. All stock options have 10-year terms and vest and become fully exercisable ratably over four years from the date of grant. On January 7, 1998, the Company's Board of Directors resolved that no further options be granted under the Plan and adopted the 1998 Stock Option Plan (the 1998 Plan). Under the 1998 Plan the maximum number of shares of common stock which may be subject to option and sold is 1,415,080 shares. The per share weighted-average fair value of stock options granted during 1996 and 1997 was $.03 and $.02 on the date of grant using the minimum value method with the following weighted average assumptions: 1996 -- expected dividend yield 0%, risk-free interest rate of 6.50%, and an expected life of 7 years; 1997 -- expected dividend yield 0%, risk-free interest rate of 6.26%, and an expected life of 3.25 years. The Company applies APB Opinion No. 25 in accounting for its Plan and, accordingly, no compensation cost has been recognized for its options in the financial statements. Had the Company recorded compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the effect on the Company's net earnings (loss) would have been changed to the pro forma amounts indicated below:
1996 1997 ---- ------ Net earnings (loss) As reported............................................... $150 (3,737) Pro forma................................................. $149 (3,741)
The pro forma net earnings (loss) reflects only options granted since December 31, 1994. Consequently, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the aforementioned results because compensation cost is incurred under SFAS 123 over the respective vesting period of such options, and options granted by the Company prior to January 1, 1995 are not reflected in the aforementioned results. F-32 SARNOFF REAL TIME CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE DATA) (10) STOCK OPTION PLAN (CONTINUED) Stock option activity during the periods indicated is as follows:
WEIGHTED- NUMBER AVERAGE OF SHARES EXERCISE PRICE --------- -------------- Balance, December 31, 1993...................... -- $ -- Granted........................................ 1,620,380 0.01 --------- Balance, December 31, 1994...................... 1,620,380 0.01 Granted........................................ 390,000 0.01 Exercised...................................... (631,250) 0.01 Forfeited...................................... (68,300) 0.01 --------- Balance, December 31, 1995...................... 1,310,830 Granted........................................ 551,500 0.07 Exercised...................................... (705,995) 0.01 Forfeited...................................... (9,209) 0.03 --------- Balance, December 31, 1996...................... 1,147,126 Granted........................................ 820,300 0.10 Exercised...................................... (478,551) 0.04 Forfeited...................................... (454,971) 0.09 --------- Balance, December 31, 1997...................... 1,033,904 =========
At December 31, 1997, the range of exercise prices and weighted-average remaining contractual life of outstanding options was $.01 -- $.10 and 8.5 years, respectively. At December 31, 1996 and 1997, the number of options exercisable was 517,305 and 333,604, respectively, and the weighted-average exercise price of those options was $.01 and $.03, respectively. (11)401(K) PLAN The Company has a non-contributory salary deferral 401(k) Retirement Plan (the Plan) covering substantially all employees. To be eligible for participation, employees must work full time for the Company. F-33 SARNOFF REAL TIME CORPORATION (A DEVELOPMENT STAGE COMPANY) BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, MARCH 31, 1997 1998 ------------ ----------- ASSETS (UNAUDITED) Current assets: Cash and cash equivalents............................ $ 460 $ 402 Inventory............................................ 1,889 2,943 Prepaids and other current assets.................... 74 64 ------ ------ Total current assets.............................. 2,423 3,409 ------ ------ Fixed assets, net of accumulated depreciation......... 1,162 1,240 Security deposit...................................... 250 250 ------ ------ Total assets...................................... $3,835 $4,899 ====== ====== LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable and accrued expenses................ $2,014 $2,627 Customer deposits -- affiliated company.............. 4,809 5,195 ------ ------ Total current liabilities......................... 6,823 7,822 ------ ------ Stockholders' deficit: Preferred stock, $0.01 par value; 20,000,000 shares authorized: Series A, convertible, 7,430,344 shares issued and outstanding at December 31, 1997, and March 31, 1998 (liquidation preference $6,811)............... 74 74 Series B, 1 share issued............................ -- -- Common stock, $0.01 par value; 30,000,000 shares authorized; 12,804,849 and 12,817,348 shares issued and outstanding at December 31, 1997, and March 31, 1998................................................ 128 128 Additional paid-in capital........................... 6,666 6,666 Deficit accumulated during the development stage..... (9,856) (9,791) ------ ------ Total stockholders' deficit....................... (2,988) (2,923) ------ ------ Total liabilities and stockholders' deficit....... $3,835 $4,899 ====== ======
See accompanying notes to financial statements. F-34 SARNOFF REAL TIME CORPORATION (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF OPERATIONS (IN THOUSANDS) UNAUDITED
THREE MONTHS PERIOD FROM ENDED MARCH INCEPTION 31, (MAY 21, 1993) --------------- TO 1997 1998 MARCH 31, 1998 ------- ------ -------------- --- Revenue: Sales -- affiliated company................ $ -- $1,965 $10,591 Sales -- other............................. -- -- 717 Research and development contract -- affiliated company....................... 787 900 10,950 Licensing agreement........................ -- -- 1,800 ------- ------ ------- Total revenue........................... 787 2,865 24,058 ------- ------ ------- Costs and expenses: Cost of sales.............................. -- 1,018 6,406 Research and development................... 1,649 1,353 21,797 General and administrative................. 289 443 5,438 ------- ------ ------- Total costs and expenses................ 1,938 2,814 33,641 ------- ------ ------- (Loss) earnings from operations............. (1,151) 51 (9,583) Interest income (expense)................... 44 14 (208) ------- ------ ------- Net (loss) earnings......................... $(1,107) $ 65 $(9,791) ======= ====== =======
See accompanying notes to financial statements. F-35 SARNOFF REAL TIME CORPORATION (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF CASH FLOWS THREE MONTHS ENDED MARCH 31, 1997 AND 1998 AND THE PERIOD FROM MAY 21, 1993 (INCEPTION) TO MARCH 31, 1998 (DOLLARS IN THOUSANDS) UNAUDITED
PERIOD FROM THREE MONTHS ENDED INCEPTION MARCH 31, (MAY 21, 1993) -------------------- TO MARCH 31, 1997 1998 1998 --------- --------- -------------- Cash flows from operating activities: Net (loss) earnings...................... $ ( 1,107) $ 65 $(9,791) Adjustments to reconcile net (loss) earnings to net cash provided by (used in) operating activities: Depreciation............................ 59 77 417 Changes in net assets and liabilities: Accounts receivable -- affiliated company............................... 770 -- -- Inventory.............................. (638) (1,054) (2,943) Prepaids and other current assets...... (210) 10 (64) Accounts payable and accrued expenses.. 11 613 2,627 Customer deposits -- affiliated company............................... 2,000 386 5,195 Unearned revenue....................... (787) -- -- --------- --------- ------- Net cash provided (used in) by operating activities................. 98 97 (4,559) --------- --------- ------- Cash flows from investing activities: Security deposit......................... -- -- (250) Capital expenditures..................... (181) (155) (1,657) Employee purchase of securities.......... -- -- 17 --------- --------- ------- Net cash used in investing activities. (181) (155) (1,890) --------- --------- ------- Cash flows from financing activities: Issuance of common stock................. -- -- 23 Repurchase of common stock............... -- -- (20) Exercise of options...................... -- -- 37 Proceeds................................. -- -- 6,811 --------- --------- ------- Net cash provided by financing activities........................... -- -- 6,851 --------- --------- ------- Net (decrease) increase in cash and cash equivalents.............................. (83) (58) 402 Cash and cash equivalents, beginning of period................................... 2,547 460 -- --------- --------- ------- Cash and cash equivalents, end of period.. $ 2,464 $ 402 $ 402 ========= ========= ======= Supplemental disclosures of cash flow information: Non cash financing and investing activities: Issuance of common stock in exchange for affiliate stock......................... $ -- $ -- $ 499 ========= ========= ======= Distribution of affiliate securities..... $ -- $ -- $ 482 ========= ========= ======= Issuance of preferred stock upon debt conversion.............................. $ -- $ -- $ 6,811 ========= ========= =======
See accompanying notes to financial statements. F-36 SARNOFF REAL TIME CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO INTERIM FINANCIAL STATEMENTS MARCH 31, 1998 THE COMPANY AND BASIS OF PRESENTATION Sarnoff Real Time Corporation (the Company), a Delaware corporation, was formed in May 1993 to develop high performance digital processing systems. The Company's systems will be configured as video servers for the distribution of digital content on networks and as a tool for the development of digital components and content (e.g., video system simulators and encoders). The Company is in the development stage, and its primary activities to date have been preparing its products for commercialization, hiring engineers and executive personnel, developing software, meeting with prospective customers and strategic partners, and deploying products in trial sites. The interim financial statements are unaudited and reflect all adjustments (consisting only of normal recurring accruals) that, in the opinion of management, are necessary for a fair presentation of the results for the interim periods. The results of operations for the current interim period are not necessarily indicative of results to be expected for the current year or any other period. These financial statements should be read in conjunction with the Company's annual financial statements for the year ended December 31, 1997. SUBSEQUENT EVENT On April 1, 1998, the Company merged with and into DIVA Systems Corporation (DIVA), with DIVA as the surviving entity. DIVA had been a 40% shareholder of the issued and outstanding capital stock of the Company. DIVA acquired the remaining 60% of the issued and outstanding stock of the Company in exchange for 3,277,539 shares of DIVA Series AA Preferred Stock and the assumption of all of the Company's options. F-37 UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS INDEX
PAGE ---- Pro Forma Combined Condensed Financial Information......................... P-2 Unaudited Pro Forma Combined Condensed Statement of Operations............. P-3 Notes to Unaudited Pro Forma Combined Condensed Financial Statements....... P-4
P-1 PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION (UNAUDITED) On January 15, 1998, the Company and SRTC executed an Agreement and Plan of Reorganization setting forth their agreement to merge SRTC into the Company, with the Company as the surviving corporation (the SRTC Transaction). On that date, the Company held approximately 40% of the outstanding capital stock of SRTC. On April 1, 1998, in exchange for the remaining approximately 60% of the issued and outstanding stock of SRTC, the Company issued 3,277,539 shares of Series AA preferred stock and assumed outstanding SRTC options. The following unaudited pro forma combined condensed statement of operations including the notes thereto give effect to the SRTC Transaction accounted for by the purchase method of accounting. The unaudited pro forma combined condensed statement of operations combines DIVA's results of operations for the year ended June 30, 1998, with SRTC's results of operations for the nine-month period ended March 31, 1998, giving effect to the business combination as if it had occurred as of the beginning of the periods presented. The following unaudited pro forma combined condensed statement of operations is not necessarily indicative of the future results of operations of the Company or the results of operations which would have resulted had the Company and SRTC been combined during the period presented. In addition, the pro forma results are not intended to be a projection of future results. The unaudited pro forma combined condensed financial statements should be read in conjunction with the financial statements DIVA and SRTC appearing elsewhere in this registration statement. P-2 UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS YEAR ENDED JUNE 30, 1998 (IN THOUSANDS)
PRO FORMA PRO DIVA SRTC ADJUSTMENTS FORMA -------- ------ ----------- -------- Revenue: Sales.............................. $ 82 $6,434 $(6,434)(A) $ 82 Research and development contract.. -- 2,950 (2,950)(C) -- Total revenue.................... 82 9,384 (9,384) 82 -------- ------ ------- -------- Operating expenses: Cost of sales...................... -- 3,407 (3,407)(A) -- Research and development........... 28,278 5,843 (2,950)(C) 31,171 Sales and marketing................ 4,170 -- -- 4,170 General and administrative......... 13,731 1,174 -- 14,905 Acquired in-process research and development....................... 18,656 -- -- 18,656 -------- ------ ------- -------- Total operating expenses......... 65,352 10,424 (6,357) 69,419 Net operating loss................... (65,270) (1,040) (3,027) (69,337) -------- ------ ------- -------- Other (income) expense, net: Equity in loss of investee......... 1,631 -- (1,235)(A) -- (396)(B) Interest income.................... (5,632) (45) -- (5,677) Interest expense (loss)............ 13,730 -- -- 13,730 -------- ------ ------- -------- Total other (income) expense, net............................. 9,729 (45) (1,631) 8,053 -------- ------ ------- -------- Loss before extraordinary item....... $(74,999) $ (995) $(1,396) $(77,390) ======== ====== ======= ========
P-3 NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS NOTE 1. PERIODS COMBINED The unaudited pro forma combined condensed statements of operations combine DIVA's results of operations for the year ended June 30, 1998, with SRTC's results of operations for the nine-month period ended March 31, 1998, giving effect to the business combination as if it had occurred as of the beginning of the period presented. NOTE 2. PRO FORMA ADJUSTMENTS The unaudited pro forma combined statement of operations gives effect to the following pro forma adjustments: A. Represents the elimination of the intercompany profit in servers purchased by DIVA from SRTC. B. Represents the elimination of DIVA's share of SRTC losses for the period. C. Represents the elimination of funded research and development payments made by DIVA to SRTC P-4 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THE OFFER OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY SECURITY OTHER THAN THOSE TO WHICH IT RELATES, NOR DOES IT CONSTITUTE AN OFFER TO SELL, OR THE SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. ---------------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary........................................................ 1 Risk Factors.............................................................. 10 Use of Proceeds........................................................... 25 Dividend Policy........................................................... 25 Capitalization............................................................ 26 Selected Consolidated Financial Data...................................... 27 Management's Discussion and Analysis of Financial Condition and Results of Operations .............................................................. 29 Business.................................................................. 35 Management................................................................ 48 Certain Relationships and Related Transactions............................ 54 Principal Stockholders.................................................... 56 The Exchange Offer........................................................ 58 Description of the Old Notes.............................................. 65 Description of the New Notes.............................................. 90 Description of Capital Stock.............................................. 91 Certain Federal Income Tax Considerations................................. 96 Plan of Distribution...................................................... 101 Legal Matters............................................................. 101 Experts................................................................... 101 Available Information..................................................... Index to Consolidated Financial Statements................................ F-1 Index to Unaudited Pro Forma Combined Condensed Financial Statements...... P-1
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- $463,000,000 PRINCIPAL AMOUNT AT MATURITY DIVA SYSTEMS CORPORATION 12 5/8% SENIOR DISCOUNT NOTES DUE 2008 ---------------- PROSPECTUS ---------------- , 199 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS Article XII of the Registrant's Amended and Restated Certificate of Incorporation provides for the indemnification of directors to the fullest extent permissible under Delaware law. Article VI of the Registrant's Bylaws provides for the indemnification of officers, directors, employees and agents of the corporation if such person acted in good faith and in a manner reasonably believed to be in and not opposed to the best interest of the corporation, and, with respect to any criminal action or proceeding the indemnified party had no reason to believe his conduct was unlawful. Section 145 of the Delaware General Corporation Law permits a corporation to include in its charter documents, and in agreements between the corporation and its directors and officers, provisions expanding the scope of indemnification beyond that specifically provided by the current law. The Registrant has entered into indemnification agreements with its directors and executive officers, and intends to enter into indemnification agreements with any new directors and executive officers in the future. The Registrant maintains liability insurance coverage for its directors and officers. ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits.
EXHIBIT NUMBER DESCRIPTION ------- ----------- 3.1 Amended and Restated Certificate of Incorporation. 3.2 Amended and Restated Bylaws. 4.1 Indenture dated as of February 19, 1998 between the Registrant and The Bank of New York, including form of Senior Discount Note Due 2008. 4.2 Specimen 12 5/8% Senior Discount Note Due 2008, Series B. *5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation. 10.1 Form of Indemnification Agreement entered into between the Registrant and all executive officers and directors. 10.2 Employment Agreement dated as of June 15, 1995 between the Registrant and Alan H. Bushell. 10.3 1995 Stock Plan and forms of agreements used thereunder. 10.4 Registration Rights Agreement dated as of February 19, 1998 among the Registrant and the Initial Purchasers. 10.5 Warrant Agreement dated as of February 19, 1998 between the Registrant and The Bank of New York. 10.6 Warrant Registration Rights Agreement dated as of February 19, 1998 among the Registrant and the Initial Purchasers. 10.7 Warrant Registration Rights Agreement dated as of May 15, 1996, as amended, by and among the Registrant, Smith Barney Inc. and Toronto Dominion Securities (USA) Inc. 10.8 Warrant Agreement dated as of May 15, 1996 between the Registrant and The Bank of New York. 10.9 Amended and Restated Stockholders Rights Agreement dated March 26, 1998 among the Registrant and certain of its stockholders. 10.10 Lease entered into July 13, 1995 between the Registrant and SRI International, as amended.
II-1
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.11 Lease entered into November 11, 1996 between the Registrant and College Road Associates, Limited Partnership. 21.1 Subsidiaries of the Registrant. 23.1 Consent of KPMG Peat Marwick LLP, independent auditors. *23.2 Consent of Counsel (included in Exhibit 5.1). 24.1 Power of Attorney (included on II-4). *25.1 Statement of Eligibility of Trustee. *27.1 Financial Data Schedule 99.1 Form of Letter of Transmittal with respect to Exchange Offer. 99.2 Form of Notice of Guaranteed Delivery. 99.3 Form of Exchange Agent Agreement.
- -------- * To be filed by Amendment (b) Financial Statement Schedules. Schedules not listed above have been omitted because the information to be set forth therein is not applicable or is shown in the financial statements or Notes thereto. ITEM 22. UNDERTAKING 1. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. 2. The undersigned Registrant hereby undertakes to respond to requests for information that is incorporated by reference into the Prospectus pursuant to Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the Registration Statement through the date of responding to the request. 3. The undersigned Registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in this Registration Statement when it became effective. 4. The undersigned registrant hereby undertakes: (a) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; II-2 (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement. (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. (b) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (c) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (d) If the registrant is a foreign private issuer, to file a post- effective amendment to the registration statement to include any financial statements required by (S)210.3-19 of this chapter at the start of any delayed offering or throughout a continuous offering. Financial statements and information otherwise required by Section 10(a)(3) of the Act need not be furnished, provided that the registrant includes in the prospectus, by means of a post-effective amendment, financial statements required pursuant to this paragraph (d) and other information necessary to ensure that all other information in the prospectus is at least as current as the date of those financial statement. Notwithstanding the foregoing, with respect to registration statements on Form F-3, a post-effective amendment need not be filed to include financial statements and information required by Section 10(a)(3) of the Act or (S)210.3-19 of this chapter if such financial statements and information are contained in periodic reports filed with or furnished to the Commission by the registrant pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the Form F-3. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Menlo Park, State of California on the 28th day of September, 1998. DIVA SYSTEMS CORPORATION /s/ Paul M. Cook ------------------------------------- Paul M. Cook Chairman and Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature Appears below hereby constitutes and appoints, jointly and severally, Paul M. Cook and Alan H. Bushell, and each of them acting individually, as his attorney-in- fact, each with full power of substitution, for him in any and all capacities, to sign any and all amendments to this Registration Statement on Form S-4 (including any post-effective amendments), and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, each acting alone, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons on the 28th day of September, 1998 in the capacities indicated:
SIGNATURE TITLE --------- ----- /s/ Paul M. Cook Chairman of the Board of Directors, ____________________________________ Chief Executive Officer (Principal Paul M. Cook Executive Officer) /s/ Alan H. Bushell President, Chief Operating Officer ____________________________________ and Chief Financial Officer Alan H. Bushell (Principal Financial Officer) /s/ William M. Scharninghausen Vice President, Finance and ____________________________________ Administration (Principal William M. Scharninghausen Accounting Officer) /s/ John W. Goddard Director ____________________________________ John W. Goddard /s/ Jules Haimovitz Director ____________________________________ Jules Haimovitz /s/ John A. Rollwagen Director ____________________________________ John A. Rollwagen /s/ Barry E. Taylor Director ____________________________________ Barry E. Taylor
II-4 DIVA SYSTEMS CORPORATION REGISTRATION STATEMENT ON FORM S-4 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION ------- ----------- 3.1 Amended and Restated Certificate of Incorporation 3.2 Amended and Restated Bylaws. 4.1 Indenture dated as of February 19, 1998 between the Registrant and The Bank of New York, including form of Senior Discount Note Due 2008. 4.2 Specimen 12 5/8% Senior Discount Note Due 2008, Series B. *5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation. 10.1 Form of Indemnification Agreement entered into between the Registrant and all executive officers and directors. 10.2 Employment Agreement dated as of June 15, 1995 between the Registrant and Alan H. Bushell. 10.3 1995 Stock Plan and forms of agreements used thereunder. 10.4 Registration Rights Agreement dated as of February 19, 1998 among the Registrant and the Initial Purchasers. 10.5 Warrant Agreement dated as of February 19, 1998 between the Registrant and The Bank of New York. 10.6 Warrant Registration Rights Agreement dated as of February 19, 1998 among the Registrant and the Initial Purchasers. 10.7 Warrant Registration Rights Agreement dated as of May 15, 1996, as amended, by and among the Registrant, Smith Barney Inc. and Toronto Dominion Securities (USA) Inc. 10.8 Warrant Agreement dated as of May 15, 1996 between the Registrant and The Bank of New York. 10.9 Amended and Restated Stockholders Rights Agreement dated March 26, 1998 among the Registrant and certain of its stockholders. 10.10 Lease entered into July 13, 1995 between the Registrant and SRI International, as amended. 10.11 Lease entered into November 11, 1996 between the Registrant and College Road Associates, Limited Partnership. 21.1 Subsidiaries of the Registrant. 23.1 Consent of KPMG Peat Marwick LLP, independent auditors. *23.2 Consent of Counsel (included in Exhibit 5.1). 24.1 Power of Attorney (included on II-4). *25.1 Statement of Eligibility of Trustee. *27.1 Financial Data Schedule 99.1 Form of Letter of Transmittal with respect to Exchange Offer. 99.2 Form of Notice of Guaranteed Delivery. 99.3 Form of Exchange Agent Agreement.
- -------- * To be filed by Amendment EX-3.1 2 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION EXHIBIT 3.1 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF DIVA SYSTEMS CORPORATION DIVA Systems Corporation, a Delaware corporation, hereby certifies as follows: The Certificate of Incorporation for DIVA Systems Corporation (the "CORPORATION") was filed in the office of the Secretary of State of the State of Delaware on June 15, 1995. All amendments to the Certificate of Incorporation reflected herein have been duly authorized and adopted by the Corporation's Board of Directors and stockholders in accordance with the provisions of Sections 242 and 245 of the Delaware General Corporation Law. This Amended and Restated Certificate of Incorporation restates and integrates and amends the Certificate of Incorporation of the Corporation. The text of the Certificate of Incorporation is amended hereby to read as herein set forth in full: ARTICLE I The name of the corporation is DIVA Systems Corporation. ARTICLE II The address of the Corporation's registered office in the State of Delaware is Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County of New Castle, zip code 19801. The name of its registered agent at such address is The Corporation Trust Company. ARTICLE III The nature of the business or purpose to be conducted or promoted by the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. ARTICLE IV The Corporation is authorized to issue two classes of shares to be designated, respectively, "Common Stock" and "Preferred Stock." Upon the filing of this Amended and Restated Certificate of Incorporation (the "FILING DATE"), each outstanding share of Common Stock shall be divided into two shares of Common Stock, and each outstanding share of Preferred Stock shall be divided into two shares of Preferred Stock of the same series. The number of shares of Common Stock authorized to be issued is Sixty-Five Million (65,000,000), of which Two (2) shares have been designated Class B Common Stock and Eight Hundred Fifty-Seven Thousand Three Hundred Seventy (857,370) shares have been designated Class C Common Stock. The number of shares of Preferred Stock authorized to be issued is Thirty Million (30,000,000), of which Two Hundred Five Thousand Six Hundred (205,600) shares have been designated as Series A Preferred Stock (the "SERIES A PREFERRED"), Four Million Four Hundred Ninety-Three Thousand Seven Hundred Forty-Eight (4,493,748) shares have been designated Series B Preferred Stock (the "SERIES B PREFERRED"), Six Million Nine Hundred Eighteen Thousand Six Hundred (6,918,600) shares have been designated Series C Preferred Stock (the "SERIES C PREFERRED"), Eight Million Five Hundred Seventeen Thousand Three Hundred Fifty-Two (8,517,352) shares have been designated Series D Preferred Stock (the "SERIES D PREFERRED") and Three Million Seven Hundred Fifty Thousand (3,750,000) shares have been designated Series AA Preferred Stock (the "SERIES AA PREFERRED"). The Common Stock and the Preferred Stock shall each have a par value of $.001 per share. The shares of Preferred Stock may be issued from time to time in one or more series. The Board of Directors is authorized, subject to limitations prescribed by law and the provisions of this Article IV, to provide for the issuance of the shares of Preferred Stock in series and, by filing a certificate pursuant to the applicable law of the State of Delaware, to establish from time to time the number of shares to be included in each such series, and to fix the designation, powers, preferences and rights of the shares of each such series and the qualifications, limitations or restrictions thereof. The authority of the Board of Directors with respect to each series shall include, but not be limited to, determination of the following: (a) The number of shares constituting that series and the distinctive designation of that series; (b) The dividend rate on the shares of that series, whether dividends shall be cumulative, and, if so, from which date or dates, and the relative rights of priority, if any, of payment of dividends on shares of that series; (c) Whether that series shall have voting rights, in addition to the voting rights provided by law, and, if so, the terms of such voting rights; (d) Whether that series shall have conversion privileges, and, if so, the terms and conditions of such conversion, including provisions for adjustment of the conversion rate in such events as the Board of Directors shall determine; (e) Whether or not the shares of that series shall be redeemable and, if so, the terms and conditions of such redemption, including the date or dates upon or after which they shall be redeemable, and the amount per share payable in case of redemption, which amount may vary under different conditions and at different redemption dates; (f) Whether that series shall have a sinking fund for the redemption or purchase of shares of that series and, if so, the terms and amount of such sinking fund; (g) The rights of the shares of that series in the event of voluntary or involuntary liquidation, dissolution or winding up of the Corporation and the relative rights of priority, if any, of payment of shares of that series; and (h) Any other relative or participating rights, preferences and limitations of that series. The relative designations, rights, preferences and restrictions of the Preferred Stock are as follows: 1. DIVIDENDS. The holders of the Series D Preferred and Series C Preferred shall be entitled to receive in any fiscal year, out of the funds legally available therefor dividends at the -2- rate of $0.345 per share and $0.25 per share, respectively (in each case adjusted for any subdivisions, combinations, consolidations or stock distributions or stock dividends with respect to such shares occurring after the Filing Date) per annum, on each outstanding share of Series D Preferred and Series C Preferred, respectively, payable in preference and priority to any payment of any dividend on the Series A Preferred, Series B Preferred, Series AA Preferred and Common Stock, when and as declared by the Board of Directors. The right to such dividends on the Series D Preferred and Series C Preferred shall not be cumulative, and no right shall accrue to holders of Series D Preferred and Series C Preferred by reason of the fact that dividends on such shares are not declared or paid in any prior year, nor shall any undeclared or unpaid dividend accrue interest. Dividends may be delivered and paid upon shares of Series D Preferred and Series C Preferred in any fiscal year of the Corporation only if dividends shall have been paid to or declared and set apart upon all outstanding Series D Preferred and Series C Preferred at such annual rate specified. The holders of the Series B Preferred shall be entitled to receive in any fiscal year, out of the funds legally available therefor dividends at the rate of $0.055 per share (adjusted for any subdivisions, combinations, consolidations or stock distributions or stock dividends with respect to such shares occurring after the Filing Date) per annum, on each outstanding share of Series B Preferred, payable in preference and priority to any payment of any dividend on the Series A Preferred, Series AA Preferred and Common Stock, when and as declared by the Board of Directors. The right to such dividends on the Series B Preferred shall not be cumulative, and no right shall accrue to holders of Series B Preferred by reason of the fact that dividends on such shares are not declared or paid in any prior year, nor shall any undeclared or unpaid dividend accrue interest. Dividends may be delivered and paid upon shares of Series B Preferred in any fiscal year of the Corporation only if dividends shall have been paid to or declared and set apart upon all outstanding Series B Preferred at such annual rate specified. The holders of the Series A Preferred shall be entitled to receive in any fiscal year, out of any funds legally available therefor dividends at the rate of $0.03 per share (adjusted for any subdivisions, combinations, consolidations or stock distributions or stock dividends with respect to such shares occurring after the Filing Date), per annum, on each outstanding share of Series A Preferred, payable in preference and priority to any payment of any dividend on the Series AA Preferred and Common Stock, when and as declared by the Board of Directors. The right to such dividends on the Series A Preferred shall not be cumulative, and no right shall accrue to holders of Series A Preferred by reason of the fact that dividends on such shares are not declared or paid in any prior year, nor shall any undeclared or unpaid dividend accrue interest. Dividends may be delivered and paid upon shares of Series A Preferred in any fiscal year of the Corporation only if dividends shall have been paid to or declared and set apart upon all outstanding Series A Preferred at such annual rate specified. The holders of the Series AA Preferred shall be entitled to receive in any fiscal year, out of any funds legally available therefor dividends at the rate of $0.39 per share (adjusted for any subdivisions, combinations, consolidations or stock distributions or stock dividends with respect to such shares occurring after the Filing Date), per annum, on each outstanding share of Series AA -3- Preferred, payable in preference and priority to any payment of any dividend on the Common Stock, when and as declared by the Board of Directors. The right to such dividends on the Series AA Preferred shall not be cumulative, and no right shall accrue to holders of Series AA Preferred by reason of the fact that dividends on such shares are not declared or paid in any prior year, nor shall any undeclared or unpaid dividend accrue interest. Dividends may be delivered and paid upon shares of Series AA Preferred in any fiscal year of the Corporation only if dividends shall have been paid to or declared and set apart upon all outstanding Series AA Preferred at such annual rate specified. No dividends shall be paid on any share of Common Stock unless a dividend is paid with respect to all outstanding shares of Series AA Preferred, Series A Preferred, Series B Preferred, Series C Preferred and Series D Preferred, in an amount for each such share of Series AA Preferred, Series A Preferred, Series B Preferred, Series C Preferred and Series D Preferred equal to or greater than the aggregate amount of such dividends for all shares of Common Stock into which each such share of Series AA Preferred, Series A Preferred, Series B Preferred or Series C Preferred could then be converted, as the case may be. 2. LIQUIDATION PREFERENCE. In the event of any liquidation, dissolution or winding up of the Corporation, either voluntary or involuntary, distributions to the stockholders of the Corporation shall be made in the following manner: (a) The holders of the Series D Preferred and Series C Preferred shall be entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds of the Corporation to the holders of the Series AA Preferred, Series A Preferred, Series B Preferred and Common Stock by reason of their ownership of such stock, the amount of $5.72 for each share of Series D Preferred then held by them, and the amount of $4.205 for each share if Series C Preferred Stock then held by them, in each case as adjusted for any subdivisions, combinations, consolidations or stock distributions or dividends with respect to such shares of Series D Preferred or Series C Preferred occurring after the Filing Date and, in addition, an amount equal to all declared but unpaid dividends on the Series D Preferred and Series C Preferred. If upon the occurrence of such event the assets and funds thus distributed among the holders of the Series D Preferred and Series C Preferred shall be insufficient to permit the payment to such holders of the Series D Preferred and Series C Preferred of the full preferential amount, then the entire assets and funds of the Corporation legally available for distribution shall be distributed among the holders of the Series D Preferred and Series C Preferred on a pro rata -------- basis, based on the aggregate liquidation preference of the shares of Series D Preferred and aggregate liquidation preference of the shares of Series C Preferred then held by each holder. (b) After payment of the full preferential amount to the holders of the Series D Preferred and Series C Preferred, the holders of the Series B Preferred shall be entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds of the Corporation to the holders of the Series A Preferred, Series AA Preferred and Common Stock by reason of their ownership of such stock, the amount of $0.855 for each share of Series B Preferred -4- then held by them, adjusted for any subdivisions, combinations, consolidations or stock distributions or dividends with respect to such shares occurring after the Filing Date and, in addition, an amount equal to all declared but unpaid dividends on the Series B Preferred. If upon the occurrence of such event the assets and funds thus distributed among the holders of the Series B Preferred shall be insufficient to permit the payment to such holders of the full preferential amount, then the entire assets and funds of the Corporation legally available for distribution shall be distributed among the holders of the Series B Preferred on a pro rata basis, based on the number of shares of Common Stock -------- issuable upon conversion of the shares of Series B Preferred then held by each holder on an as-converted basis. (c) After payment of the full preferential amount to the holders of the Series D Preferred, Series C Preferred and Series B Preferred, the holders of the Series A Preferred shall be entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds of the Corporation to the holders of the Series AA Preferred and Common Stock by reason of their ownership of such stock, the amount of $0.50 for each share of Series A Preferred then held by them, adjusted for any subdivisions, combinations, consolidations or stock distributions or dividends with respect to such shares occurring after the Filing Date and, in addition, an amount equal to all declared but unpaid dividends on the Series A Preferred. If upon the occurrence of such event the assets and funds thus distributed among the holders of the Series A Preferred shall be insufficient to permit the payment to such holders of the full preferential amount, then the entire assets and funds of the Corporation legally available for distribution shall be distributed among the holders of the Series A Preferred on a pro rata basis, based on the number of -------- shares of Common Stock issuable upon conversion of the shares of Series A Preferred then held by each holder on an as-converted basis. (d) After payment of the full preferential amount to the holders of the Series D Preferred, Series C Preferred, Series B Preferred and Series A Preferred, the holders of the Series AA Preferred shall be entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds of the Corporation to the holders of the Common Stock by reason of their ownership of such stock, the amount of $6.50 for each share of Series AA Preferred then held by them, adjusted for any subdivisions, combinations, consolidations or stock distributions or dividends with respect to such shares occurring after the Filing Date and, in addition, an amount equal to all declared but unpaid dividends on the Series AA Preferred. If upon the occurrence of such event the assets and funds thus distributed among the holders of the Series AA Preferred shall be insufficient to permit the payment to such holders of the full preferential amount, then the entire assets and funds of the Corporation legally available for distribution shall be distributed among the holders of the Series AA Preferred on a pro rata basis, based on the number of shares of Common Stock issuable upon conversion of the shares of Series AA Preferred then held by each holder on an as-converted basis. -5- (e) After payment of the full preferential amount to the holders of the Series D Preferred, Series C Preferred, Series B Preferred, Series A Preferred and Series AA Preferred, the holders of Class C Common Stock then outstanding shall be entitled to be paid the amount of $0.82 for each share of Class C Common Stock then held by them, adjusted for any subdivisions, combinations, consolidations or stock distributions or dividends with respect to such shares occurring after the Filing Date and, in addition, an amount equal to all declared but unpaid dividends on the Class C Common Stock. If upon the occurrence of such event the assets and funds thus distributed among the holders of the Class C Common Stock shall be insufficient to permit the payment to such holders of the full preferential amount, then the entire assets and funds of the Corporation legally available for distribution shall be distributed among the holders of Class C Common Stock on a pro rata basis. -------- (f) After payment of the full preferential amount to the holders of the Series D Preferred, Series C Preferred, Series B Preferred, Series A Preferred, Series AA Preferred and Class C Common Stock, the holders of Common Stock (other than Class B and Class C Common Stock) then outstanding shall be entitled to be paid the amount of $.025 for each share of Common Stock (other than Class B and Class C Common Stock) then held by them, adjusted for any subdivisions, combinations, consolidations or stock distributions or dividends with respect to such shares occurring after the Filing Date and, in addition, an amount equal to all declared but unpaid dividends on the Common Stock (other than Class B and Class C Common Stock). If upon the occurrence of such event the assets and funds thus distributed among the holders of the Common Stock (other than Class B and Class C Common Stock) shall be insufficient to permit the payment to such holders of the full preferential amount, then the entire assets and funds of the Corporation legally available for distribution shall be distributed among the holders of Common Stock (other than Class B and Class C Common Stock) on a pro rata basis, based on the number of shares of Common Stock -------- each held by holder. (g) After payment of the full preferential amount to the holders of the Series D Preferred, Series C Preferred, Series B Preferred, Series A Preferred, Series AA Preferred, Class C Common Stock and Common Stock (other than Class B Common Stock) of the full amounts to which they shall be entitled, the holders of Class B Common Stock then outstanding shall be entitled to be paid the amount of $5.00 for each share of Class B Common Stock then held by them, adjusted for any subdivisions, combinations, consolidations or stock distributions or dividends with respect to such shares occurring after the Filing Date. If upon the occurrence of such event the assets and funds thus distributed among the holders of the Class B Common Stock shall be insufficient to permit the payment to such holders of the full preferential amount, then the entire assets and funds of the Corporation legally available for distribution shall be distributed among the holders of Class B Common Stock on a pro rata basis, based on the number of shares of Class B Common Stock then held by each holder. (h) After setting apart or paying in full the preferential amounts due pursuant to subsections (a), (b), (c), (d), (e), (f) and (g) the remaining assets of the Corporation available for distribution to stockholders, if any, shall be distributed to the holders of the Series AA -6- Preferred, Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred, Class C Common Stock and Common Stock (other than Class B Common Stock) on a pro rata basis, based on the number of shares of Common Stock then -------- held by each holder on an as-converted basis. (i) A consolidation or merger of the Corporation with or into any other corporation or corporations, or a sale, conveyance or disposition of all or substantially all of the assets of the Corporation or the effectuation by the Corporation of a transaction or series of related transactions in which more than 50% of the voting power of the Corporation is disposed of shall be deemed to be a liquidation, dissolution or winding up within the meaning of this Section 2. (j) Notwithstanding paragraphs (a), (b), (c), (d), (e), (f) and (g) hereof, the Corporation may at any time, out of funds legally available therefor, repurchase shares of Common Stock of the Corporation issued to or held by employees, officers, contractors or consultants of the Corporation or its subsidiaries upon termination of their employment or services, pursuant to any agreement providing for such right of repurchase, whether or not dividends on the Series AA Preferred, Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred and Class C Common Stock shall have been declared and funds set aside therefor and such repurchases shall not be subject to the liquidation preferences of the Series AA Preferred, Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred, Class B Common Stock, Class C Common Stock or Common Stock. 3. VOTING RIGHTS. Except as otherwise required by law or as set forth herein, the holder of each share of Common Stock issued and outstanding shall have one vote for each share of Common Stock held by such holder, and the holder of each share of Series AA Preferred, Series A Preferred, Series B Preferred, Series C Preferred and Series D Preferred shall be entitled to the number of votes equal to the number of shares of Common Stock into which such share of Series AA Preferred, Series A Preferred, Series B Preferred, Series C Preferred and Series D Preferred, respectively, could be converted at the record date for determination of the stockholders entitled to vote on such matters, or, if no such record date is established, at the date such vote is taken or any written consent of stockholders is solicited, such votes to be counted together with all other shares of stock of the Corporation having general voting power and not counted separately as a class. Holders of Common Stock, Series AA Preferred, Series A Preferred, Series B Preferred, Series C Preferred and Series D Preferred shall be entitled to notice of any stockholders' meeting in accordance with the Bylaws of the Corporation. 4. CONVERSION. The holders of the Series AA Preferred, Series A Preferred, Series B Preferred, Series C Preferred and Series D Preferred and Class C Common Stock have conversion rights as follows (the "CONVERSION RIGHTS"): (a) Right to Convert Series D Preferred. Each share of Series D Preferred shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share at the office of the Corporation or any transfer agent for the Series D Preferred, into such number of fully paid and nonassessable shares of Common Stock as is determined in the case of the -7- Series D Preferred by dividing $5.72 by the Series D Conversion Price, determined as hereinafter provided, in effect at the time of the conversion. The price at which shares of Common Stock shall be deliverable upon conversion of the Series D Preferred (the "SERIES D CONVERSION PRICE") shall initially be $5.72 per share of Common Stock. Such initial Conversion Price shall be subject to adjustment as hereinafter provided. (b) Right to Convert Series C Preferred. Each share of Series C Preferred shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share at the office of the Corporation or any transfer agent for the Series C Preferred, into such number of fully paid and nonassessable shares of Common Stock as is determined in the case of the Series C Preferred by dividing $4.205 by the Series C Preferred Conversion Price, determined as hereinafter provided, in effect at the time of the conversion. The price at which shares of Common Stock shall be deliverable upon conversion of the Series C Preferred (the "SERIES C CONVERSION PRICE") shall initially be $4.205 per share of Common Stock. Such initial Conversion Price shall be subject to adjustment as hereinafter provided. (c) Right to Convert Series B Preferred. Each share of Series B Preferred shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share at the office of the Corporation or any transfer agent for the Series B Preferred, into such number of fully paid and nonassessable shares of Common Stock as is determined in the case of the Series B Preferred by dividing $0.855 by the Series B Preferred Conversion Price, determined as hereinafter provided, in effect at the time of the conversion. The price at which shares of Common Stock shall be deliverable upon conversion of the Series B Preferred (the "SERIES B CONVERSION PRICE") shall initially be $0.855 per share of Common Stock. Such initial Conversion Price shall be subject to adjustment as hereinafter provided. (d) Right to Convert Series A Preferred. Each share of Series A Preferred shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share at the office of the Corporation or any transfer agent for the Series A Preferred, into such number of fully paid and nonassessable shares of Common Stock as is determined in the case of the Series A Preferred by dividing $0.50 by the Series A Conversion Price, determined as hereinafter provided, in effect at the time of the conversion. The price at which shares of Common Stock shall be deliverable upon conversion of the Series A Preferred (the "SERIES A CONVERSION PRICE") shall initially be $0.50 per share of Common Stock. Such initial Conversion Price shall be subject to adjustment as hereinafter provided. (e) Right to Convert Series AA Preferred. Each share of Series AA Preferred shall be convertible, at the option of the holder thereof, at any time after the earlier of (i) the third anniversary of the date of issuance of such share, (ii) a sale, conveyance or disposition of all or substantially all of the assets of the Corporation or the effectuation by the Corporation of a transaction or series of related transactions in which more than 50% of the voting power of the Corporation is transferred and (iii) such time as the Corporation consents in writing, at the office of the Corporation or any transfer agent for the Series AA Preferred, into such number of fully paid and -8- nonassessable shares of Common Stock as is determined in the case of the Series AA Preferred by dividing $6.50 by the Series AA Conversion Price, determined as hereinafter provided, in effect at the time of the conversion. The price at which shares of Common Stock shall be deliverable upon conversion of the Series AA Preferred (the "SERIES AA CONVERSION PRICE") shall initially be $6.50 per share of Common Stock. Such initial Conversion Price shall be subject to adjustment as herein after provided. (f) Right to Convert Class C Common Stock. Each share of Class C Common Stock shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share at the office of the Corporation or any transfer agent for the Class C Common Stock, into such number of fully paid and nonassessable shares of Common Stock as is determined in the case of the Class C Common Stock by dividing $0.82 by the undesignated Class C Conversion Price, determined as hereinafter provided, in effect at the time of the conversion. The price at which shares of Common Stock shall be deliverable upon conversion of the Class C Common Stock (the "CLASS C COMMON CONVERSION PRICE") shall initially be $0.82 per share of Common Stock. Such initial Conversion Price shall be subject to adjustment as hereinafter provided. (g) Automatic Conversion. Each share of Series D Preferred shall automatically be converted into shares of Common Stock at the then effective, applicable Conversion Price immediately prior to the closing of an underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, covering the offer and sale of securities for the account of the Corporation to the public at a price per share of Common Stock of not less than $6.80 per share (subject to proportionate adjustment in the event of a stock split, reverse stock split, reclassification or stock dividend occurring after the Filing Date) and an aggregate offering price (net of all registration and selling expenses) of not less than Fifteen Million Dollars ($15,000,000). Each share of Series C Preferred shall automatically be converted into shares of Common Stock at the then effective, applicable Conversion Price immediately prior to the closing of an underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, covering the offer and sale of securities for the account of the Corporation to the public at a price per share of Common Stock of not less than $5.00 per share (subject to proportionate adjustment in the event of a stock split, reverse stock split, reclassification or stock dividend occurring after the Filing Date) and an aggregate offering price (net of all registration and selling expenses) of not less than Fifteen Million Dollars ($15,000,000). Each share of Series AA Preferred shall automatically be converted into shares of Common Stock at the then effective, applicable Conversion Price immediately prior to the closing of an underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, covering the offer and sale of securities for the account of the Corporation to the public at an aggregate offering price (net of all registration and selling expenses) of not less than Fifteen Million Dollars ($15,000,000). -9- Each share of Series A Preferred and Series B Preferred and Class C Common Stock shall automatically be converted into shares of Common Stock at the then effective, applicable Conversion Price immediately prior to the closing of an underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, covering the offer and sale of securities for the account of the Corporation to the public at a price per share of Common Stock of not less than $2.00 per share (subject to proportionate adjustment in the event of a stock split, reverse stock split, reclassification or stock dividend occurring after the Filing Date) and an aggregate offering price (net of all registration and selling expenses) of not less than Ten Million Dollars ($10,000,000). (h) Mechanics of Conversion. No fractional shares of Common Stock shall be issued upon conversion of Series AA Preferred, Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred or Class C Common Stock. In lieu of any fractional shares to which the holder would otherwise be entitled, the Corporation shall pay cash equal to such fraction multiplied by the then effective respective Conversion Price. Before any holder of Series AA Preferred, Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred or Class C Common Stock shall be entitled to convert the same into full shares of Common Stock and to receive certificates therefor, he shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Corporation or of any transfer agent for the Series AA Preferred, Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred or Class C Common Stock, as the case may be, and shall give written notice to the Corporation at such office that he elects to convert the same. The Corporation shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Series AA Preferred, Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred or Class C Common Stock, as the case may be, a certificate or certificates for the number of shares of Common Stock to which he shall be entitled as aforesaid and a check payable to the holder in the amount of any cash amounts payable as the result of a conversion into fractional shares of Common Stock. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Series AA Preferred, Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred or Class C Common Stock, as the case may be, to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock on such date. (i) Reservation of Stock Issuable Upon Conversion. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock solely for the purpose of effecting the conversion of the shares of the Series AA Preferred, Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred and Class C Common Stock such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of the Series AA Preferred, Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred and Class C Common Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Series AA Preferred, Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred and Class C Common Stock, in addition to such -10- other remedies as shall be available to the holder of such Series AA Preferred, Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred or Class C Common Stock, this Corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes. 5. ADJUSTMENTS TO CONVERSION PRICE. (a) Special Definitions. For purposes of this Section 5, the following definitions shall apply: (i) "OPTIONS" shall mean rights, options or warrants to subscribe for, purchase or otherwise acquire either Common Stock or Convertible Securities. (ii) "ORIGINAL ISSUE DATE" for the Series A Preferred, Series B Preferred, Series C Preferred and Series D Preferred shall mean the date on which the first share of Series A Preferred, Series B Preferred, Series C Preferred or Series D Preferred, as the case may be, was issued. (iii) "CONVERTIBLE SECURITIES" shall mean any evidences of indebtedness, shares (other than the Series AA Preferred, Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred and Common Stock) or other securities directly or indirectly convertible into or exchangeable for Common Stock. (iv) "ADDITIONAL SHARES OF COMMON STOCK" shall mean all shares (including reissued shares) of Common Stock issued (or, pursuant to paragraph 5(c), deemed to be issued) by the Corporation after the Original Issue Date, other than: (A) shares of Common Stock issued upon conversion of the Series AA Preferred, Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred and Class C Common Stock authorized herein; (B) shares of Common Stock (including any of such shares which are repurchased) issued to officers, directors, employees and consultants of the Corporation pursuant to stock option or purchase plans approved by a majority of the members of the Board of Directors and any other shares of Common Stock held by officers, directors, employees and consultants which are repurchased at cost subsequent to the Original Issue Date; (C) as a dividend or distribution on Series A Preferred, Series B Preferred, Series C Preferred or Series D Preferred or any event for which adjustment is made pursuant to paragraph 5(i) or 5(j) hereof; -11- (D) shares of Common Stock issued or deemed issued upon exercise of warrants of the Corporation outstanding as of the Original Issue Date; (E) up to an aggregate of 3,934,360 shares of Common Stock issued in connection with a licensing agreement for technology and the acquisition of a company; (F) Options (or shares of Common Stock issued upon exercise thereof) issued in connection with the issuance of the Subordinated Notes or the Senior Notes; (G) shares of Series AA Preferred Stock issued, or issuable upon exercise of options assumed, pursuant to the acquisition by the Corporation of Sarnoff Real Time Corporation; or (H) shares of Common Stock and Preferred Stock issued pursuant to the two-for-one stock split effective on the Filing Date. (v) "SENIOR NOTES" shall mean the 12.625% Senior Discount Notes due March 1, 2008 issued on February 19, 1998 as governed by the Indenture between the Corporation and the Bank of New York as Trustee dated as of February 19, 1998. (vi) "SUBORDINATED NOTES" shall mean the 13% Subordinated Discount Notes due May 15, 2006 issued on May 30, 1996 as governed by the Indenture between the Corporation and The Bank of New York as Trustee dated as of May 30, 1996. (b) No Adjustment of Conversion Price. No adjustment in the Conversion Price of the Series A Preferred, Series B Preferred, Series C Preferred and Series D Preferred shall be made in respect of the issuance of Additional Shares of Common Stock unless the consideration per share for an Additional Share of Common Stock issued or deemed to be issued by the Corporation is less than the applicable Conversion Price of such series in effect on the date of and immediately prior to such issue. (c) Deemed Issue of Additional Shares of Common Stock. In the event the Corporation at any time or from time to time after the Original Issue Date shall issue any Options or Convertible Securities or shall fix a record date for the determination of holders of any class of securities entitled to receive any such Options or Convertible Securities, then the maximum number of shares (as set forth in the instrument relating thereto without regard to any provisions contained therein for a subsequent adjustment of such number that would result in an adjustment pursuant to clause (ii) below) of Common Stock issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, the conversion or exchange of such Convertible Securities, shall be deemed to be Additional Shares of Common Stock issued as of the time of such issue or, in case such a record date shall have been fixed, as of the close of business on such record date, -12- provided that Additional Shares of Common Stock shall not be deemed to have been issued unless the consideration per share (determined pursuant to paragraph 5(g) hereof) of such Additional Shares of Common Stock would be less than the applicable Conversion Price of the Series A Preferred, Series B Preferred, Series C Preferred or Series D Preferred, as the case may be, in effect on the date of and immediately prior to such issue, or such record date, as the case may be, and provided further that in any such case in which Additional Shares of Common Stock are deemed to be issued: (i) no further adjustment in the Conversion Price shall be made upon the subsequent issue of Convertible Securities or shares of Common Stock upon the exercise of such Options or conversion or exchange of such Convertible Securities; (ii) if such Options or Convertible Securities by their terms provide, with the passage of time or otherwise, for any increase or decrease in the consideration payable to the Corporation, or increase or decrease in the number of shares of Common Stock issuable, upon the exercise, conversion or exchange thereof, the Conversion Price computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon any such increase or decrease becoming effective, be recomputed to reflect such increase or decrease insofar as it affects such Options or the rights of conversion or exchange under such Convertible Securities; (iii) upon the expiration of any such Options or any rights of conversion or exchange under such Convertible Securities which shall not have been exercised, the Conversion Price computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon such expiration, be recomputed as if: (A) in the case of Convertible Securities or Options for Common Stock, the only Additional Shares of Common Stock issued were shares of Common Stock, if any, actually issued upon the exercise of such Options or the conversion or exchange of such Convertible Securities and the consideration received therefor was the consideration actually received by the Corporation for the issue of all such Options, whether or not exercised, plus the consideration actually received by the Corporation upon such exercise, or for the issue of all such Convertible Securities which were actually converted or exchanged, plus the additional consideration, if any, actually received by the Corporation upon such conversion or exchange, and (B) in the case of Options for Convertible Securities, only the Convertible Securities, if any, actually issued upon the exercise thereof were issued at the time of issue of such Options, and the consideration received by the Corporation for the Additional Shares of Common Stock deemed to have been then issued was the consideration actually received by the Corporation for the issue of all such Options, whether or not exercised, plus the consideration deemed to have been received by the Corporation upon the issue of the Convertible Securities with respect to which such Options were actually exercised; -13- (iv) no readjustment pursuant to clause (ii) or (iii) above shall have the effect of increasing the Conversion Price to an amount which exceeds the lower of (i) the Conversion Price on the original adjustment date, or (ii) the Conversion Price that would have resulted from any issuance of Additional Shares of Common Stock between the original adjustment date and such readjustment date; and (v) in the case of any Options which expire by their terms not more than 30 days after the date of issue thereof, no adjustment of the Conversion Price shall be made until the expiration or exercise of all such Options, whereupon such adjustment shall be made in the manner provided in clause (iii) above. (d) Adjustment of Conversion Price of Series A Preferred Upon Issuance of Additional Shares of Common Stock. In the event that after the Original Issue Date the Corporation shall issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to paragraph 5(c)) without consideration or for a consideration per share less than the Conversion Price of the Series A Preferred in effect on the date of and immediately prior to such issue, then and in such event, such Conversion Price of the Series A Preferred be reduced, concurrently with such issue, to a price (calculated to the nearest cent) determined by multiplying such Conversion Price of the Series A Preferred, by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue plus the number of shares of Common Stock which the aggregate consideration received by the Corporation for the total number of Additional Shares of Common Stock so issued would purchase at such Conversion Price; and the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue plus the number of such Additional Shares of Common Stock so issued; and provided further that, for the purposes of this subsection (d), all shares of Common Stock issuable upon conversion of outstanding Series AA Preferred, Series A Preferred, Series B Preferred, Series C Preferred and Series D Preferred and outstanding Convertible Securities or exercise of outstanding Options shall be deemed to be outstanding, and immediately after any Additional Shares of Common Stock are deemed issued pursuant to subsection 5(c), such Additional Shares of Common Stock shall be deemed to be outstanding. (e) Adjustment of Conversion Price of Series B Preferred Upon Issuance of Additional Shares of Common Stock. In the event that after the Original Issue Date the Corporation shall issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to subsection 5(c)) without consideration or for a consideration per share less than the Conversion Price of the Series B Preferred in effect on the date of and immediately prior to such issue, then and in such event, such Conversion Price of the Series B Preferred shall be reduced, concurrently with such issue, to a price (calculated to the nearest cent) determined by multiplying such Conversion Price of the Series B Preferred, by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue plus the number of shares of Common Stock which the aggregate consideration received by the Corporation for the total number of Additional Shares of Common Stock so issued -14- would purchase at such Conversion Price; and the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue plus the number of such Additional Shares of Common Stock so issued; and provided further that, for the purposes of this subsection (e), all shares of Common Stock issuable upon conversion of outstanding Series AA Preferred, Series A Preferred, Series B Preferred, Series C Preferred and Series D Preferred and outstanding Convertible Securities or exercise of outstanding Options shall be deemed to be outstanding, and immediately after any Additional Shares of Common Stock are deemed issued pursuant to subsection 5(c), such Additional Shares of Common Stock shall be deemed to be outstanding. (f) Adjustment of Conversion Price of Series C Preferred Upon Issuance of Additional Shares of Common Stock. In the event that after the Original Issue Date the Corporation shall issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to subsection 5(c)) without consideration or for a consideration per share less than the Conversion Price of the Series C Preferred in effect on the date of and immediately prior to such issue, then and in such event, such Conversion Price of the Series C Preferred shall be reduced, concurrently with such issue, to a price (calculated to the nearest cent) determined by multiplying such Conversion Price of the Series C Preferred, by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue plus the number of shares of Common Stock which the aggregate consideration received by the Corporation for the total number of Additional Shares of Common Stock so issued would purchase at such Conversion Price; and the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue plus the number of such Additional Shares of Common Stock so issued; and provided further that, for the purposes of this subsection (f), all shares of Common Stock issuable upon conversion of outstanding Series AA Preferred, Series A Preferred, Series B Preferred, Series C Preferred and Series D Preferred and outstanding Convertible Securities or exercise of outstanding Options shall be deemed to be outstanding, and immediately after any Additional Shares of Common Stock are deemed issued pursuant to subsection 5(c), such Additional Shares of Common Stock shall be deemed to be outstanding. (g) Adjustment of Conversion Price of Series D Preferred Upon Issuance of Additional Shares of Common Stock. In the event that after the Original Issue Date the Corporation shall issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to paragraph 5(c)) without consideration or for a consideration per share less than the Conversion Price of the Series D Preferred in effect on the date of and immediately prior to such issue, then and in such event, such Conversion Price of the Series D Preferred shall be reduced, concurrently with such issue, to a price (calculated to the nearest cent) determined by multiplying such Conversion Price of the Series D Preferred, by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue plus the number of shares of Common Stock which the aggregate consideration received by the Corporation for the total number of Additional Shares of Common Stock so issued would purchase at such Conversion Price; and the denominator of which shall be the number of -15- shares of Common Stock outstanding immediately prior to such issue plus the number of such Additional Shares of Common Stock so issued; and provided further that, for the purposes of this subsection (g), all shares of Common Stock issuable upon conversion of outstanding Series AA Preferred, Series A Preferred, Series B Preferred, Series C Preferred and Series D Preferred and outstanding Convertible Securities or exercise of outstanding Options shall be deemed to be outstanding, and immediately after any Additional Shares of Common Stock are deemed issued pursuant to subsection 5(c), such Additional Shares of Common Stock shall be deemed to be outstanding. (h) Determination of Consideration. For purposes of this Section 5, the consideration received by the Corporation for the issue of any Additional Shares of Common Stock shall be computed as follows: (i) Cash and Property: Except as provided in clause (ii) below, such consideration shall: (A) insofar as it consists of cash, be computed at the aggregate amount of cash received by the Corporation excluding amounts paid or payable for accrued interest or accrued dividends; (B) insofar as it consists of property other than cash, be computed at the fair value thereof at the time of such issue, as determined in good faith by the Board; provided, however, that no value shall be attributed to any services performed by any employee, officer or director of the Corporation; and (C) in the event Additional Shares of Common Stock are issued together with other shares or securities or other assets of the Corporation for consideration which covers both, be the proportion of such consideration so received with respect to such Additional Shares of Common Stock, computed as provided in clauses (A) and (B) above, as determined in good faith by the Board. (ii) Expenses. In the event the Corporation pays or incurs expenses, commissions or compensation, or allows concessions or discounts to underwriters, dealers or others performing similar services in connection with such issue, in an aggregate amount in excess of 10% of the aggregate consideration received by the Corporation for such issue, as determined in clause (i) above, consideration shall be computed as provided in clause (i) above after deducting the aggregate amount in excess of 10% of the aggregate consideration received by the Corporation for the issue. (iii) Options and Convertible Securities. The consideration per share received by the Corporation for Additional Shares of Common Stock deemed to have been issued pursuant to Section 5(c), relating to Options and Convertible Securities, shall be determined by dividing -16- (x) the total amount, if any, received or receivable by the Corporation as consideration for the issue of such Options or Convertible Securities, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration) payable to the Corporation upon the exercise of such Options or the conversion or exchange of such Convertible Securities, or in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities by (y) the maximum number of shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities. (i) Adjustments for Stock Dividends, Subdivisions, Combinations or Consolidations of Common Stock. In the event the outstanding shares of Common Stock shall be subdivided (by stock dividend, stock split, or otherwise), into a greater number of shares of Common Stock after the Filing Date, the Series AA, Series A, Series B, Series C, Series D and Class C Common Conversion Prices then in effect shall, concurrently with the effectiveness of such subdivision, be proportionately decreased. In the event the outstanding shares of Common Stock shall be combined or consolidated, by reclassification or otherwise, into a lesser number of shares of Common Stock, the Series AA, Series A, Series B, Series C, Series D and Class C Common Conversion Prices then in effect shall, concurrently with the effectiveness of such combination or consolidation, be proportionately increased. (j) Adjustments for Other Distributions. In the event the Corporation at any time or from time to time makes, or fixes a record date for the determination of holders of Common Stock entitled to receive any distribution payable in securities or assets of the Corporation other than shares of Common Stock then and in each such event provision shall be made so that the holders of Series AA Preferred, Series A Preferred, Series B Preferred, Series C Preferred and Series D Preferred shall receive upon conversion thereof, in addition to the number of shares of Common Stock receivable thereupon, the amount of securities or assets of the Corporation which they would have received had their Series AA Preferred, Series A Preferred, Series B Preferred, Series C Preferred and Series D Preferred been converted into Common Stock on the date of such event and had they thereafter, during the period from the date of such event to and including the date of conversion, retained such securities or assets receivable by them as aforesaid during such period, subject to all other adjustments called for during such period under this Section 5 with respect to the rights of the holders of the Series AA Preferred, Series A Preferred, Series B Preferred, Series C Preferred and Series D Preferred. (k) Adjustments for Reclassification, Exchange and Substitution. If the Common Stock issuable upon conversion of the Series AA Preferred, Series A Preferred, Series B Preferred, Series C Preferred and Series D Preferred and Class C Common Stock shall be changed into the same or a different number of shares of any other class or classes of stock, whether by -17- capital reorganization, reclassification or otherwise (other than a subdivision or combination of shares provided for above), then and in each such event the holder of each share of Series AA Preferred, Series A Preferred, Series B Preferred, Series C Preferred and Series D Preferred and Class C Common Stock shall have the right thereafter to convert such share into the kind and amount of shares of stock and other securities and property receivable upon such reorganization or reclassification or other change by holders of the number of shares of Common Stock that would have been subject to receipt by the holders upon conversion of the Series AA Preferred, Series A Preferred, Series B Preferred, Series C Preferred and Series D Preferred and Class C Common Stock immediately before that change, all subject to further adjustment as provided herein. (l) No Impairment. The Corporation will not, by amendment of its Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation but will at all times in good faith assist in the carrying out of all the provisions of Section 5 and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of the Series AA Preferred, Series A Preferred, Series B Preferred, Series C Preferred and Series D Preferred against impairment. (m) Certificate as to Adjustments. Upon the occurrence of each adjustment or readjustment of the Conversion Price pursuant to Section 5, the Corporation at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and furnish to each holder of Series AA Preferred, Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred and Class C Common Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Corporation shall, upon the written request at any time of any holder of Series AA Preferred, Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred or Class C Common Stock, furnish or cause to be furnished to such holder a like certificate setting forth (i) such adjustments and readjustments, (ii) the Conversion Price at the time in effect, and (iii) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of Series AA Preferred, Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred or Class C Common Stock, as the case may be. 6. NOTICES OF RECORD DATE. In the event that the Corporation shall propose at any time: (a) to declare any dividend or distribution upon its Common Stock, whether in cash, property, stock or other securities, whether or not a regular cash dividend and whether or not out of earnings or earned surplus; (b) to offer for subscription pro rata to the holders of any -------- class or series of its stock any additional shares of stock of any class or series or other rights; -18- (c) to effect any reclassification or recapitalization of its Common Stock outstanding involving a change in the Common Stock; or (d) to merge or consolidate with or into any other corporation, or sell, lease or convey all or substantially all its property or business, or to liquidate, dissolve or wind up, then, in connection with each such event, the Corporation shall send to the holders of the Series A Preferred, Series B Preferred, Series C Preferred and Series D Preferred: (i) at least 20 days' prior written notice of the date on which a record shall be taken for such dividend, distribution or subscription rights (and specifying the date on which the holders of Common Stock shall be entitled thereto) or for determining rights to vote in respect of the matters referred to in (c) and (d) above; and (ii) in the case of the matters referred to in (c) and (d) above, at least 20 days' prior written notice of the date when the same shall take place (and specifying the date on which the holders of Common Stock shall be entitled to exchange their Common Stock for securities or other property deliverable upon the occurrence of such event). Each such written notice shall be delivered personally or given by first class mail, postage prepaid, addressed to the holders of the Preferred Stock at the address for each such holder as shown on the books of this Corporation. 7. COVENANTS. In addition to any other rights provided by law, so long as the Series A Preferred, Series B Preferred, Series C Preferred and Series D Preferred shall be outstanding, the Corporation shall not, without first obtaining the affirmative vote or written consent of the holders of not less than fifty percent (50%) of such outstanding shares of Series A Preferred, Series B Preferred, Series C Preferred and Series D Preferred, voting together as a single class: (a) amend or repeal any provision of, or add any provision to, the Certificate of Incorporation of the Corporation or the Bylaws of the Corporation; (b) authorize or issue shares of any class of stock having any preference or priority as to dividends or assets superior to any such preference or priority of the Series A Preferred, Series B Preferred, Series C Preferred or Series D Preferred; (c) reclassify any shares of Common Stock and any other shares of this Corporation other than the Series A Preferred, Series B Preferred, Series C Preferred and Series D Preferred into shares having any preference or priority as to dividends or assets superior to any such preference or priority of the Preferred Stock; or (d) merge or consolidate the Corporation with or into another corporation or sell, transfer or lease all or substantially all of the assets of the Corporation. -19- ARTICLE V The relative designations, rights, preferences and restrictions of the Class B Common Stock are as follows: 1. VOTING RIGHTS. The holders of the Class B Common Stock, voting as a separate class, shall be entitled to elect one member of the Board of Directors and any successor thereto, in the event that such person resigns or is otherwise removed from the Board; provided, however, that such any such person elected shall be reasonably acceptable to a majority of the remaining members of the Board of Directors. 2. REDEMPTION. The Class B Common Stock is redeemable at a price of $5.00 per share at the option of the Corporation. (a) at such time as the Corporation, under the Exclusive Purchase and Sale and Technology License Agreement (the "AGREEMENT") dated November 21, 1995 between the Corporation and Sarnoff Real Time Corporation ("SRTC"), no longer has exclusivity rights to the Americas (as defined in the Agreement); or (b) upon any merger or consolidation of SRTC or acquisition of all substantially all of SRTC's assets, including any merger or consolidation with or acquisition by the Corporation. 3. DIVIDENDS. The holders of the Class B Common Stock shall not be entitled to receive dividends or other distributions. 4. LIQUIDATION RIGHTS. In the event of any liquidation, dissolution or winding up of the Corporation, either voluntary or involuntary, distributions to the holders of Class B Common Stock shall be made in accordance with Article IV, Section 2. ARTICLE VI The Series AA Preferred is subject to the following additional restrictions: 1. NON-TRANSFERABILITY. Until three years from date the first share of Series AA Preferred is issued (the "NON-TRANSFERABILITY PERIOD"), the Series AA Preferred may not be sold or otherwise transferred in any manner by any holder of Series AA Preferred (a "SERIES AA HOLDER") other than (A) by will or intestacy to the Series AA Holder's Immediate Family, (B) with the prior written consent of the Corporation, or (C) to a trust for the benefit of the Series AA Holder or the Series AA Holder's Immediate Family. "IMMEDIATE FAMILY" as used herein shall mean spouse, lineal descendant or antecedent, father, mother, brother or sister. 2. RIGHT OF FIRST REFUSAL. -20- (a) GENERAL. After the expiration of the Non-Transferability Period, before any Series AA Preferred held by a Series AA Holder or any transferee (either being sometimes referred to herein as the "SELLING STOCKHOLDER") may be sold or otherwise transferred (including transfer by gift or operation of law), the Corporation or its assignee(s) shall have rights of first refusal to purchase the shares on the terms and conditions set forth in this Section 2 (the "RIGHT OF FIRST REFUSAL"). (b) NOTICE OF PROPOSED TRANSFER. The Selling Stockholder of the shares shall deliver to the Corporation a written notice (the "NOTICE") stating: (i) the Selling Stockholder's bona fide intention to sell or otherwise transfer such shares (the "OFFERED SHARES"); (ii) the name of each proposed purchaser or other transferee ("PROPOSED TRANSFEREE"); (iii) the number of Offered Shares to be transferred to each Proposed Transferee; and (iv) the bona fide cash price or other consideration for which the Selling Stockholder proposes to transfer the Offered Shares (the "OFFERED PRICE"), and the Selling Stockholder shall offer the Offered Shares at the Offered Price to the Corporation or its assignee(s). (c) EXERCISE OF RIGHT OF FIRST REFUSAL. At any time within fifteen (15) days after receipt of the Notice, the Corporation or its assignee(s) may, by giving written notice to the Selling Stockholder, elect to purchase all of the Offered Shares, at the purchase price determined in accordance with Section 2(d) below. (d) PURCHASE PRICE. The purchase price ("PURCHASE PRICE") for the Offered Shares purchased by the Corporation or its assignee(s) under this Section 2(d) shall be the Offered Price. If the Offered Price includes consideration other than cash, the cash equivalent value of the non-cash consideration shall be determined by the Board of Directors of the Corporation in good faith. (e) PAYMENT. Payment of the Purchase Price shall be made, at the option of the Corporation or its assignee(s), in cash (by check), by cancellation of all or a portion of any outstanding indebtedness of the Selling Stockholder to the Corporation (or, in the case of repurchase by an assignee, to the assignee), or by any combination thereof within forty (40) days after receipt of the Notice or in the manner and at the times set forth in the Notice. The sale shall constitute a representation and warranty by the Selling Stockholder that the shares being sold are free and clear of all liens, claims and encumbrances. (f) SELLING STOCKHOLDER'S RIGHT TO TRANSFER. If all of the Offered Shares proposed in the Notice to be transferred to a given Proposed Transferee are not purchased by the Corporation, its assignee(s) as provided in this Section 2, then none of the Offered Shares shall be purchased under this Section 2, and the Selling Stockholder may sell or otherwise transfer the Offered Shares to that Proposed Transferee at the Offered Price or at a higher price, provided that such sale or other transfer (i) is consummated within ninety (90) days after the date of the Notice, (ii) is in accordance with all the terms of this Certificate of Incorporation and (iii) is effected in accordance with any applicable securities laws. If the Offered Shares described in the Notice are not -21- transferred to the Proposed Transferee within such period, a new Notice shall be given to the Corporation, and the Corporation or its assignees shall again be offered the Rights of First Refusal before any Offered Shares held by the Selling Stockholder may be sold or otherwise transferred. (g) EXCEPTION FOR CERTAIN TRANSFERS. Anything to the contrary contained in this Section 2 notwithstanding, the provisions of this Section 2 shall not apply to the transfer of any or all of the Offered Shares (i) during the Selling Stockholder's lifetime or on the Selling Stockholder's death by will or intestacy to the Selling Stockholder's Immediate Family, a trust for the benefit of the Selling Stockholder or the Selling Stockholder's Immediate Family or (ii) subject to the prior written approval of the Corporation, which may be withheld in its sole discretion, by a Selling Stockholder as a charitable contribution. In such case, the transferee or other recipient shall receive and hold the Offered Shares so transferred subject to the provisions of this Section 2, and there shall be no further transfer of such Offered Shares except in accordance with the terms of this Section 2. ARTICLE VII The Corporation is to have perpetual existence. ARTICLE VII In furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized to make, alter, amend or repeal the Bylaws of the Corporation. ARTICLE IX The number of directors which will constitute the whole Board of Directors of the Corporation shall be as designated in the Bylaws of the Corporation. ARTICLE X The election of directors need not be by written ballot unless the Bylaws of the Corporation shall so provide. ARTICLE XI Meetings of stockholders may be held within or without the State of Delaware, as the Bylaws may provide. The books of the Corporation may be kept (subject to any provision contained in the statutes) outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the Bylaws of the Corporation. ARTICLE XII -22- 1. To the fullest extent permitted by the Delaware General Corporation Law as the same exists or as may hereafter be amended, a director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. 2. The Corporation shall indemnify to the fullest extent permitted by law any person made or threatened to be made a party to an action or proceeding, whether criminal, civil administrative or investigative, by reason of the fact that he or she, or his or her testator or intestate is or was a director or officer of the Corporation or any predecessor of the Corporation or serves or served at any other enterprise as a director, officer or employee at the request of the Corporation or any predecessor to the Corporation. 3. Neither any amendment nor repeal of this Article, nor the adoption of any provision of this Corporation's Certificate of Incorporation inconsistent with this Article, shall eliminate or reduce the effect of this Article in respect of any matter occurring, or any action or proceeding accruing or arising or that, but for this Article, would accrue or arise, prior to such amendment, repeal or adoption of an inconsistent provision. ARTICLE XII Except as provided in Article XII above, the Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation. -23- IN WITNESS WHEREOF, said Corporation has caused this Certificate to be signed by Alan H. Bushell, the President and Chief Operating Officer of the Corporation, and attested by Barry E. Taylor, the Assistant Secretary of the Corporation. The signatures below shall constitute the affirmation or acknowledgment, under penalties of perjury, that the facts herein stated are true. Dated: March 26, 1998 /s/ Alan H. Bushell ------------------------------------- Alan H. Bushell President and Chief Operating Officer ATTEST: /s/ Barry E. Taylor - --------------------- Barry E. Taylor Assistant Secretary -24- EX-3.2 3 AMENDED AND RESTATED BYLAWS EXHIBIT 3.2 BYLAWS OF DIVA SYSTEMS CORPORATION (AMENDED AND RESTATED AS OF FEBRUARY 29, 1996) TABLE OF CONTENTS PAGE ----
ARTICLE I CORPORATE OFFICES................................................. -1- 1.1 Registered Office..................................................... -1- 1.2 Other Offices......................................................... -1- ARTICLE II STOCKHOLDERS.................................................... -1- 2.1 Place of Meetings..................................................... -1- 2.2 Annual Meeting........................................................ -1- 2.3 Special Meeting....................................................... -2- 2.4 Notice of Stockholders Meetings....................................... -2- 2.5 Manner of Giving Notice; Affidavit of Notice.......................... -3- 2.6 Quorum................................................................ -3- 2.7 Adjourned Meeting; Notice............................................. -3- 2.8 Voting................................................................ -4- 2.9 Waiver of Notice...................................................... -4- 2.10 Stockholder Action by Written Consent Without a Meeting............... -5- 2.11 Record Date for Stockholder Notice; Voting; Giving Consents........... -5- 2.12 Proxies............................................................... -6- 2.13 List of Stockholders Entitled to Vote................................. -7- 2.14 Conduct of Business................................................... -7- 2.15 Inspectors of Election................................................ -7- 2.16 Inspectors of Election and Procedures for Counting Written Consents... -7- ARTICLE III DIRECTORS...................................................... -9- 3.1 Powers................................................................ -9- 3.2 Number of Directors................................................... -9- 3.3 Election, Qualification and Term of Office of Directors............... -9- 3.4 Resignation and Vacancies............................................. -10- 3.5 Place of Meetings; Meetings by Telephone.............................. -11- 3.6 Regular Meetings...................................................... -11- 3.7 Special Meetings; Notice.............................................. -11- 3.8 Quorum................................................................ -12- 3.9 Waiver of Notice...................................................... -12- 3.10 Adjourned Meeting; Notice............................................. -12- 3.11 Board Action by Written Consent Without a Meeting..................... -12- 3.12 Fees and Compensation of Directors.................................... -13- 3.13 Approval of Loans to Officers......................................... -13- -i-
3.14 Removal of Directors.................................................. -13- 3.15 Conduct of Business................................................... -14- ARTICLE IV COMMITTEES...................................................... -14- 4.1 Committees of Directors............................................... -14- 4.2 Committee Minutes..................................................... -15- 4.3 Meetings and Action of Committees..................................... -15- ARTICLE V OFFICERS......................................................... -15- 5.1 Officers.............................................................. -15- 5.2 Appointment of Officers............................................... -15- 5.3 Subordinate Officers.................................................. -16- 5.4 Removal and Resignation of Officers................................... -16- 5.5 Vacancies in Offices.................................................. -16- 5.6 Chairman of the Board................................................. -16- 5.7 President............................................................. -17- 5.8 Vice Presidents....................................................... -17- 5.9 Secretary............................................................. -17- 5.10 Chief Financial Officer............................................... -18- 5.11 Assistant Secretary................................................... -18- 5.12 Assistant Treasurer................................................... -18- 5.13 Authority and Duties of Officers...................................... -18- 5.14 Representation of Shares of Other Corporations........................ -19- ARTICLE VI INDEMNITY....................................................... -19- 6.1 Indemnification of Directors and Officers............................. -19- 6.2 Indemnification of Others............................................. -19- 6.3 Insurance............................................................. -20- ARTICLE VII RECORDS AND REPORTS............................................ -20- 7.1 Maintenance and Inspection of Records................................. -20- 7.2 Inspection by Directors............................................... -20- 7.3 Annual Statement to Stockholders...................................... -21- ARTICLE VIII GENERAL MATTERS............................................... -21- 8.1 Checks................................................................ -21- 8.2 Execution of Corporate Contracts and Instruments...................... -21- 8.3 Stock Certificates; Partly Paid Shares................................ -21- 8.4 Special Designation on Certificates................................... -22- 8.5 Lost Certificates..................................................... -22- 8.6 Construction; Definitions............................................. -22- -ii-
8.7 Dividends............................................................. -23- 8.8 Fiscal Year........................................................... -23- 8.9 Seal.................................................................. -23- 8.10 Transfer of Stock..................................................... -23- 8.11 Stock Transfer Agreements............................................. -23- 8.12 Registered Stockholders............................................... -24- 8.13 Notices............................................................... -24- ARTICLE IX AMENDMENTS...................................................... -24- ARTICLE X DISSOLUTION...................................................... -24- ARTICLE XI CUSTODIAN....................................................... -25- 11.1 Appointment of a Custodian in Certain Cases........................... -25- 11.2 Duties of Custodian................................................... -26- -iii-
BYLAWS OF DIVA SYSTEMS CORPORATION ARTICLE I CORPORATE OFFICES 1.1 REGISTERED OFFICE The registered office of the corporation shall be in the City of Wilmington, County of New Castle, State of Delaware. The name of the registered agent of the corporation at such location is The Corporation Trust Company. 1.2 OTHER OFFICES The board of directors may at any time establish other offices at any place or places where the corporation is qualified to do business. ARTICLE II STOCKHOLDERS 2.1 PLACE OF MEETINGS Meetings of stockholders shall be held at any place, within or outside the State of Delaware, designated by the board of directors. In the absence of any such designation, stockholders' meetings shall be held at the registered office of the corporation. 2.2 ANNUAL MEETING The annual meeting of stockholders shall be held, each year, on a date and at a time designated by the board of directors. In the absence of such designation, the annual meeting of stockholders shall be held on the third day of May in each year at 2:00 p.m. However, if such day falls on a legal holiday, then the meeting shall be held at the same time and place on the next succeeding full business day. At the meeting, directors shall be elected and any other proper business may be transacted. To be properly brought before an annual meeting business must be (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the board of directors, (b) otherwise properly brought before the meeting by or at the direction of the board of directors, or (c) otherwise properly brought before the meeting by a stockholder. For business to be properly brought before the meeting by a stockholder, the secretary of the corporation must have received notice in writing from the stockholder not less than thirty (30) days nor more than sixty (60) days prior to the meeting; provided, however, that if less than thirty-five (35) days' notice of the meeting is given to stockholders, such notice shall have been received by the secretary not later than the close of business on the seventh (7th) day following the day on which the notice of meeting was mailed. Such written notice to the secretary shall set forth, as to each matter the stockholder proposes to bring before the annual meeting: (i) a brief description of the business, (ii) the name and address, as they appear on the corporation's books, of the stockholder proposing such business, (iii) the number of shares of stock of the corporation beneficially owned by such stockholder, and (iv) any material interest of such stockholder in such business. Notwithstanding any provision in the bylaws to the contrary, no business shall be conducted at an annual meeting except in accordance with the procedures set forth in this Section 2.2. 2.3 SPECIAL MEETING A special meeting of the stockholders may be called at any time by the board of directors or by the chairman of the board or by one or more stockholders holding shares in the aggregate entitled to cast not less than ten percent (10%) of the votes at that meeting. If a special meeting is called by any person or persons other than the board of directors, the request shall be in writing, specifying the time of such meeting and the general nature of the business proposed to be transacted, and shall be delivered personally or sent by registered mail or by telegraphic or other facsimile transmission to the chairman of the board, the president, chief executive officer or the secretary of the corporation. No business may be transacted at such special meeting otherwise than specified in such notice. The officer receiving the request shall cause notice to be promptly given to the stockholders entitled to vote, in accordance with the provisions of Sections 2.4 and 2.5, that a meeting will be held at the time requested by the person or persons who called the meeting, not less than thirty-five (35) nor more than sixty (60) days after the receipt of the request. If the notice is not given within twenty (20) days after the receipt of the request, the person or persons requesting the meeting may give the notice. Nothing contained in this paragraph of this Section 2.3 shall be construed as limiting, fixing, or affecting the time when a meeting of stockholders called by action of the board of directors may be held. 2.4 NOTICE OF STOCKHOLDERS MEETINGS All notices of meetings of stockholders shall be in writing and shall be sent or otherwise given in accordance with Section 2.5 of these bylaws not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder entitled to vote at such meeting, except as -2- otherwise provided herein or required by law (meaning, here and hereinafter, as required from time to time by the General Corporation Law of Delaware or the certificate of incorporation of the corporation). The notice shall specify the place, date, and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called. 2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE Written notice of any meeting of stockholders, if mailed, is given when deposited in the United States mail, postage prepaid, directed to the stockholder at his address as it appears on the records of the corporation. An affidavit of the secretary or an assistant secretary or of the transfer agent of the corporation that the notice has been given shall, in the absence of fraud, be prima facie evidence of the facts stated therein. 2.6 QUORUM At any meeting of the stockholders, the holders of a majority, present in person or by proxy, of all of the shares of the stock entitled to vote at the meeting shall constitute a quorum for all purposes, unless or except to the extent that the presence of a larger number may be required by law. Where a separate vote by a class or classes is required, a majority, present in person or by proxy, of the shares of such class or classes entitled to take action with respect to that vote on that matter shall constitute a quorum. If a quorum shall fail to attend any meeting, the chairman of the meeting may adjourn the meeting to another place, date or time. If a notice of any adjourned special meeting of stockholders is sent to all stockholders entitled to vote thereat, stating that it will be held with those present constituting a quorum, those present at such adjourned meeting shall constitute a quorum (but in no event shall a quorum consist of less than one- third of the shares entitled to vote at the meeting), and all matters shall be determined by a majority of the votes cast at such meeting, except as otherwise required by law. 2.7 ADJOURNED MEETING; NOTICE When a meeting is adjourned to another time or place, unless these bylaws otherwise require, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting the corporation may transact any business that might have been transacted at the original meeting. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. -3- 2.8 VOTING The stockholders entitled to vote at any meeting of stockholders shall be determined in accordance with the provisions of Section 2.11 of these bylaws, subject to the provisions of Sections 217 and 218 of the General Corporation Law of Delaware (relating to voting rights of fiduciaries, pledgors and joint owners of stock and to voting trusts and other voting agreements). Each stockholder shall have one (1) vote for every share of stock entitled to vote that is registered in his or her name on the record date for the meeting (as determined in accordance with Section 2.11 of these bylaws), except as otherwise provided herein or required by law. At a stockholders' meeting at which directors are to be elected, each stockholder shall be entitled to cumulate votes (i.e., cast for any candidate a number of votes greater than the number of votes which such stockholder normally is entitled to cast) if the candidates' names have been properly placed in nomination (in accordance with these bylaws) prior to commencement of the voting and the stockholder requesting cumulative voting has given notice prior to commencement of the voting of the stockholder's intention to cumulate votes. If cumulative voting is properly requested, each holder of stock, or of any class or classes or of a series or series thereof, who elects to cumulate votes shall be entitled to as many votes as equals the number of votes which (absent this provision as to cumulative voting) he would be entitled to cast for the election of directors with respect to his shares of stock multiplied by the number of directors to be elected by him, and he may cast all of such votes for a single director or may distribute them among the number to be voted for, or for any two or more of them, as he may see fit. Every stock vote shall be taken by ballots, each of which shall state the name of the stockholder or proxy voting and such other information as may be required under the procedure established for the meeting. All elections shall be determined by a plurality of the votes cast, and except as otherwise required by law or provided herein, all other matters shall be determined by a majority of the votes cast affirmatively or negatively. 2.9 WAIVER OF NOTICE Whenever notice is required to be given under any provision of the General Corporation Law of Delaware or of the certificate of incorporation or these bylaws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders need be specified in any written waiver of notice unless so required by the certificate of incorporation or these bylaws. -4- 2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING Any action required or able to be taken at any annual or special meeting of stockholders may be taken without a meeting, without prior notice, and without a vote if a consent or consents in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted and shall be delivered to the corporation at its registered office in Delaware, its principal place of business, or to an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery to the corporation's registered office shall be made by hand or by certified or registered mail, return receipt requested. Every written consent shall bear the date of signature of each stockholder who signs the consent and no written consent shall be effective to take the corporate action referred to therein unless, within sixty (60) days after the date the earliest dated consent is delivered to the corporation, a written consent or consents signed by holders of a sufficient number of votes to take action are delivered to the corporation in the manner prescribed in the first paragraph of this section. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. If the action which is consented to is such as would have required the filing of a certificate under any section of the General Corporation Law of Delaware if such action had been voted on by stockholders at a meeting thereof, then the certificate filed under such section shall state, in lieu of any statement required by such section concerning any vote of stockholders, that written notice and written consent have been given as provided in Section 228 of the General Corporation Law of Delaware. 2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the board of directors may fix a record date, which shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting, nor more than sixty (60) days prior to any other action. If the board of directors does not so fix a record date: (i) The record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. -5- (ii) The record date for determining stockholders entitled to receive payment of any dividend or other distribution or allotment of rights or to exercise any rights of change, conversion or exchange of stock or for any other purpose shall be at the close of business on the day on which the board of directors adopts the resolution relating thereto. In order that the corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the board of directors may fix a record date, which record date shall neither precede nor be more than ten (10) days after the date upon which such resolution is adopted by the board of directors. Any stockholder of record seeking to have the stockholders authorize or take action by written consent shall, by written notice to the secretary, request the board of directors to fix a record date. The board of directors shall promptly, but in all events within ten (10) days after the date on which such notice is received, adopt a resolution fixing the record date. If the board of directors has not fixed a record date within such time, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the board of directors is required by law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the corporation in the manner prescribed in the first paragraph of Section 2.10 of these bylaws. If the board of directors has not fixed a record date within such time and prior action by the board of directors is required by law, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the date on which the board of directors adopts the resolution taking such prior action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the board of directors may fix a new record date for the adjourned meeting. 2.12 PROXIES Each stockholder entitled to vote at a meeting of stockholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for him by a written proxy, filed in accordance with the procedure established for the meeting or taking of action in writing, but no such proxy shall be voted or acted upon after three (3) years from its date, unless the proxy provides for a longer period. Any copy, facsimile telecommunication or other reliable reproduction of the writing or transmission created pursuant to this Section 2.12 may be substituted or used in lieu of the original writing or transmission for any and all purposes for which the original writing or transmission could be used, provided that such copy, facsimile telecommunication or other reproduction shall be a complete reproduction of the entire original writing or transmission. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Section 212(c) of the General Corporation Law of Delaware. -6- 2.13 LIST OF STOCKHOLDERS ENTITLED TO VOTE The officer who has charge of the stock ledger of a corporation shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. Such list shall presumptively determine the identity of the stockholders entitled to vote at the meeting and the number of shares held by each of them. 2.14 CONDUCT OF BUSINESS Such person as the board of directors may have designated or, in the absence of such a person, any executive officer of the corporation, shall call to order any meeting of the stockholders and act as chairman of the meeting. In the absence of the secretary of the corporation, the secretary of the meeting shall be such person as the chairman appoints. The chairman of any meeting of stockholders shall determine the order of business and the procedure at the meeting, including such regulation of the manner of voting and the conduct of discussion as seem to him in order. The date and time of the opening and closing of the polls for each matter upon which the stockholders will vote at the meeting shall be announced at the meeting. 2.15 INSPECTORS OF ELECTION The corporation may, and to the extent required by law, shall, in advance of any meeting of stockholders, appoint one or more inspectors to act at the meeting and make a written report thereof. The corporation may designate one or more persons as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate is able to act at a meeting of stockholders, the person presiding at the meeting may, and to the extent required by law, shall, appoint one or more inspectors to act at the meeting. Each inspector, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his ability. Every vote taken by ballots shall be counted by an inspector or inspectors appointed by the chairman of the meeting. 2.16 INSPECTORS OF ELECTION AND PROCEDURES FOR COUNTING WRITTEN CONSENTS Within three (3) business days after receipt of the earliest dated consent delivered to the corporation in the manner provided in Section 228(c) of the Delaware General Corporation Law or the determination by the board of directors of the corporation that the corporation should seek corporate -7- action by written consent, as the case may be, the secretary may engage nationally recognized independent inspectors of elections for the purpose of performing a ministerial review of the validity of the consents and revocations. The cost of retaining inspectors of election shall be borne by the corporation. Consents and revocations shall be delivered to the inspectors upon receipt by the corporation, the stockholder or stockholders soliciting consents or soliciting revocations in opposition to action by consent proposed by the corporation (the "Soliciting Stockholders") or their proxy solicitors or other designated agents. As soon as consents and revocations are received, the inspectors shall review the consents and revocations and shall maintain a count of the number of valid and unrevoked consents. The inspectors shall keep such count confidential and shall not reveal the count to the corporation, the Soliciting Stockholders or their representatives or any other person or entity. As soon as practicable after the earlier of (i) sixty (60) days after the date of the earliest dated consent delivered to the corporation in the manner provided in Section 228(c) of the Delaware General Corporation Law or (ii) a written request therefor by the corporation or the Soliciting Stockholders (whichever is soliciting consents) (which request, except in the case of corporate action by written consent taken pursuant to the solicitations of not more than ten (10) persons, may be made no earlier than after such reasonable amount of time after the commencement date of the applicable solicitation of consents as is necessary to permit the inspectors to commence and organize their count, but in no event less than five (5) days after such commencement date), notice of which request shall be given to the party opposing the solicitation of consents, if any, which request shall state that the corporation or Soliciting Stockholders, as the case may be, have a good faith belief that the requisite number of valid and unrevoked consents to authorize or take the action specified in the consents has been received in accordance with these bylaws, the inspectors shall issue a preliminary report to the corporation and the Soliciting Stockholders stating: (i) the number of valid consents; (ii) the number of valid revocations; (iii) the number of valid and unrevoked consents; (iv) the number of invalid consents; (v) the number of invalid revocations; and (vi) whether, based on their preliminary count, the requisite number of valid and unrevoked consents has been obtained to authorize or take the action specified in the consents. Unless the corporation and the Soliciting Stockholders shall agree to a shorter or longer period, the corporation and the Soliciting Stockholders shall have 48 hours to review the consents and revocations and to advise the inspectors and the opposing party in writing as to whether they intend to challenge the preliminary report of the inspectors. If no written notice of an intention to challenge the preliminary report is received within 48 hours after the inspectors' issuance of the preliminary report, the inspectors shall issue to the corporation and the Soliciting Stockholders their final report containing the information from the inspectors' determination with respect to whether the requisite number of valid and unrevoked consents was obtained to authorize and take the action specified in the consents. If the corporation or the Soliciting Stockholders issue written notice of an intention to challenge the inspectors' preliminary report within 48 hours after the issuance of that report, a challenge session shall be scheduled by the inspectors as promptly as practicable. A transcript of the challenge session shall be recorded by a certified court reporter. Following completion of the -8- challenge session, the inspectors shall as promptly as practicable issue their final report to the corporation and the Soliciting Stockholders, which report shall contain the information included in the preliminary report, plus all changes made to the vote totals as a result of the challenge and a certification of whether the requisite number of valid and unrevoked consents was obtained to authorize or take the action specified in the consents. A copy of the final report of the inspectors shall be included in the book in which the proceedings of meetings of stockholders are recorded. ARTICLE III DIRECTORS 3.1 POWERS Subject to the provisions of the General Corporation Law of Delaware and any limitations in the certificate of incorporation or these bylaws relating to action required to be approved by the stockholders or by the outstanding shares, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the board of directors. 3.2 NUMBER OF DIRECTORS The number of directors of the corporation shall be determined by resolution of the board of directors or by the stockholders. No reduction of the authorized number of directors shall have the effect of removing any director before that director's term of office expires. 3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS Except as provided in Section 3.4 of these bylaws, at each annual meeting of stockholders, directors of the corporation shall be elected to hold office until the expiration of the term for which they are elected, and until their successors have been duly elected and qualified; except that if any such election shall not be so held, such election shall take place at a stockholders' meeting called and held in accordance with the Delaware General Corporation Law. Directors need not be stockholders unless so required by the certificate of incorporation or these bylaws, wherein other qualifications for directors may be prescribed. Nominations for election to the board of directors of the corporation at an annual meeting of stockholders may be made by the board or on behalf of the board by a nominating committee -9- appointed by the board, or by any stockholder of the corporation entitled to vote for the election of directors at such meeting. Such nominations, other than those made by or on behalf of the board, shall be made by notice in writing received by the secretary of the corporation not less than thirty (30) days nor more than sixty (60) days prior to the date of the annual meeting; provided, however, that if less than thirty-five (35) days notice of the meeting is given to stockholders, such nomination shall have been received by the secretary not later than the close of business on the seventh (7th) day following the day on which the notice was mailed. Such notice shall set forth (i) the name and address of the stockholder who intends to make the nomination; (ii) a representation that the nominating stockholder is a holder of record of stock of the corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting and nominate the person or persons specified in the notice; (iii) the number of shares of stock held beneficially and of record by the nominating stockholder; (iv) the name, age, business address and, if known, residence address of each nominee proposed in such notice; (v) the principal occupation or employment of such nominee; (vi) the number of shares of stock of the corporation beneficially owned by each such nominee; (vii) a description of all arrangements or understandings between the nominating stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the nominating stockholder; (viii) any other information concerning the nominee that must be disclosed of nominees in proxy solicitations pursuant to Regulation 14A under the Securities Exchange Act of 1934; and (ix) the consent of such nominee to serve as a director of the corporation if so elected. The chairman of the annual meeting may, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the foregoing procedure. If such determination and declaration is made, the defective nomination shall be disregarded. 3.4 RESIGNATION AND VACANCIES Any director may resign at any time upon written notice to the corporation. When one or more directors so resigns and the resignation is effective at a future date, only a majority of the directors then in office, including those who have so resigned, shall have power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each director so chosen shall hold office as provided in this section in the filling of other vacancies. Unless otherwise provided in the certificate of incorporation or these bylaws: (i) Vacancies and newly created directorships resulting from any increase in the authorized number of directors elected by all of the stockholders having the right to vote as a single class may be filled only by a majority of the directors then in office, although less than a quorum, or by a sole remaining director. -10- (ii) Whenever the holders of any class or classes of stock or series thereof are entitled to elect one or more directors by the provisions of the certificate of incorporation, vacancies and newly created directorships of such class or classes or series may be filled only by a majority of the directors elected by such class or classes or series thereof then in office, or by a sole remaining director so elected. If at any time, by reason of death or resignation or other cause, the corporation should have no directors in office, then any officer or any stockholder or an executor, administrator, trustee or guardian of a stockholder, or other fiduciary entrusted with like responsibility for the person or estate of a stockholder, may call a special meeting of stockholders in accordance with the provisions of the certificate of incorporation or these bylaws, or may apply to the Court of Chancery for a decree summarily ordering an election as provided in Section 211 of the General Corporation Law of Delaware. If, at the time of filling any vacancy or any newly created directorship, the directors then in office constitute less than a majority of the whole board (as constituted immediately prior to any such increase), then the Court of Chancery may, upon application of any stockholder or stockholders holding at least ten (10) percent of the total number of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in office as aforesaid, which election shall be governed by the provisions of Section 211 of the General Corporation Law of Delaware as far as applicable. 3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE The board of directors of the corporation may hold meetings, both regular and special, either within or outside the State of Delaware. Unless otherwise restricted by the certificate of incorporation or these bylaws, members of the board of directors, or any committee designated by the board of directors, may participate in a meeting of the board of directors, or any committee, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. 3.6 REGULAR MEETINGS Regular meetings of the board of directors shall be held at such place or places, on such date or dates, and at such time or times as shall have been established by the board of directors and publicized among all directors. A notice of each regular meeting shall not be required. 3.7 SPECIAL MEETINGS; NOTICE -11- Special meetings of the board of directors for any purpose or purposes may be called at any time by the secretary or by any executive officer of the corporation, or by one-third of the directors then in office (rounded up to the nearest whole number) and shall be held at a place, on a date and at a time as such officer or such directors shall fix. Notice of the place, date and time of special meetings, unless waived, shall be given to each director by mailing written notice not less than two (2) days before the meeting or by sending a facsimile transmission of the same not less than two (2) hours before the time of the holding of the meeting. If the circumstances warrant, notice may also be given personally or by telephone not less than two (2) hours before the time of the holding of the meeting. Oral notice given personally or by telephone may be communicated either to the director or to a person at the office of the director who the person giving the notice has reason to believe will promptly communicate it to the director. Unless otherwise indicated in the notice thereof, any and all business may be transacted at a special meeting. 3.8 QUORUM At all meetings of the board of directors, a majority of the authorized number of directors shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the board of directors, except as may be otherwise specifically provided by statute or by the certificate of incorporation. If a quorum is not present at any meeting of the board of directors, then the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for that meeting. 3.9 WAIVER OF NOTICE Whenever notice is required to be given under any provision of the General Corporation Law of Delaware or of the certificate of incorporation or these bylaws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the directors, or members of a committee of directors, need be specified in any written waiver of notice unless so required by the certificate of incorporation or these bylaws. 3.10 ADJOURNED MEETING; NOTICE -12- If a quorum is not present at any meeting of the board of directors, then the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present. 3.11 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING Unless otherwise restricted by the certificate of incorporation or these bylaws, any action required or permitted to be taken at any meeting of the board of directors, or of any committee thereof, may be taken without a meeting if all members of the board or committee, as the case may be, consent thereto in writing and the writing or writings are filed with the minutes of proceedings of the board or committee. 3.12 FEES AND COMPENSATION OF DIRECTORS Unless otherwise restricted by the certificate of incorporation or these bylaws, the board of directors shall have the authority to fix the compensation of directors. The directors may be paid their expenses, if any, of attendance of each meeting of the board of directors and may be paid a fixed sum for attendance at each meeting of the board of directors or a stated salary as director. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. 3.13 APPROVAL OF LOANS TO OFFICERS The corporation may lend money to, or guarantee any obligation of, or otherwise assist any officer or other employee of the corporation or of its subsidiaries, including any officer or employee who is a director of the corporation or its subsidiaries, whenever, in the judgment of the directors, such loan, guaranty or assistance may reasonably be expected to benefit the corporation. The loan, guaranty or other assistance may be with or without interest and may be unsecured, or secured in such manner as the board of directors shall approve, including, without limitation, a pledge of shares of stock of the corporation. Nothing in this section contained shall be deemed to deny, limit or restrict the powers of guaranty or warranty of the corporation at common law or under any statute. 3.14 REMOVAL OF DIRECTORS Unless otherwise restricted by statute, by the certificate of incorporation or by these bylaws, any director or the entire board of directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of the directors. For purposes of the foregoing paragraph, "cause" shall mean (i) continued willful failure to perform the obligations of a director, (ii) gross negligence by the director, (iii) engaging in transactions that defraud the corporation, (iv) fraud or intentional misrepresentation, including falsifying use of funds -13- and intentional misstatements made in financial statements, books, records or reports to stockholders or governmental agencies, (v) material violation of any agreement between the director and the corporation, (vi) knowingly causing the corporation to commit violations of applicable law (including by failure to act), (vii) acts of moral turpitude or (viii) conviction of a felony. No reduction of the authorized number of directors shall have the effect of removing any director prior to the expiration of such director's term of office. 3.15 CONDUCT OF BUSINESS At any meeting of the board of directors, business shall be transacted in such order and manner as the board may from time to time determine, and all matters shall be determined by the vote of a majority of the directors present, except as otherwise provided herein or required by law. ARTICLE IV COMMITTEES 4.1 COMMITTEES OF DIRECTORS The board of directors may, by resolution passed by a majority of the whole board, designate one or more committees, with each committee to consist of one or more of the directors of the corporation. The board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the board of directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the board of directors or in the bylaws of the corporation, shall have and may exercise all the powers and authority of the board of directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers that may require it; but no such committee shall have the power or authority to (i) amend the certificate of incorporation (except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the board of directors as provided in Section 151(a) of the General Corporation Law of Delaware, fix the designation and any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the corporation or fix the number of shares of any series of stock or authorize the increase or decrease of the shares of any series), (ii) adopt an agreement of merger or consolidation under Section 251 or 252 of the General -14- Corporation Law of Delaware, (iii) recommend to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, (iv) recommend to the stockholders a dissolution of the corporation or a revocation of a dissolution, or (v) amend the bylaws of the corporation; and, unless the board resolution establishing the committee, a supplemental resolution of the board of directors, the bylaws or the certificate of incorporation expressly so provide, no such committee shall have the power or authority to declare a dividend, to authorize the issuance of stock, or to adopt a certificate of ownership and merger pursuant to Section 253 of the General Corporation Law of Delaware. 4.2 COMMITTEE MINUTES Each committee shall keep regular minutes of its meetings and report the same to the board of directors when required. 4.3 MEETINGS AND ACTION OF COMMITTEES Meetings and actions of committees shall be governed by, and held and taken in accordance with, the provisions of Article III of these bylaws, Section 3.5 (place of meetings and meetings by telephone), Section 3.6 (regular meetings), Section 3.7 (special meetings and notice), Section 3.8 (quorum), Section 3.9 (waiver of notice), Section 3.10 (adjournment and notice of adjournment), and Section 3.11 (action without a meeting), with such changes in the context of those bylaws as are necessary to substitute the committee and its members for the board of directors and its members; provided, however, that the time of regular meetings of committees may be determined either by resolution of the board of directors or by resolution of the committee, that special meetings of committees may also be called by resolutions of the board of directors, and that notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. The board of directors may adopt rules for the government of any committee not inconsistent with the provisions of these bylaws. ARTICLE V OFFICERS 5.1 OFFICERS The officers of the corporation shall be a president, a secretary, and a chief financial officer. The corporation may also have, at the discretion of the board of directors, a chairman of the board, one or more vice presidents, one or more assistant secretaries, a controller, one or more assistant controllers, a treasurer, one or more assistant treasurers, and any such other officers as may be appointed in -15- accordance with the provisions of Section 5.3 of these bylaws. Any number of offices may be held by the same person. 5.2 APPOINTMENT OF OFFICERS The officers of the corporation, except such officers as may be appointed in accordance with the provisions of Section 5.3 or 5.5 of these bylaws, shall be appointed by the board of directors, subject to the rights, if any, of an officer under any contract of employment. 5.3 SUBORDINATE OFFICERS The board of directors may appoint, or empower the president to appoint, such other officers and agents as the business of the corporation may require, each of whom shall hold office for such period, have such authority, and perform such duties as are provided in these bylaws or as the board of directors may from time to time determine. 5.4 REMOVAL AND RESIGNATION OF OFFICERS Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by an affirmative vote of the majority of the board of directors at any regular or special meeting of the board or, except in the case of an officer chosen by the board of directors, by any officer upon whom such power of removal may be conferred by the board of directors. Any officer may resign at any time by giving written notice to the corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice; and, unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party. 5.5 VACANCIES IN OFFICES Any vacancy occurring in any office of the corporation shall be filled in the manner prescribed in these bylaws for regular appointments to that office. 5.6 CHAIRMAN OF THE BOARD The chairman of the board, if such an officer be elected, shall, if present, preside at meetings of the board of directors and exercise and perform such other powers and duties as may from time to time be assigned to him by the board of directors or as may be prescribed by these bylaws. If there is no president, then the chairman of the board shall also be the chief executive officer of the corporation and shall have the powers and duties prescribed in Section 5.7 of these bylaws. -16- 5.7 PRESIDENT Subject to such supervisory powers, if any, as may be given by the board of directors to the chairman of the board, if there be such an officer, the president shall be the chief executive officer of the corporation and shall, subject to the control of the board of directors, have general supervision, direction, and control of the business and the officers of the corporation. He shall preside at all meetings of the stockholders and, in the absence or nonexistence of a chairman of the board, at all meetings of the board of directors. He shall have the general powers and duties of management usually vested in the office of president of a corporation and shall have such other powers and duties as may be prescribed by the board of directors or these bylaws. 5.8 VICE PRESIDENTS In the absence or disability of the president, the vice presidents, if any, in order of their rank as fixed by the board of directors or, if not ranked, a vice president designated by the board of directors, shall perform all the duties of the president and when so acting shall have all the powers of, and be subject to all the restrictions upon, the president. The vice presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the board of directors, these bylaws, the president or the chairman of the board. 5.9 SECRETARY The secretary shall keep or cause to be kept, at the principal executive office of the corporation or such other place as the board of directors may direct, a book of minutes of all meetings and actions of directors, committees of directors, and stockholders. The minutes shall show the time and place of each meeting, whether regular or special (and, if special, how authorized and the notice given), the names of those present at directors' meetings or committee meetings, the number of shares present or represented at stockholders' meetings, and the proceedings thereof. The secretary shall keep, or cause to be kept, at the principal executive office of the corporation or at the office of the corporation's transfer agent or registrar, as determined by resolution of the board of directors, a share register, or a duplicate share register, showing the names of all stockholders and their addresses, the number and classes of shares held by each, the number and date of certificates evidencing such shares, and the number and date of cancellation of every certificate surrendered for cancellation. The secretary shall give, or cause to be given, notice of all meetings of the stockholders and of the board of directors required to be given by law or by these bylaws. He shall keep the seal of the corporation, if one be adopted, in safe custody and shall have such other powers and perform such other duties as may be prescribed by the board of directors or by these bylaws. -17- 5.10 CHIEF FINANCIAL OFFICER The chief financial officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings, and shares. The books of account shall at all reasonable times be open to inspection by any director. The chief financial officer shall deposit all money and other valuables in the name and to the credit of the corporation with such depositories as may be designated by the board of directors. He shall disburse the funds of the corporation as may be ordered by the board of directors, shall render to the president and directors, whenever they request it, an account of all of his transactions as chief financial officer and of the financial condition of the corporation, and shall have such other powers and perform such other duties as may be prescribed by the board of directors or these bylaws. The duties of the chief financial officer may be allocated by the board of directors among one or more persons, in its discretion. 5.11 ASSISTANT SECRETARY The assistant secretary, or, if there is more than one, the assistant secretaries in the order determined by the stockholders or board of directors (or if there be no such determination, then in the order of their election) shall, in the absence of the secretary or in the event of his or her inability or refusal to act, perform the duties and exercise the powers of the secretary and shall perform such other duties and have such other powers as the board of directors or the stockholders may from time to time prescribe. 5.12 ASSISTANT TREASURER The assistant treasurer, or, if there is more than one, the assistant treasurers in the order determined by the stockholders or board of directors (or if there be no such determination, then in the order of their election), shall, in the absence of the treasurer or in the event of his or her inability or refusal to act, perform the duties and exercise the powers of the treasurer and shall perform such other duties and have such other powers as the board of directors or the stockholders may from time to time prescribe. 5.13 AUTHORITY AND DUTIES OF OFFICERS In addition to the foregoing authority and duties, all officers of the corporation shall respectively have such authority and perform such duties in the management of the business of the corporation as may be designated from time to time by the board of directors or the stockholders. 5.14 REPRESENTATION OF SHARES OF OTHER CORPORATIONS -18- The chairman of the board, the president, any vice president, the treasurer, the secretary or assistant secretary of this corporation, or any other person authorized by the board of directors or the president or a vice president, is authorized to vote, represent, and exercise on behalf of this corporation all rights incident to any and all shares of any other corporation or corporations standing in the name of this corporation. The authority granted herein may be exercised either by such person directly or by any other person authorized to do so by proxy or power of attorney duly executed by such person having the authority. ARTICLE VI INDEMNITY 6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS The corporation shall, to the maximum extent and in the manner permitted by the General Corporation Law of Delaware, indemnify each of its directors and executive officers against expenses (including attorneys' fees), judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with any proceeding, arising by reason of the fact that such person is or was an agent of the corporation. For purposes of this Section 6.1, a "director" or "executive officer" of the corporation includes any person (i) who is or was a director or executive officer of the corporation, (ii) who is or was serving at the request of the corporation as a director or executive officer of another corporation partnership, joint venture, trust or other enterprise, or (iii) who was a director or executive officer of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. 6.2 INDEMNIFICATION OF OTHERS The corporation shall have the power, to the extent and in the manner permitted by the General Corporation Law of Delaware, to indemnify each of its employees and agents (other than directors and executive officers) against expenses (including attorney's fees), judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with any proceeding, arising by reason of the fact that such person is or was an agent of the corporation. For purposes of this Section 6.2, an "employee" or "agent" of the corporation (other than a director or executive officer) includes any person (i) who is or was an employee or agent of the corporation, (ii) who is or was serving at the request of the corporation as an employee or agent of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was an employee or agent of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. -19- 6.3 INSURANCE The corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability under the provisions of the General Corporation Law of Delaware. ARTICLE VII RECORDS AND REPORTS 7.1 MAINTENANCE AND INSPECTION OF RECORDS The corporation shall, either at its principal executive office or at such place or places as designated by the board of directors, keep a record of its stockholders listing their names and addresses and the number and class of shares held by each stockholder, a copy of these bylaws as amended to date, accounting books, and other records. Any stockholder of record, in person or by attorney or other agent, shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose the corporation's stock ledger, a list of its stockholders, and its other books and records and to make copies or extracts therefrom. A proper purpose shall mean a purpose reasonably related to such person's interest as a stockholder. In every instance where an attorney or other agent is the person who seeks the right to inspection, the demand under oath shall be accompanied by a power of attorney or such other writing that authorizes the attorney or other agent to so act on behalf of the stockholder. The demand under oath shall be directed to the corporation at its registered office in Delaware or at its principal place of business. 7.2 INSPECTION BY DIRECTORS Any director shall have the right to examine the corporation's stock ledger, a list of its stockholders, and its other books and records for a purpose reasonably related to his position as a director. The Court of Chancery is hereby vested with the exclusive jurisdiction to determine whether a director is entitled to the inspection sought. The Court may summarily order the corporation to permit the director to inspect any and all books and records, the stock ledger, and the stock list and to make copies or extracts therefrom. The Court may, in its discretion, prescribe any limitations or -20- conditions with reference to the inspection, or award such other and further relief as the Court may deem just and proper. 7.3 ANNUAL STATEMENT TO STOCKHOLDERS The board of directors shall present at each annual meeting, and at any special meeting of the stockholders when called for by vote of the stockholders, a full and clear statement of the business and condition of the corporation. ARTICLE VIII GENERAL MATTERS 8.1 CHECKS From time to time, the board of directors shall determine by resolution which person or persons may sign or endorse all checks, drafts, other orders for payment of money, notes or other evidences of indebtedness that are issued in the name of or payable to the corporation, and only the persons so authorized shall sign or endorse those instruments. 8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS The board of directors, except as otherwise provided in these bylaws, may authorize any officer or officers, or agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation; such authority may be general or confined to specific instances. Unless so authorized or ratified by the board of directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. 8.3 STOCK CERTIFICATES; PARTLY PAID SHARES The shares of a corporation shall be represented by certificates, provided that the board of directors of the corporation may provide by resolution or resolutions that some or all of any or all classes or series of its stock shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the corporation. Notwithstanding the adoption of such a resolution by the board of directors, every holder of stock represented by certificates and upon request every holder of uncertificated shares shall be entitled to have a certificate signed by, or in the name of the corporation by the chairman or vice-chairman of the board of directors, or the president or vice-president, and by the treasurer or an assistant treasurer, or the secretary or an assistant secretary of such corporation representing the number of shares registered in certificate form. Any or all of the signatures on the certificate may be a facsimile. In -21- case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate has ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. The corporation may issue the whole or any part of its shares as partly paid and subject to call for the remainder of the consideration to be paid therefor. Upon the face or back of each stock certificate issued to represent any such partly paid shares, upon the books and records of the corporation in the case of uncertificated partly paid shares, the total amount of the consideration to be paid therefor and the amount paid thereon shall be stated. Upon the declaration of any dividend on fully paid shares, the corporation shall declare a dividend upon partly paid shares of the same class, but only upon the basis of the percentage of the consideration actually paid thereon. 8.4 SPECIAL DESIGNATION ON CERTIFICATES If the corporation is authorized to issue more than one class of stock or more than one series of any class, then the powers, the designations, the preferences, and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate that the corporation shall issue to represent such class or series of stock; provided, however, that, except as otherwise provided in Section 202 of the General Corporation Law of Delaware, in lieu of the foregoing requirements there may be set forth on the face or back of the certificate that the corporation shall issue to represent such class or series of stock a statement that the corporation will furnish without charge to each stockholder who so requests the powers, the designations, the preferences, and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. 8.5 LOST CERTIFICATES Except as provided in this Section 8.5, no new certificates for shares shall be issued to replace a previously issued certificate unless the latter is surrendered to the corporation and cancelled at the same time. The corporation may issue a new certificate of stock or uncertificated shares in the place of any certificate theretofore issued by it, alleged to have been lost, stolen or destroyed, and the corporation may require the owner of the lost, stolen or destroyed certificate, or his legal representative, to give the corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate or uncertificated shares. 8.6 CONSTRUCTION; DEFINITIONS -22- Unless the context requires otherwise, the general provisions, rules of construction, and definitions in the General Corporation Law of Delaware shall govern the construction of these bylaws. Without limiting the generality of this provision, the singular number includes the plural, the plural number includes the singular, and the term "person" includes both a corporation and a natural person. 8.7 DIVIDENDS The directors of the corporation, subject to any restrictions contained in (i) the General Corporation Law of Delaware or (ii) the certificate of incorporation, may declare and pay dividends upon the shares of its capital stock. Dividends may be paid in cash, in property, or in shares of the corporation's capital stock. The directors of the corporation may set apart out of any of the funds of the corporation available for dividends a reserve or reserves for any proper purpose and may abolish any such reserve. Such purposes shall include but not be limited to equalizing dividends, repairing or maintaining any property of the corporation, and meeting contingencies. 8.8 FISCAL YEAR The fiscal year of the corporation shall be fixed by resolution of the board of directors and may be changed by the board of directors. 8.9 SEAL The corporation may adopt a corporate seal, which may be altered at pleasure, and may use the same by causing it or a facsimile thereof to be impressed or affixed or in any other manner reproduced. 8.10 TRANSFER OF STOCK Upon surrender to the corporation or the transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate, and record the transaction in its books. 8.11 STOCK TRANSFER AGREEMENTS The corporation shall have power to enter into and perform any agreement with any number of stockholders of any one or more classes of stock of the corporation to restrict the transfer of shares of stock of the corporation of any one or more classes owned by such stockholders in any manner not prohibited by the General Corporation Law of Delaware. -23- VIII.12 REGISTERED STOCKHOLDERS The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends and to vote as such owner, shall be entitled to hold liable for calls and assessments the person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of another person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. VIII.13 NOTICES Except as otherwise specifically provided herein or required by law, all notices required to be given to any stockholder, director, officer, employee or agent shall be in writing and may in every instance be effectively given by hand delivery, by mail, postage paid, or by facsimile transmission. Any such notice shall be addressed to such stockholder, director, officer, employee or agent at his last known address as it appears on the books of the corporation. The time when such notice shall be deemed received, if hand delivered, or dispatched, if sent by mail or facsimile, transmission, shall be the time of the giving of the notice. ARTICLE IX AMENDMENTS Any of these bylaws may be altered, amended or repealed by the affirmative vote of a majority of the board of directors or, with respect to bylaw amendments placed before the stockholders for approval and except as otherwise provided herein or required by law, by the affirmative vote of the holders of a majority of the shares of the corporation's stock entitled to vote in the election of directors, voting as one class. ARTICLE X DISSOLUTION If it should be deemed advisable in the judgment of the board of directors of the corporation that the corporation should be dissolved, the board, after the adoption of a resolution to that effect by a majority of the whole board at any meeting called for that purpose, shall cause notice to be mailed to each stockholder entitled to vote thereon of the adoption of the resolution and of a meeting of stockholders to take action upon the resolution. -24- At the meeting a vote shall be taken for and against the proposed dissolution. If a majority of the outstanding stock of the corporation entitled to vote thereon votes for the proposed dissolution, then a certificate stating that the dissolution has been authorized in accordance with the provisions of Section 275 of the General Corporation Law of Delaware and setting forth the names and residences of the directors and officers shall be executed, acknowledged, and filed and shall become effective in accordance with Section 103 of the General Corporation Law of Delaware. Upon such certificate's becoming effective in accordance with Section 103 of the General Corporation Law of Delaware, the corporation shall be dissolved. Whenever all the stockholders entitled to vote on a dissolution consent in writing, either in person or by duly authorized attorney, to a dissolution, no meeting of directors or stockholders shall be necessary. The consent shall be filed and shall become effective in accordance with Section 103 of the General Corporation Law of Delaware. Upon such consent's becoming effective in accordance with Section 103 of the General Corporation Law of Delaware, the corporation shall be dissolved. If the consent is signed by an attorney, then the original power of attorney or a photocopy thereof shall be attached to and filed with the consent. The consent filed with the Secretary of State shall have attached to it the affidavit of the secretary or some other officer of the corporation stating that the consent has been signed by or on behalf of all the stockholders entitled to vote on a dissolution; in addition, there shall be attached to the consent a certification by the secretary or some other officer of the corporation setting forth the names and residences of the directors and officers of the corporation. ARTICLE XI CUSTODIAN 11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES The Court of Chancery, upon application of any stockholder, may appoint one or more persons to be custodians and, if the corporation is insolvent, to be receivers, of and for the corporation when: (i) any meeting held for the election of directors the stockholders are so divided that they have failed to elect successors to directors whose terms have expired or would have expired upon qualification of their successors; or (ii) the business of the corporation is suffering or is threatened with irreparable injury because the directors are so divided respecting the management of the affairs of the corporation that the required vote for action by the board of directors cannot be obtained and the stockholders are unable to terminate this division; or -25- (iii) the corporation has abandoned its business and has failed within a reasonable time to take steps to dissolve, liquidate or distribute its assets. 11.2 DUTIES OF CUSTODIAN The custodian shall have all the powers and title of a receiver appointed under Section 291 of the General Corporation Law of Delaware, but the authority of the custodian shall be to continue the business of the corporation and not to liquidate its affairs and distribute its assets, except when the Court of Chancery otherwise orders and except in cases arising under Sections 226(a)(3) or 352(a)(2) of the General Corporation Law of Delaware. -26- EX-4.1 4 INDENTURE BETWEEN REGISTRANT & BANK OF NEW YORK EXHIBIT 4.1 EXECUTION COPY ================================================================================ DIVA SYSTEMS CORPORATION, Issuer and THE BANK OF NEW YORK, Trustee ------------------------- Indenture Dated as of February 19, 1998 ------------------------- 12_% Senior Discount Notes due 2008 ================================================================================ CROSS-REFERENCE TABLE --------------------- TIA Sections Indenture Sections - ------------ ------------------ (S) 310(a)(1)............................................ 7.10 (a)(2)............................................ 7.10 (b)............................................... 7.08 (S) 313(c)............................................... 7.06; 10.02 (S) 314(a)............................................... 4.17; 10.02 (a)(4)............................................ 4.16; 10.02 (c)(1)............................................ 10.03 (c)(2)............................................ 10.03 (e)............................................... 10.04 (S) 315(b)............................................... 7.05; 10.02 (S) 316(a)(1)(A)......................................... 6.05 (a)(1)(B)......................................... 6.04 (b)............................................... 6.07 (S) 317(a)(1)............................................ 6.08 (a)(2)............................................ 6.09 (S) 318(a)............................................... 10.01 (c)............................................... 10.01 Note: The Cross-Reference Table shall not for any purpose be deemed to be a part of the Indenture. TABLE OF CONTENTS Page ARTICLE ONE DEFINITIONS AND INCORPORATION BY REFERENCE SECTION 1.01. Definitions................................................. 2 SECTION 1.02. Incorporation by Reference of Trust Indenture Act........... 23 SECTION 1.03. Rules of Construction....................................... 23 ARTICLE TWO THE NOTES SECTION 2.01. Form and Dating............................................. 24 SECTION 2.02. Restrictive Legends......................................... 25 SECTION 2.03. Execution, Authentication and Denominations................. 27 SECTION 2.04. Registrar and Paying Agent.................................. 28 SECTION 2.05. Paying Agent to Hold Money in Trust......................... 29 SECTION 2.06. Transfer and Exchange....................................... 29 SECTION 2.07. Book-Entry Provisions for Global Notes...................... 30 SECTION 2.08. Special Transfer Provisions................................. 32 SECTION 2.09. Replacement Notes........................................... 35 SECTION 2.10. Outstanding Notes........................................... 36 SECTION 2.11. Temporary Notes............................................. 36 SECTION 2.12. Cancellation................................................ 36 SECTION 2.13. CUSIP Numbers............................................... 37 SECTION 2.14. Defaulted Interest.......................................... 37 SECTION 2.15. Issuance of Additional Notes................................ 37 ARTICLE THREE REDEMPTION SECTION 3.01. Right of Redemption; Mandatory Redemption................... 37 SECTION 3.02. Notices to Trustee.......................................... 38 SECTION 3.03. Selection of Notes to Be Redeemed........................... 38 SECTION 3.04. Notice of Redemption........................................ 39 SECTION 3.05. Effect of Notice of Redemption.............................. 40 - ------------------------ Note: The Table of Contents shall not for any purposes be deemed to be a part of the Indenture. SECTION 3.06. Deposit of Redemption Price................................ 40 SECTION 3.07. Payment of Notes Called for Redemption..................... 40 SECTION 3.08. Notes Redeemed in Part..................................... 40 ARTICLE FOUR COVENANTS SECTION 4.01. Payment of Notes........................................... 41 SECTION 4.02. Maintenance of Office or Agency............................ 41 SECTION 4.03. Limitation on Indebtedness................................. 41 SECTION 4.04. Limitation on Restricted Payments.......................... 44 SECTION 4.05. Limitation on Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries.......................... 47 SECTION 4.06. Limitation on the Issuance and Sale of Capital Stock of Restricted Subsidiaries................................. 48 SECTION 4.07. Limitation on Issuances of Guarantees by Restricted Subsidiaries............................................... 48 SECTION 4.08. Limitation on Transactions with Stockholders and Affiliates 49 SECTION 4.09. Limitation on Liens........................................ 50 SECTION 4.10. Limitation on Asset Sales.................................. 50 SECTION 4.11.............................................................. 51 SECTION 4.12. Payment of Taxes and Other Claims.......................... 51 SECTION 4.13. Maintenance of Properties and Insurance.................... 52 SECTION 4.14. Notice of Defaults......................................... 52 SECTION 4.15. Compliance Certificates.................................... 52 SECTION 4.16. Commission Reports and Reports to Holders.................. 53 SECTION 4.18. Waiver of Stay, Extension or Usury Laws.................... 54 SECTION 4.19. Limitation on Sale and Leaseback Transactions.............. 54 ARTICLE FIVE SUCCESSOR CORPORATION SECTION 5.01. When Company May Merge, Etc................................ 54 SECTION 5.02. Successor Substituted...................................... 55 ARTICLE SIX DEFAULT AND REMEDIES SECTION 6.01. Events of Default.......................................... 55 SECTION 6.02. Acceleration............................................... 57 SECTION 6.03. Other Remedies............................................. 57 SECTION 6.04. Waiver of Past Defaults.................................... 58 SECTION 6.05. Control by Majority........................................ 58 SECTION 6.06. Limitation on Suits........................................ 58 SECTION 6.07. Rights of Holders to Receive Payment....................... 59 SECTION 6.08. Collection Suit by Trustee................................. 59 SECTION 6.09. Trustee May File Proofs of Claim........................... 59 SECTION 6.10. Priorities................................................. 60 SECTION 6.11. Undertaking for Costs...................................... 60 SECTION 6.12. Restoration of Rights and Remedies......................... 60 SECTION 6.13. Rights and Remedies Cumulative............................. 61 SECTION 6.14. Delay or Omission Not Waiver............................... 61 ARTICLE SEVEN TRUSTEE SECTION 7.01. General.................................................... 61 SECTION 7.02. Certain Rights of Trustee.................................. 61 SECTION 7.03. Individual Rights of Trustee............................... 62 SECTION 7.04. Trustee's Disclaimer....................................... 62 SECTION 7.05. Notice of Default.......................................... 63 SECTION 7.06. Reports by Trustee to Holders.............................. 63 SECTION 7.07. Compensation and Indemnity................................. 63 SECTION 7.08. Replacement of Trustee..................................... 64 SECTION 7.09. Successor Trustee by Merger, Etc........................... 65 SECTION 7.10. Eligibility................................................ 65 SECTION 7.11. Money Held in Trust........................................ 65 SECTION 7.12. Withholding Taxes.......................................... 65 ARTICLE EIGHT DISCHARGE OF INDENTURE SECTION 8.01. Termination of Company's Obligations....................... 66 SECTION 8.02. Defeasance and Discharge of Indenture...................... 66 SECTION 8.03. Defeasance of Certain Obligations.......................... 69 SECTION 8.04. Application of Trust Money................................. 71 SECTION 8.05. Repayment to Company....................................... 71 SECTION 8.06. Reinstatement.............................................. 71 ARTICLE NINE AMENDMENTS, SUPPLEMENTS AND WAIVERS SECTION 9.01. Without Consent of Holders................................. 71 SECTION 9.02. With Consent of Holders.................................... 72 SECTION 9.03. Revocation and Effect of Consent........................... 73 SECTION 9.04. Notation on or Exchange of Notes........................... 74 SECTION 9.05. Trustee to Sign Amendments, Etc............................ 74 SECTION 9.06. Conformity with Trust Indenture Act........................ 74 ARTICLE TEN MISCELLANEOUS SECTION 10.01. Trust Indenture Act of 1939............................... 74 SECTION 10.02. Notices................................................... 74 SECTION 10.03. Certificate and Opinion as to Conditions Precedent........ 75 SECTION 10.04. Statements Required in Certificate or Opinion............. 76 SECTION 10.05. Rules by Trustee, Paying Agent or Registrar............... 76 SECTION 10.06. Payment Date Other Than a Business Day.................... 76 SECTION 10.07. Governing Law............................................. 76 SECTION 10.08. No Adverse Interpretation of Other Agreements............. 77 SECTION 10.09. No Recourse Against Others................................ 77 SECTION 10.10. Successors................................................ 77 SECTION 10.11. Duplicate Originals....................................... 77 SECTION 10.12. Separability.............................................. 77 SECTION 10.13. Table of Contents, Headings, Etc.......................... 77 SECTION 10.14. Registration Rights....................................... 78 EXHIBIT A Form of Note................................................. A-1 EXHIBIT B Form of Certificate.......................................... B-1 EXHIBIT C Form of Certificate to Be Delivered in Connection with Transfers to Non-QIB Accredited Investors................. C-1 EXHIBIT D Form of Certificate to Be Delivered in Connection with Transfers Pursuant to Regulation S........................ D-1 SCHEDULE I Form of Subordinated Note.................................... I-1 INDENTURE, dated as of February 19, 1998, between DIVA SYSTEMS CORPORATION, a Delaware corporation (the "Company"), and THE BANK OF NEW YORK, a New York ------- banking corporation (the "Trustee"). ------- RECITALS The Company has duly authorized the execution and delivery of this Indenture to provide for the issuance initially of up to $463,000,000 aggregate principal amount at maturity of the Company's 12_% Senior Discount Notes due 2008 (the "Notes") issuable as provided in this Indenture. The Company has ----- agreed to issue a total of 463,000 Units (the "Units") each of which consists of ----- one Note and three warrants (each, a "Warrant"), each Warrant initially ------- entitling the holder thereof to purchase one share of common stock, par value $0.001 per share, of the Company. Pursuant to the terms of a Units Purchase Agreement, dated February 11, 1998, between the Company on the one hand and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), Chase Securities Inc. and Morgan Stanley & Co. Incorporated - --------------- on the other hand (the "Purchase Agreement"), the Company has agreed to issue ------------------ and sell to the Initial Purchasers 404,998 Units. Pursuant to the terms of an exchange offer memorandum and accompanying Transmittal Form from the Company to the holders (the "Exchange Noteholders") of the Company's outstanding 13% -------------------- Subordinated Discount Notes due 2006, the Company has agreed to issue to the Exchange Noteholders an aggregate of 58,002 Units. The Note and Warrants included in each Unit will automatically become separately transferable at the close of business upon the earliest to occur of (i) the date that is six months after the Closing Date, (ii) the commencement of an exchange offer with respect to the Notes undertaken pursuant to the Registration Rights Agreement, (iii) the effectiveness of a shelf registration statement with respect to the Notes, (iv) the commencement of an Offer to Purchase the Notes and (v) such earlier date as determined by Merrill Lynch in its sole discretion (the "Separation Date"). All things necessary to make this --------------- Indenture a valid agreement of the Company, in accordance with its terms, have been done, and the Company has done all things necessary to make the Notes, when executed by the Company and authenticated and delivered by the Trustee hereunder and duly issued by the Company, the valid obligations of the Company as hereinafter provided. This Indenture is subject to, and shall be governed by, the provisions of the Trust Indenture Act of 1939 that are required to be a part of and to govern indentures qualified under the Trust Indenture Act of 1939. AND THIS INDENTURE FURTHER WITNESSETH For and in consideration of the premises and the purchase of the Notes by the Holders thereof, it is mutually covenanted and agreed, for the equal and proportionate benefit of all Holders, the Company and the Trustee, as follows. 2 ARTICLE ONE DEFINITIONS AND INCORPORATION BY REFERENCE SECTION 1.01. Definitions. ----------- "Accreted Value" is defined to mean, for any Specified Date, the amount calculated pursuant to (i), (ii), (iii) or (iv) for each $1,000 of principal amount at maturity of Notes: (i) if the Specified Date occurs on one or more of the following dates (each a "Semi-Annual Accrual Date"), the Accreted Value will equal the amount set forth below for such Semi-Annual Accrual Date: SEMI-ANNUAL ACCRETED ACCRUAL DATE VALUE -------------- --------- March 1, 1998 $ 542.20 September 1, 1988 $ 576.42 March 1, 1999 $ 612.81 September 1, 1999 $ 651.49 March 1, 2000 $ 692.62 September 1, 2000 $ 736.34 March 1, 2001 $ 782.82 September 1, 2001 $ 832.24 March 1, 2002 $ 884.77 September 1, 2002 $ 940.62 March 1, 2003 $1,000.00 (ii) if the Specified Date occurs before the first Semi-Annual Accrual Date, the Accreted Value will equal the sum of (a) $540.00 and (b) an amount equal to the product of (1) the Accreted Value for the first Semi- Annual Accrual Date less $540.00 multiplied by (2) a fraction, the numerator of which is the number of days from the issue date of the Notes to the Specified Date, using a 360-day year of twelve 30-day months, and the denominator of which is the number of days elapsed from the issue date of the Notes to the first Semi-Annual Accrual Date, using a 360-day year of twelve 30-day months; (iii) if the Specified Date occurs between two Semi-Annual Accrual Dates, the Accreted Value will equal the sum of (a) the Accreted Value for the Semi-Annual Accrual Date immediately preceding such Specified Date and (b) an amount equal to the product of (1) the Accreted Value for the immediately following Semi-Annual Accrual Date less the Accreted Value for the immediately preceding Semi-Annual Accrual Date multiplied by (2) a fraction, the numerator of which is the number of days from the immediately preceding 3 Semi-Annual Accrual Date to the Specified Date, using a 360-day year of twelve 30-day months, and the denominator of which is 180; or (iv) if the Specified Date occurs after the last Semi-Annual Accrual Date, the Accreted Value will equal $1,000. "Acquired Indebtedness" means Indebtedness of a Person existing at the time such Person becomes a Restricted Subsidiary or assumed in connection with an Asset Acquisition by a Restricted Subsidiary and not Incurred in connection with, or in anticipation of, such Person becoming a Restricted Subsidiary or such Asset Acquisition; provided that Indebtedness of such Person which is redeemed, defeased, retired or otherwise repaid at the time of or immediately after consummation of the transactions by which such Person becomes a Restricted Subsidiary or such Asset Acquisition shall not be Acquired Indebtedness. "Adjusted Consolidated Net Income" means, for any period, the aggregate net income (or loss) of the Company and its Restricted Subsidiaries for such period determined in conformity with GAAP; provided that the following items shall be excluded in computing Adjusted Consolidated Net Income (without duplication): (i) the net income of any Person that is not a Restricted Subsidiary, except to the extent of the amount of dividends or other distributions actually paid to the Company or any of its Restricted Subsidiaries by such Person during such period; (ii) solely for the purposes of calculating the amount of Restricted Payments that may be made pursuant to clause (C) of the first paragraph of Section 4.04 (and in such case, except to the extent includable pursuant to clause (i) above), the net income (or loss) of any Person accrued prior to the date it becomes a Restricted Subsidiary or is merged into or consolidated with the Company or any of its Restricted Subsidiaries or all or substantially all of the property and assets of such Person are acquired by the Company or any of its Restricted Subsidiaries; (iii) the net income of any Restricted Subsidiary to the extent that the declaration or payment of dividends or similar distributions by such Restricted Subsidiary of such net income is not at the time permitted by the operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to such Restricted Subsidiary, except to the extent that such net income could be paid to the Company or a Restricted Subsidiary by loans, advances, intercompany transfers, principal repayments or otherwise (iv) any gains or losses (on an after-tax basis) attributable to Asset Sales; (v) except for purposes of calculating the amount of Restricted Payments that may be made pursuant to clause (C) of the first paragraph of Section 4.04, any amount paid or accrued as dividends on Preferred Stock of the Company or any Restricted Subsidiary owned by Persons other than the Company and any of its Restricted Subsidiaries; and (vi) all extraordinary gains and extraordinary losses. "Adjusted Consolidated Net Tangible Assets" means the total amount of assets of the Company and its Restricted Subsidiaries (less applicable depreciation, amortization and other valuation reserves), except to the extent resulting from write-ups of capital assets (excluding write-ups in connection with accounting for acquisitions in conformity with GAAP), after deducting 4 therefrom (i) all current liabilities of the Company and its Restricted Subsidiaries (excluding intercompany items) and (ii) all goodwill, trade names, trademarks, patents, unamortized debt discount and expense and other like intangibles, all as set forth on the most recent quarterly or annual consolidated balance sheet of the Company and its Restricted Subsidiaries, prepared in conformity with GAAP and filed with the Commission or provided to the Trustee pursuant to Section 4.16. "Affiliate" means, as applied to any Person, any other Person directly or indirectly controlling, controlled by, or under direct or indirect common control with, such Person. For purposes of this definition, "control" (including, with correlative meanings, the terms "controlling," "controlled by" and "under common control with"), as applied to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise. "Agent" means any Registrar, Co-Registrar, Paying Agent or authenticating agent. "Agent Members" has the meaning provided in Section 2.07(a). "Asset Acquisition" means (i) an Investment by the Company or any of its Restricted Subsidiaries in any other Person pursuant to which such Person shall become a Restricted Subsidiary or shall be merged into or consolidated with the Company or any of its Restricted Subsidiaries; provided that such Person's primary business is related, ancillary or complementary to the businesses of the Company and its Restricted Subsidiaries on the date of such Investment or (ii) an acquisition by the Company or any of its Restricted Subsidiaries of the property and assets of any Person other than the Company or any of its Restricted Subsidiaries that constitute substantially all of such Person or of a division or line of business of such Person; provided that the property and assets acquired are related, ancillary or complementary to the businesses of the Company and its Restricted Subsidiaries on the date of such acquisition. "Asset Disposition" means the sale or other disposition by the Company or any of its Restricted Subsidiaries (other than to the Company or another Restricted Subsidiary) of (i) all or substantially all of the Capital Stock of any Restricted Subsidiary or (ii) all or substantially all of the assets that constitute a division or line of business of the Company or any of its Restricted Subsidiaries. "Asset Sale" means any sale, transfer or other disposition (including by way of merger, consolidation or sale-leaseback transaction) in one transaction or a series of related transactions by the Company or any of its Restricted Subsidiaries to any Person other than the Company or any of its Restricted Subsidiaries of (i) all or any of the Capital Stock of any Restricted Subsidiary, (ii) all or substantially all of the property and assets of an operating unit or business of the Company or any of its Restricted Subsidiaries or (iii) any other property and assets (other than the Capital Stock or other Investment in an Unrestricted Subsidiary) of the Company or any of its Restricted Subsidiaries 5 outside the ordinary course of business of the Company or such Restricted Subsidiary and, in each case, that is not governed by the provisions of Article Five of this Indenture; provided that "Asset Sale" shall not include (a) sales or other dispositions of inventory, receivables and other current assets, (b) sales or other dispositions of assets for consideration at least equal to the fair market value of the assets sold or disposed of, to the extent that the consideration received would constitute property or assets of the kinds described in clause (ii)(B) of Section 4.10, (c) sales, transfers or other dispositions of assets constituting Restricted Payments permitted to be made under Section 4.04 or (d) transfers consisting of granting of Liens permitted under Section 4.09 and dispositions of such assets in accordance with such Liens. "Attributable Debt" means, with respect to an operating lease included in any Sale and Leaseback Transaction at the time of determination, the present value (discounted at the interest rate implicit in the lease or, if not known, at the Company's incremental borrowing rate) of the obligations of the lessee of the property subject to such lease for rental payments during the remaining term of the lease included in such transaction, including any period for which such lease has been extended or may, at the option of the lessor, be extended, or until the earliest date on which the lessee may terminate such lease without penalty or upon payment of penalty (in which case the rental payments shall include such penalty), after excluding from such rental payments all amounts required to be paid on account of maintenance and repairs, insurance, taxes, assessments, water, utilities and similar charges. "Average Life" means, at any date of determination with respect to any debt security, the quotient obtained by dividing (i) the sum of the products of (a) the number of years from such date of determination to the dates of each successive scheduled principal payment of such debt security and (b) the amount of such principal payment by (ii) the sum of all such principal payments. "Board of Directors" means the Board of Directors of the Company or any committee of such Board of Directors duly authorized to act under this Indenture. "Board Resolution" means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification, and delivered to the Trustee. "Business Day" means any day except a Saturday, Sunday or other day on which commercial banks in The City of New York, or in the city of the Corporate Trust Office of the Trustee, are authorized by law to close. "Capital Stock" means, with respect to any Person, any and all shares, interests, participations or other equivalents (however designated, whether voting or non-voting) in the equity of such Person, whether outstanding on the Closing Date or issued thereafter, including, without limitation, all Common Stock and Preferred Stock. 6 "Capitalized Lease" means, as applied to any Person, any lease of any property (whether real, personal or mixed) of which the discounted present value of the rental obligations of such Person as lessee, in conformity with GAAP, is required to be capitalized on the balance sheet of such Person. "Capitalized Lease Obligations" means the discounted present value of the rental obligations under a Capitalized Lease. "Change of Control" means such time as (i) (a) prior to the occurrence of a Public Market, a "person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act) becomes the ultimate "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of Voting Stock representing a greater percentage of the total voting power of the Voting Stock of the Company, on a fully diluted basis, than is held by the Existing Stockholders on such date and (b) after the occurrence of a Public Market, a "person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act) becomes the ultimate "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of more than 35% of the total voting power of the Voting Stock of the Company on a fully diluted basis, and such ownership is greater than the percentage of the total voting power of the Voting Stock of the Company, on a fully-diluted basis, than is held by the Existing Stockholders on such date; or (ii) individuals who on the Closing Date constitute the Board of Directors (together with any new directors whose election by the Board of Directors or whose nomination by the Board of Directors for election by the Company's stockholders was approved by a vote of at least two-thirds of the members of the Board of Directors then in office who either were members of the Board of Directors on the Closing Date or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the members of the Board of Directors then in office. "Closing Date" means the date on which the Notes are originally issued under this Indenture. "Commission" means the Securities and Exchange Commission, as from time to time constituted, created under the Exchange Act or, if at any time after the execution of this instrument such Commission is not existing and performing the duties now assigned to it under the TIA, then the body performing such duties at such time. "Common Stock" means, with respect to any Person, any and all shares, interests, participations or other equivalents (however designated, whether voting or non-voting) of such Person's equity, other than Preferred Stock of such Person, whether outstanding on the Closing Date or issued thereafter, including, without limitation, all series and classes of such common stock. "Company" means the party named as such in the first paragraph of this Indenture until a successor replaces it pursuant to Article Five of this Indenture and thereafter means the successor. 7 "Company Order" means a written request or order signed in the name of the Company (i) by its Chairman, a Vice Chairman, its President or a Vice President and (ii) by its Treasurer, an Assistant Treasurer, its Secretary or an Assistant Secretary and delivered to the Trustee; provided, however, that such written request or order may be signed by any two of the officers or directors listed in clause (i) above in lieu of being signed by one of such officers or directors listed in such clause (i) and one of the officers listed in clause (ii) above. "Consolidated EBITDA" means, for any period, Adjusted Consolidated Net Income for such period plus, to the extent such amount was deducted in calculating such Adjusted Consolidated Net Income, (i) Consolidated Interest Expense, (ii) income taxes (other than income taxes (either positive or negative) attributable to extraordinary and non-recurring gains or losses on sales of assets), (iii) depreciation expense, (iv) amortization expense and (v) all other non-cash items reducing Adjusted Consolidated Net Income (other than items that will require cash payments and for which an accrual or reserve is, or is required by GAAP to be, made), less all non-cash items increasing Adjusted Consolidated Net Income, all as determined on a consolidated basis for the Company and its Restricted Subsidiaries in conformity with GAAP; provided that, if any Restricted Subsidiary is not a Wholly Owned Restricted Subsidiary, Consolidated EBITDA shall be reduced (to the extent not otherwise reduced in the calculation of Adjusted Consolidated Net Income) by an amount equal to (A) the amount of the Adjusted Consolidated Net Income attributable to such Restricted Subsidiary multiplied by (B) the percentage ownership interest in the income of such Restricted Subsidiary not owned on the last day of such period by the Company or any of its Restricted Subsidiaries. "Consolidated Interest Expense" means, for any period, the aggregate amount of interest in respect of Indebtedness (including, without limitation, amortization of original issue discount on any Indebtedness and the interest portion of any deferred payment obligation, calculated in accordance with the effective interest method of accounting; all commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing; the net costs associated with Interest Rate Agreements; and Indebtedness that is Guaranteed or secured by the Company or any of its Restricted Subsidiaries) and all but the principal component of rentals in respect of Capitalized Lease Obligations paid, accrued or scheduled to be paid or to be accrued by the Company and its Restricted Subsidiaries during such period; excluding, however, (i) any amount of such interest of any Restricted Subsidiary if the net income of such Restricted Subsidiary is excluded in the calculation of Adjusted Consolidated Net Income pursuant to clause (iii) of the definition thereof (but only in the same proportion as the net income of such Restricted Subsidiary is excluded from the calculation of Adjusted Consolidated Net Income pursuant to clause (iii) of the definition thereof) and (ii) any premiums, fees and expenses (and any amortization thereof) payable in connection with the offering of the Notes, all as determined on a consolidated basis (without taking into account Unrestricted Subsidiaries) in conformity with GAAP. 8 "Consolidated Leverage Ratio" means, on any Transaction Date, the ratio of (i) the aggregate amount of Indebtedness of the Company and its Restricted Subsidiaries on a consolidated basis outstanding on such Transaction Date to (ii) the aggregate amount of Consolidated EBITDA for the then most recent fiscal quarter for which financial statements of the Company have been filed with the Commission or provided to the Trustee pursuant to Section 4.16 (such fiscal quarter period being the "Quarter") multiplied by four; provided that, in making the foregoing calculation, (A) pro forma effect shall be given to any Indebtedness to be Incurred or repaid on the Transaction Date; (B) pro forma effect shall be given to Asset Dispositions and Asset Acquisitions (including giving pro forma effect to the application of proceeds of any Asset Disposition) that occur from the beginning of the Quarter through the Transaction Date (the "Reference Period"), as if they had occurred and such proceeds had been applied on the first day of such Reference Period; and (C) pro forma effect shall be given to asset dispositions and asset acquisitions (including giving pro forma effect to the application of proceeds of any asset disposition) that have been made by any Person that has become a Restricted Subsidiary or has been merged with or into the Company or any Restricted Subsidiary during such Reference Period and that would have constituted Asset Dispositions or Asset Acquisitions had such transactions occurred when such Person was a Restricted Subsidiary as if such asset dispositions or asset acquisitions were Asset Dispositions or Asset Acquisitions that occurred on the first day of such Reference Period; provided that to the extent that clause (B) or (C) of this sentence requires that pro forma effect be given to an Asset Acquisition or Asset Disposition, such pro forma calculation shall be based upon the full fiscal quarter immediately preceding the Transaction Date of the Person, or division or line of business of the Person, that is acquired or disposed of for which financial information is available. "Consolidated Net Worth" means, at any date of determination, stockholders' equity as set forth on the most recently available quarterly or annual consolidated balance sheet of the Company and its Restricted Subsidiaries (which shall be as of a date not more than 90 days prior to the date of such computation, and which shall not take into account Unrestricted Subsidiaries), less any amounts attributable to Disqualified Stock or any equity security convertible into or exchangeable for Indebtedness, the cost of treasury stock and the principal amount of any promissory notes receivable from the sale of the Capital Stock of the Company or any of its Restricted Subsidiaries, each item to be determined in conformity with GAAP (excluding the effects of foreign currency exchange adjustments under Financial Accounting Standards Board Statement of Financial Accounting Standards No. 52). "Corporate Trust Office" means the office of the Trustee at which the corporate trust business of the Trustee shall, at any particular time, be principally administered, which office is, at the date of this Indenture, located at 101 Barclay Street, Floor 21 West, New York, NY 10286, Attention: Corporate Trust Trustee Administration. "Currency Agreement" means any foreign exchange contract, currency swap agreement, currency option or other similar agreement or arrangement. 9 "Debt Securities" means any Indebtedness (including any Guarantee) issued in connection with a public offering (whether or not underwritten) or a private placement (provided such private placement is underwritten for resale pursuant to Rule 144A, Regulation S or otherwise under the Securities Act or sold on an agency basis by a broker-dealer or one of its Affiliates to 10 or more beneficial holders); it being understood that "Debt Securities" shall not include commercial bank borrowings or similar borrowings, recourse transfers of financial assets, capital leases or other types of borrowings incurred in a manner not customarily viewed as a "securities offering" or Guarantees in respect of the foregoing. "Default" means any event that is, or after notice or passage of time or both would be, an Event of Default. "Depositary" means The Depository Trust Company, its nominees, and their respective successors. "Disqualified Stock" means any class or series of Capital Stock of any Person that by its terms or otherwise is (i) required to be redeemed prior to the Stated Maturity of the Notes, (ii) redeemable at the option of the holder of such class or series of Capital Stock at any time prior to the Stated Maturity of the Notes or (iii) convertible into or exchangeable for Capital Stock referred to in clause (i) or (ii) above or Indebtedness having a scheduled maturity prior to the Stated Maturity of the Notes; provided that any Capital Stock that would not constitute Disqualified Stock but for provisions thereof giving holders thereof the right to require such Person to repurchase or redeem such Capital Stock upon the occurrence of an "asset sale" or "change of control" occurring prior to the Stated Maturity of the Notes shall not constitute Disqualified Stock if the "asset sale" or "change of control" provisions applicable to such Capital Stock are no more favorable to the holders of such Capital Stock than the provisions contained in Section 4.10 and Section 4.17, respectively, and such Capital Stock specifically provides that such Person will not repurchase or redeem any such stock pursuant to such provision prior to the Company's repurchase of such Notes as are required to be repurchased pursuant to Section 4.10 and Section 4.17. "Event of Default" has the meaning provided in Section 6.01. "Excess Proceeds" has the meaning provided in Section 4.10. "Exchange Act" means the Securities Exchange Act of 1934. "Exchange Notes" means any securities of the Company containing terms identical to the Notes (except that such Exchange Notes shall be registered under the Securities Act) that are issued and exchanged for the Notes pursuant to the Registration Rights Agreement and this Indenture. 10 "Existing Stockholders" means Alan H. Bushell, Paul M. Cook, John A. Rollwagen, Acorn Ventures, Inc. (for so long as there has been no change of control of Acorn Ventures, Inc.), and Sarnoff Corporation. "fair market value" means the price that would be paid in an arm's-length transaction between an informed and willing seller under no compulsion to sell and an informed and willing buyer under no compulsion to buy, as determined in good faith by the Board of Directors, whose determination shall be conclusive if evidenced by a Board Resolution; provided that for purposes of clause (viii) of the second paragraph of Section 4.03(a), (x) the fair market value of any security registered under the Exchange Act shall be the average of the closing prices, regular way, of such security for the 20 consecutive trading days immediately preceding the sale of Capital Stock and (y) in the event the aggregate fair market value of any other property (other than cash or cash equivalents) received by the Company exceeds $10 million, the fair market value of such property shall be determined by a nationally recognized investment banking firm and set forth in their written opinion which shall be delivered to the Trustee. "GAAP" means generally accepted accounting principles in the United States of America as in effect as of the Closing Date, including, without limitation, those set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as approved by a significant segment of the accounting profession. All ratios and computations contained or referred to in this Indenture shall be computed in conformity with GAAP applied on a consistent basis, except that calculations made for purposes of determining compliance with the terms of the covenants and with other provisions of this Indenture shall be made without giving effect to (i) the amortization of any expenses incurred in connection with the offering of the Notes and (ii) except as otherwise provided, the amortization of any amounts required or permitted by Accounting Principles Board Opinion Nos. 16 and 17. "Global Notes" has the meaning provided in Section 2.01. "Guarantee" means any obligation, contingent or otherwise, of any Person directly or indirectly guaranteeing any Indebtedness of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness of such other Person (whether arising by virtue of partnership arrangements, or by agreements to keep-well, to purchase assets, goods, securities or services (unless such purchase arrangements are on arm's-length terms and are entered into in the ordinary course of business), to take-or-pay, or to maintain financial statement conditions or otherwise) or (ii) entered into for purposes of assuring in any other manner the obligee of such Indebtedness of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part); provided that the term "Guarantee" shall not 11 include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. "Guaranteed Indebtedness" has the meaning provided in Section 4.07. "Holder" means the registered holder of any Note. "Incur" means, with respect to any Indebtedness, to incur, create, issue, assume, Guarantee or otherwise become liable for or with respect to, or become responsible for, the payment of, contingently or otherwise, such Indebtedness, including an "Incurrence" of Acquired Indebtedness; provided that neither the accrual of interest nor the accretion of original issue discount shall be considered an Incurrence of Indebtedness. "Indebtedness" means, with respect to any Person at any date of determination (without duplication), (i) all indebtedness of such Person for borrowed money, (ii) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) all obligations of such Person in respect of letters of credit or other similar instruments (including reimbursement obligations with respect thereto), (iv) all obligations of such Person to pay the deferred and unpaid purchase price of property or services, which purchase price is due more than six months after the date of placing such property in service or taking delivery and title thereto or the completion of such services, except Trade Payables, (v) all Capitalized Lease Obligations of such Person, (vi) all Attributable Debt of such Person with respect to any Sale and Leaseback Transaction to which such Person is a lessee, (vii) the maximum fixed redemption or repurchase price of Disqualified Stock of such Person at the date of determination, (viii) all Indebtedness of other Persons secured by a Lien on any asset of such Person, whether or not such Indebtedness is assumed by such Person; provided that the amount of such Indebtedness shall be the lesser of (A) the fair market value of such asset at such date of determination and (B) the amount of such Indebtedness, (ix) all Indebtedness of other Persons Guaranteed by such Person to the extent such Indebtedness is Guaranteed by such Person and (x) to the extent not otherwise included in this definition, net obligations under Currency Agreements and Interest Rate Agreements. For purposes of the preceding sentence, the maximum fixed repurchase price of any Disqualified Stock that does not have a fixed repurchase price shall be calculated in accordance with the terms of such Disqualified Stock as if such Disqualified Stock were repurchased on any date on which Indebtedness shall be required to be determined pursuant to this Indenture; provided that if such Disqualified Stock is not then permitted to be repurchased, the repurchase price shall be the book value of such Disqualified Stock. The amount of Indebtedness of any Person at any date shall be the outstanding balance at such date of all unconditional obligations as described above and, with respect to contingent obligations, the maximum liability upon the occurrence of the contingency giving rise to the obligation, provided that (A) the amount outstanding at any time of any Indebtedness issued with original issue discount is the face amount of such Indebtedness less the remaining unamortized portion of the original issue discount of such Indebtedness at the time of its issuance as determined in conformity with GAAP, (B) money borrowed and set aside at the time of the Incurrence of any Indebtedness in order to prefund the 12 payment of the interest on such Indebtedness shall not be deemed to be "Indebtedness" and (C) Indebtedness shall not include any liability for federal, state, local or other taxes. "Indenture" means this Indenture as originally executed or as it may be amended or supplemented from time to time by one or more indentures supplemental to this Indenture entered into pursuant to the applicable provisions of this Indenture. "Institutional Accredited Investor" shall mean an institution that is an "accredited investor" as that term is defined in Rule 501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act. "Interest Payment Date" means each semiannual interest payment date on March 1 and September 1 of each year, commencing September 1, 2003. "Interest Rate Agreement" means any interest rate protection agreement, interest rate future agreement, interest rate option agreement, interest rate swap agreement, interest rate cap agreement, interest rate collar agreement, interest rate hedge agreement, option or future contract or other similar agreement or arrangement. "Investment" in any Person means any direct or indirect advance, loan or other extension of credit (including, without limitation, by way of Guarantee or similar arrangement; but excluding (x) advances to customers (including distributors) in the ordinary course of business that are, in conformity with GAAP, recorded as accounts receivable on the balance sheet of the Company or its Restricted Subsidiaries, (y) advances to suppliers in the ordinary course of business that are, in conformity with GAAP, recorded as prepaid expenses on the balance sheet of the Company or its Restricted Subsidiaries and (z) advances or prepayments to SRTC in connection with the SRTC Transaction), or capital contribution to (by means of any transfer of cash or other property to others or any payment for property or services for the account or use of others), or any purchase or acquisition of Capital Stock, bonds, notes, debentures or other similar instruments issued by, such Person and shall include (i) the designation of a Restricted Subsidiary as an Unrestricted Subsidiary and (ii) the fair market value of the Capital Stock (or any other Investment), held by the Company or any of its Restricted Subsidiaries, of (or in) any Person that has ceased to be a Restricted Subsidiary, including without limitation, by reason of any transaction permitted by clause (iii) of Section 4.06; provided that the fair market value of the Investment remaining in any Person that has ceased to be a Restricted Subsidiary shall not exceed the aggregate amount of Investments previously made in such Person valued at the time such Investments were made less the net reduction of such Investments. For purposes of the definition of "Unrestricted Subsidiary" and Section 4.04, (i) "Investment" shall include the fair market value of the assets (net of liabilities (other than liabilities to the Company or any of its Restricted Subsidiaries)) of any Restricted Subsidiary at the time that such Restricted Subsidiary is designated an Unrestricted Subsidiary, (ii) the fair market value of the assets (net of liabilities (other than liabilities to the Company or any of its Restricted Subsidiaries)) of any Unrestricted Subsidiary at the time that such Unrestricted Subsidiary 13 is designated a Restricted Subsidiary shall be considered a reduction in outstanding Investments and (iii) any property transferred to or from an Unrestricted Subsidiary shall be valued at its fair market value at the time of such transfer. "Lien" means any mortgage, pledge, security interest, encumbrance, lien or charge of any kind (including, without limitation, any conditional sale or other title retention agreement or lease in the nature thereof or any agreement to give any security interest). "Moody's" means Moody's Investors Service, Inc. and its successors. "Net Cash Proceeds" means, (a) with respect to any Asset Sale, the proceeds of such Asset Sale in the form of cash or cash equivalents, including payments in respect of deferred payment obligations (to the extent corresponding to the principal, but not interest, component thereof) when received in the form of cash or cash equivalents (except to the extent such obligations are financed or sold with recourse to the Company or any Restricted Subsidiary) and proceeds from the conversion of other property received when converted to cash or cash equivalents, net of (i) brokerage commissions and other fees and expenses (including fees and expenses of counsel, accountants and investment bankers and other professionals) related to such Asset Sale, (ii) provisions for all taxes (whether or not such taxes will actually be paid or are payable) as a result of such Asset Sale without regard to the consolidated results of operations of the Company and its Restricted Subsidiaries, taken as a whole, (iii) payments made to repay Indebtedness or any other obligation outstanding at the time of such Asset Sale that either (A) is secured by a Lien on the property or assets sold or (B) is required to be paid as a result of such sale and (iv) appropriate amounts to be provided by the Company or any Restricted Subsidiary as a reserve against any liabilities associated with such Asset Sale, including, without limitation, pension and other post-employment benefit liabilities, liabilities related to environmental matters and liabilities under any indemnification obligations associated with such Asset Sale, all as determined in conformity with GAAP and (b) with respect to any issuance or sale of Capital Stock, the proceeds of such issuance or sale in the form of cash or cash equivalents, including payments in respect of deferred payment obligations (to the extent corresponding to the principal, but not interest, component thereof) when received in the form of cash or cash equivalents (except to the extent such obligations are financed or sold with recourse to the Company or any Restricted Subsidiary) and proceeds from the conversion of other property received when converted to cash or cash equivalents, net of attorney's fees, accountants' fees, underwriters' or placement agents' fees, discounts or commissions and brokerage, consultant and other fees incurred in connection with such issuance or sale and net of taxes paid or payable as a result thereof. "Non-U.S. Person" means a person who is not a "U.S. person" (as defined in Regulation S). "Notes" means any of the securities, as defined in the first paragraph of the recitals hereof, that are authenticated and delivered under this Indenture. For all purposes of this Indenture, the term 14 "Notes" shall include the Notes initially issued on the Closing Date, any Exchange Notes to be issued and exchanged for any Notes pursuant to the Registration Rights Agreement and this Indenture and any other Notes issued after the Closing Date under this Indenture. For purposes of this Indenture, all Notes shall vote together as one series of Notes under this Indenture. "Offer to Purchase" means an offer to purchase Notes by the Company from the Holders commenced by mailing a notice to the Trustee and each Holder stating: (i) the covenant pursuant to which the offer is being made and that all Notes validly tendered in accordance with the terms of the Offer to Purchase will be accepted for payment on a pro rata basis; (ii) the purchase price and the date of purchase (which shall be a Business Day no earlier than 30 days nor later than 60 days from the date such notice is mailed) (the "Payment Date"); (iii) that any Note not tendered will continue to accrue interest (or original issue discount) pursuant to its terms; (iv) that, unless the Company defaults in the payment of the purchase price, any Note accepted for payment pursuant to the Offer to Purchase shall cease to accrue interest (or original issue discount) on and after the Payment Date; (v) that Holders electing to have a Note purchased pursuant to the Offer to Purchase will be required to deliver the Note, together with the form entitled "Option of the Holder to Elect Purchase" on the reverse side of the Note completed, to the Paying Agent at the address specified in the notice prior to the close of business on the Business Day immediately preceding the Payment Date; (vi) that Holders will be entitled to withdraw their election if the Paying Agent receives, not later than the close of business on the third Business Day immediately preceding the Payment Date, a telegram, facsimile transmission or letter setting forth the name of such Holder, the principal amount at maturity of Notes delivered for purchase and a statement that such Holder is withdrawing its election to have such Notes purchased; and (vii) that Holders whose Notes are being purchased only in part will be issued new Notes equal in principal amount to the unpurchased portion of the Notes surrendered; provided that each Note purchased and each new Note issued shall be in a principal amount at maturity of $1,000 or integral multiples thereof. On or prior to the Payment Date, the Company shall (i) accept for payment on a pro rata basis Notes or portions thereof tendered pursuant to an Offer to Purchase; (ii) deposit with the Paying Agent money sufficient to pay the purchase price of all Notes or portions thereof so accepted; and (iii) deliver, or cause to be delivered, to the Trustee all Notes or portions thereof so accepted together with an Officers' Certificate specifying the Notes or portions thereof accepted for payment by the Company. The Paying Agent shall promptly mail to the Holders of Notes so accepted payment in an amount equal to the purchase price, and the Trustee shall promptly authenticate and mail to such Holders a new Note equal in principal amount at maturity to any unpurchased portion of the Note surrendered; provided that each Note purchased and each new Note issued shall be in a principal amount at maturity of $1,000 or integral multiples thereof. The Company will publicly announce the results of an Offer to Purchase as soon as practicable after the Payment Date. The Trustee shall act as the Paying Agent for an Offer to Purchase. The Company will comply with Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable, in the event that the Company is required to repurchase Notes pursuant to an Offer to Purchase. 15 "Officer" means, with respect to the Company, (i) the Chairman of the Board, the Chief Executive Officer, the President, any Vice President or the Chief Financial Officer, and (ii) the Treasurer or any Assistant Treasurer, or the Secretary or any Assistant Secretary. "Officers' Certificate" means a certificate signed by one Officer listed in clause (i) of the definition thereof and one Officer listed in clause (ii) of the definition thereof or two officers listed in clause (i) of the definition thereof. Each Officers' Certificate (other than certificates provided pursuant to TIA Section 314(a)(4)) shall include the statements provided for in TIA Section 314(e). "Offshore Global Note" has the meaning provided in Section 2.01. "Offshore Physical Notes" has the meaning provided in Section 2.01. "Opinion of Counsel" means a written opinion signed by legal counsel, who may be an employee of or counsel to the Company, that meets the requirements of Section 10.04 hereof. Each such Opinion of Counsel shall include the statements provided for in TIA Section 314(e). "Paying Agent" has the meaning provided in Section 2.04, except that, for the purposes of Article Eight, the Paying Agent shall not be the Company or a Subsidiary of the Company or an Affiliate of any of them. The term "Paying Agent" includes any additional Paying Agent. "Permanent Offshore Global Notes" has the meaning provided in Section 2.01. "Permitted Investment" means (i) an Investment in the Company or a Restricted Subsidiary or a Person which will, upon the making of such Investment, become a Restricted Subsidiary or be merged or consolidated with or into or transfer or convey all or substantially all its assets to, the Company or a Restricted Subsidiary; provided that such person's primary business is related, ancillary or complementary to the businesses of the Company and its Restricted Subsidiaries on the date of such Investment; (ii) Temporary Cash Investments; (iii) payroll, travel, relocation and similar advances to cover matters that are expected at the time of such advances ultimately to be treated as expenses in accordance with GAAP; (iv) loans or advances to employees made in the ordinary course of business that do not in the aggregate exceed $500,000 at any time outstanding; (v) Investments in Unrestricted Subsidiaries in an aggregate amount not to exceed $5 million; provided each such Unrestricted Subsidiary's primary business is related, ancillary or complementary to the businesses of the Company and its Restricted Subsidiaries on the dates of such Investments; and (vi) Investments received in satisfaction of judgments or as part of or in connection with the bankruptcy, winding up or liquidation of a Person, except if such Investment is received in consideration for an Investment made in such Person in connection with or in anticipation of such bankruptcy, winding up or liquidation. 16 "Permitted Liens" means (i) Liens for taxes, assessments, governmental charges or claims that are being contested in good faith by appropriate legal proceedings promptly instituted and diligently conducted and for which a reserve or other appropriate provision, if any, as shall be required in conformity with GAAP shall have been made; (ii) statutory and common law Liens of landlords and carriers, warehousemen, mechanics, suppliers, materialmen, repairmen or other similar Liens arising in the ordinary course of business and with respect to amounts not yet delinquent or being contested in good faith by appropriate legal proceedings promptly instituted and diligently conducted and for which a reserve or other appropriate provision, if any, as shall be required in conformity with GAAP shall have been made; (iii) Liens incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security; (iv) Liens incurred or deposits made to secure the performance of tenders, bids, leases, statutory or regulatory obligations, bankers' acceptances, surety and appeal bonds, government contracts, performance and return-of-money bonds and other obligations of a similar nature incurred in the ordinary course of business (exclusive of obligations for the payment of borrowed money); (v) easements, rights-of-way, municipal and zoning ordinances and similar charges, encumbrances, title defects or other irregularities that do not materially interfere with the ordinary course of business of the Company or any of its Restricted Subsidiaries; (vi) Liens (including extensions and renewals thereof) upon real or personal property acquired after the Closing Date; provided that (a) such Lien is created solely for the purpose of securing Indebtedness Incurred in accordance with Section 4.03, to finance the cost (including, without limitation, the cost of design, development, construction, acquisition, transportation, installation, improvement or integration) of the real or personal property subject thereto and such Lien is created prior to, at the time of or within six months after the later of the acquisition, the completion of construction or the commencement of full operation of such property, (b) the principal amount of the Indebtedness secured by such Lien does not exceed 100% of such cost and (c) any such Lien shall not extend to or cover any property other than such item of property and any improvements on such property and any proceeds (including insurance proceeds) and products thereof and attachments and accessions thereto; (vii) leases or subleases granted to others that do not materially interfere with the ordinary course of business of the Company and its Restricted Subsidiaries, taken as a whole; (viii) Liens encumbering property or assets under construction arising from progress or partial payments by a customer of the Company or its Restricted Subsidiaries relating to such property or assets; (ix) any interest or title of a lessor in the property subject to any Capitalized Lease or operating lease; (x) Liens arising from filing Uniform Commercial Code financing statements regarding leases or other Uniform Commercial Code financing statements for precautionary purposes relating to arrangements not constituting Indebtedness; (xi) Liens on property of, or on shares of Capital Stock or Indebtedness of, any Person existing at the time such Person becomes, or becomes a part of, any Restricted Subsidiary; provided that such Liens do not extend to or cover any property or assets of the Company or any Restricted Subsidiary other than the property or assets acquired and any proceeds (including insurance proceeds) and products thereof and attachments and accessions thereto ; (xii) Liens in favor of the Company or any Restricted Subsidiary; (xiii) Liens arising from the rendering of a final judgment or order against the Company or any Restricted Subsidiary that does 17 not give rise to an Event of Default; (xiv) Liens securing reimbursement obligations with respect to letters of credit that encumber documents and other property relating to such letters of credit and the products and proceeds thereof; (xv) Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of customs duties in connection with the importation of goods; (xvi) Liens encumbering customary initial deposits and margin deposits, and other Liens that are within the general parameters customary in the industry and incurred in the ordinary course of business, in each case, securing Indebtedness under Interest Rate Agreements and Currency Agreements and forward contracts, options, future contracts, futures options or similar agreements or arrangements designed solely to protect the Company or any of its Restricted Subsidiaries from fluctuations in interest rates, currencies or the price of commodities; (xvii) Liens arising out of conditional sale, title retention, consignment or similar arrangements for the sale of goods entered into by the Company or any of its Restricted Subsidiaries in the ordinary course of business in accordance with the past practices of the Company and its Restricted Subsidiaries prior to the Closing Date; (xviii) Liens on or sales of receivables; (xix) any interest or title of a licensor in the property subject to a license; and (xx) Liens on the Capital Stock of Unrestricted Subsidiaries. "Person" means an individual, a corporation, a partnership, a limited liability company, an association, a trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "Preferred Stock" means, with respect to any Person, any and all shares, interests, participations or other equivalents (however designated, whether voting or non-voting) of such Person's preferred or preference equity, whether outstanding on the Closing Date or issued thereafter, including, without limitation, all series and classes of such preferred or preference stock. "principal" of a debt security, including the Notes, means the principal amount due on the Stated Maturity as shown on such debt security. "Private Placement Legend" means the legend initially set forth on the Notes in the form set forth in Section 2.02. "Public Equity Offering" means an underwritten primary public offering of Common Stock of the Company pursuant to an effective registration statement under the Securities Act. A "Public Market" shall be deemed to exist if (i) a Public Equity Offering has been consummated and (ii) at least 15% of the total issued and outstanding Common Stock of the Company has been distributed by means of an effective registration statement under the Securities Act or sales pursuant to Rule 144 under the Securities Act. "QIB" means a "qualified institutional buyer" as defined in Rule 144A. 18 "Redemption Date" means, when used with respect to any Note to be redeemed, the date fixed for such redemption by or pursuant to this Indenture. "Redemption Price" means, when used with respect to any Note to be redeemed, the price at which such Note is to be redeemed pursuant to this Indenture. "Registrar" has the meaning provided in Section 2.04. "Registration Rights Agreement" means the Registration Rights Agreement, dated as of the Closing Date, between the Company and Merrill Lynch, Pierce, Fenner & Smith Incorporated, Chase Securities Inc., Morgan Stanley & Co. Incorporated and certain permitted assigns specified therein. "Registration Statement" means the Registration Statement as defined and described in the Registration Rights Agreement. "Regular Record Date" for the interest payable on any Interest Payment Date means the February 15 or August 15 (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. "Regulation S" means Regulation S under the Securities Act. "Responsible Officer", when used with respect to the Trustee, means the chairman or any vice chairman of the board of directors, the chairman or any vice chairman of the executive committee of the board of directors, the chairman of the trust committee, the president, any vice president, any assistant vice president, the secretary, any assistant secretary, the treasurer, any assistant treasurer, the cashier, any assistant cashier, any trust officer or assistant trust officer, the controller or any assistant controller or any other officer of the Trustee in its Corporate Trust Trustee Administration customarily performing functions similar to those performed by any of the above-designated officers and in each case having direct responsibility for the administration of this Indenture and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of his or her knowledge of and familiarity with the particular subject. "Restricted Payments" has the meaning provided in Section 4.04. "Restricted Subsidiary" means any Subsidiary of the Company other than an Unrestricted Subsidiary. "Rule 144A" means Rule 144A under the Securities Act. 19 "Sale and Leaseback Transaction" means any direct or indirect arrangement pursuant to which the Company or any of its Restricted Subsidiaries sells or transfers any of its assets or properties (whether owned on the Closing Date or acquired thereafter) and then or thereafter leases such assets or properties or any part thereof or any other assets or properties which the Company or its Restricted Subsidiaries intends to use for substantially the same purpose or purposes as the assets or properties sold or transferred. "Securities Act" means the Securities Act of 1933. "Security Register" has the meaning provided in Section 2.04. "Separation Date" has the meaning provided in the recitals to this Indenture. "Significant Subsidiary" means, at any date of determination, any Restricted Subsidiary that, together with its Subsidiaries, (i) for the most recent fiscal year of the Company, accounted for more than 10% of the consolidated revenues of the Company and its Restricted Subsidiaries or (ii) as of the end of such fiscal year, was the owner of more than 10% of the consolidated assets of the Company and its Restricted Subsidiaries, all as set forth on the most recently available consolidated financial statements of the Company for such fiscal year. "Specified Date" means any Redemption Date, any Payment Date for an Offer to Purchase or any date on which the Notes first become due and payable after an Event of Default. "S&P" means Standard & Poor's Ratings Services, a division of The McGraw- Hill Companies, Inc. and its successors. "SRTC" means Sarnoff Real Time Corp., a Delaware corporation. "SRTC Transaction" means the merger of SRTC with and into the Company, with the Company as the surviving corporation, pursuant to an Agreement and Plan of Reorganization, dated January 15, 1998, between the Company and SRTC. "Stated Maturity" means, (i) with respect to any debt security, the date specified in such debt security as the fixed date on which the final installment of principal of such debt security is due and payable and (ii) with respect to any scheduled installment of principal of or interest on any debt security, the date specified in such debt security as the fixed date on which such installment is due and payable. "Strategic Subordinated Indebtedness" means Indebtedness of the Company Incurred to finance the acquisition of a Person engaged in the VOD Business that by its terms, or by the terms of any agreement or instrument pursuant to which such Indebtedness is Incurred, (i) is expressly 20 made subordinate in right of payment to the Notes pursuant to the terms of a subordinated note substantially in the form attached as Schedule I hereto; provided that the Company shall have received an opinion of counsel as to the validity and enforceability of such subordinated note and (ii) provides that no payment of principal, premium or interest on, or any other payment with respect to, such Indebtedness may be made prior to the payment in full of all of the Company's obligations under the Notes; provided that such Indebtedness may provide for and be repaid at any time from the proceeds of the sale of Capital Stock (other than Disqualified Stock) of the Company after the Incurrence of such Indebtedness. "Subsidiary" means, with respect to any Person, any corporation, association or other business entity of which more than 50% of the voting power of the outstanding Voting Stock is owned, directly or indirectly, by such Person and one or more other Subsidiaries of such Person. "Subsidiary Guarantee" has the meaning provided in Section 4.07. "Temporary Cash Investment" means any of the following: (i) direct obligations of the United States of America or any agency thereof or obligations fully and unconditionally guaranteed by the United States of America or any agency thereof, (ii) time deposit accounts, certificates of deposit and money market deposits maturing within 180 days of the date of acquisition thereof issued by a bank or trust company which is organized under the laws of the United States of America, any state thereof or any foreign country recognized by the United States of America, and which bank or trust company has capital, surplus and undivided profits aggregating in excess of $50 million (or the foreign currency equivalent thereof) and has outstanding debt which is rated "A" (or such similar equivalent rating) or higher by at least one nationally recognized statistical rating organization (as defined in Rule 436 under the Securities Act) or any money-market fund sponsored by a registered broker dealer or mutual fund distributor, (iii) repurchase obligations with a term of not more than 30 days for underlying securities of the types described in clause (i) above entered into with a bank meeting the qualifications described in clause (ii) above, (iv) commercial paper, maturing not more than 270 days after the date of acquisition, issued by a corporation (other than an Affiliate of the Company) organized and in existence under the laws of the United States of America, any state thereof or any foreign country recognized by the United States of America with a rating at the time as of which any investment therein is made of "P-1" (or higher) according to Moody's or "A-1" (or higher) according to S&P, (v) auction-rate preferred stocks of any corporation maturing not later than 45 days after the acquisition thereof, with a rating at the time of acquisition on not less than "AAA" according to S&P or "Aaa" according to Moody's, (vi) corporate debt obligations maturing within 12 months after the date of acquisition, with a rating on the date of acquisition not less than "AAA" or "A-1" according to S&P or "Aaa" or "P-1" according to Moody's, and (vii) securities with maturities of six months or less from the date of acquisition issued or fully and unconditionally guaranteed by any state, commonwealth or territory of the United States of America, or by any political subdivision or taxing authority thereof, and rated at least "A" by S&P or Moody's. 21 "Temporary Offshore Global Notes" has the meaning provided in Section 2.01. "TIA" or "Trust Indenture Act" means the Trust Indenture Act of 1939 (15 U.S. Code (S)(S) 77aaa-77bbbb), as in effect on the date this Indenture was executed, except as provided in Section 9.06. "Trade Payables" means, with respect to any Person, any accounts payable or any other indebtedness or monetary obligation to trade creditors created, assumed or Guaranteed by such Person or any of its Subsidiaries arising in the ordinary course of business in connection with the acquisition of goods or services. "Transaction Date" means, with respect to the Incurrence of any Indebtedness by the Company or any of its Restricted Subsidiaries, the date such Indebtedness is to be Incurred and, with respect to any Restricted Payment, the date such Restricted Payment is to be made. "Trustee" means the party named as such in the first paragraph of this Indenture until a successor replaces it in accordance with the provisions of Article Seven of this Indenture and thereafter means such successor. "Unit" has the meaning provided in the recitals to this Indenture. "United States Bankruptcy Code" means the Bankruptcy Reform Act of 1978, as amended and as codified in Title 11 of the United States Code, as amended from time to time hereafter, or any successor federal bankruptcy law. "Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at the time of determination shall be designated an Unrestricted Subsidiary by the Board of Directors in the manner provided below; and (ii) any Subsidiary of an Unrestricted Subsidiary. The Board of Directors may designate any Restricted Subsidiary (including any newly acquired or newly formed Subsidiary of the Company) to be an Unrestricted Subsidiary unless such Subsidiary owns any Capital Stock of, or owns or holds any Lien on any property of, the Company or any Restricted Subsidiary; provided that (A) any Guarantee by the Company or any Restricted Subsidiary of any Indebtedness of the Subsidiary being so designated shall be deemed an "Incurrence" of such Indebtedness and an "Investment" by the Company or such Restricted Subsidiary (or both, if applicable) at the time of such designation; (B) either (I) the Subsidiary to be so designated has total assets of $1,000 or less or (II) if such Subsidiary has assets greater than $1,000, such designation would be permitted under Section 4.04 and (C) if applicable, the Incurrence of Indebtedness and the Investment referred to in clause (A) of this proviso would be permitted under Section 4.03 and Section 4.04. The Board of Directors may designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided that (i) no Default or Event of Default shall have occurred and be continuing at the time of or after giving effect to such designation and (ii) all Liens and Indebtedness of such Unrestricted Subsidiary outstanding immediately after such designation would, if Incurred at such time, have been permitted 22 to be Incurred (and shall be deemed to have been Incurred) for all purposes of this Indenture. Any such designation by the Board of Directors shall be evidenced to the Trustee by promptly filing with the Trustee a copy of the Board Resolution giving effect to such designation and an Officers' Certificate certifying that such designation complied with the foregoing provisions. "U.S. Global Notes" has the meaning provided in Section 2.01. "U.S. Government Obligations" means securities that are (i) direct obligations of the United States of America for the payment of which its full faith and credit is pledged or (ii) obligations of a Person controlled or supervised by and acting as an agency or instrumentality of the United States of America the payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States of America, which, in either case, are not callable or redeemable at the option of the issuer thereof at any time prior to the Stated Maturity of the Notes, and shall also include a depository receipt issued by a bank or trust company as custodian with respect to any such U.S. Government Obligation or a specific payment of interest on or principal of any such U.S. Government Obligation held by such custodian for the account of the holder of a depository receipt; provided that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depository receipt from any amount received by the custodian in respect of the U.S. Government Obligation or the specific payment of interest on or principal of the U.S. Government Obligation evidenced by such depository receipt. "U.S. Physical Notes" has the meaning provided in Section 2.01. "VOD Business" means the development, ownership or operation of video-on- demand systems or the provision of video-on-demand services and any related, ancillary or complementary business. "Voting Stock" means with respect to any Person, Capital Stock of any class or kind ordinarily having the power to vote for the election of directors, managers or other voting members of the governing body of such Person. "Warrants" has the meaning provided in the recitals to this Indenture. "Wholly Owned" means, with respect to any Subsidiary of any Person, the ownership of all of the outstanding Capital Stock of such Subsidiary (other than any director's qualifying shares or Investments by foreign nationals mandated by applicable law) by such Person or one or more Wholly Owned Subsidiaries of such Person. SECTION 1.02. Incorporation by Reference of Trust Indenture Act. ------------------------------------------------- Whenever this Indenture refers to a provision of the TIA, the provision is incorporated by reference in and made 23 a part of this Indenture. The following TIA terms used in this Indenture have the following meanings: "indenture securities" means the Notes; "indenture security holder" means a Holder or a Noteholder; "indenture to be qualified" means this Indenture; "indenture trustee" or "institutional trustee" means the Trustee; and "obligor" on the indenture securities means the Company or any other obligor on the Notes. All other TIA terms used in this Indenture that are defined by the TIA, defined by TIA reference to another statute or defined by a rule of the Commission and not otherwise defined herein have the meanings assigned to them therein. SECTION 1.03. Rules of Construction. Unless the context otherwise --------------------- requires: (i) a term has the meaning assigned to it; (ii) an accounting term not otherwise defined has the meaning assigned to it in accordance with GAAP; (iii) "or" is not exclusive; (iv) words in the singular include the plural, and words in the plural include the singular; (v) provisions apply to successive events and transactions; (vi) "herein," "hereof" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision; (vii) all ratios and computations based on GAAP contained in this Indenture shall be computed in accordance with the definition of GAAP set forth in Section 1.01; and (viii) all references to Sections or Articles refer to Sections or Articles of this Indenture unless otherwise indicated. 24 ARTICLE TWO THE NOTES SECTION 2.01. Form and Dating. The Notes and the Trustee's certificate --------------- of authentication shall be substantially in the form annexed hereto as Exhibit A with such appropriate insertions, omissions, substitutions and other variations as are required or permitted by this Indenture. The Notes may have notations, legends or endorsements required by law, stock exchange agreements to which the Company is subject or usage. The Company shall approve the form of the Notes and any notation, legend or endorsement on the Notes. Each Note shall be dated the date of its authentication. The terms and provisions contained in the form of the Notes annexed hereto as Exhibit A shall constitute, and are hereby expressly made, a part of this Indenture. To the extent applicable, the Company and the Trustee, by their execution and delivery of this Indenture, expressly agree to such terms and provisions and to be bound thereby. Notes offered and sold in reliance on Rule 144A shall be issued initially in the form of one or more permanent global Notes in registered form, substantially in the form set forth in Exhibit A (the "U.S. Global Notes"), ----------------- registered in the name of the nominee of the Depositary, deposited with the Trustee, as custodian for the Depositary, duly executed by the Company and authenticated by the Trustee as hereinafter provided. The aggregate principal amount of the U.S. Global Notes may from time to time be increased or decreased by adjustments made on the records of the Trustee, as custodian for the Depositary or its nominee, in accordance with the instructions given by the Holder thereof, as hereinafter provided. Notes offered and sold in offshore transactions in reliance on Regulation S shall be issued initially in the form of one or more temporary global Notes in registered form substantially in the form set forth in Exhibit A (the "Temporary --------- Offshore Global Notes"), registered in the name of the nominee of the - --------------------- Depositary, deposited with the Trustee, as custodian for the Depositary, duly executed by the Company and authenticated by the Trustee as hereinafter provided. On or after the later of (i) March 31, 1998 and (ii) the Separation Date, in either case, upon receipt by the Trustee and the Company of a certificate substantially in the form of Exhibit B hereto, one or more permanent global Notes in registered form substantially in the form set forth in Exhibit A (the "Permanent Offshore Global Notes"; and together with the Temporary Offshore ------------------------------- Global Notes, the "Offshore Global Notes") duly executed by the Company and --------------------- authenticated by the Trustee as hereinafter provided shall be deposited with the Trustee, as custodian for the Depositary, and the Registrar shall reflect on its books and records the date and a decrease in the principal amount at maturity of the Temporary Offshore Global Notes in an amount equal to the principal amount at maturity of the beneficial interest in the Temporary Offshore Global Notes transferred. 25 Notes delivered pursuant to Section 2.08 to Institutional Accredited Investors and Notes delivered pursuant to Section 2.07 in exchange for interests in the U.S. Global Notes shall be in the form of permanent certificated Notes in registered form substantially in the form set forth in Exhibit A (the "U.S. ---- Physical Notes"), and Notes delivered pursuant to Section 2.07 in exchange for - -------------- interests in the Offshore Global Notes shall be in the form of permanent certificated Notes in registered form substantially in the form set forth in Exhibit A (the "Offshore Physical Notes"). ----------------------- The Offshore Physical Notes and U.S. Physical Notes are sometimes collectively herein referred to as the "Physical Notes." The U.S. Global Notes -------------- and the Offshore Global Notes are sometimes referred to herein as the "Global ------ Notes." - ----- The definitive Notes shall be typed, printed, lithographed or engraved or produced by any combination of these methods or may be produced in any other manner permitted by the rules of any securities exchange on which the Notes may be listed, all as determined by the Officers executing such Notes, as evidenced by their execution of such Notes. SECTION 2.02. Restrictive Legends. Unless and until a Note is exchanged ------------------- for an Exchange Note in connection with an effective Registration Statement pursuant to the Registration Rights Agreement, the U.S. Global Notes, Temporary Offshore Global Notes and each U.S. Physical Note shall bear the following legend on the face thereof: THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE OR OTHER SECURITIES LAWS, AND, ACCORDINGLY, MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHIN THE UNITED STATES OR TO, OR FOR THE BENEFIT OF, U.S. PERSONS EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. BY ITS ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT), OR (B) IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS SECURITY IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH REGULATION S UNDER THE SECURITIES ACT, OR (C) IT ACQUIRED THIS NOTE DIRECTLY FROM DIVA SYSTEMS CORPORATION (THE "COMPANY") IN A TRANSACTION EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, OR (D) PROVIDED THAT THIS NOTE HAS NOT BEEN ACQUIRED BY SUCH HOLDER IN THE INITIAL DISTRIBUTION OF THE NOTES, IT IS AN INSTITUTIONAL "ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(a)(1), (2), (3) OR (7) OF REGULATION D UNDER THE SECURITIES ACT); (2) AGREES THAT IT WILL NOT, WITHIN THE TIME PERIOD REFERRED TO IN RULE 144(k), TAKING INTO ACCOUNT THE PROVISIONS OF RULE 144(d), IF APPLICABLE, UNDER THE SECURITIES ACT (THE "RESALE RESTRICTION TERMINATION DATE"), RESELL OR OTHERWISE TRANSFER THIS NOTE EXCEPT 26 (A) TO THE COMPANY OR ANY SUBSIDIARY THEREOF, (B) TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A UNDER THE SECURITIES ACT, (C) OUTSIDE THE UNITED STATES IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH RULE 904 UNDER THE SECURITIES ACT, (D) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OR (E) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, AND (3) AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THIS NOTE IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND; PROVIDED THAT THE COMPANY AND THE TRUSTEE SHALL HAVE THE RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER (I) PURSUANT TO CLAUSE (C) OR (D) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM, AND (II) IN EACH OF THE FOREGOING CASES, TO REQUIRE THAT A CERTIFICATION OF TRANSFER IN THE FORM APPEARING ON THE OTHER SIDE OF THIS NOTE IS COMPLETED AND DELIVERED BY THE TRANSFEROR TO THE TRUSTEE. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION," "UNITED STATES" AND "U.S. PERSON" HAVE THE RESPECTIVE MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES ACT. Each Global Note, whether or not an Exchange Note, shall also bear the following legend on the face thereof: UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY OR SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (AND ANY PAYMENT HEREON IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INSOFAR AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. TRANSFERS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF CEDE & CO. OR TO A SUCCESSOR 27 THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN SECTION 2.08 OF THE INDENTURE. Prior to the Separation Date, each Note shall bear the following legend on the face thereof: THIS NOTE IS INITIALLY ISSUED AS PART OF AN ISSUANCE OF UNITS, EACH OF WHICH CONSISTS OF ONE NOTE AND THREE WARRANTS (EACH, A "WARRANT"), EACH WARRANT INITIALLY ENTITLING THE HOLDER THEREOF TO PURCHASE ONE SHARE OF COMMON STOCK, PAR VALUE $0.001 PER SHARE, OF DIVA SYSTEMS CORPORATION. PRIOR TO THE CLOSE OF BUSINESS UPON THE EARLIEST TO OCCUR OF (i) AUGUST 19, 1998, (ii) THE COMMENCEMENT OF AN EXCHANGE OFFER WITH RESPECT TO THE NOTES, (iii) THE EFFECTIVENESS OF A SHELF REGISTRATION STATEMENT WITH RESPECT TO THE NOTES, (iv) THE COMMENCEMENT OF AN OFFER TO PURCHASE (AS DEFINED IN THE INDENTURE WITH RESPECT TO THE NOTES) THE NOTES AND (v) SUCH EARLIER DATE AS DETERMINED BY MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED IN ITS SOLE DISCRETION, THE NOTES EVIDENCED BY THIS CERTIFICATE MAY NOT BE TRANSFERRED OR EXCHANGED SEPARATELY FROM, BUT MAY BE TRANSFERRED OR EXCHANGED ONLY TOGETHER WITH, THE WARRANTS. SECTION 2.03. Execution, Authentication and Denominations. Subject to ------------------------------------------- Article Four and any requirements of applicable law, the aggregate principal amount of Notes which may be authenticated and delivered under this Indenture is unlimited. The Notes shall be executed by two Officers of the Company. The signature of these Officers on the Notes may be by facsimile or manual signature in the name and on behalf of the Company. If an Officer whose signature is on a Note no longer holds that office at the time the Trustee or authenticating agent authenticates the Note, the Note shall be valid nevertheless. A Note shall not be valid until the Trustee or authenticating agent manually signs the certificate of authentication on the Note. The signature shall be conclusive evidence that the Note has been authenticated under this Indenture. At any time and from time to time after the execution of this Indenture, the Trustee or an authenticating agent shall upon receipt of a Company Order authenticate for original issue Notes in the aggregate principal amount at maturity specified in such Company Order; provided that the Trustee shall be entitled to receive an Officers' Certificate and an Opinion of Counsel of the Company in connection with such authentication of Notes. Such Company Order shall specify the 28 amount of Notes to be authenticated and the date on which the original issue of Notes is to be authenticated and in case of an issuance of Notes pursuant to Section 2.15, shall certify that such issuance is in compliance with Article Four. The Trustee may appoint an authenticating agent to authenticate Notes. An authenticating agent may authenticate Notes whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such authenticating agent. An authenticating agent has the same rights as an Agent to deal with the Company or an Affiliate of the Company. The Trustee shall not be liable for the misconduct or negligence of any authenticating agent appointed with due care. The Notes shall be issuable only in registered form without coupons and only in denominations of $1,000 in principal amount at maturity and any integral multiple of $1,000 in excess thereof. SECTION 2.04. Registrar and Paying Agent. The Company shall maintain an -------------------------- office or agency where Notes may be presented for registration of transfer or for exchange (the "Registrar"), an office or agency where Notes may be presented --------- for payment (the "Paying Agent") and an office or agency where notices and ------------ demands to or upon the Company in respect of the Notes and this Indenture may be served, which shall be in the Borough of Manhattan, The City of New York. The Company shall cause the Registrar to keep a register of the Notes and of their transfer and exchange (the "Security Register"). The Company may have one or ----------------- more co-Registrars and one or more additional Paying Agents. The Company shall enter into an appropriate agency agreement with any Agent not a party to this Indenture. The agreement shall implement the provisions of this Indenture that relate to such Agent. The Company shall give prompt written notice to the Trustee of the name and address of any such Agent and any change in the address of such Agent. If the Company fails to maintain a Registrar, Paying Agent and/or agent for service of notices and demands, the Trustee shall act as such Registrar, Paying Agent and/or agent for service of notices and demands. The Company may remove any Agent upon written notice to such Agent and the Trustee; provided that no such removal shall become effective until (i) the acceptance of an appointment by a successor Agent to such Agent as evidenced by an appropriate agency agreement entered into by the Company and such successor Agent and delivered to the Trustee or (ii) notification to the Trustee that the Trustee shall serve as such Agent until the appointment of a successor Agent in accordance with clause (i) of this proviso. The Company, any Subsidiary of the 29 Company, or any Affiliate of any of them may act as Paying Agent, Registrar or co-Registrar, and/or agent for service of notice and demands. The Company initially appoints the Trustee as Registrar, Paying Agent, authenticating agent and agent for service of notice and demands. The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of Holders and shall otherwise comply with TIA (S) 312(a). If the Trustee is not the Registrar, the Company shall furnish to the Trustee as of each Regular Record Date and at such other times as the Trustee may request in writing a list in such form and as of such date as the Trustee may reasonably require of the names and addresses of Holders, including the aggregate principal amount at maturity of Notes held by each Holder. SECTION 2.05. Paying Agent to Hold Money in Trust. Not later than 12:00 ----------------------------------- p.m. (New York City time) on each due date of the principal, premium, if any, and interest, if any, on any Notes, the Company shall deposit with the Paying Agent money in immediately available funds sufficient to pay such principal, premium, if any, and interest, if any, so becoming due. The Company shall require each Paying Agent other than the Trustee to agree in writing that such Paying Agent shall hold in trust for the benefit of the Holders or the Trustee all money held by the Paying Agent for the payment of principal of, premium, if any, and interest, if any, on the Notes (whether such money has been paid to it by the Company or any other obligor on the Notes), and such Paying Agent shall promptly notify the Trustee of any default by the Company (or any other obligor on the Notes) in making any such payment. The Company at any time may require a Paying Agent to pay all money held by it to the Trustee and account for any funds disbursed, and the Trustee may at any time during the continuance of any payment default, upon written request to a Paying Agent, require such Paying Agent to pay all money held by it to the Trustee and to account for any funds disbursed. Upon doing so, the Paying Agent shall have no further liability for the money so paid over to the Trustee. If the Company or any Subsidiary of the Company or any Affiliate of any of them acts as Paying Agent, it will, on or before each due date of any principal of, premium, if any, or interest, if any, on the Notes, segregate and hold in a separate trust fund for the benefit of the Holders a sum of money sufficient to pay such principal, premium, if any, or interest so becoming due until such sum of money shall be paid to such Holders or otherwise disposed of as provided in this Indenture, and will promptly notify the Trustee of its action or failure to act. SECTION 2.06. Transfer and Exchange. The Notes are issuable only in --------------------- registered form. The Notes shall initially be issued as part of an issue of Units, each of which consists of one Note and three Warrants. Prior to the Separation Date, the Notes may not be transferred or exchanged separately from, but may be transferred or exchanged only together with, the Warrants issued in connection with the Notes. A Holder may transfer a Note only by written application to the Registrar stating the name of the proposed transferee and otherwise complying with the terms of this Indenture. No such transfer shall be effected until, and such transferee shall succeed to the rights of a Holder only upon, final acceptance and registration of the transfer by the Registrar in the 30 Security Register. Prior to the registration of any transfer by a Holder as provided herein, the Company, the Trustee, and any agent of the Company shall treat the person in whose name the Note is registered as the owner thereof for all purposes whether or not the Note shall be overdue, and neither the Company, the Trustee, nor any such agent shall be affected by notice to the contrary. Furthermore, any Holder of a Global Note shall, by acceptance of such Global Note, agree that transfers of beneficial interests in such Global Note may be effected only through a book-entry system maintained by the Holder of such Global Note (or its agent) and that ownership of a beneficial interest in the Note shall be required to be reflected in a book entry. When Notes are presented to the Registrar or a co-Registrar with a request to register the transfer or to exchange them for an equal principal amount at maturity of Notes of other authorized denominations (including an exchange of Notes for Exchange Notes), the Registrar shall register the transfer or make the exchange as requested if its requirements for such transactions are met (including that such Notes are duly endorsed or accompanied by a written instrument of transfer in form satisfactory to the Trustee and Registrar duly executed by the Holder thereof or by an attorney who is authorized in writing to act on behalf of the Holder); provided that no exchanges of Notes for Exchange Notes shall occur until a Registration Statement shall have been declared effective by the Commission and that any Notes that are exchanged for Exchange Notes shall be cancelled by the Trustee. To permit registrations of transfers and exchanges, the Company shall execute and the Trustee shall authenticate Notes at the Registrar's request. No service charge shall be made for any registration of transfer or exchange or redemption of the Notes, but the Company may require payment of a sum sufficient to cover any transfer tax or similar governmental charge payable in connection therewith (other than any such transfer taxes or other similar governmental charge payable upon exchanges pursuant to Section 2.11, 3.08 or 9.04). The Registrar shall not be required (i) to issue, register the transfer of or exchange any Note during a period beginning at the opening of business 15 days before the day of the mailing of a notice of redemption of Notes selected for redemption under Section 3.03 and ending at the close of business on the day of such mailing, or (ii) to register the transfer of or exchange any Note so selected for redemption in whole or in part, except the unredeemed portion of any Note being redeemed in part. SECTION 2.07. Book-Entry Provisions for Global Notes. (a) The U.S. -------------------------------------- Global Notes and Offshore Global Notes initially shall (i) be registered in the name of the Depositary for such Global Notes or the nominee of such Depositary, (ii) be delivered to the Trustee as custodian for such Depositary and (iii) bear legends as set forth in Section 2.02. Members of, or participants in, the Depositary ("Agent Members") shall have ------------- no rights under this Indenture with respect to any Global Note held on their behalf by the Depositary, or the Trustee as its custodian, or under the Global Note, and the Depositary may be treated by the Company, the Trustee and any agent of the Company or the Trustee as the absolute owner of such Global Note for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Company, 31 the Trustee or any agent of the Company or the Trustee, from giving effect to any written certification, proxy or other authorization furnished by the Depositary or impair, as between the Depositary and its Agent Members, the operation of customary practices governing the exercise of the rights of a holder of any Note. Neither the Company nor the Trustee shall be liable for any delay by the Depositary in identifying the beneficial owners of the Notes and the Company and the Trustee may conclusively rely on, and shall be protected in relying on, instructions from the Depositary for all purposes (including with respect to the registration and delivery, and the respective principal amounts, of any Notes to be issued). (b) Transfers of a Global Note shall be limited to transfers of such Global Note in whole, but not in part, to the Depositary, its successors or their respective nominees. Interests of beneficial owners in a Global Note may be transferred in accordance with the rules and procedures of the Depositary and the provisions of Section 2.08. In addition, U.S. Physical Notes and Offshore Physical Notes shall be transferred to all beneficial owners in exchange for their beneficial interests in the U.S. Global Notes or the Offshore Global Notes, respectively, if (i) the Depositary notifies the Company that it is unwilling or unable to continue as Depositary for the U.S. Global Notes or the Offshore Global Notes, as the case may be, and a successor depositary is not appointed by the Company within 90 days of such notice, (ii) an Event of Default has occurred and is continuing and the Registrar has received a request from the Depositary or (iii) in accordance with the rules and procedures of the Depositary and the provisions of Section 2.08. (c) Any beneficial interest in one of the Global Notes that is transferred to a person who takes delivery in the form of an interest in the other Global Note will, upon transfer, cease to be an interest in such Global Note and become an interest in the other Global Note and, accordingly, will thereafter be subject to all transfer restrictions, if any, and other procedures applicable to beneficial interests in such other Global Note for as long as it remains such an interest. (d) In connection with any transfer of a portion of the beneficial interests in the U.S. Global Notes to beneficial owners pursuant to paragraph (b) of this Section 2.07, the Registrar shall reflect on its books and records the date and a decrease in the principal amount of the U.S. Global Notes in an amount equal to the principal amount of the beneficial interest in the U.S. Global Notes to be transferred, and the Company shall execute, and the Trustee shall authenticate and deliver, one or more U.S. Physical Notes of like tenor and amount. (e) In connection with the transfer of the entire U.S. Global Note or Offshore Global Note to beneficial owners pursuant to paragraph (b) of this Section 2.07, the U.S. Global Note or Offshore Global Note, as the case may be, shall be deemed to be surrendered to the Trustee for cancellation, and the Company shall execute, and the Trustee shall authenticate and deliver, to each beneficial owner identified by the Depositary in exchange for its beneficial interest in the U.S. Global Note or Offshore Global Note, as the case may be, an equal aggregate principal amount of U.S. Physical Notes or Offshore Physical Notes, as the case may be, of authorized denominations. 32 (f) Any U.S. Physical Note delivered in exchange for an interest in the U.S. Global Note pursuant to paragraph (b) or (d) of this Section 2.07 shall, except as otherwise provided by paragraph (f) of Section 2.08, bear the legend regarding transfer restrictions applicable to the U.S. Physical Note set forth in Section 2.02. (g) Any Offshore Physical Note delivered in exchange for an interest in the Offshore Global Note pursuant to paragraph (b) of this Section 2.07 shall, except as otherwise provided by paragraph (f) of Section 2.08, bear the legend regarding transfer restrictions applicable to the Offshore Physical Note set forth in Section 2.02. (h) The registered holder of a Global Note may grant proxies and otherwise authorize any person, including Agent Members and persons that may hold interests through Agent Members, to take any action which a Holder is entitled to take under this Indenture or the Notes. SECTION 2.08. Special Transfer Provisions. Unless and until a Note is --------------------------- exchanged for an Exchange Note in connection with an effective Registration Statement pursuant to the Registration Rights Agreement, the following provisions shall apply: (a) Transfers to Non-QIB Institutional Accredited Investors. The following ------------------------------------------------------- provisions shall apply with respect to the registration of any proposed transfer of a Note to any Institutional Accredited Investor which is not a QIB (excluding Non-U.S. Persons): (i) The Registrar shall register the transfer of any Note, whether or not such Note bears the Private Placement Legend, if (x) the requested transfer is after the time period referred to in Rule 144(k) under the Securities Act or (y) the proposed transferee has delivered to the Registrar (A) a certificate substantially in the form of Exhibit C hereto and (B) if the Accreted Value of the Notes being transferred is less than $250,000, an opinion of counsel acceptable to the Company that such transfer is in compliance with the Securities Act. (ii) If the proposed transferor is an Agent Member holding a beneficial interest in the U.S. Global Note, upon receipt by the Registrar of (x) the documents, if any, required by paragraph (i) and (y) instructions given in accordance with the Depositary's and the Registrar's procedures, the Registrar shall reflect on its books and records the date and a decrease in the principal amount of the U.S. Global Note in an amount equal to the principal amount of the beneficial interest in the U.S. Global Note to be transferred, and the Company shall execute, and the Trustee shall authenticate and deliver, one or more U.S. Physical Notes of like tenor and amount. 33 (b) Transfers to QIBs. The following provisions shall apply with respect ----------------- to the registration of any proposed transfer of a U.S. Physical Note or an interest in the U.S. Global Note to a QIB (excluding Non-U.S. Persons): (i) If the Note to be transferred consists of (x) U.S. Physical Notes, the Registrar shall register the transfer if such transfer is being made by a proposed transferor who has checked the box provided for on the form of Note stating, or has otherwise advised the Company and the Registrar in writing, that the sale has been made in compliance with the provisions of Rule 144A to a transferee who has signed the certification provided for on the form of Note stating, or has otherwise advised the Company and the Registrar in writing, that it is purchasing the Note for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is a QIB within the meaning of Rule 144A, and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Company as it has requested pursuant to Rule 144A or has determined not to request such information and that it is aware that the transferor is relying upon its foregoing representations in order to claim the exemption from registration provided by Rule 144A or (y) an interest in the U.S. Global Note, the transfer of such interest may be effected only through the book entry system maintained by the Depositary. (ii) If the proposed transferee is an Agent Member, and the Note to be transferred consists of U.S. Physical Notes, upon receipt by the Registrar of the documents referred to in clause (i) and instructions given in accordance with the Depositary's and the Registrar's procedures, the Registrar shall reflect on its books and records the date and an increase in the principal amount of the U.S. Global Note in an amount equal to the principal amount of the U.S. Physical Notes to be transferred, and the Trustee shall cancel the U.S. Physical Note so transferred. (c) Transfers of Interests in the Temporary Offshore Global Note. The ------------------------------------------------------------ following provisions shall apply with respect to registration of any proposed transfer of interests in the Temporary Offshore Global Note: (i) The Registrar shall register the transfer of any Note (x) if the proposed transferee is a Non-U.S. Person and the proposed transferor has delivered to the Registrar a certificate substantially in the form of Exhibit D hereto or (y) if the proposed transferee is a QIB and the proposed transferor has checked the box provided for on the form of Note stating, or has otherwise advised the Company and the Registrar in writing, that the sale has been made in compliance with the provisions of Rule 144A to a transferee who has signed the certification provided for on the form of Note stating, or has otherwise advised the Company and the Registrar in writing, that it is purchasing the Note for its own account or an account with respect to which it exercises sole investment discretion and that it and any 34 such account is a QIB within the meaning of Rule 144A, and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Company as it has requested pursuant to Rule 144A or has determined not to request such information and that it is aware that the transferor is relying upon its foregoing representations in order to claim the exemption from registration provided by Rule 144A. (ii) If the proposed transferee is an Agent Member, upon receipt by the Registrar of the documents referred to in clause (i)(y) above and instructions given in accordance with the Depositary's and the Registrar's procedures, the Registrar shall reflect on its books and records the date and an increase in the principal amount of the U.S. Global Note in an amount equal to the principal amount of the Temporary Offshore Global Note to be transferred, and the Trustee shall decrease the amount of the Temporary Offshore Global Note. (d) Transfers of Interests in the Permanent Offshore Global Note or --------------------------------------------------------------- Offshore Physical Notes to U.S. Persons. The following provisions shall apply - --------------------------------------- with respect to any transfer of interests in the Permanent Offshore Global Note or Offshore Physical Notes to U.S. Persons: The Registrar shall register the transfer of any such Note without requiring any additional certification. (e) Transfers to Non-U.S. Persons at Any Time. The following provisions ----------------------------------------- shall apply with respect to any transfer of a Note to a Non-U.S. Person: (i) Prior to March 31, 1998, the Registrar shall register any proposed transfer of a Note to a Non-U.S. Person upon receipt of a certificate substantially in the form of Exhibit D hereto from the proposed transferor. (ii) On and after March 31, 1998, the Registrar shall register any proposed transfer to any Non-U.S. Person if the Note to be transferred is a U.S. Physical Note or an interest in the U.S. Global Note, upon receipt of a certificate substantially in the form of Exhibit D hereto from the proposed transferor. (iii) (a) If the proposed transferor is an Agent Member holding a beneficial interest in the U.S. Global Note, upon receipt by the Registrar of (x) the documents, if any, required by paragraph (ii) and (y) instructions in accordance with the Depositary's and the Registrar's procedures, the Registrar shall reflect on its books and records the date and a decrease in the principal amount of the U.S. Global Note in an amount equal to the principal amount of the beneficial interest in the U.S. Global Note to be transferred, and (b) if the proposed transferee is an Agent Member, upon receipt by the Registrar of instructions given in accordance with the Depositary's and the Registrar's procedures, the Registrar shall reflect on its books and records the date and an increase in the principal amount of the Offshore Global Note in an amount equal to the principal amount of the U.S. Physical Notes or the 35 U.S. Global Note, as the case may be, to be transferred, and the Trustee shall cancel the Physical Note, if any, so transferred or decrease the amount of the U.S. Global Note. (f) Private Placement Legend. Upon the transfer, exchange or replacement ------------------------ of Notes not bearing the Private Placement Legend, the Registrar shall deliver Notes that do not bear the Private Placement Legend. Upon the transfer, exchange or replacement of Notes bearing the Private Placement Legend, the Registrar shall deliver only Notes that bear the Private Placement Legend unless either (i) the circumstances contemplated by the fourth paragraph of Section 2.01 or paragraph (a)(i)(x) or (e)(ii) of this Section 2.08 exist or (ii) there is delivered to the Registrar an Opinion of Counsel reasonably satisfactory to the Company and the Trustee to the effect that neither such legend nor the related restrictions on transfer are required in order to maintain compliance with the provisions of the Securities Act. (g) General. By its acceptance of any Note bearing the Private Placement ------- Legend, each Holder of such a Note acknowledges the restrictions on transfer of such Note set forth in this Indenture and in the Private Placement Legend and agrees that it will transfer such Note only as provided in this Indenture. The Registrar shall not register a transfer of any Note unless such transfer complies with the restrictions on transfer of such Note set forth in this Indenture. In connection with any transfer of Notes, each Holder agrees by its acceptance of the Notes to furnish the Registrar or the Company such certifications, legal opinions or other information as either of them may reasonably require to confirm that such transfer is being made pursuant to an exemption from, or a transaction not subject to, the registration requirements of the Securities Act; provided that the Registrar shall not be required to determine (but may rely on a determination made by the Company with respect to) the sufficiency of any such certifications, legal opinions or other information. The Registrar shall retain copies of all letters, notices and other written communications received pursuant to Section 2.07 or this Section 2.08. The Company shall have the right to inspect and make copies of all such letters, notices or other written communications at any reasonable time upon the giving of reasonable written notice to the Registrar. SECTION 2.09. Replacement Notes. If a mutilated Note is surrendered to ----------------- the Trustee or if the Holder claims that the Note has been lost, destroyed or wrongfully taken, the Company shall issue and the Trustee shall authenticate a replacement Note of like tenor and principal amount and bearing a number not contemporaneously outstanding; provided that the requirements of the second paragraph of Section 2.10 are met. If required by the Trustee or the Company, an indemnity bond must be furnished that is sufficient in the judgment of both the Trustee and the Company to protect the Company, the Trustee or any Agent from any loss that any of them may suffer if a Note is replaced. The Company may charge such Holder for its expenses and the expenses of the Trustee in replacing a Note. In case any such mutilated, lost, destroyed or wrongfully taken Note has become or is about to become due and payable, the Company in its discretion may pay such Note instead of issuing a new Note in replacement thereof. 36 Every replacement Note is an additional obligation of the Company and shall be entitled to the benefits of this Indenture. SECTION 2.10. Outstanding Notes. Notes outstanding at any time are all ----------------- Notes that have been authenticated by the Trustee except for those cancelled by it, those delivered to it for cancellation and those described in this Section 2.10 as not outstanding. If a Note is replaced pursuant to Section 2.09, it ceases to be outstanding unless and until the Trustee and the Company receive proof satisfactory to them that the replaced Note is held by a bona fide purchaser. If the Paying Agent (other than the Company or an Affiliate of the Company) holds on the maturity date money sufficient to pay Notes payable on that date, then on and after that date such Notes cease to be outstanding and interest on them shall cease to accrue. A Note does not cease to be outstanding because the Company or one of its Affiliates holds such Note, provided, however, that in determining whether the Holders of the requisite principal amount of the outstanding Notes have given any request, demand, authorization, direction, notice, consent or waiver hereunder, Notes owned by the Company or any other obligor upon the Notes or any Affiliate of the Company or of such other obligor shall be disregarded and deemed not to be outstanding, except that, in determining whether the Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Notes which a Responsible Officer of the Trustee knows to be so owned shall be so disregarded. Notes so owned which have been pledged in good faith may be regarded as outstanding if the pledgee establishes to the satisfaction of the Trustee the pledgee's right so to act with respect to such Notes and that the pledgee is not the Company or any other obligor upon the Notes or any Affiliate of the Company or of such other obligor. SECTION 2.11. Temporary Notes. Until definitive Notes are ready for --------------- delivery, the Company may prepare and the Trustee shall authenticate temporary Notes. Temporary Notes shall be substantially in the form of definitive Notes but may have insertions, substitutions, omissions and other variations determined to be appropriate by the Officers executing the temporary Notes, as evidenced by their execution of such temporary Notes. If temporary Notes are issued, the Company will cause definitive Notes to be prepared without unreasonable delay. After the preparation of definitive Notes, the temporary Notes shall be exchangeable for definitive Notes upon surrender of the temporary Notes at the office or agency of the Company designated for such purpose pursuant to Section 4.02, without charge to the Holder. Upon surrender for cancellation of any one or more temporary Notes the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor a like principal amount of definitive Notes of authorized denominations. Until 37 so exchanged, the temporary Notes shall be entitled to the same benefits under this Indenture as definitive Notes. SECTION 2.12. Cancellation. The Company at any time may deliver to the ------------ Trustee for cancellation any Notes previously authenticated and delivered hereunder which the Company may have acquired in any manner whatsoever, and may deliver to the Trustee for cancellation any Notes previously authenticated hereunder which the Company has not issued and sold. The Registrar and the Paying Agent shall forward to the Trustee any Notes surrendered to them for transfer, exchange or payment. The Trustee shall cancel all Notes surrendered for transfer, exchange, payment or cancellation and shall destroy them in accordance with its normal procedure. Except as expressly permitted by this Indenture, the Company may not issue new Notes to replace Notes it has paid in full or delivered to the Trustee for cancellation. SECTION 2.13. CUSIP Numbers. The Company in issuing the Notes may use ------------- "CUSIP", "CINS" or "ISIN" numbers (if then generally in use), and the Trustee shall use CUSIP, CINS or ISIN numbers, as the case may be, in notices of redemption or exchange as a convenience to Holders; provided that any such notice shall state that no representation is made as to the correctness of such numbers either as printed on the Notes or as contained in any notice of redemption or exchange and that reliance may be placed only on the other identification numbers printed on the Notes. The Company will promptly notify the Trustee of any change in "CUSIP", "CINS" or "ISIN" numbers for the Notes. SECTION 2.14. Defaulted Interest. If the Company defaults in a payment ------------------ of interest on the Notes, it shall pay, or shall deposit with the Paying Agent money in immediately available funds sufficient to pay, the defaulted interest, plus (to the extent lawful) any interest payable on the defaulted interest, to the Persons who are Holders on a subsequent special record date. A special record date, as used in this Section 2.14 with respect to the payment of any defaulted interest, shall mean the 15th day next preceding the date fixed by the Company for the payment of defaulted interest, whether or not such day is a Business Day. At least 15 days before the subsequent special record date, the Company shall mail to each Holder and to the Trustee a notice that states the subsequent special record date, the payment date and the amount of defaulted interest to be paid. SECTION 2.15. Issuance of Additional Notes. The Company may, subject to ---------------------------- Article Four of this Indenture, issue additional Notes under this Indenture. The Notes issued on the Closing Date and any additional Notes subsequently issued shall be treated as a single class for all purposes under this Indenture. ARTICLE THREE REDEMPTION 38 SECTION 3.01. Right of Redemption; Mandatory Redemption. (a) The Notes ----------------------------------------- will be redeemable, at the Company's option, in whole or in part, at any time or from time to time, on or after March 1, 2003 and prior to maturity, upon not less than 30 nor more than 60 days' prior notice mailed by first-class mail to each Holder's last address, as it appears in the Security Register, at the following Redemption Prices (expressed in percentages of principal amount at maturity), plus accrued and unpaid interest, if any, to the Redemption Date (subject to the right of Holders of record on the relevant Regular Record Date that is prior to the Redemption Date to receive interest due on an Interest Payment Date), if redeemed during the 12-month period commencing March 1 of the years set forth below: Redemption Year Price ---- ----- 2003........................... 106.31% 2004........................... 104.20% 2005........................... 102.10% 2006 and thereafter............ 100.00% (b) At any time prior to March 1, 2001, the Company may redeem up to 35% of the Accreted Value of the Notes with the proceeds of one or more sales of Capital Stock (other than Disqualified Stock) of the Company, at any time or from time to time in part, at a Redemption Price (expressed as a percentage of the Accreted Value on the Redemption Date) of 112.625%, plus accrued and unpaid interest, if any, to the Redemption Date (subject to the rights of Holders of record on the relevant Regular Record Date that is prior to the Redemption Date to receive interest due on an Interest Payment Date); provided that Notes representing at least $300,950,000 aggregate principal amount at maturity remain outstanding after each such redemption. SECTION 3.02. Notices to Trustee. If the Company elects to redeem Notes ------------------ pursuant to Section 3.01(a) or (b), it shall notify the Trustee in writing of the Redemption Date and the principal amount at maturity of Notes to be redeemed. The Company shall give each notice provided for in this Section 3.02 in an Officers' Certificate at least 45 days before the Redemption Date (unless a shorter period shall be satisfactory to the Trustee). SECTION 3.03. Selection of Notes to Be Redeemed. If less than all of the --------------------------------- Notes are to be redeemed at any time, the Trustee shall select the Notes to be redeemed in compliance with the requirements, as certified to it by the Company, of the principal national securities exchange, if any, on which the Notes are listed or, if the Notes are not listed on a national securities exchange, on a pro rata basis, by lot or by such other method as the Trustee in its sole discretion shall deem fair and appropriate; provided that no Notes of $1,000 in principal amount at maturity or less shall be redeemed in part. 39 The Trustee shall make the selection from the Notes outstanding and not previously called for redemption. Notes in denominations of $1,000 in principal amount at maturity may only be redeemed in whole. The Trustee may select for redemption portions (equal to $1,000 in principal amount at maturity or any integral multiple thereof) of Notes that have denominations larger than $1,000 in principal amount at maturity. Provisions of this Indenture that apply to Notes called for redemption also apply to portions of Notes called for redemption. The Trustee shall notify the Company and the Registrar promptly in writing of the Notes or portions of Notes to be called for redemption. SECTION 3.04. Notice of Redemption. With respect to any redemption of -------------------- Notes pursuant to Section 3.01, at least 30 days but not more than 60 days before a Redemption Date, the Company shall mail a notice of redemption by first-class mail to each Holder whose Notes are to be redeemed. The notice shall identify the Notes to be redeemed and shall state: (i) the Redemption Date; (ii) the Redemption Price; (iii) the name and address of the Paying Agent; (iv) that Notes called for redemption must be surrendered to the Paying Agent in order to collect the Redemption Price; (v) that, unless the Company defaults in making the redemption payment, interest on Notes called for redemption ceases to accrue on and after the Redemption Date and the only remaining right of the Holders is to receive payment of the Redemption Price plus accrued interest, if any, to the Redemption Date upon surrender of the Notes to the Paying Agent; (vi) that, if any Note is being redeemed in part, the portion of the principal amount at maturity (equal to $1,000 in principal amount at maturity or any integral multiple thereof) of such Note to be redeemed and that, on and after the Redemption Date, upon surrender of such Note, a new Note or Notes in principal amount at maturity equal to the unredeemed portion thereof will be reissued; and (vii) that, if any Note contains a CUSIP, CINS or ISIN number as provided in Section 2.13, no representation is being made as to the correctness of the CUSIP, CINS or ISIN number either as printed on the Notes or as contained in the notice of redemption and that reliance may be placed only on the other identification numbers printed on the Notes. 40 At the Company's request (which request may be revoked by the Company at any time prior to the time at which the Trustee shall have given such notice to the Holders), made in writing to the Trustee at least 45 days (or such shorter period as shall be satisfactory to the Trustee) before a Redemption Date, the Trustee shall give the notice of redemption pursuant to Section 3.01(a) or (b) in the name and at the expense of the Company. If, however, the Company gives such notice to the Holders, the Company shall concurrently deliver to the Trustee an Officers' Certificate stating that such notice has been given. SECTION 3.05. Effect of Notice of Redemption. Once notice of redemption ------------------------------ is mailed, Notes called for redemption become due and payable on the Redemption Date and at the Redemption Price. Upon surrender of any Notes to the Paying Agent, such Notes shall be paid at the Redemption Price, plus accrued interest, if any, to the Redemption Date. Notice of redemption shall be deemed to be given when mailed, whether or not the Holder receives the notice. In any event, failure to give such notice, or any defect therein, shall not affect the validity of the proceedings for the redemption of Notes held by Holders to whom such notice was properly given. SECTION 3.06. Deposit of Redemption Price. On or prior to any Redemption --------------------------- Date, the Company shall deposit with the Paying Agent (or, if the Company is acting as its own Paying Agent, shall segregate and hold in trust as provided in Section 2.05) money sufficient to pay the Redemption Price of and accrued interest on all Notes to be redeemed on that date other than Notes or portions thereof called for redemption on that date that have been delivered by the Company to the Trustee for cancellation. SECTION 3.07. Payment of Notes Called for Redemption. If notice of -------------------------------------- redemption has been given in the manner provided above, the Notes or portion of Notes specified in such notice to be redeemed shall become due and payable on the Redemption Date at the Redemption Price stated therein, together with accrued interest to such Redemption Date, and on and after such date (unless the Company shall default in the payment of such Notes at the Redemption Price and accrued interest to the Redemption Date, in which case the principal, until paid, shall bear interest from the Redemption Date at the rate prescribed in the Notes), such Notes shall cease to accrue interest. Upon surrender of any Note for redemption in accordance with a notice of redemption, such Note shall be paid and redeemed by the Company at the Redemption Price, together with accrued interest, if any, to the Redemption Date; provided that installments of interest whose Stated Maturity is on or prior to the Redemption Date shall be payable to the Holders registered as such at the close of business on the relevant Regular Record Date. SECTION 3.08. Notes Redeemed in Part. Upon surrender of any Note that is ---------------------- redeemed in part, the Company shall execute and the Trustee shall authenticate and deliver to the Holder a new Note equal in principal amount at maturity to the unredeemed portion of such surrendered Note. 41 ARTICLE FOUR COVENANTS SECTION 4.01. Payment of Notes. The Company shall pay the principal of, ---------------- premium, if any, and interest on the Notes on the dates and in the manner provided in the Notes and this Indenture. An installment of principal, premium, if any, or interest shall be considered paid on the date due if the Trustee or Paying Agent (other than the Company, a Subsidiary of the Company, or any Affiliate of any of them) holds on that date money designated for and sufficient to pay the installment. If the Company or any Subsidiary of the Company or any Affiliate of any of them acts as Paying Agent, an installment of principal, premium, if any, or interest shall be considered paid on the due date if the entity acting as Paying Agent complies with the last sentence of Section 2.05. As provided in Section 6.09, upon any bankruptcy or reorganization procedure relative to the Company, the Trustee shall serve as the Paying Agent, if any, for the Notes. The Company shall pay interest on overdue principal, premium, if any, and interest on overdue installments of interest, to the extent lawful, at the rate per annum specified in the Notes. SECTION 4.02. Maintenance of Office or Agency. The Company will maintain ------------------------------- in the Borough of Manhattan, The City of New York, an office or agency where Notes may be surrendered for registration of transfer or exchange or for presentation for payment and where notices and demands to or upon the Company in respect of the Notes and this Indenture may be served. The Company will give prompt written notice to the Trustee of the location, and any change in the location, of such office or agency. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the address of the Trustee set forth in Section 10.02. The Company may also from time to time designate one or more other offices or agencies where the Notes may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; provided that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in the Borough of Manhattan, The City of New York for such purposes. The Company will give prompt written notice to the Trustee of any such designation or rescission and of any change in the location of any such other office or agency. The Company hereby initially designates the Corporate Trust Office of the Trustee as such office of the Company in accordance with Section 2.04. 42 SECTION 4.03. Limitation on Indebtedness. (a) The Company will not, and -------------------------- will not permit any of its Restricted Subsidiaries to, Incur any Indebtedness (other than the Notes and Indebtedness existing on the Closing Date); provided that the Company may Incur Indebtedness, and any Restricted Subsidiary may Incur Acquired Indebtedness, if, after giving effect to the Incurrence of such Indebtedness and the receipt and application of the proceeds therefrom, the Consolidated Leverage Ratio would be less than 6 to 1. Notwithstanding the foregoing, the Company and (except as specified below) any Restricted Subsidiary, may Incur each and all of the following: (i) Indebtedness in an aggregate principal amount outstanding at any time not to exceed $25 million, less any amount of such Indebtedness permanently repaid as provided under Section 4.10; (ii) Indebtedness owed (A) to the Company and evidenced by an unsubordinated promissory note or (B) to any Restricted Subsidiary; provided that any event which results in any such Restricted Subsidiary ceasing to be a Restricted Subsidiary or any subsequent transfer of such Indebtedness (other than to the Company or another Restricted Subsidiary) shall be deemed, in each case, to constitute an Incurrence of such Indebtedness not permitted by this clause (ii); (iii) Indebtedness issued in exchange for, or the net proceeds of which are used to refinance or refund, then outstanding Indebtedness (other than Indebtedness Incurred under clause (i), (ii), (iv), (vi), (ix), (x) or (xi) of this paragraph) and any refinancings of such new Indebtedness in an amount not to exceed the amount so refinanced or refunded (plus premiums, accrued interest, fees and expenses); provided that Indebtedness the proceeds of which are used to refinance or refund the Notes or Indebtedness that is pari passu in right of payment with, or subordinated in right of payment to, the Notes shall only be permitted under this clause (iii) if (A) in case the Notes are refinanced in part or the Indebtedness to be refinanced is pari passu in right of payment with the Notes, such new Indebtedness, by its terms or by the terms of any agreement or instrument pursuant to which such new Indebtedness is outstanding, is expressly made pari passu in right of payment with, or subordinate in right of payment to, the remaining Notes, (B) in case the Indebtedness to be refinanced is subordinated in right of payment to the Notes, such new Indebtedness, by its terms or by the terms of any agreement or instrument pursuant to which such new Indebtedness is issued or remains outstanding, is expressly made subordinate in right of payment to the Notes at least to the extent that the Indebtedness to be refinanced is subordinated to the Notes and (C) such new Indebtedness, determined as of the date of Incurrence of such new Indebtedness, does not mature prior to the Stated Maturity of the Indebtedness to be refinanced or refunded, and the Average Life of such new Indebtedness is at least equal to the remaining Average Life of the Indebtedness to be refinanced or refunded; and provided further that in no event may Indebtedness of the Company be refinanced by means of any Indebtedness of any Restricted Subsidiary pursuant to this clause (iii); (iv) Indebtedness (A) in respect of performance, surety or appeal bonds provided in the ordinary course of business, (B) under Currency Agreements and Interest Rate Agreements; provided that such agreements (a) are designed solely to protect the Company or its Restricted Subsidiaries against fluctuations in foreign currency exchange rates or interest rates and (b) do not increase the Indebtedness of the obligor outstanding at any time other 43 than as a result of fluctuations in foreign currency exchange rates or interest rates or by reason of fees, indemnities and compensation payable thereunder and (C) arising from agreements providing for indemnification, adjustment of purchase price or similar obligations, or from Guarantees or letters of credit, surety bonds or performance bonds securing any obligations of the Company or any of its Restricted Subsidiaries pursuant to such agreements, in each case Incurred in connection with the disposition of any business, assets or Restricted Subsidiary (other than Guarantees of Indebtedness Incurred by any Person acquiring all or any portion of such business, assets or Restricted Subsidiary for the purpose of financing such acquisition), in a principal amount not to exceed the gross proceeds actually received by the Company or any Restricted Subsidiary in connection with such disposition; (v) Indebtedness of the Company, to the extent the net proceeds thereof are promptly (A) used to purchase Notes tendered in an Offer to Purchase made as a result of a Change of Control or (B) deposited to defease all of the Notes in accordance with Article Eight; (vi) Guarantees of the Notes and Guarantees of Indebtedness of the Company by any Restricted Subsidiary, provided the Guarantee of such Indebtedness is permitted by and made in accordance with Section 4.07; (vii) Indebtedness Incurred to finance the cost (including the cost of design, development, acquisition, construction, installation, improvement, transportation or integration) of equipment, inventory or network assets (including acquisitions by way of Capitalized Lease and acquisitions of the Capital Stock of a Person that becomes a Restricted Subsidiary to the extent of the fair market value of the equipment, inventory or network assets so acquired) acquired by the Company or a Restricted Subsidiary after the Closing Date or to finance or support working capital or capital expenditures for the VOD Business; (viii) Indebtedness of the Company not to exceed, at any one time outstanding, two times (A) the Net Cash Proceeds received by the Company after the Closing Date from the issuance and sale of its Capital Stock (other than Disqualified Stock) to a Person that is not a Subsidiary of the Company, to the extent such Net Cash Proceeds have not been used pursuant to clause (C)(2) of the first paragraph or clause (iii), (iv) or (vi) of the second paragraph of Section 4.04 to make a Restricted Payment and (B) 80% of the fair market value of property (other than cash and cash equivalents) received by the Company after the Closing Date from the sale of its Capital Stock (other than Disqualified Stock) to a Person that is not a Subsidiary of the Company, to the extent such sale of Capital Stock has not been used pursuant to clause (iii), (iv) or (vii) of the second paragraph of Section 4.04 to make a Restricted Payment; provided that such Indebtedness does not mature prior to the Stated Maturity of the Notes and has an Average Life longer than the Notes; (ix) Indebtedness of the Company, in an aggregate principal amount outstanding at any time not to exceed $1 million, Incurred in connection with the repurchase of shares of Capital Stock of the Company, options on any such shares or related stock appreciation rights held by employees, former employees, directors or former directors (or their estates or beneficiaries under their estates), upon death, disability, retirement or termination of employment; provided that such Indebtedness, by its terms, (A) is expressly made subordinate in right of payment to the Notes, and (B) provides that no payments of principal (including by way of sinking fund, mandatory redemption or otherwise (including defeasance)), may be made while any of the Notes are outstanding; (x) Strategic Subordinated Indebtedness; and (xi) Indebtedness of the Company (in addition to Indebtedness permitted under clauses (i) through (x) of this paragraph) in an aggregate 44 principal amount outstanding at any time not to exceed $15 million, less any amount of such Indebtedness permanently repaid as provided in Section 4.10. (b) Notwithstanding any other provision of this Section 4.03, the maximum amount of Indebtedness that the Company or a Restricted Subsidiary may Incur pursuant to this Section 4.03 shall not be deemed to be exceeded due solely to the result of fluctuations in the exchange rates of currencies. (c) For purposes of determining any particular amount of Indebtedness under this Section 4.03, (1) Guarantees, Liens or obligations with respect to letters of credit supporting Indebtedness otherwise included in the determination of such particular amount shall not be included and (2) any Liens granted pursuant to the equal and ratable provisions referred to in Section 4.09 shall not be treated as Indebtedness. For purposes of determining compliance with this Section 4.03, in the event that an item of Indebtedness meets the criteria of more than one of the types of Indebtedness described in the above clauses, the Company, in its sole discretion, shall classify and may, from time to time, reclassify, such item of Indebtedness and only be required to include the amount and type of such Indebtedness in one of such clauses. SECTION 4.04. Limitation on Restricted Payments. The Company will not, --------------------------------- and will not permit any Restricted Subsidiary to, directly or indirectly, (i) declare or pay any dividend or make any distribution on or with respect to its Capital Stock (other than (x) dividends or distributions payable solely in shares of its Capital Stock (other than Disqualified Stock) or in options, warrants or other rights to acquire shares of such Capital Stock and (y) pro rata dividends or distributions on Common Stock of Restricted Subsidiaries held by minority stockholders) held by Persons other than the Company or any of its Restricted Subsidiaries, (ii) purchase, redeem, retire or otherwise acquire for value any shares of Capital Stock of (A) the Company or an Unrestricted Subsidiary (including options, warrants or other rights to acquire such shares of Capital Stock) held by any Person or (B) a Restricted Subsidiary (including options, warrants or other rights to acquire such shares of Capital Stock) held by any Affiliate of the Company (other than a Wholly Owned Restricted Subsidiary) or any holder (or any Affiliate of such holder) of 5% or more of the Capital Stock of the Company, (iii) make any voluntary or optional principal payment, or voluntary or optional redemption, repurchase, defeasance, or other acquisition or retirement for value, of Indebtedness of the Company that is subordinated in right of payment to the Notes or (iv) make any Investment, other than a Permitted Investment, in any Person (such payments or any other actions described in clauses (i) through (iv) above being collectively "Restricted Payments") if, at the time of, and after giving effect to, the proposed Restricted Payment: (A) a Default or Event of Default shall have occurred and be continuing, (B) the Company could not Incur at least $1.00 of Indebtedness under the first paragraph of Section 4.03(a) or (C) the aggregate amount of all Restricted Payments (the amount, if other than in cash, to be determined in good faith by the Board of Directors, whose determination shall be conclusive and evidenced by a Board Resolution) made after the Closing Date shall exceed the sum 45 of (1) the aggregate amount of the Consolidated EBITDA (or, if Consolidated EBITDA is negative, minus the amount by which Consolidated EBITDA is less than zero) less 1.5 times Consolidated Interest Expense, in each case accrued on a cumulative basis during the period (taken as one accounting period) beginning on the first day of the fiscal quarter immediately following the Closing Date and ending on the last day of the last fiscal quarter preceding the Transaction Date for which reports have been filed with the Commission or provided to the Trustee pursuant to Section 4.16 plus (2) the aggregate Net Cash Proceeds received by the Company after the Closing Date from the issuance and sale permitted by this Indenture of its Capital Stock (other than Disqualified Stock) to a Person who is not a Subsidiary of the Company, including an issuance or sale permitted by this Indenture of Indebtedness of the Company for cash subsequent to the Closing Date upon the conversion of such Indebtedness into Capital Stock (other than Disqualified Stock) of the Company, or from the issuance to a Person who is not a Subsidiary of the Company of any options, warrants or other rights to acquire Capital Stock of the Company (in each case, exclusive of any Disqualified Stock or any options, warrants or other rights that are redeemable at the option of the holder, or are required to be redeemed, prior to the Stated Maturity of the Notes), in each case except to the extent such Net Cash Proceeds are used to Incur Indebtedness pursuant to clause (viii) of the second paragraph of Section 4.03(a), plus (3) an amount equal to the net reduction in Investments (other than reductions in Permitted Investments) in any Person resulting from payments of interest on Indebtedness, dividends, distributions, repayments of loans or advances, or other transfers of assets, in each case to the Company or any Restricted Subsidiary or from the Net Cash Proceeds from the sale of any such Investment (except, in each case, to the extent any such payment or proceeds is included in the calculation of Adjusted Consolidated Net Income), or from redesignations of Unrestricted Subsidiaries as Restricted Subsidiaries (valued in each case as provided in the definition of "Investments"), not to exceed, in each case, the amount of Investments previously made by the Company or any Restricted Subsidiary in such Person or Unrestricted Subsidiary. The foregoing provision shall not be violated by reason of: (i) the payment of any dividend within 60 days after the date of declaration thereof if, at such date of declaration, such payment would comply with the foregoing paragraph; (ii) the redemption, repurchase, defeasance or other acquisition or retirement for value of Indebtedness that is subordinated in right of payment to the Notes, including premium, if any, and accrued and unpaid interest, with the proceeds of, or in exchange for, Indebtedness Incurred under clause (iii) of the second paragraph of Section 4.03(a); (iii) the repurchase, redemption or other acquisition of Capital Stock of the Company or an Unrestricted Subsidiary (or options, warrants or other rights to acquire such Capital Stock) in exchange for, or out of the proceeds of a substantially concurrent offering of, shares of Capital Stock (other than Disqualified Stock) of the Company (or options, warrants or other rights to acquire such Capital Stock); (iv) the making of any principal payment or the repurchase, redemption, retirement, defeasance or other acquisition for value of Indebtedness of the Company which is subordinated in right of payment to the Notes in exchange for, or out of the proceeds of a substantially concurrent offering of shares of, the Capital Stock (other than Disqualified Stock) of the Company (or options, warrants or other rights to acquire such Capital Stock); (v) payments or distributions to dissenting 46 stockholders pursuant to applicable law pursuant to or in connection with a consolidation, merger or transfer of assets that complies with the provisions of Article Five; (vi) Investments in any Person the primary business of which is related, ancillary or complementary to the business of the Company and its Restricted Subsidiaries on the date of such Investments; provided that the aggregate amount of Investments made pursuant to this clause (vi) does not exceed the sum of (x) $30 million plus (y) the amount of Net Cash Proceeds received by the Company after the Closing Date from the sale of its Capital Stock (other than Disqualified Stock) to a Person who is not a Subsidiary of the Company, except to the extent such Net Cash Proceeds are used to Incur Indebtedness pursuant to clause (viii) of the second paragraph of Section 4.03(a) or to make Restricted Payments pursuant to clause (C)(2) of the first paragraph, or clause (iii) or (iv) of this paragraph, of this Section 4.04, plus (z) the net reduction in Investments made pursuant to this clause (vi) resulting from distributions on or repayments of such Investments or from the Net Cash Proceeds from the sale of any such Investment (except in each case to the extent any such payment or proceeds is included in the calculation of Consolidated EBITDA) or from such Person becoming a Restricted Subsidiary (valued in each case as provided in the definition of "Investments"), provided that the net reduction in any Investment shall not exceed the amount of such Investment; (vii) Investments acquired in exchange for Capital Stock (other than Disqualified Stock) of the Company; (viii) the declaration or payment of dividends on the Common Stock of the Company following a Public Equity Offering of such Common Stock, of up to 6% per annum of the Net Cash Proceeds received by the Company in such Public Equity Offering; (ix) repurchases of Warrants pursuant to a Repurchase Offer; (x) any purchase of any fractional share of Common Stock of the Company in connection with an exercise of the Warrants; (xi) Investments in any Person the primary business of which is located outside the United States and is related, ancillary or complementary to the business of the Company and its Restricted Subsidiaries on the date of such Investments, provided that the aggregate amount of Investments pursuant to this clause (xi) does not exceed (x) $5 million plus (y) the net reduction in Investments made pursuant to this clause (xi) resulting from distributions on or repayments of such Investments or from the Net Cash Proceeds from the sale of any such Investment (except in each case to the extent any such payment or proceeds is included in the calculation of Consolidated EBITDA) or from such Person becoming a Restricted Subsidiary (valued in each case as provided in the definition of "Investments"), provided that the net reduction in any Investment shall not exceed the amount of such Investment; or (xii) repurchases of Capital Stock of the Company from employees, former employees, directors or former directors of the Company (or their estates or beneficiaries under their estates) upon their death, disability, retirement or termination of employment; provided that the aggregate consideration paid for such repurchases shall not exceed $500,000 in any calendar year, or $3 million in the aggregate; provided that, except in the case of clauses (i) and (iii), no Default or Event of Default shall have occurred and be continuing, or occur as a consequence of the actions or payments set forth therein. Each Restricted Payment permitted pursuant to the preceding paragraph (other than the Restricted Payment referred to in clause (ii) thereof, an exchange of Capital Stock for Capital Stock or Indebtedness referred to in clause (iii) or (iv) thereof and an Investment referred to in clause (vi) 47 thereof), and the Net Cash Proceeds from any issuance of Capital Stock referred to in clauses (iii) and (iv) thereof, shall be included in calculating whether the conditions of clause (C) of the first paragraph of this Section 4.04 have been met with respect to any subsequent Restricted Payments. In the event the proceeds of an issuance of Capital Stock of the Company are used for the redemption, repurchase or other acquisition of the Notes, or Indebtedness that is pari passu in right of payment with the Notes, then the Net Cash Proceeds of such issuance shall be included in clause (C) of the first paragraph of this Section 4.04 only to the extent such proceeds are not used for such redemption, repurchase or other acquisition of Indebtedness. SECTION 4.05. Limitation on Dividend and Other Payment Restrictions ----------------------------------------------------- Affecting Restricted Subsidiaries. The Company will not, and will not permit - --------------------------------- any Restricted Subsidiary to, create or otherwise cause or suffer to exist or become effective any consensual encumbrance or restriction of any kind on the ability of any Restricted Subsidiary to (i) pay dividends or make any other distributions permitted by applicable law on any Capital Stock of such Restricted Subsidiary owned by the Company or any other Restricted Subsidiary, (ii) pay any Indebtedness owed to the Company or any other Restricted Subsidiary, (iii) make loans or advances to the Company or any other Restricted Subsidiary or (iv) transfer any of its property or assets to the Company or any other Restricted Subsidiary. The foregoing provisions shall not restrict any encumbrances or restrictions: (i) existing on the Closing Date in this Indenture or any other agreements in effect on the Closing Date, and any extensions, refinancings, renewals or replacements of such agreements; provided that the encumbrances and restrictions in any such extensions, refinancings, renewals or replacements are no less favorable in any material respect to the Holders than those encumbrances or restrictions that are then in effect and that are being extended, refinanced, renewed or replaced; (ii) existing under or by reason of applicable law; (iii) existing with respect to any Person or the property or assets of such Person acquired by the Company or any Restricted Subsidiary and existing at the time of such acquisition and not incurred in contemplation thereof, which encumbrances or restrictions are not applicable to any Person or the property or assets of any Person other than such Person or the property or assets of such Person so acquired; (iv) in the case of clause (iv) of the first paragraph of this Section 4.05, (A) that restrict in a customary manner the subletting, assignment or transfer of any property or asset that is a lease, license, conveyance or contract or similar property or asset, (B) existing by virtue of any transfer of, agreement to transfer, option or right with respect to, or Lien on, any property or assets of the Company or any Restricted Subsidiary not otherwise prohibited by this Indenture or (C) arising or agreed to in the ordinary course of business, not relating to any Indebtedness, and that do not, individually or in the aggregate, detract from the value of property or assets of the Company or any Restricted Subsidiary in any manner material to the Company or any Restricted Subsidiary; (v) with respect to a Restricted Subsidiary and imposed pursuant to an agreement that has been entered into for the sale or disposition of all or substantially all of the Capital Stock of, or property and assets of, such Restricted Subsidiary; or (vi) contained in the terms of any Indebtedness or any agreement pursuant to which such Indebtedness was issued if (A) the 48 encumbrance or restriction is not materially more disadvantageous to the Holders of the Notes than is customary in comparable financings (as determined by the Company) and (B) the Company determines that any such encumbrance or restriction is not reasonably expected to materially affect the Company's ability to make principal or interest payments on the Notes. Nothing contained in this Section 4.05 shall prevent the Company or any Restricted Subsidiary from (1) creating, incurring, assuming or suffering to exist any Liens otherwise permitted in Section 4.09 or (2) restricting the sale or other disposition of property or assets of the Company or any of its Restricted Subsidiaries that secure Indebtedness of the Company or any of its Restricted Subsidiaries. SECTION 4.06. Limitation on the Issuance and Sale of Capital Stock of ------------------------------------------------------- Restricted Subsidiaries. The Company will not sell, and will not permit any - ----------------------- Restricted Subsidiary, directly or indirectly, to issue or sell, any shares of Capital Stock of a Restricted Subsidiary (including options, warrants or other rights to purchase shares of such Capital Stock) except (i) to the Company or a Wholly Owned Restricted Subsidiary, (ii) issuances of director's qualifying shares, or sales to foreign nationals of shares of Capital Stock of foreign Restricted Subsidiaries, to the extent required by applicable law, (iii) if, immediately after giving effect to such issuance or sale, such Restricted Subsidiary would no longer constitute a Restricted Subsidiary and any Investment in such Person remaining after giving effect to such issuance or sale would have been permitted to be made under Section 4.04 if made on the date of such issuance or sale or (iv) issuances or sales of Common Stock of a Restricted Subsidiary, provided that the Company or such Restricted Subsidiary applies the Net Cash Proceeds, if any, of any such sale in accordance with clause (A) or (B) of the first paragraph of Section 4.10. SECTION 4.07. Limitation on Issuances of Guarantees by Restricted --------------------------------------------------- Subsidiaries. The Company will not permit any Restricted Subsidiary to (x) - ------------ directly or indirectly, Guarantee any Indebtedness of the Company which is pari passu in right of payment with, or subordinate in right of payment to, the Notes ("Guaranteed Indebtedness") or (y) issue any Debt Securities, unless (i) such ----------------------- Restricted Subsidiary simultaneously executes and delivers a supplemental indenture to this Indenture providing for a Guarantee (a "Subsidiary Guarantee") -------------------- of payment of the Notes by such Restricted Subsidiary and (ii) such Restricted Subsidiary waives, and will not in any manner whatsoever claim or take the benefit or advantage of, any rights of reimbursement, indemnity or subrogation or any other rights against the Company or any other Restricted Subsidiary as a result of any payment by such Restricted Subsidiary under its Subsidiary Guarantee; provided that this paragraph shall not be applicable to any Guarantee of any Restricted Subsidiary that existed at the time such Person became a Restricted Subsidiary and was not Incurred in connection with, or in contemplation of, such Person becoming a Restricted Subsidiary. If the Guaranteed Indebtedness is (A) pari passu in right of payment with the Notes, then the Guarantee of such Guaranteed Indebtedness shall be pari passu in right of payment with, or subordinated in right of payment to, the Subsidiary Guarantee or (B) subordinated in right of payment to the Notes, then the Guarantee 49 of such Guaranteed Indebtedness shall be subordinated in right of payment to the Subsidiary Guarantee at least to the extent that the Guaranteed Indebtedness is subordinated in right of payment to the Notes. Notwithstanding the foregoing, any Subsidiary Guarantee by a Restricted Subsidiary may provide by its terms that it shall be automatically and unconditionally released and discharged upon (i) any sale, exchange or transfer, to any Person not an Affiliate of the Company, of all of the Company's and each Restricted Subsidiary's Capital Stock in, or all or substantially all the assets of, such Restricted Subsidiary (which sale, exchange or transfer is not prohibited by this Indenture) or (ii) the release or discharge of the Guarantee which resulted in the creation of such Subsidiary Guarantee, except a discharge or release by or as a result of payment under such Guarantee. SECTION 4.08. Limitation on Transactions with Stockholders and ------------------------------------------------ Affiliates. The Company will not, and will not permit any Restricted Subsidiary to, directly or indirectly, enter into, renew or extend any transaction (including, without limitation, the purchase, sale, lease or exchange of property or assets, or the rendering of any service) with any holder (or any Affiliate of such holder) of 5% or more of any class of Capital Stock of the Company or with any Affiliate of the Company or any Restricted Subsidiary, except upon fair and reasonable terms no less favorable to the Company or such Restricted Subsidiary than could be obtained, at the time of such transaction or, if such transaction is pursuant to a written agreement, at the time of the execution of the agreement providing therefor, in a comparable arm's-length transaction with a Person that is not such a holder or an Affiliate. The foregoing limitation does not limit, and shall not apply to: (i) transactions (A) approved by a majority of the disinterested members of the Board of Directors or (B) for which the Company or a Restricted Subsidiary delivers to the Trustee a written opinion of a nationally recognized investment banking firm stating that the transaction is fair to the Company or such Restricted Subsidiary from a financial point of view; (ii) any transaction solely between the Company and any of its Wholly Owned Restricted Subsidiaries or solely between Wholly Owned Restricted Subsidiaries; (iii) the payment of reasonable and customary regular fees to directors of the Company who are not employees of the Company; (iv) any payments or other transactions pursuant to any tax-sharing agreement between the Company and any other Person with which the Company files a consolidated tax return or with which the Company is part of a consolidated group for tax purposes; (v) transactions arising under the SRTC Transaction, including certain payments, advances and prepayments by the Company to SRTC contemplated thereby, the Exclusive Purchase and Sale and Technology License Agreement dated as of November 21, 1995, by and between SRTC and the Company or the Agreement dated October 30, 1995, between Sarnoff Corporation and the Company; (vi) transactions between the Company or any of its Restricted Subsidiaries and a non-Wholly Owned Restricted Subsidiary or an Unrestricted Subsidiary on a cost, rather than fair market value, basis, or on other terms of the kind customarily employed to allocate charges among members of a consolidated group of entities, in any such case that are fair and reasonable to the Company or such 50 Restricted Subsidiary; provided that the aggregate fair market value of the consideration subject to such transactions does not exceed $1 million in any calendar year; (vii) the licensing or sublicensing of use of any intellectual property by the Company or any Restricted Subsidiary to any Person for use of such intellectual property outside the United States; provided such licensing or sublicensing of such intellectual property shall not adversely affect the Company's and its Restricted Subsidiaries' access to such intellectual property for the conduct of their respective businesses or (viii) any Restricted Payments not prohibited by Section 4.04. Notwithstanding the foregoing, any transaction or series of related transactions covered by the first paragraph of this Section 4.08 and not covered by clauses (ii) through (viii) of this paragraph, (a) the aggregate amount of which exceeds $2 million in value, must be approved or determined to be fair in the manner provided for in clause (i)(A) or (B) above and (b) the aggregate amount of which exceeds $10 million in value, must be determined to be fair in the manner provided for in clause (i)(B) above. SECTION 4.09. Limitation on Liens. The Company will not, and will not ------------------- permit any Restricted Subsidiary to, create, incur, assume or suffer to exist any Lien on any of its assets or properties of any character, or any shares of Capital Stock or Indebtedness of any Restricted Subsidiary, without making effective provision for all of the Notes and all other amounts due under this Indenture to be directly secured equally and ratably with (or, if the obligation or liability to be secured by such Lien is subordinated in right of payment to the Notes, prior to) the obligation or liability secured by such Lien. The foregoing limitation does not apply to: (i) Liens existing on the Closing Date; (ii) Liens granted after the Closing Date on any assets or Capital Stock of the Company or its Restricted Subsidiaries created in favor of the Holders; (iii) Liens with respect to the assets of a Restricted Subsidiary granted by such Restricted Subsidiary to the Company or a Wholly Owned Restricted Subsidiary to secure Indebtedness owing to the Company or such other Restricted Subsidiary; (iv) Liens securing Indebtedness which is Incurred to refinance secured Indebtedness which is permitted to be Incurred under clause (iii) of the second paragraph of Section 4.03(a); provided that such Liens do not extend to or cover any property or assets of the Company or any Restricted Subsidiary other than the property or assets securing the Indebtedness being refinanced; (v) Liens on the Capital Stock of, or any property or assets of, a Restricted Subsidiary securing Indebtedness of such Restricted Subsidiary permitted under Section 4.03(a); (vi) Liens securing obligations under revolving credit, working capital or similar facilities Incurred under clause (i), or Indebtedness Incurred under clause (vii), of the second paragraph of Section 4.03(a); or (vii) Permitted Liens. SECTION 4.10. Limitation on Asset Sales. The Company will not, and will ------------------------- not permit any Restricted Subsidiary to, consummate any Asset Sale, unless (i) the consideration received by the Company or such Restricted Subsidiary is at least equal to the fair market value of the assets sold or disposed of and (ii) at least 85% of the consideration received consists of cash or Temporary Cash Investments. In the event and to the extent that the Net Cash Proceeds received by the Company or any of its Restricted Subsidiaries from one or more Asset Sales occurring on or after the Closing 51 Date in any period of 12 consecutive months exceed 10% of Adjusted Consolidated Net Tangible Assets (determined as of the date closest to the commencement of such 12-month period for which a consolidated balance sheet of the Company and its Subsidiaries has been filed with the Commission or provided to the Trustee pursuant to Section 4.16), then the Company shall or shall cause the relevant Restricted Subsidiary to (i) within 12 months after the date Net Cash Proceeds so received exceed 10% of Adjusted Consolidated Net Tangible Assets (A) apply an amount equal to such excess Net Cash Proceeds to permanently repay unsubordinated Indebtedness of the Company or any Restricted Subsidiary providing a Subsidiary Guarantee pursuant to Section 4.07 or Indebtedness of any other Restricted Subsidiary, in each case owing to a Person other than the Company or any of its Restricted Subsidiaries, or (B) invest an amount equal to such excess Net Cash Proceeds, or the amount of such Net Cash Proceeds not so applied pursuant to clause (A) (or enter into a definitive agreement committing to so invest within 12 months after the date of such agreement), in property or assets (other than current assets) of a nature or type or that are used in a business (or in a Person having property and assets of a nature or type, or engaged in a business) similar or related to the nature or type of the property and assets of, or the business of, the Company and its Restricted Subsidiaries existing on the date of such investment and (ii) apply (no later than the end of the 12-month period referred to in clause (i)) such excess Net Cash Proceeds (to the extent not applied (or committed to be applied) pursuant to clause (i)) as provided in the following paragraph of this Section 4.10. The amount of such excess Net Cash Proceeds required to be applied (or to be committed to be applied) during such 12-month period as set forth in clause (i) of the preceding sentence and not applied as so required by the end of such period shall constitute "Excess Proceeds." If, as of the first day of any calendar month, the aggregate amount of Excess Proceeds not theretofore subject to an Offer to Purchase pursuant to this Section 4.10 totals at least $5 million, the Company shall commence, not later than the fifteenth Business Day of such month, and consummate an Offer to Purchase from the Holders on a pro rata basis an aggregate Accreted Value of Notes equal to the Excess Proceeds on such date, at a purchase price equal to 100% of the Accreted Value of the Notes on the relevant Payment Date plus, in each case, accrued interest, if any, to the Payment Date. SECTION 4.11. Existence. Subject to Articles Four and Five of this --------- Indenture, the Company will do or cause to be done all things necessary to preserve and keep in full force and effect its existence and the existence of each of its Restricted Subsidiaries in accordance with the respective organizational documents of the Company and each such Restricted Subsidiary and the rights (whether pursuant to charter, partnership certificate, agreement, statute or otherwise), material licenses and franchises of the Company and each such Restricted Subsidiary. SECTION 4.12. Payment of Taxes and Other Claims. The Company will pay or --------------------------------- discharge and shall cause each of its Subsidiaries to pay or discharge, or cause to be paid or discharged, before the same shall become delinquent (i) all material taxes, assessments and governmental charges levied or imposed upon (a) the Company or any such Subsidiary, (b) the income or profits of any such 52 Subsidiary which is a corporation or (c) the property of the Company or any such Subsidiary and (ii) all material lawful claims for labor, materials and supplies that, if unpaid, might by law become a lien upon the property of the Company or any Restricted Subsidiary; provided that the Company shall not be required to pay or discharge, or cause to be paid or discharged, any such tax, assessment, charge or claim the amount, applicability or validity of which is being contested in good faith by appropriate proceedings and for which adequate reserves have been established. SECTION 4.13. Maintenance of Properties and Insurance. The Company will --------------------------------------- cause all properties used or useful in the conduct of its business or the business of any of its Restricted Subsidiaries to be maintained and kept in good condition, repair and working order and supplied with all necessary equipment and will cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all as in the judgment of the Company may be necessary so that the business carried on in connection therewith may be properly and advantageously conducted at all times; provided that nothing in this Section 4.13 shall prevent the Company or any such Subsidiary from discontinuing the use, operation or maintenance of any of such properties or disposing of any of them, if such discontinuance or disposal is, in the judgment of the Company, desirable in the conduct of the business of the Company or such Subsidiary. The Company will provide or cause to be provided, for itself and its Restricted Subsidiaries, insurance (including appropriate self-insurance) against loss or damage of the kinds customarily insured against by corporations similarly situated and owning like properties, including, but not limited to, products liability insurance and public liability insurance, with reputable insurers or with the government of the United States of America, or an agency or instrumentality thereof, in such amounts, with such deductibles and by such methods as shall be customary for corporations similarly situated in the industry in which the Company or any such Restricted Subsidiary, as the case may be, is then conducting business. SECTION 4.14. Notice of Defaults. In the event that the Company becomes ------------------ aware of any Default or Event of Default, the Company, promptly after it becomes aware thereof, will give written notice thereof to the Trustee. SECTION 4.15. Compliance Certificates. (a) The Company shall deliver to ----------------------- the Trustee, within 90 days after the end of each fiscal year, an Officers' Certificate stating whether or not the signers know of any Default or Event of Default that occurred during such fiscal year. Such certificate shall contain a certification from the principal executive officer, principal financial officer or principal accounting officer of the Company that a review has been conducted of the activities of the Company and its Restricted Subsidiaries and the Company's and its Restricted Subsidiaries' performance under this Indenture and that the Company has complied with all conditions and covenants under this Indenture. For purposes of this Section 4.15, such compliance shall be determined without regard to any period of grace or requirement of notice provided under this Indenture. If the officers of the Company signing such certificate do know of such a Default or 53 Event of Default, the certificate shall describe any such Default or Event of Default and its status. The first certificate to be delivered pursuant to this Section 4.15(a) shall be for the first fiscal year beginning after the execution of this Indenture. Except as set forth herein, the Trustee shall have no obligation to monitor the Company's compliance with its obligations set forth herein. (b) The Company shall deliver to the Trustee, within 90 days after the end of the Company's fiscal year, a certificate signed by the Company's independent certified public accountants stating (i) that their audit examination has included a review of the terms of this Indenture and the Notes as they relate to accounting matters, (ii) that they have read the most recent Officers' Certificate delivered to the Trustee pursuant to paragraph (a) of this Section 4.15 and (iii) whether, in connection with their audit examination, anything came to their attention that caused them to believe that the Company was not in compliance with any of the terms, covenants, provisions or conditions of Article Four and Section 5.01 of this Indenture as they pertain to accounting matters and, if any Default or Event of Default has come to their attention, specifying the nature and period of existence thereof; provided that such independent certified public accountants shall not be liable in respect of such statement by reason of any failure to obtain knowledge of any such Default or Event of Default that would not be disclosed in the course of an audit examination conducted in accordance with generally accepted auditing standards in effect at the date of such examination. SECTION 4.16. Commission Reports and Reports to Holders. At all times ----------------------------------------- from and after the earlier of (i) the date of commencement of an Exchange Offer (as defined in the Registration Rights Agreement) or the effectiveness of the Shelf Registration Statement (as defined in the Registration Rights Agreement) and (ii) the date that is one year after the Closing Date, in either case, whether or not the Company is then required to file reports with the Commission, the Company shall file with the Commission the annual, quarterly and other reports and other information required by Sections 13(a) or 15(d) of the Exchange Act (unless the Commission will not accept such a filing). The Company shall mail or cause to be mailed copies of such reports and information to the Trustee and each Holder or shall mail or cause to be mailed copies of such reports and information to the Trustee for forwarding to each Holder, without cost to such Holder, within 15 days after the date it files such reports and information with the Commission or after the date it would have been required to file such reports and information with the Commission had it been subject to such sections of the Exchange Act; provided, however, that the copies of such reports and information mailed to Holders may omit exhibits, which the Company will supply to any Holder at such Holder's request. At all times prior to the earlier of (i) the date of commencement of an Exchange Offer or the effectiveness of the Shelf Registration Statement and (ii) the date that is one year after the Closing Date, the Company shall, at its cost, mail to each Holder (or to the Trustee for forwarding to such Holder) quarterly and annual reports substantially equivalent to those that would be required by the Exchange Act. In addition, at all times prior to the date of commencement of an Exchange Offer or the effectiveness of the Shelf Registration Statement, upon the request of any Holder or any 54 prospective purchaser of Notes designated by a Holder, the Company shall mail to such Holder or such prospective purchaser the information required under Rule 144A under the Securities Act. SECTION 4.17. Repurchase of Notes upon a Change of Control. The Company -------------------------------------------- shall commence, within 30 days after the occurrence of a Change of Control, and thereafter consummate an Offer to Purchase for all Notes then outstanding, at a purchase price equal to 101% of the Accreted Value thereof on the relevant Payment Date, plus accrued interest, if any, to the Payment Date. SECTION 4.18. Waiver of Stay, Extension or Usury Laws. The Company --------------------------------------- covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law or any usury law or other law that would prohibit or forgive the Company from paying all or any portion of the principal of, premium, if any, or interest on the Notes as contemplated herein, wherever enacted, now or at any time hereafter in force, or that may affect the covenants or the performance of this Indenture; and (to the extent that it may lawfully do so) the Company hereby expressly waives all benefit or advantage of any such law and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. SECTION 4.19. Limitation on Sale and Leaseback Transactions. The Company --------------------------------------------- will not, and will not permit any Restricted Subsidiary to, enter into any Sale and Leaseback Transaction. The foregoing restriction does not apply to any Sale and Leaseback Transaction if (i) the lease is for a period, including renewal rights, of not in excess of three years; (ii) the lease secures or relates to industrial revenue or pollution control bonds; (iii) the transaction is solely between the Company and any Wholly Owned Restricted Subsidiary or solely between Wholly Owned Restricted Subsidiaries; or (iv) the Company or such Restricted Subsidiary, within 12 months after the sale or transfer of any assets or properties is completed, applies an amount not less than the net proceeds received from such sale in accordance with clause (A) or (B) of the first paragraph of Section 4.10. ARTICLE FIVE SUCCESSOR CORPORATION SECTION 5.01. When Company May Merge, Etc. The Company shall not --------------------------- consolidate with, merge with or into, or sell, convey, transfer, lease or otherwise dispose of all or substantially all of its property and assets (as an entirety or substantially an entirety in one transaction or a series of related transactions) to, any Person or permit any Person to merge with or into the Company unless: (i) the Company shall be the continuing Person, or the Person (if other than the Company) formed by such consolidation or into which the Company is merged or that acquired or leased such property and assets of the Company shall be a corporation organized and validly existing under the 55 laws of the United States of America or any jurisdiction thereof, and shall expressly assume, by a supplemental indenture, executed and delivered to the Trustee, all of the obligations of the Company on all of the Notes and under this Indenture; (ii) immediately after giving effect to such transaction, no Default or Event of Default shall have occurred and be continuing; (iii) immediately after giving effect to such transaction on a pro forma basis, the Company or any Person becoming the successor obligor of the Notes shall have a Consolidated Net Worth equal to or greater than the Consolidated Net Worth of the Company immediately prior to such transaction; (iv) immediately after giving effect to such transaction on a pro forma basis, the Company, or any Person becoming the successor obligor of the Notes, as the case may be, shall have a Consolidated Leverage Ratio not greater than the Consolidated Leverage Ratio of the Company immediately prior to the transaction; provided that this clause (iv) shall not apply to a consolidation or merger with or into a Wholly Owned Restricted Subsidiary with a positive net worth; provided that in connection with any such merger or consolidation, no consideration (other than Capital Stock (other than Disqualified Stock) in the surviving Person or the Company) shall be issued or distributed to the stockholders of the Company; and (v) the Company delivers to the Trustee an Officers' Certificate (attaching the arithmetic computations to demonstrate compliance with clauses (iii) and (iv) above) and an Opinion of Counsel, in each case stating that such consolidation, merger or transfer and such supplemental indenture comply with this provision and that all conditions precedent provided for herein relating to such transaction have been complied with; provided, however, that clauses (iii) and (iv) above do not apply if, in the good faith determination of the Board of Directors of the Company, whose determination shall be evidenced by a Board Resolution, the principal purpose of such transaction is to change the state of incorporation of the Company; and provided further that any such transaction shall not have as one of its purposes the evasion of the foregoing limitations. SECTION 5.02. Successor Substituted. Upon any consolidation or merger, --------------------- or any sale, conveyance, transfer, lease or other disposition of all or substantially all of the property and assets of the Company in accordance with Section 5.01 of this Indenture, the successor Person formed by such consolidation or into which the Company is merged or to which such sale, conveyance, transfer, lease or other disposition is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Indenture with the same effect as if such successor Person had been named as the Company herein; provided that the Company shall not be released from its obligation to pay the principal of, premium, if any, or interest on the Notes in the case of a lease of all or substantially all of its property and assets. ARTICLE SIX DEFAULT AND REMEDIES SECTION 6.01. Events of Default. An "Event of Default" shall occur with ----------------- ---------------- respect to the Notes if: 56 (a) the Company defaults in the payment of the principal of (or premium, if any, on) any Note when the same becomes due and payable at maturity, upon acceleration, redemption or otherwise; (b) the Company defaults in the payment of interest on any Note when the same becomes due and payable, and such default continues for a period of 30 days; (c) the Company defaults in the performance of, or breaches the provisions of, Article Five or fails to make or consummate an Offer to Purchase in accordance with Section 4.10 or 4.17; (d) the Company defaults in the performance of or breaches any covenant or agreement of the Company in this Indenture or under the Notes (other than a default specified in clause (a), (b) or (c) above), and such default or breach continues for a period of 30 consecutive days after written notice by the Trustee or the Holders of at least 25% in aggregate principal amount at maturity of the Notes then outstanding; (e) there occurs with respect to any issue or issues of Indebtedness of the Company or any Significant Subsidiary having an outstanding principal amount of $10 million or more in the aggregate for all such issues of all such Persons, whether such Indebtedness now exists or shall hereafter be created, (I) an event of default that has caused the holder thereof to declare such Indebtedness to be due and payable prior to its Stated Maturity and such Indebtedness has not been discharged in full or such acceleration has not been rescinded or annulled within 30 days of such acceleration and/or (II) the failure to make a principal payment at the final (but not any interim) fixed maturity and such defaulted payment shall not have been made, waived or extended within 30 days of such payment default; (f) any final judgment or order (not covered by insurance) for the payment of money in excess of $10 million in the aggregate for all such final judgments or orders against the Company or any Significant Subsidiary (treating any deductibles, self-insurance or retention as not so covered) shall be rendered against the Company or any Significant Subsidiary and shall not be paid or discharged, and there shall be any period of 30 consecutive days following entry of the final judgment or order that causes the aggregate amount for all such final judgments or orders outstanding and not paid or discharged against all such Persons to exceed $10 million during which a stay of enforcement of such final judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; (g) a court having jurisdiction in the premises enters a decree or order for (A) relief in respect of the Company or any Significant Subsidiary in an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, (B) appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar 57 official of the Company or any Significant Subsidiary or for all or substantially all of the property and assets of the Company or any Significant Subsidiary or (C) the winding up or liquidation of the affairs of the Company or any Significant Subsidiary and, in each case, such decree or order shall remain unstayed and in effect for a period of 60 consecutive days; or (h) the Company or any Significant Subsidiary (A) commences a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or consents to the entry of an order for relief in an involuntary case under any such law, (B) consents to the appointment of or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official of the Company or any Significant Subsidiary or for all or substantially all of the property and assets of the Company or any Significant Subsidiary or (C) effects any general assignment for the benefit of creditors. SECTION 6.02. Acceleration. If an Event of Default (other than an Event ------------ of Default specified in clause (g) or (h) of Section 6.01 that occurs with respect to the Company) occurs and is continuing under this Indenture, the Trustee or the Holders of at least 25% in aggregate principal amount of the Notes then outstanding, by written notice to the Company (and to the Trustee if such notice is given by the Holders), may, and the Trustee at the request of such Holders shall, declare the Accreted Value of, premium, if any, and accrued interest on the Notes to be immediately due and payable. Upon a declaration of acceleration, such Accreted Value, premium, if any, and accrued interest shall be immediately due and payable. In the event of a declaration of acceleration because an Event of Default set forth in clause (e) of Section 6.01 has occurred and is continuing, such declaration of acceleration shall be automatically rescinded and annulled if the event of default triggering such Event of Default pursuant to clause (e) shall be remedied or cured by the Company or the relevant Significant Subsidiary or waived by the holders of the relevant Indebtedness within 60 days after the declaration of acceleration with respect thereto. If an Event of Default specified in clause (g) or (h) of Section 6.01 occurs with respect to the Company, the Accreted Value of, premium, if any, and accrued interest on the Notes then outstanding shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Holder. The Holders of at least a majority in aggregate principal amount at maturity of the outstanding Notes, by written notice to the Company and to the Trustee, may waive all past defaults and rescind and annul a declaration of acceleration and its consequences if (i) all existing Events of Default, other than the nonpayment of the Accreted Value of, premium, if any, and interest on the Notes that have become due solely by such declaration of acceleration, have been cured or waived and (ii) the rescission would not conflict with any judgment or decree of a court of competent jurisdiction. 58 SECTION 6.03. Other Remedies. If an Event of Default occurs and is -------------- continuing, the Trustee may, and at the direction of the Holders of at least a majority in aggregate principal amount at maturity of the outstanding Notes shall, pursue any available remedy by proceeding at law or in equity to collect the payment of the Accreted Value of, premium, if any, or interest on the Notes or to enforce the performance of any provision of the Notes or this Indenture. The Trustee may maintain a proceeding even if it does not possess any of the Notes or does not produce any of them in the proceeding. SECTION 6.04. Waiver of Past Defaults. Subject to Sections 6.02, 6.07 ----------------------- and 9.02, the Holders of at least a majority in aggregate principal amount at maturity of the outstanding Notes, by notice to the Trustee, may waive an existing Default or Event of Default and its consequences, except a Default in the payment of the principal of, premium, if any, or interest on any Note as specified in clause (a) or (b) of Section 6.01 or in respect of a covenant or provision of this Indenture which cannot be modified or amended without the consent of the Holder of each outstanding Note affected. Upon any such waiver, such Default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other Default or Event of Default or impair any right consequent thereto. SECTION 6.05. Control by Majority. The Holders of at least a majority in ------------------- aggregate principal amount at maturity of the outstanding Notes may direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on the Trustee. However, the Trustee may refuse to follow any direction that conflicts with law or this Indenture, that may involve the Trustee in personal liability, or that the Trustee determines in good faith may be unduly prejudicial to the rights of Holders of Notes not joining in the giving of such direction and may take any other action it deems proper that is not inconsistent with any such direction received from Holders of Notes. SECTION 6.06. Limitation on Suits. A Holder may not pursue any remedy ------------------- with respect to this Indenture or the Notes unless: (i) the Holder gives the Trustee written notice of a continuing Event of Default; (ii) the Holders of at least 25% in aggregate principal amount at maturity of outstanding Notes make a written request to the Trustee to pursue the remedy; (iii) such Holder or Holders offer (and if requested provide) the Trustee indemnity satisfactory to the Trustee against any costs, liability or expense; 59 (iv) the Trustee does not comply with the request within 60 days after receipt of the request and the offer of indemnity; and (v) during such 60-day period, the Holders of a majority in aggregate principal amount at maturity of the outstanding Notes do not give the Trustee a direction that is inconsistent with the request. For purposes of Section 6.05 of this Indenture and this Section 6.06, the Trustee shall comply with TIA Section 316(a) in making any determination of whether the Holders of the required aggregate principal amount at maturity of outstanding Notes have concurred in any request or direction of the Trustee to pursue any remedy available to the Trustee or the Holders with respect to this Indenture or the Notes or otherwise under the law. A Holder may not use this Indenture to prejudice the rights of another Holder or to obtain a preference or priority over such other Holder. SECTION 6.07. Rights of Holders to Receive Payment. Notwithstanding any ------------------------------------ other provision of this Indenture, the right of any Holder of a Note to receive payment of the principal of, premium, if any, or interest on, such Note or to bring suit for the enforcement of any such payment, on or after the due date expressed in the Notes, shall not be impaired or affected without the consent of such Holder. SECTION 6.08. Collection Suit by Trustee. If an Event of Default in -------------------------- payment of principal, premium or interest specified in clause (a), (b) or (c) of Section 6.01 occurs and is continuing, the Trustee may recover judgment in its own name and as trustee of an express trust against the Company or any other obligor of the Notes for the whole amount of principal, premium, if any, and accrued interest remaining unpaid, together with interest on overdue principal, premium, if any, and, to the extent that payment of such interest is lawful, interest on overdue installments of interest, in each case at the rate specified in the Notes, and such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. SECTION 6.09. Trustee May File Proofs of Claim. The Trustee may file -------------------------------- such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 7.07) and the Holders allowed in any judicial proceedings relative to the Company (or any other obligor of the Notes), its creditors or its property and shall be entitled and empowered to collect and receive any monies, securities or other property payable or deliverable upon conversion or exchange of the Notes or upon any such claims and to distribute the same, and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is 60 hereby authorized by each Holder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due to it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 7.07. Nothing herein contained shall be deemed to empower the Trustee to authorize or consent to, or accept or adopt on behalf of any Holder, any plan of reorganization, arrangement, adjustment or composition affecting the Notes or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding. SECTION 6.10. Priorities. If the Trustee collects any money pursuant to ---------- this Article Six, it shall pay out the money in the following order: First: to the Trustee for all amounts due under Section 7.07; Second: to Holders for amounts then due and unpaid for the principal of, premium, if any, and interest on the Notes in respect of which or for the benefit of which such money has been collected, ratably, without preference or priority of any kind, according to the amounts due and payable on such Notes for principal, premium, if any, and interest, respectively; and Third: to the Company or any other obligors of the Notes, as their interests may appear, or as a court of competent jurisdiction may direct. The Trustee, upon prior written notice to the Company, may fix a record date and payment date for any payment to Holders pursuant to this Section 6.10. SECTION 6.11. Undertaking for Costs. In any suit for the enforcement of --------------------- any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as Trustee, a court may require any party litigant in such suit to file an undertaking to pay the costs of the suit, and the court may assess reasonable costs, including reasonable attorneys' fees, against any party litigant in the suit having due regard to the merits and good faith of the claims or defenses made by the party litigant. This Section 6.11 does not apply to a suit by the Trustee, a suit by a Holder pursuant to Section 6.07, or a suit by Holders of more than 10% in principal amount of the outstanding Notes. SECTION 6.12. Restoration of Rights and Remedies. If the Trustee or any ---------------------------------- Holder has instituted any proceeding to enforce any right or remedy under this Indenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then, and in every such case, subject to any determination in such proceeding, the Company, the Trustee and the Holders shall be restored severally and respectively to their former 61 positions hereunder and thereafter all rights and remedies of the Company, Trustee and the Holders shall continue as though no such proceeding had been instituted. SECTION 6.13. Rights and Remedies Cumulative. Except as otherwise ------------------------------ provided with respect to the replacement or payment of mutilated, destroyed, lost or wrongfully taken Notes in Section 2.09, no right or remedy herein conferred upon or reserved to the Trustee or to the Holders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. SECTION 6.14. Delay or Omission Not Waiver. No delay or omission of the ---------------------------- Trustee or of any Holder to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article Six or by law to the Trustee or to the Holders may be exercised from time to time, and as often as may be deemed expedient, by the Trustee or by the Holders, as the case may be. ARTICLE SEVEN TRUSTEE SECTION 7.01. General. The duties and responsibilities of the Trustee ------- shall be as provided by the TIA and as set forth herein. Notwithstanding the foregoing, no provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. Whether or not herein expressly so provided, every provision of this Indenture relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of this Article Seven. SECTION 7.02. Certain Rights of Trustee. Subject to TIA Sections 315(a) ------------------------- through (d): (i) the Trustee may rely, and shall be protected in acting or refraining from acting, upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document believed by it to be genuine and to have been signed or presented by the proper person. The Trustee need not investigate any fact or matter stated in any such document; 62 (ii) before the Trustee acts or refrains from acting, it may require an Officers' Certificate or an Opinion of Counsel, which shall conform to Section 10.04. The Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on such certificate or opinion; (iii) the Trustee may act through its attorneys and agents and shall not be responsible for the misconduct or negligence of any attorney or agent appointed with due care; (iv) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders, unless such Holders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities that might be incurred by it in compliance with such request or direction; (v) the Trustee shall not be liable for any action it takes or omits to take in good faith that it believes to be authorized or within its rights or powers or for any action it takes or omits to take in accordance with the written direction of the Holders of a majority in principal amount of the outstanding Notes relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under this Indenture; (vi) whenever in the administration of this Indenture the Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the Trustee (unless other evidence be herein specifically prescribed) may, in the absence of bad faith on its part, rely upon an Officers' Certificate; and (vii) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine the books, records and premises of the Company personally or by agent or attorney. SECTION 7.03. Individual Rights of Trustee. The Trustee, in its ---------------------------- individual or any other capacity, may become the owner or pledgee of Notes and may otherwise deal with the Company or its Affiliates with the same rights it would have if it were not the Trustee. Any Agent may do the same with like rights. However, the Trustee is subject to TIA Sections 310(b) and 311. SECTION 7.04. Trustee's Disclaimer. The Trustee (i) makes no -------------------- representation as to the validity or adequacy of this Indenture or the Notes, (ii) shall not be accountable for the Company's 63 use or application of the proceeds from the Notes and (iii) shall not be responsible for any statement in the Notes other than its certificate of authentication. SECTION 7.05. Notice of Default. If any Default or any Event of Default ----------------- occurs and is continuing and if such Default or Event of Default is known to a Responsible Officer of the Trustee, the Trustee shall mail to each Holder in the manner and to the extent provided in TIA Section 313(c) notice of the Default or Event of Default within 45 days after it occurs, unless such Default or Event of Default has been cured; provided, however, that, except in the case of a default in the payment of the principal of, premium, if any, or interest on any Note, the Trustee shall be protected in withholding such notice if and so long as the board of directors, the executive committee or a trust committee of directors and/or Responsible Officers of the Trustee in good faith determine that the withholding of such notice is in the interest of the Holders. SECTION 7.06. Reports by Trustee to Holders. Within 60 days after each ----------------------------- May 15, beginning with May 15, 1998, the Trustee shall mail to each Holder as provided in TIA Section 313(c) a brief report dated as of such May 15, if required by TIA Section 313(a). SECTION 7.07. Compensation and Indemnity. The Company shall pay to the -------------------------- Trustee such compensation as shall be agreed upon in writing for its services. The compensation of the Trustee shall not be limited by any law on compensation of a trustee of an express trust. The Company shall reimburse the Trustee upon request for all reasonable out-of-pocket expenses and advances incurred or made by the Trustee. Such expenses shall include the reasonable compensation and expenses of the Trustee's agents and counsel. The Company shall indemnify the Trustee against any and all losses, liabilities, obligations, damages, penalties, judgments, actions, suits, proceedings, reasonable costs and expenses (including reasonable fees and disbursements of counsel) of any kind whatsoever which may be incurred by the Trustee in connection with any investigative, administrative or judicial proceeding (whether or not such indemnified party is designated a party to such proceeding) arising out of or in connection with the acceptance or administration of its duties under this Indenture; provided, however, that the Company need not reimburse any expense or indemnify against any loss, obligation, damage, penalty, judgment, action, suit, proceeding, reasonable cost or expense (including reasonable fees and disbursements of counsel) of any kind whatsoever which may be incurred by the Trustee in connection with any investigative, administrative or judicial proceeding (whether or not such indemnified party is designated a party to such proceeding) in which it is determined that the Trustee acted with negligence, bad faith or willful misconduct. The Trustee shall notify the Company promptly of any claim for which it may seek indemnity. Failure by the Trustee to so notify the Company shall not relieve the Company of its obligations hereunder, unless the Company is materially prejudiced thereby. The Company shall defend the claim and the Trustee shall cooperate in the defense. Unless otherwise set forth herein, the Trustee may have separate counsel and the 64 Company shall pay the reasonable fees and expenses of such counsel. The Company need not pay for any settlement made without its consent, which consent shall not be unreasonably withheld. To secure the Company's payment obligations in this Section 7.07, the Trustee shall have a lien prior to the Notes on all money or property held or collected by the Trustee, in its capacity as Trustee, except money or property held by the Trustee in trust to pay principal of, premium, if any, and interest on particular Notes. If the Trustee incurs expenses or renders services after the occurrence of an Event of Default specified in clause (g) or (h) of Section 6.01, the expenses and the compensation for the services will be intended to constitute expenses of administration under Title 11 of the United States Bankruptcy Code or any applicable federal or state law for the relief of debtors. SECTION 7.08. Replacement of Trustee. A resignation or removal of the ---------------------- Trustee and appointment of a successor Trustee shall become effective only upon the successor Trustee's acceptance of appointment as provided in this Section 7.08. The Trustee may resign at any time by so notifying the Company in writing at least 30 days prior to the date of the proposed resignation. The Holders of a majority in principal amount of the outstanding Notes may remove the Trustee by so notifying the Trustee in writing and may appoint a successor Trustee with the consent of the Company. The Company may remove the Trustee if: (i) the Trustee is no longer eligible under Section 7.10; (ii) the Trustee is adjudged a bankrupt or an insolvent; (iii) a receiver or other public officer takes charge of the Trustee or its property; or (iv) the Trustee becomes incapable of acting. If the Trustee resigns or is removed, or if a vacancy exists in the office of Trustee for any reason, the Company shall promptly appoint a successor Trustee. Within one year after the successor Trustee takes office, the Holders of a majority in principal amount of the outstanding Notes may appoint a successor Trustee to replace the successor Trustee appointed by the Company. If the successor Trustee does not deliver its written acceptance required by the next succeeding paragraph of this Section 7.08 within 30 days after the retiring Trustee resigns or is removed, the retiring Trustee, the Company or the Holders of a majority in principal amount of the outstanding Notes may petition any court of competent jurisdiction for the appointment of a successor Trustee. A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Company. Immediately after the delivery of such written acceptance, subject to the lien provided in Section 7.07, (i) the retiring Trustee shall transfer all property held by it as Trustee to the successor Trustee, (ii) the resignation or removal of the retiring Trustee shall become effective and (iii) the successor Trustee shall have all the rights, powers and duties of the Trustee under this Indenture. A successor Trustee shall mail notice of its succession to each Holder. 65 If the Trustee is no longer eligible under Section 7.10, any Holder who satisfies the requirements of TIA Section 310(b) may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. The Company shall give notice of any resignation and any removal of the Trustee and each appointment of a successor Trustee to all Holders. Each notice shall include the name of the successor Trustee and the address of its Corporate Trust Office. Notwithstanding replacement of the Trustee pursuant to this Section 7.08, the Company's obligation under Section 7.07 shall continue for the benefit of the retiring Trustee. SECTION 7.09. Successor Trustee by Merger, Etc. If the Trustee -------------------------------- consolidates with, merges or converts into, or transfers all or substantially all of its corporate trust business to, another corporation or national banking association, the resulting, surviving or transferee corporation or national banking association without any further act shall be the successor Trustee with the same effect as if the successor Trustee had been named as the Trustee herein. SECTION 7.10. Eligibility. This Indenture shall always have a Trustee ----------- who satisfies the requirements of TIA Section 310(a)(1). The Trustee shall have a combined capital and surplus of at least $25 million as set forth in its most recent published annual report of condition. SECTION 7.11. Money Held in Trust. The Trustee shall not be liable for ------------------- interest on any money received by it except as the Trustee may agree with the Company. Money held in trust by the Trustee need not be segregated from other funds except to the extent required by law and except for money held in trust under Article Eight of this Indenture. SECTION 7.12. Withholding Taxes. The Trustee, as agent for the Company, ----------------- shall exclude and withhold from each payment of principal and interest and other amounts due hereunder or under the Notes any and all withholding taxes applicable thereto as required by law. The Trustee agrees to act as such withholding agent and, in connection therewith, whenever any present or future taxes or similar charges are required to be withheld with respect to any amounts payable in respect of the Notes, to withhold such amounts and timely pay the same to the appropriate authority in the name of and on behalf of the Holders of the Notes, that it will file any necessary withholding tax returns or statements when due, and that, as promptly as possible after the payment thereof, it will deliver to each Holder of a Note appropriate documentation showing the payment thereof, together with such additional documentary evidence as such Holders may reasonably request from time to time. 66 ARTICLE EIGHT DISCHARGE OF INDENTURE SECTION 8.01. Termination of Company's Obligations. Except as otherwise ------------------------------------ provided in this Section 8.01, the Company may terminate its obligations under the Notes and this Indenture if: (i) all Notes previously authenticated and delivered (other than destroyed, lost or stolen Notes that have been replaced or Notes that are paid pursuant to Section 4.01 or Notes for whose payment money or securities have theretofore been held in trust and thereafter repaid to the Company, as provided in Section 8.05) have been delivered to the Trustee for cancellation and the Company has paid all sums payable by it hereunder; or (ii) (A) the Notes mature within one year or all of them are to be called for redemption within one year under arrangements satisfactory to the Trustee for giving the notice of redemption, (B) the Company irrevocably deposits in trust with the Trustee during such one-year period, under the terms of an irrevocable trust agreement in form and substance satisfactory to the Trustee, as trust funds solely for the benefit of the Holders for that purpose, money or U.S. Government Obligations sufficient (in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee), without consideration of any reinvestment of any interest thereon, to pay principal, premium, if, any, and interest on the Notes to maturity or redemption, as the case may be, and to pay all other sums payable by it hereunder, (C) no Default or Event of Default with respect to the Notes shall have occurred and be continuing on the date of such deposit, (D) such deposit will not result in a breach or violation of, or constitute a default under, this Indenture or any other agreement or instrument to which the Company is a party or by which it is bound and (E) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, in each case stating that all conditions precedent provided for herein relating to the satisfaction and discharge of this Indenture have been complied with. With respect to the foregoing clause (i), the Company's obligations under Section 7.07 shall survive. With respect to the foregoing clause (ii), the Company's obligations in Sections 2.02, 2.03, 2.04, 2.05, 2.06, 2.07, 2.08, 2.09, 2.14, 4.01, 4.02, 7.07, 7.08, 8.04, 8.05 and 8.06 shall survive until the Notes are no longer outstanding. Thereafter, only the Company's obligations in Sections 7.07, 8.05 and 8.06 shall survive. After any such irrevocable deposit, the Trustee upon request shall acknowledge in writing the discharge of the Company's obligations under the Notes and this Indenture except for those surviving obligations specified above. SECTION 8.02. Defeasance and Discharge of Indenture. The Company will be ------------------------------------- deemed to have paid and will be discharged from any and all obligations in respect of the Notes on the 123rd day after the date of the deposit referred to in clause (A) of this Section 8.02, and the provisions of 67 this Indenture will no longer be in effect with respect to the Notes, and the Trustee, at the expense of the Company, shall execute proper instruments acknowledging the same, except as to (i) rights of registration of transfer and exchange, (ii) substitution of apparently mutilated, defaced, destroyed, lost or stolen Notes, (iii) rights of Holders to receive payments of principal thereof and interest thereon, (iv) the Company's obligations under Section 4.02, (v) the rights, obligations and immunities of the Trustee hereunder and (vi) the rights of the Holders as beneficiaries of this Indenture with respect to the property so deposited with the Trustee payable to all or any of them; provided that the following conditions shall have been satisfied: (A) with reference to this Section 8.02, the Company has irrevocably deposited or caused to be irrevocably deposited with the Trustee (or another trustee satisfying the requirements of Section 7.10) and conveyed all right, title and interest for the benefit of the Holders, under the terms of an irrevocable trust agreement in form and substance satisfactory to the Trustee as trust funds in trust, specifically pledged to the Trustee for the benefit of the Holders as security for payment of the principal of, premium, if any, and interest, if any, on the Notes, and dedicated solely to, the benefit of the Holders, in and to (1) money in an amount, (2) U.S. Government Obligations that, through the payment of interest, premium, if any, and principal in respect thereof in accordance with their terms, will provide, not later than one day before the due date of any payment referred to in this clause (A), money in an amount or (3) a combination thereof in an amount sufficient, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay and discharge, without consideration of the reinvestment of such interest and after payment of all federal, state and local taxes or other charges and assessments in respect thereof payable by the Trustee, the principal of, premium, if any, and accrued interest on the outstanding Notes at the Stated Maturity of such principal or interest; provided that the Trustee shall have been irrevocably instructed to apply such money or the proceeds of such U.S. Government Obligations to the payment of such principal, premium, if any, and interest with respect to the Notes; (B) such deposit will not result in a breach or violation of, or constitute a default under, this Indenture or any other agreement or instrument to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries is bound; (C) immediately after giving effect to such deposit on a pro forma basis, no Default, Event of Default or event that after the giving of notice or the lapse of time or both would become an Event of Default, shall have occurred and be continuing on the date of such deposit or during the period ending on the 123rd day after such date of deposit; (D) the Company shall have delivered to the Trustee (1) either (x) a ruling directed to the Trustee received from the Internal Revenue Service to the effect that the Holders will not recognize income, gain or loss for federal income tax purposes as a result 68 of the Company's exercise of its option under this Section 8.02 and will be subject to federal income tax on the same amount and in the same manner and at the same times as would have been the case if such option had not been exercised or (y) an Opinion of Counsel to the same effect as the ruling described in clause (x) above that is based on and accompanied by a ruling to that effect published by the Internal Revenue Service, unless there has been a change in the applicable federal income tax law since the Closing Date such that a ruling from the Internal Revenue Service is no longer required and (2) an Opinion of Counsel to the effect that (x) the creation of the defeasance trust does not violate the Investment Company Act of 1940 and (y) after the passage of 123 days following the deposit (except, with respect to any trust funds for the account of any Holder who may be deemed to be an "insider" for purposes of the United States Bankruptcy Code, after one year following the deposit), the trust funds will not be subject to the effect of Section 547 of the United States Bankruptcy Code or Section 15 of the New York Debtor and Creditor Law in a case commenced by or against the Company under either such statute, and either (I) the trust funds will no longer remain the property of the Company (and therefore will not be subject to the effect of any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally) or (II) if a court were to rule under any such law in any case or proceeding that the trust funds remained property of the Company, (a) assuming such trust funds remained in the possession of the Trustee prior to such court ruling to the extent not paid to the Holders, the Trustee will hold, for the benefit of the Holders, a valid and perfected security interest in such trust funds that is not avoidable in bankruptcy or otherwise except for the effect of Section 552(b) of the United States Bankruptcy Code on interest on the trust funds accruing after the commencement of a case under such statute and (b) the Holders will be entitled to receive adequate protection of their interests in such trust funds if such trust funds are used in such case or proceeding; (E) if the Notes are then listed on a national securities exchange, the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that such deposit, defeasance and discharge will not cause the Notes to be delisted; and (F) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, in each case stating that all conditions precedent provided for herein relating to the defeasance contemplated by this Section 8.02 have been complied with. Notwithstanding the foregoing, prior to the end of the 123-day (or one year) period referred to in clause (D)(2)(y) of this Section 8.02, none of the Company's obligations under this Indenture shall be discharged. Subsequent to the end of such 123-day (or one year) period with respect to this Section 8.02, the Company's obligations in Sections 2.02, 2.03, 2.04, 2.05, 2.06, 2.07, 2.08, 2.09, 2.14, 4.01, 4.02, 7.07, 7.08, 8.05 and 8.06 shall survive until the Notes are no longer outstanding. Thereafter, only the Company's obligations in Sections 7.07, 8.05 and 8.06 shall survive. If and when a ruling from the Internal Revenue Service or an Opinion of Counsel referred to in clause 69 (D)(1) of this Section 8.02 is able to be provided specifically without regard to, and not in reliance upon, the continuance of the Company's obligations under Section 4.01, then the Company's obligations under such Section 4.01 shall cease upon delivery to the Trustee of such ruling or Opinion of Counsel and compliance with the other conditions precedent provided for herein relating to the defeasance contemplated by this Section 8.02. After any such irrevocable deposit, the Trustee upon request shall acknowledge in writing the discharge of the Company's obligations under the Notes and this Indenture except for those surviving obligations in the immediately preceding paragraph. SECTION 8.03. Defeasance of Certain Obligations. The Company may omit to --------------------------------- comply with any term, provision or condition set forth in clauses (iii) and (iv) of Section 5.01 and Sections 4.03 through 4.16 and Section 4.19, and clause (c) of Section 6.01 with respect to clauses (iii) and (iv) of Section 5.01, clause (d) of Section 6.01 with respect to Sections 4.03 through 4.16 and Section 4.19 and clauses (e) and (f) of Section 6.01 shall be deemed not to be Events of Default, in each case with respect to the outstanding Notes if: (i) with reference to this Section 8.03, the Company has irrevocably deposited or caused to be irrevocably deposited with the Trustee (or another trustee satisfying the requirements of Section 7.10) and conveyed all right, title and interest to the Trustee for the benefit of the Holders, under the terms of an irrevocable trust agreement in form and substance satisfactory to the Trustee as trust funds in trust, specifically pledged to the Trustee for the benefit of the Holders as security for payment of the principal of, premium, if any, and interest, if any, on the Notes, and dedicated solely to, the benefit of the Holders, in and to (A) money in an amount, (B) U.S. Government Obligations that, through the payment of interest and principal in respect thereof in accordance with their terms, will provide, not later than one day before the due date of any payment referred to in this clause (i), money in an amount or (C) a combination thereof in an amount sufficient, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay and discharge, without consideration of the reinvestment of such interest and after payment of all federal, state and local taxes or other charges and assessments in respect thereof payable by the Trustee, the principal of, premium, if any, and interest on the outstanding Notes on the Stated Maturity of such principal or interest; provided that the Trustee shall have been irrevocably instructed to apply such money or the proceeds of such U.S. Government Obligations to the payment of such principal, premium, if any, and interest with respect to the Notes; (ii) such deposit will not result in a breach or violation of, or constitute a default under, this Indenture or any other agreement or instrument to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries is bound; 70 (iii) immediately after giving effect to such deposit on a pro forma basis, no Default, Event of Default or event that after the giving of notice or the lapse of time or both would become an Event of Default, shall have occurred and be continuing on the date of such deposit or during the period ending on the 123rd day after such date of deposit; (iv) the Company has delivered to the Trustee an Opinion of Counsel to the effect that (A) the creation of the defeasance trust does not violate the Investment Company Act of 1940, (B) the Trustee, for the benefit of the Holders, has a valid first-priority security interest in the trust funds, (C) the Holders will not recognize income, gain or loss for federal income tax purposes as a result of such deposit and defeasance of certain obligations and will be subject to federal income tax on the same amount and in the same manner and at the same times as would have been the case if such deposit and defeasance had not occurred and (D) after the passage of 123 days following the deposit (except, with respect to any trust funds for the account of any Holder who may be deemed to be an "insider" for purposes of the United States Bankruptcy Code, after one year following the deposit), the trust funds will not be subject to the effect of Section 547 of the United States Bankruptcy Code or Section 15 of the New York Debtor and Creditor Law in a case commenced by or against the Company under either such statute, and either (1) the trust funds will no longer remain the property of the Company (and therefore will not be subject to the effect of any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally) or (2) if a court were to rule under any such law in any case or proceeding that the trust funds remained property of the Company, (x) assuming such trust funds remained in the possession of the Trustee prior to such court ruling to the extent not paid to the Holders, the Trustee will hold, for the benefit of the Holders, a valid and perfected security interest in such trust funds that is not avoidable in bankruptcy or otherwise (except for the effect of Section 552(b) of the United States Bankruptcy Code on interest on the trust funds accruing after the commencement of a case under such statute) and (y) the Holders will be entitled to receive adequate protection of their interests in such trust funds if such trust funds are used in such case or proceeding; (v) if the Notes are then listed on a national securities exchange, the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that such deposit, defeasance and discharge will not cause the Notes to be delisted; and (vi) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, in each case stating that all conditions precedent provided for herein relating to the defeasance contemplated by this Section 8.03 have been complied with. SECTION 8.04. Application of Trust Money. Subject to Section 8.06, the -------------------------- Trustee or Paying Agent shall hold in trust money or U.S. Government Obligations deposited with it pursuant to Section 8.01, 8.02 or 8.03, as the case may be, and shall apply the deposited money and the money from U.S. Government Obligations in accordance with the Notes and this Indenture to the payment 71 of principal of, premium, if any, and interest on the Notes; but such money need not be segregated from other funds except to the extent required by law. SECTION 8.05. Repayment to Company. Subject to Sections 7.07, 8.01, 8.02 -------------------- and 8.03, the Trustee and the Paying Agent shall promptly pay to the Company upon request set forth in an Officers' Certificate any excess money held by them at any time and thereupon shall be relieved from all liability with respect to such money. The Trustee and the Paying Agent shall pay to the Company upon request any money held by them for the payment of principal, premium, if any, or interest that remains unclaimed for two years. After payment to the Company, Holders entitled to such money must look to the Company for payment as general creditors unless an applicable law designates another Person, and all liability of the Trustee and such Paying Agent with respect to such money shall cease. SECTION 8.06. Reinstatement. If the Trustee or Paying Agent is unable to ------------- apply any money or U.S. Government Obligations in accordance with Section 8.01, 8.02 or 8.03, as the case may be, by reason of any legal proceeding or by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, the Company's obligations under this Indenture and the Notes shall be revived and reinstated as though no deposit had occurred pursuant to Section 8.01, 8.02 or 8.03, as the case may be, until such time as the Trustee or Paying Agent is permitted to apply all such money or U.S. Government Obligations in accordance with Section 8.01, 8.02 or 8.03, as the case may be; provided that, if the Company has made any payment of principal of, premium, if any, or interest on any Notes because of the reinstatement of its obligations, the Company shall be subrogated to the rights of the Holders of such Notes to receive such payment from the money or U.S. Government Obligations held by the Trustee or Paying Agent. ARTICLE NINE AMENDMENTS, SUPPLEMENTS AND WAIVERS SECTION 9.01. Without Consent of Holders. The Company, when authorized -------------------------- by a resolution of its Board of Directors (as evidenced by a Board Resolution delivered to the Trustee), and the Trustee may amend or supplement this Indenture or the Notes without notice to or the consent of any Holder: (1) to cure any ambiguity, defect or inconsistency in this Indenture; provided that such amendments or supplements shall not, in the good faith opinion of the Board of Directors as evidenced by a Board Resolution, adversely affect the interests of the Holders in any material respect; (2) to comply with Article Five; 72 (3) to comply with any requirements of the Commission in connection with the qualification of this Indenture under the TIA; (4) to evidence and provide for the acceptance of appointment hereunder by a successor Trustee; or (5) to make any change that, in the good faith opinion of the Board of Directors as evidenced by a Board Resolution, does not materially and adversely affect the rights of any Holder. SECTION 9.02. With Consent of Holders. Subject to Sections 6.04 and 6.07 ----------------------- and without prior notice to the Holders, the Company, when authorized by its Board of Directors (as evidenced by a Board Resolution delivered to the Trustee), and the Trustee may amend this Indenture and the Notes with the written consent of the Holders of a majority in principal amount at maturity of the Notes then outstanding, and the Holders of a majority in principal amount at maturity of the Notes then outstanding by written notice to the Trustee may waive future compliance by the Company with any provision of this Indenture and the Notes. Notwithstanding the provisions of this Section 9.02, without the consent of each Holder affected, an amendment or waiver, including a waiver pursuant to Section 6.04, may not: (i) change the Stated Maturity of the principal of, or any installment of interest on, any Note; (ii) reduce the Accreted Value or principal amount of any Note, or the rate of interest thereon, or any premium payable upon the redemption thereof; (iii) change any place of payment where, or the currency in which, any Note or any premium or the interest thereon is payable; (iv) impair the right to institute suit for the enforcement of any payment on or after the Stated Maturity (or, in the case of redemption, on or after the Redemption Date) of any Note; (v) reduce the percentage in principal amount at maturity of outstanding Notes the consent of whose Holders is required for any such supplemental indenture, for any waiver of compliance with certain provisions of this Indenture or certain Defaults and their consequences provided for in this Indenture; (vi) waive a default in the payment of principal of, premium, if any, or interest on, any Note; or 73 (vii) modify any of the provisions of this Section 9.02, except to increase any such percentage or to provide that certain other provisions of this Indenture cannot be modified or waived without the consent of the Holder of each outstanding Note affected thereby. It shall not be necessary for the consent of the Holders under this Section 9.02 to approve the particular form of any proposed amendment, supplement or waiver, but it shall be sufficient if such consent approves the substance thereof. After an amendment, supplement or waiver under this Section 9.02 becomes effective, the Company shall mail to the Holders affected thereby a notice briefly describing the amendment, supplement or waiver. The Company will mail supplemental indentures to Holders upon request. Any failure of the Company to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such supplemental indenture or waiver. SECTION 9.03. Revocation and Effect of Consent. Until an amendment or -------------------------------- waiver becomes effective, a consent to it by a Holder is a continuing consent by the Holder and every subsequent Holder of a Note or portion of a Note that evidences the same debt as the Note of the consenting Holder, even if notation of the consent is not made on any Note. However, any such Holder or subsequent Holder may revoke the consent as to its Note or portion of its Note. Such revocation shall be effective only if the Trustee receives the notice of revocation before the time the amendment, supplement or waiver becomes effective. An amendment, supplement or waiver shall become effective on receipt by the Trustee of written consents from the Holders of the requisite percentage in principal amount of the outstanding Notes. The Company may, but shall not be obligated to, fix a record date for the purpose of determining the Holders entitled to consent to any amendment, supplement or waiver. If a record date is fixed, then, notwithstanding the last two sentences of the immediately preceding paragraph, those persons who were Holders at such record date (or their duly designated proxies) and only those persons shall be entitled to consent to such amendment, supplement or waiver or to revoke any consent previously given, whether or not such persons continue to be Holders after such record date. No such consent shall be valid or effective for more than 90 days after such record date. After an amendment, supplement or waiver becomes effective, it shall bind every Holder unless it is of the type described in any of clauses (i) through (v) of the second paragraph of Section 9.02. In case of an amendment or waiver of the type described in clauses (i) through (v) of the second paragraph of Section 9.02, the amendment or waiver shall bind each Holder who has consented to it and every subsequent Holder of a Note that evidences the same indebtedness as the Note of the consenting Holder. 74 SECTION 9.04. Notation on or Exchange of Notes. If an amendment, -------------------------------- supplement or waiver changes the terms of a Note, the Trustee may require the Holder to deliver it to the Trustee. At the Company's expense, the Trustee may place an appropriate notation on the Note about the changed terms and return it to the Holder and the Trustee may place an appropriate notation on any Note thereafter authenticated. Alternatively, if the Company or the Trustee so determines, the Company in exchange for the Note shall issue and the Trustee shall authenticate a new Note that reflects the changed terms. Failure to make the appropriate notation, or issue a new Note, shall not affect the validity and effect of such amendment, supplement or waiver. SECTION 9.05. Trustee to Sign Amendments, Etc. The Trustee shall be ------------------------------- entitled to receive, and shall be fully protected in relying upon, an Opinion of Counsel stating that the execution of any amendment, supplement or waiver authorized pursuant to this Article Nine is authorized or permitted by this Indenture and that it will be valid and binding upon the Company. Subject to the preceding sentence, the Trustee shall sign such amendment, supplement or waiver if the same does not adversely affect the rights, duties, liabilities or immunities of the Trustee. The Trustee may, but shall not be obligated to, execute any such amendment, supplement or waiver that affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. SECTION 9.06. Conformity with Trust Indenture Act. Every supplemental ----------------------------------- indenture executed pursuant to this Article Nine shall conform to the requirements of the TIA as then in effect. ARTICLE TEN MISCELLANEOUS SECTION 10.01. Trust Indenture Act of 1939. Prior to the effectiveness --------------------------- of the Registration Statement, this Indenture shall incorporate and be governed by the provisions of the TIA that are required to be part of and to govern indentures qualified under the TIA. After the effectiveness of the Registration Statement, this Indenture shall be subject to the provisions of the TIA that are required to be a part of this Indenture and shall, to the extent applicable, be governed by such provisions. SECTION 10.02. Notices. Any notice or communication shall be ------- sufficiently given if in writing and delivered in person, mailed by first-class mail or sent by telecopier transmission addressed as follows: if to the Company: ----------------- DIVA Systems Corporation 333 Ravenswood Drive, Building 205 Menlo Park, California 94025 Telecopier No.: (650) 859-6959 75 Attention: Treasurer with a copy to: Wilson Sonsini Goodrich & Rosati, P.C. 650 Page Mill Road Palo Alto, California 94304 Attention: Meredith Jackson if to the Trustee: ----------------- The Bank of New York 101 Barclay Street New York, NY 10286 Telecopier No.: (212) 815-5915 Attention: Corporate Trust Trustee Administration The Company or the Trustee by notice to the other may designate additional or different addresses for subsequent notices or communications. Any notice or communication mailed to a Holder shall be mailed to it at its address as it appears on the Security Register by first-class mail and shall be sufficiently given to him if so mailed within the time prescribed. Copies of any such communication or notice to a Holder shall also be mailed to the Trustee and each Agent at the same time. Failure to transmit a notice or communication to a Holder as provided herein or any defect in any such notice shall not affect its sufficiency with respect to other Holders. Except for a notice to the Trustee, which is deemed given only when received, and except as otherwise provided in this Indenture, if a notice or communication is mailed in the manner provided in this Section 10.02, it is duly given, whether or not the addressee receives it. Where this Indenture provides for notice in any manner, such notice may be waived in writing by the Person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. Waivers of notice by Holders shall be filed with the Trustee, but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such waiver. In case by reason of the suspension of regular mail service or by reason of any other cause it shall be impracticable to give such notice by mail, then such notification as shall be made with the approval of the Trustee shall constitute a sufficient notification for every purpose hereunder. 76 SECTION 10.03. Certificate and Opinion as to Conditions Precedent. Upon -------------------------------------------------- any request or application by the Company to the Trustee to take any action under this Indenture, the Company shall furnish to the Trustee: (i) an Officers' Certificate stating that, in the opinion of the signers, all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with; and (ii) an Opinion of Counsel stating that, in the opinion of such Counsel, all such conditions precedent have been complied with. SECTION 10.04. Statements Required in Certificate or Opinion. Each --------------------------------------------- certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture shall include: (i) a statement that each person signing such certificate or opinion has read such covenant or condition and the definitions herein relating thereto; (ii) a brief statement as to the nature and scope of the examination or investigation upon which the statement or opinion contained in such certificate or opinion is based; (iii) a statement that, in the opinion of each such person, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (iv) a statement as to whether or not, in the opinion of each such person, such condition or covenant has been complied with; provided, however, that, with respect to matters of fact, an Opinion of Counsel may rely on an Officers' Certificate or certificates of public officials. SECTION 10.05. Rules by Trustee, Paying Agent or Registrar. The Trustee ------------------------------------------- may make reasonable rules for action by or at a meeting of Holders. The Paying Agent or Registrar may make reasonable rules for its functions. SECTION 10.06. Payment Date Other Than a Business Day. If an Interest -------------------------------------- Payment Date, Redemption Date, Payment Date, Stated Maturity or date of maturity of any Note shall not be a Business Day, then payment of principal of, premium, if any, or interest on such Note, as the case may be, need not be made on such date, but may be made on the next succeeding Business Day with the same force and effect as if made on the Interest Payment Date, Payment Date or Redemption Date, or at the Stated Maturity or date of maturity of such Note; provided that no interest shall accrue 77 for the period from and after such Interest Payment Date, Payment Date, Redemption Date, Stated Maturity or date of maturity, as the case may be. SECTION 10.07. Governing Law. The laws of the State of New York shall ------------- govern this Indenture and the Notes. The Trustee, the Company and the Holders agree to submit to the jurisdiction of the courts of the State of New York in any action or proceeding arising out of or relating to this Indenture or the Notes. SECTION 10.08. No Adverse Interpretation of Other Agreements. This --------------------------------------------- Indenture may not be used to interpret another indenture, loan or debt agreement of the Company or any Subsidiary of the Company. Any such indenture, loan or debt agreement may not be used to interpret this Indenture. SECTION 10.09. No Recourse Against Others. No recourse for the payment -------------------------- of the principal of, premium, if any, or interest on any of the Notes, or for any claim based thereon or otherwise in respect thereof, and no recourse under or upon any obligation, covenant or agreement of the Company contained in this Indenture, or in any of the Notes, or because of the creation of any Indebtedness represented thereby, shall be had against any incorporator or against any past, present or future partner, shareholder, other equityholder, officer, director, employee or controlling person, as such, of the Company or of any successor Person, either directly or through the Company or any successor Person, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise; it being expressly understood that all such liability is hereby expressly waived and released as a condition of, and as a consideration for, the execution of this Indenture and the issue of the Notes. SECTION 10.10. Successors. All agreements of the Company in this ---------- Indenture and the Notes shall bind its successors. All agreements of the Trustee in this Indenture shall bind its successor. SECTION 10.11. Duplicate Originals. The parties may sign any number of ------------------- copies of this Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. SECTION 10.12. Separability. In case any provision in this Indenture or ------------ in the Notes shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 10.13. Table of Contents, Headings, Etc. The Table of Contents, -------------------------------- Cross-Reference Table and headings of the Articles and Sections of this Indenture have been inserted for convenience of reference only, are not to be considered a part hereof and shall in no way modify or restrict any of the terms and provisions hereof. 78 SECTION 10.14. Registration Rights. The Holders of the Notes will be ------------------- entitled to the benefits, and subject to the restrictions, of the Registration Rights Agreement, and each Holder of Notes shall be deemed to be a "Holder" for purposes of and as defined in the Registration Rights Agreement. 79 SIGNATURES IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed, all as of the date first written above. DIVA SYSTEMS CORPORATION By: /s/ Alan H. Bushell ------------------------------ Name: Alan H. Bushell Title: President, Chief Operating Officer, Chief Financial Officer and Secretary THE BANK OF NEW YORK By: /s/ Vivian Georges --------------------------------- Name: Vivian Georges Title: Assistant Vice President EXHIBIT A --------- [FACE OF NOTE] DIVA SYSTEMS CORPORATION 12_% Senior Discount Note Due 2008 [CUSIP] [CINS] __________ No. $_________ This Note is being issued with original issue discount for federal income tax purposes. Information including the issue price, the amount of original issue discount, the issue date and the yield to maturity will, beginning no later than 10 days after the issue date, be made available to holders upon request to Emily Tashman, Treasurer, DIVA Systems Corporation, at (650) 859-6400 or 333 Ravenswood Avenue, Building 205, Menlo Park, California 94025, in accordance with Section 1273 and 1275 of the Internal Revenue Code. DIVA SYSTEMS CORPORATION, a Delaware corporation (the "Company", which term includes any successor under the Indenture hereinafter referred to), for value received, promises to pay to ____________, or its registered assigns, the principal sum of __________ ($_________) on March 1, 2008. Interest Payment Dates: March 1 and September 1, commencing September 1, 2003. Regular Record Dates: February 15 and August 15. Reference is hereby made to the further provisions of this Note set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. A-2 IN WITNESS WHEREOF, the Company has caused this Note to be signed manually or by facsimile by its duly authorized officers. DIVA SYSTEMS CORPORATION By: ----------------------------------- Name: Title: By: ----------------------------------- Name: Title: (Trustee's Certificate of Authentication) This is one of the 12_% Senior Discount Notes due 2008 described in the within-mentioned Indenture. Date: THE BANK OF NEW YORK, as Trustee By:------------------------------- Authorized Signatory A-3 [REVERSE SIDE OF NOTE] DIVA SYSTEMS CORPORATION 12_% Senior Discount Note due 2008 1. Principal and Interest. ---------------------- The Company will pay the principal of this Note on March 1, 2008. The Company promises to pay interest on the principal amount of this Note on each Interest Payment Date, as set forth below, at the rate per annum shown above. Interest will be payable semi-annually (to the holders of record of the Notes at the close of business on the February 15 or August 15 immediately preceding the Interest Payment Date) on each Interest Payment Date, commencing September 1, 2003; provided that no interest shall accrue on the principal amount of this Note prior to March 1, 2003 and no interest shall be paid on this Note prior to September 1, 2003, except as provided in the next paragraph. If an exchange offer (the "Exchange Offer") registered under the Securities Act is not consummated, and a shelf registration statement (the "Shelf Registration Statement") under the Securities Act with respect to resales of the Notes is not declared effective by the Commission, on or before February 19, 1999 in accordance with the terms of the Registration Rights Agreement dated February 19, 1998 among the Company and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Chase Securities Inc. and Morgan Stanley & Co. Incorporated, interest (in addition to the accrual of original discount during the period ending March 1, 2003 and in addition to the interest otherwise due on the Notes after such date) will accrue, at an annual rate of 0.5% of the Accreted Value on the preceding Semi-Annual Accrual Date, from February 19, 1999, payable in cash semiannually, in arrears, on each Interest Payment Date, commencing September 1, 1999 until the Exchange Offer is consummated or the Shelf Registration Statement is declared effective. The Holder of this Note is entitled to the benefits of such Registration Rights Agreement. From and after March 1, 2003, interest on the Notes will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from March 1, 2003; provided that, if there is no existing default in the payment of interest and this Note is authenticated between a Regular Record Date referred to on the face hereof and the next succeeding Interest Payment Date, interest shall accrue from such Interest Payment Date. Interest will be computed on the basis of a 360-day year of twelve 30-day months. The Company shall pay interest on overdue principal and premium, if any, and interest on overdue installments of interest, to the extent lawful, at a rate per annum that is 2% in excess of the rate otherwise payable. 2. Method of Payment. ----------------- The Company will pay principal as provided above and interest (except defaulted interest) on the principal amount of the Notes as provided above on each March 1 and September 1, commencing September 1, 2003, to the persons who are Holders (as reflected in the Security Register at the close of business on such February 15 and August 15 immediately preceding the Interest Payment Date), in each case, even if the Note is cancelled on registration of transfer or registration of exchange after such record date; provided that, with respect to the payment of principal, the Company will make payment to the Holder that surrenders this Note to a Paying Agent on or after March 1, 2008. The Company will pay principal, premium, if any, and as provided above, interest in money of the United States that at the time of payment is legal tender for payment of public and private debts. However, the Company may pay principal, premium, if any, and interest by its check payable in such money. It may mail an interest check to a Holder's registered address (as reflected in the Security Register). If a payment date is a date other than a Business Day at a place of payment, payment may be made at that place on the next succeeding day that is a Business Day and no interest shall accrue for the intervening period. 3. Paying Agent and Registrar. -------------------------- Initially, the Trustee will act as authenticating agent, Paying Agent and Registrar. The Company may change any authenticating agent, Paying Agent or Registrar without notice. The Company, any Subsidiary or any Affiliate of any of them may act as Paying Agent, Registrar or co-Registrar. 4. Indenture; Limitations. ---------------------- The Company issued the Notes under an Indenture dated as of February 19, 1998 (the "Indenture"), between the Company and The Bank of New York, trustee (the "Trustee"). Capitalized terms herein are used as defined in the Indenture unless otherwise indicated. The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act. The Notes are subject to all such terms, and Holders are referred to the Indenture and the Trust Indenture Act for a statement of all such terms. To the extent permitted by applicable law, in the event of any inconsistency between the terms of this Note and the terms of the Indenture, the terms of the Indenture shall control. A-5 The Notes are general unsecured obligations of the Company. 5. Redemption. ---------- The Notes will be redeemable, at the Company's option, in whole or in part, at any time or from time to time, on or after March 1, 2003 and prior to maturity, upon not less than 30 nor more than 60 days' prior notice mailed by first class mail to each Holder's last address, as it appears in the Security Register, at the following Redemption Prices (expressed in percentages of principal amount at maturity), plus accrued and unpaid interest to the Redemption Date (subject to the right of Holders of record on the relevant Regular Record Date that is prior to the Redemption Date to receive interest due on an Interest Payment Date), if redeemed during the 12-month period commencing March 1 of the years set forth below:
Year Redemption Price ---- ---------------- 2003.......................... 106.31% 2004.......................... 104.20% 2005.......................... 102.10% 2006 and thereafter........... 100.00%
At any time prior to March 1, 2001, the Company may redeem up to 35% of the Accreted Value of the Notes with the proceeds of one or more sales of Capital Stock (other than Disqualified Stock) of the Company, at any time or from time to time in part, at a Redemption Price (expressed as a percentage of Accreted Value on the Redemption Date) of 112.625%, plus accrued and unpaid interest to the Redemption Date (subject to the rights of Holders of record on the relevant Regular Record Date that is prior to the Redemption Date to receive interest due on an Interest Payment Date); provided that Notes representing at least $300,950,000 aggregate principal amount at maturity remain outstanding after each such redemption. Notes in original denominations larger than $1,000 may be redeemed in part. On and after the Redemption Date, interest ceases to accrue on Notes or portions of Notes called for redemption, unless the Company defaults in the payment of the Redemption Price. 6. Repurchase upon Change of Control. --------------------------------- Upon the occurrence of any Change of Control, each Holder shall have the right to require the repurchase of its Notes by the Company in cash pursuant to the offer described in the Indenture at a purchase price equal to 101% of the Accreted Value thereof on the relevant Payment Date, plus accrued and unpaid interest, if any, to the date of purchase (the "Payment Date"). A-6 A notice of such Change of Control will be mailed within 30 days after any Change of Control occurs to each Holder at its last address as it appears in the Security Register. Notes in original denominations larger than $1,000 may be sold to the Company in part. On and after the Payment Date, interest ceases to accrue on Notes or portions of Notes surrendered for purchase by the Company, unless the Company defaults in the payment of the purchase price. 7. Denominations; Transfer; Exchange. --------------------------------- The Notes are in registered form without coupons in denominations of $1,000 of principal amount at maturity and integral multiples of $1,000 in excess thereof. A Holder may register the transfer or exchange of Notes in accordance with the Indenture. The Registrar may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. The Registrar need not register the transfer or exchange of any Notes selected for redemption. Also, it need not register the transfer or exchange of any Notes for a period of 15 days before the day of mailing of a notice of redemption of Notes selected for redemption. 8. Persons Deemed Owners. --------------------- A Holder shall be treated as the owner of a Note for all purposes. 9. Unclaimed Money. --------------- If money for the payment of principal, premium, if any, or interest remains unclaimed for two years, the Trustee and the Paying Agent will pay the money back to the Company. After that, Holders entitled to the money must look to the Company for payment, unless an abandoned property law designates another Person, and all liability of the Trustee and such Paying Agent with respect to such money shall cease. 10. Discharge Prior to Redemption or Maturity. ----------------------------------------- If the Company deposits with the Trustee money or U.S. Government Obligations sufficient to pay the then outstanding principal of, premium, if any, and accrued interest, if any, on the Notes (a) to redemption or maturity, the Company will be discharged from the Indenture and the Notes, except in certain circumstances for certain sections thereof, and (b) to the Stated Maturity, the Company will be discharged from certain covenants set forth in the Indenture. 11. Amendment; Supplement; Waiver. ----------------------------- Subject to certain exceptions set forth in the Indenture, the Indenture or the Notes may be amended or supplemented with the consent of the Holders of at least a majority in principal amount A-7 at maturity of the Notes then outstanding, and any existing default or compliance with any provision may be waived with the consent of the Holders of at least a majority in principal amount at maturity of the Notes then outstanding. Without notice to or the consent of any Holder, the parties thereto may amend or supplement the Indenture or the Notes to, among other things, cure any ambiguity, defect or inconsistency and make any change that does not materially and adversely affect the rights of any Holder. 12. Restrictive Covenants. --------------------- The Indenture imposes certain limitations on the ability of the Company and its Restricted Subsidiaries, among other things, to Incur additional Indebtedness, make Restricted Payments, use the proceeds from Asset Sales, engage in transactions with Affiliates or merge, consolidate or transfer substantially all of its assets. Within 90 days after the end of each fiscal year, the Company must report to the Trustee on compliance with such limitations. 13. Successor Persons. ----------------- When a successor Person or other entity assumes, in accordance with the Indenture, all the obligations of its predecessor under the Notes and the Indenture, the predecessor Person, subject to certain exceptions, will be released from those obligations. 14. Defaults and Remedies. --------------------- The following events constitute "Events of Default" under the Indenture: (a) the Company defaults in the payment of the principal of (or premium, if any, on) any Note when the same becomes due and payable at maturity, upon acceleration, redemption or otherwise; (b) the Company defaults in the payment of interest on any Note when the same becomes due and payable, and such default continues for a period of 30 days; (c) the Company defaults in the performance of, or breaches the provisions of, Article Five or fails to make or consummate an Offer to Purchase in accordance with Section 4.10 or 4.17; (d) the Company defaults in the performance of or breaches any covenant or agreement of the Company in the Indenture or under the Notes (other than a default specified in clause (a), (b) or (c) above), and such default or breach continues for a period of 30 consecutive days after written notice by the Trustee or the Holders of at least 25% in aggregate principal amount at maturity of the Notes then outstanding; (e) there occurs with respect to any issue or issues of Indebtedness of the Company or any Significant Subsidiary having an outstanding principal amount of $10 million or more in the aggregate for all such issues of all such Persons, whether such Indebtedness now exists or shall hereafter be created, (I) an event of default that has caused the holder thereof to declare such Indebtedness to be due and payable prior to its Stated Maturity and such Indebtedness has not been discharged in full or such acceleration has not been rescinded or annulled within 30 days of such acceleration and/or (II) the failure to make a principal payment at the final (but not any interim) fixed maturity and such defaulted payment shall not have been made, A-8 waived or extended within 30 days of such payment default; (f) any final judgment or order (not covered by insurance) for the payment of money in excess of $10 million in the aggregate for all such final judgments or orders against the Company or any Significant Subsidiary (treating any deductibles, self-insurance or retention as not so covered) shall be rendered against the Company or any Significant Subsidiary and shall not be paid or discharged, and there shall be any period of 30 consecutive days following entry of the final judgment or order that causes the aggregate amount for all such final judgments or orders outstanding and not paid or discharged against all such Persons to exceed $10 million during which a stay of enforcement of such final judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; (g) a court having jurisdiction in the premises enters a decree or order for (A) relief in respect of the Company or any Significant Subsidiary in an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, (B) appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official of the Company or any Significant Subsidiary or for all or substantially all of the property and assets of the Company or any Significant Subsidiary or (C) the winding up or liquidation of the affairs of the Company or any Significant Subsidiary and, in each case, such decree or order shall remain unstayed and in effect for a period of 60 consecutive days; or (h) the Company or any Significant Subsidiary (A) commences a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or consents to the entry of an order for relief in an involuntary case under any such law, (B) consents to the appointment of or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official of the Company or any Significant Subsidiary or for all or substantially all of the property and assets of the Company or any Significant Subsidiary or (C) effects any general assignment for the benefit of creditors. If an Event of Default, as defined in the Indenture, occurs and is continuing, the Trustee may, and at the direction of the Holders of at least 25% in aggregate principal amount at maturity of the Notes then outstanding shall, declare all the Notes to be due and payable. If a bankruptcy or insolvency default with respect to the Company occurs and is continuing, the Notes automatically become due and payable. Holders may not enforce the Indenture or the Notes except as provided in the Indenture. The Trustee may require indemnity satisfactory to it before it enforces the Indenture or the Notes. Subject to certain limitations, Holders of at least a majority in principal amount at maturity of the Notes then outstanding may direct the Trustee in its exercise of any trust or power. 15. Trustee Dealings with Company. ----------------------------- The Trustee under the Indenture, in its individual or any other capacity, may make loans to, accept deposits from and perform services for the Company or its Affiliates and may otherwise deal with the Company or its Affiliates as if it were not the Trustee. A-9 16. No Recourse Against Others. -------------------------- No incorporator or any past, present or future partner, stockholder, other equity holder, officer, director, employee or controlling person as such, of the Company or of any successor Person shall have any liability for any obligations of the Company under the Notes or the Indenture or for any claim based on, in respect of or by reason of, such obligations or their creation. Each Holder by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for the issuance of the Notes. 17. Authentication. -------------- This Note shall not be valid until the Trustee or authenticating agent manually signs the certificate of authentication on the other side of this Note. 18. Abbreviations. ------------- Customary abbreviations may be used in the name of a Holder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the entireties), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian) and U/G/M/A (= Uniform Gifts to Minors Act). The Company will furnish a copy of the Indenture to any Holder upon written request and without charge. Requests may be made to DIVA Systems Corporation, 333 Ravenswood Drive, Building 205, Menlo Park, CA 94025; Attention: Emily Tashman. A-10 [FORM OF TRANSFER NOTICE] FOR VALUE RECEIVED the undersigned registered holder hereby sell(s), assign(s) and transfer(s) unto Insert Taxpayer Identification No. - ---------------------------------- _________________________________________________________________________ Please print or typewrite name and address including zip code of assignee _________________________________________________________________________ the within Note and all rights thereunder, hereby irrevocably constituting and appointing ____________________________________________________ attorney to transfer said Note on the books of the Company with full power of substitution in the premises. [THE FOLLOWING PROVISION TO BE INCLUDED ON ALL NOTES OTHER THAN EXCHANGE NOTES, PERMANENT OFFSHORE GLOBAL NOTES AND PERMANENT OFFSHORE PHYSICAL NOTES] In connection with any transfer of this Note occurring prior to the date which is the earlier of (i) the date the Shelf Registration Statement is declared effective or (ii) the end of the period referred to in Rule 144(k) under the Securities Act, the undersigned confirms that without utilizing any general solicitation or general advertising that: [Check One] --------- [ ] (a) this Note is being transferred in compliance with the exemption from registration under the Securities Act of 1933 provided by Rule 144A thereunder. or -- [ ] (b) this Note is being transferred other than in accordance with (a) above and documents are being furnished which comply with the conditions of transfer set forth in this Note and the Indenture. A-11 If none of the foregoing boxes is checked, the Trustee or other Registrar shall not be obligated to register this Note in the name of any Person other than the Holder hereof unless and until the conditions to any such transfer of registration set forth herein and in Section 2.08 of the Indenture shall have been satisfied. Date:________ ________________________________________________________ NOTICE: The signature to this assignment must correspond with the name as written upon the face of the within-mentioned instrument in every particular, without alteration or any change whatsoever. TO BE COMPLETED BY PURCHASER IF (a) ABOVE IS CHECKED. The undersigned represents and warrants that it is purchasing this Note for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is a "qualified institutional buyer" within the meaning of Rule 144A under the Securities Act of 1933 and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Company as the undersigned has requested pursuant to Rule 144A or has determined not to request such information and that it is aware that the transferor is relying upon the undersigned's foregoing representations in order to claim the exemption from registration provided by Rule 144A. Dated:___________ ________________________________________________________ NOTICE: To be executed by an executive officer A-12 OPTION OF HOLDER TO ELECT PURCHASE If you wish to have this Note purchased by the Company pursuant to Section 4.10 or 4.17 of the Indenture, check the Box: [_] If you wish to have a portion of this Note purchased by the Company pursuant to Section 4.10 or 4.17 of the Indenture, state the amount: $___________________. Date: _________________ Your Signature: ______________________________________________________________ (Sign exactly as your name appears on the other side of this Note) Signature Guarantee: ______________________________ Signatures must be guaranteed by an "eligible guarantor institution" meeting the requirements of the Trustee, which requirements include membership or participation in the Security Transfer Agent Medallion Program ("STAMP") or such other "signature guarantee program" as may be determined by the Trustee in addition to, or in substitution for, STAMP, all in accordance with the Securities Exchange Act of 1934, as amended. EXHIBIT B --------- Form of Certificate ------------------- __________, ____ The Bank of New York 101 Barclay Street, Floor 21 West New York, NY 10286 Attention: Corporate Trust Trustee Administration DIVA Systems Corporation (the "Company") 12_% Senior Discount Notes due 2008 (the "Notes") ------------------------------------------------- Ladies and Gentlemen: This letter relates to U.S. $_______________ principal amount of Notes represented by a Note (the "Legended Note") which bears a legend outlining restrictions upon transfer of such Legended Note. Pursuant to Section 2.01 of the Indenture dated as of February 19, 1998 (the "Indenture") relating to the Notes, we hereby certify that we are (or we will hold such securities on behalf of) a person outside the United States to whom the Notes could be transferred in accordance with Rule 904 of Regulation S promulgated under the U.S. Securities Act of 1933. Accordingly, you are hereby requested to exchange the legended certificate for an unlegended certificate representing an identical principal amount of Notes, all in the manner provided for in the Indenture. You and the Company are entitled to rely upon this letter and are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceedings or official inquiry with respect to the matters covered hereby. Terms used in this certificate have the meanings set forth in Regulation S. Very truly yours, [Name of Holder] By: _____________________________________________ Authorized Signature EXHIBIT C --------- Form of Certificate to be Delivered in Connection with Transfers to Non-QIB Accredited Investors ----------------------------------------- _______ __, ____ The Bank of New York 101 Barclay Street, Floor 21 West New York, New York 10286 Attention: Corporate Trust Trustee Administration DIVA Systems Corporation (the "Company") 12_% Senior Discount Notes due 2008 (the "Notes") ------------------------------------------------- Ladies and Gentlemen: In connection with our proposed purchase of $___________ aggregate principal amount of the Notes, we confirm that: 1. We understand that any subsequent transfer of the Notes is subject to certain restrictions and conditions set forth in the Indenture dated as of February 19, 1998 relating to the Notes (the "Indenture") and the undersigned agrees to be bound by, and not to resell, pledge or otherwise transfer the Notes except in compliance with, such restrictions and conditions and the Securities Act of 1933, as amended (the "Securities Act"). 2. We understand that the offer and sale of the Notes have not been registered under the Securities Act, and that the Notes may not be offered or sold except as permitted in the following sentence. We agree, on our own behalf and on behalf of any accounts for which we are acting as hereinafter stated, that if we should sell any Notes, we will do so only (A) to the Company or any subsidiary thereof, (B) in accordance with Rule 144A under the Securities Act to a "qualified institutional buyer" (as defined therein), (C) to an institutional "accredited investor" (as defined below) that, prior to such transfer, furnishes (or has furnished on its behalf by a U.S. broker-dealer) to you and to the Company a signed letter substantially in the form of this letter, (D) outside the United States in accordance with Rule 904 of Regulation S under the Securities Act, (E) pursuant to another available exemption from the registration requirements of the Securities Act, or (F) pursuant to an effective registration statement under the Securities Act, and we further agree to provide to any person purchasing any of the Notes from us a notice advising such purchaser that resales of the Notes are restricted as stated herein. 3. We understand that, on any proposed resale of any Notes, we will be required to furnish to you and the Company such certifications, legal opinions and other information as you and the Company may reasonably require to confirm that the proposed sale complies with the foregoing restrictions. We further understand that the Notes purchased by us will bear a legend to the foregoing effect. 4. We are an institutional "accredited investor" (as defined in Rule 501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act) and have such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of our investment in the Notes, and we and any accounts for which we are acting are each able to bear the economic risk of our or its investment. 5. We are acquiring the Notes purchased by us for our own account or for one or more accounts (each of which is an institutional "accredited investor") as to each of which we exercise sole investment discretion. You and the Company are entitled to rely upon this letter and are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceedings or official inquiry with respect to the matters covered hereby. Very truly yours, [Name of Transferee] By:_____________________________________________________________________________ Authorized Signature EXHIBIT D --------- Form of Certificate to Be Delivered in Connection with Transfers Pursuant to Regulation S -------------------------------------------------- ____________, ____ The Bank of New York 101 Barclay Street, Floor 21 West New York, New York 10286 Attention: Corporate Trust Trustee Administration DIVA Systems Corporation (the "Company") 12_% Senior Discount Notes due 2008 (the "Notes") ------------------------------------------------- Ladies and Gentlemen: In connection with our proposed sale of U.S.$__________________ aggregate principal amount of the Notes, we confirm that such sale has been effected pursuant to and in accordance with Regulation S under the Securities Act of 1933 and, accordingly, we represent that: (1) the offer of the Notes was not made to a person in the United States; (2) at the time the buy order was originated, the transferee was outside the United States or we and any person acting on our behalf reasonably believed that the transferee was outside the United States; (3) no directed selling efforts have been made by us in the United States in contravention of the requirements of Rule 903(b) or Rule 904(b) of Regulation S, as applicable; and (4) the transaction is not part of a plan or scheme to evade the registration requirements of the U.S. Securities Act of 1933. You and the Company are entitled to rely upon this letter and are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceedings or official inquiry with respect to the matters covered hereby. Terms used in this certificate have the meanings set forth in Regulation S. Very truly yours, [Name of Transferor] By:______________________________________ Authorized Signature SCHEDULE I ---------- THE INDEBTEDNESS EVIDENCED BY THIS INSTRUMENT IS SUBORDINATED TO THE PRIOR PAYMENT IN FULL IN CASH OF ALL OF SENIOR INDEBTEDNESS (AS DEFINED BELOW) PURSUANT TO THE TERMS OF THIS SUBORDINATED NOTE AND TO THE EXTENT PROVIDED HEREIN. FORM OF SUBORDINATED NOTE Dated: ___________ __, ____ FOR VALUE RECEIVED, the undersigned DIVA SYSTEMS CORPORATION, a Delaware corporation ("DIVA"), HEREBY PROMISES TO PAY TO THE ORDER OF _______________, _______________ [lender] or its permitted registered assigns (the "Subordinated Lender"), the principal amount of [SPECIFY PRINCIPAL AMOUNT EVIDENCED BY THIS NOTE IN WORDS] DOLLARS ($__________) on __________ __, ____*. Interest shall accrue on the principal amount outstanding from time to time under this Subordinated Note, from and including the date of issuance hereof until such principal amount is paid in full, at a rate per annum (computed on the basis of a 365/366-day year) equal to __%. Accrued and unpaid interest shall be added automatically to the principal amount outstanding under this Subordinated Note and shall become a part thereof. Capitalized terms not otherwise defined in this Subordinated Note shall have the same meanings as specified therefor in the Indenture (as hereinafter defined). Both principal and interest are payable in lawful money of the United States of America to the Subordinated Lender, at its offices at __________, __________, __________ or at such other location as shall be designated by the Subordinated Lender in a written notice to DIVA and the Senior Representative (as hereinafter defined), in same day funds. The loan made by the Subordinated Lender to DIVA hereunder, and all payments and prepayments made on account of principal hereof, shall be recorded by the Subordinated Lender and, prior to any transfer hereof, endorsed on the grid attached hereto that is part of this Subordinated Note; provided that the failure _____________________________ * The stated maturity date of each of the Subordinated Notes shall be no earlier than the later of (a) March 1, 2008 and (b) the payment in full cash of all Senior Notes. None of the Subordinated Notes shall have any other scheduled or mandatory redemption or repurchase dates. of the Subordinated Lender to make any such recordation or endorsement shall not affect the obligations of DIVA under this Subordinated Note. Subject to the provisions of the Indenture, the principal amount outstanding under this Subordinated Note may, at the option of DIVA, be prepaid at any time, in whole or in part, without penalty or premium. The aggregate principal amount owing to the Subordinated Lender from time to time under this Subordinated Note, all accrued and unpaid interest thereof, and any other indebtedness evidenced by or otherwise owing in respect of this Subordinated Note (collectively, the "Subordinated Debt") is and shall be subordinate and junior in right of payment and otherwise, to the extent and in the manner hereinafter set forth, to the prior payment in full of all of the Senior Indebtedness (as hereinafter defined), whether now or hereafter existing; provided that the Subordinated Debt may be repaid in whole or in part at any time from the proceeds of the sale of Capital Stock (as defined in the Indenture) (other than Disqualified Stock (as defined in the Indenture)) of the Company after the date of this Subordinated Note. For all purposes of this Subordinated Note, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and the plural forms of the terms defined): "Indenture" means the Indenture dated as of February 19, 1998 between DIVA Systems Corporation and The Bank of New York relating to the 12_% Senior Discount Notes due 2008, as amended, supplemented or otherwise modified from time to time. "Senior Creditors" means the trustee under the Indenture and the holders from time to time of Senior Debt. "Senior Notes" means the 12_% Senior Discount Notes due 2008 issued under the Indenture, as such notes may be amended, supplemented or otherwise modified from time to time. "Senior Debt" means (i) all obligations of DIVA, whether now or hereafter existing, under or in respect of the Indenture and the Senior Notes, whether direct or indirect, absolute or contingent, and whether for principal, interest (including, without limitation, interest accruing after the filing of a petition initiating any Insolvency Proceeding (as hereinafter defined), whether or not such interest accrues after the filing of such petition for purposes of any applicable Insolvency Laws (as hereinafter defined), or is an allowed claim in such Insolvency Proceeding), premium, fees, indemnification payments, contract causes of action, costs, expenses or otherwise and (ii) any and all extensions, modifications, substitutions, amendments, renewals, refinancings, replacements and refundings of any or all of the obligations referred to in clause (i) of this definition, and any instrument or agreement evidencing or otherwise setting forth the terms of any Indebtedness or other obligations I-3 incurred in any such extension, modification, substitution, amendment, renewal, refinancing, replacement or refunding. "Senior Representative" means the trustee for the Senior Notes or the holders of a majority in aggregate principal amount at maturity of the outstanding Senior Notes. In the event of any dissolution, winding up, liquidation, arrangement, reorganization, adjustment, protection, relief or composition of DIVA or its debts, whether voluntary or involuntary, in any bankruptcy, insolvency, arrangement, reorganization, receivership, relief or other similar action or proceeding under the United States Federal Bankruptcy Code or any other federal or state bankruptcy or insolvency laws or any similar requirements of law of any other jurisdiction covering the protection of creditors' rights or the relief of debtors (collectively, the "Insolvency Laws"), or upon an assignment for the benefit of creditors or any other marshalling of the property, assets and liabilities of DIVA or otherwise (each, an "Insolvency Proceeding"), the Senior Creditors shall be entitled to receive payment in full in cash of all of the Senior Debt before the Subordinated Lender is entitled to receive any payment or distribution of any kind or character on account of all or any of the Subordinated Debt, and, to that end, any payment or distribution of any kind or character (whether in cash, property or securities) that otherwise would be payable or deliverable upon or with respect to the Subordinated Debt in any such Insolvency Proceeding (including, without limitation, any payment that may be payable by reason of any other Indebtedness of DIVA being subordinated to payment of the Subordinated Debt) shall be paid or delivered forthwith directly to the Senior Representative, for the ratable account of the Senior Creditors, in the same form as so received (with any necessary endorsement or assignment), for application (in the case of cash) to, or to be held as collateral (in the case of noncash property or securities) for, the payment or prepayment of the Senior Debt until all of the Senior Debt shall have been paid in full in cash. No payment or distribution of any property or assets of DIVA of any kind or character (including, without limitation, any payment that may be payable by reason of any other Indebtedness of DIVA being subordinated to payment of the Subordinated Debt) shall be made by or on behalf of DIVA for or on account of any Subordinated Debt, unless and until all of the Senior Debt shall have been paid in full in cash or unless such payment is expressly permitted to be made under Section 4.04 of the Indenture; provided that the Subordinated Debt may be repaid in whole or in part at any time from the proceeds of the sale of Capital Stock (other than Disqualified Stock) of the Company after the date of this Subordinated Note. Furthermore, so long as the Senior Debt shall not have been paid in full in cash, the Subordinated Lender shall not (a) ask, demand, sue for, take or receive from DIVA, directly or indirectly, in cash or other property or by setoff or in any manner (including, without limitation, from or by way of collateral), payment of all or any of the Subordinated Debt, except to the extent that such payment is expressly permitted to be made under Section 4.04 of the Indenture, (b) commence, or join with any creditor other than the Senior Representative in commencing, or directly or indirectly cause DIVA to commence, or assist DIVA in commencing, any Insolvency Proceeding, or (c) request or accept any collateral or other security I-4 for the Subordinated Debt. If the Subordinated Lender, in contravention hereof, shall commence, prosecute or participate in any Insolvency Proceeding, then the Senior Representative may intervene and interpose as a defense or plea the terms of this Subordinated Note in its own name or in the name of the Subordinated Lender. Until such time as all of the Senior Debt has been paid in full in cash, if any Insolvency Proceeding is commenced by or against DIVA: (i) the Senior Representative is hereby irrevocably authorized and empowered (in its own name or in the name of the Subordinated Lender or otherwise), but shall have no obligation, to demand, sue for, collect and receive every payment or distribution otherwise payable to the Subordinated Lender in respect of this Subordinated Note and give acquittance therefor, and to file claims and proofs of claim and take such other actions (including, without limitation, voting the Subordinated Debt or enforcing any security interest or other lien securing payment of the Subordinated Debt) as it may deem necessary or advisable for the exercise or enforcement of any of the rights or interests of the Senior Representative or any of the other Senior Creditors under this Subordinated Note; and (ii) the Subordinated Lender shall duly and promptly take such action as the Senior Representative may reasonably request (a) to collect the Subordinated Debt for the account of the Senior Representative, for the ratable benefit of the Senior Creditors, and to file appropriate claims or proofs of claim in respect of the Subordinated Debt, (b) to execute and deliver to the Senior Representative such powers of attorney, assignments or other instruments as the Senior Representative may reasonably request in order to enable the Senior Representative to enforce any and all claims with respect to, and any security interests and other liens securing payment of, the Subordinated Debt and (c) to collect and receive any and all payments or distributions that may be payable or deliverable upon or with respect to the Subordinated Debt. All payments or distributions upon or with respect to the Subordinated Debt that are received by the Subordinated Lender contrary to the provisions of this Subordinated Note shall be received in trust for the benefit of the Senior Representative and the Senior Creditors, shall be segregated from other property or funds of the Subordinated Lender and shall be paid or delivered forthwith directly to the Senior Representative, for the account of the Senior Creditors, in the same form as so received (with any necessary endorsement or assignment), to be applied (in the case of cash) to, or held as collateral (in the case of noncash property or securities) for, the payment or prepayment of the Senior Debt until all of the Senior Debt shall have been paid in full in cash. To the extent that DIVA, the Subordinated Lender or any of their respective Subsidiaries or any other guarantor of or provider of collateral for the Senior Debt shall make any payment on the Senior Debt that is subsequently invalidated, declared to be fraudulent or preferential or set aside or I-5 is required to be repaid to a trustee, receiver or any other party under any applicable Insolvency Law or equitable cause (any such payment being a "Voided Payment"), then to the extent of such Voided Payment, that portion of the Senior Debt that had been previously satisfied by such Voided Payment shall be reinstated and continue in full force and effect as if such Voided Payment had never been made. To the extent that the Subordinated Lender shall have received any payments subsequent to the date of the initial receipt of such Voided Payment by the Senior Representative or any of the other Senior Creditors and such payments have not been invalidated, declared to be fraudulent or preferential or set aside or required to be repaid to a trustee, receiver or any other party under any applicable Insolvency Law or equitable cause, the Subordinated Lender shall be obligated and hereby agrees that any such payment so made or received shall be deemed to have been received in trust for the benefit of the Senior Representative and the other Senior Creditors, and the Subordinated Lender hereby agrees to pay to the Senior Representative, upon demand, the full amount so received by the Subordinated Lender during such period of time to the extent necessary to fully restore to the Senior Representative and the other Senior Creditors the amount of such Voided Payment, which amount shall be applied as set forth in the immediately preceding paragraph. The Senior Representative is hereby authorized to demand specific performance of the subordination provisions of this Subordinated Note, whether or not DIVA shall have complied with any of the provisions hereof applicable to it, at any time when the Subordinated Lender shall have failed to comply with any of the subordination provisions of this Subordinated Note. The Subordinated Lender hereby irrevocably waives any defense based on the adequacy of a remedy at law which might be asserted as a bar to such remedy of specific performance. The Subordinated Lender will not: (i) Cancel or otherwise discharge any of the Subordinated Debt (except upon payment in full of all of the Senior Debt or, at any time and from time to time prior thereto, to the extent that such payment is expressly permitted to be made under Section 4.04 of the Indenture or is made from the proceeds of the sale of Capital Stock (other than Disqualified Stock) of the Company after the date of this Subordinated Note, (ii) convert or exchange any of the Subordinated Debt into or for any other Indebtedness (except to the extent expressly permitted by the Indenture), or (iii) convert or exchange any of the Subordinated Debt into or for any Capital Stock of DIVA (except to the extent expressly permitted by the Indenture); (ii) Sell, assign, pledge, encumber or otherwise dispose of any of the Subordinated Debt; or (iii) Permit the terms of any of the Subordinated Debt to be amended, waived, supplemented or otherwise modified in such a manner as could have an adverse effect upon the rights or interests of the Senior Representative or any of the other Senior Creditors under I-6 this Subordinated Note, the Indenture or any of the other agreements, instruments or other documents evidencing or otherwise setting forth the terms of any of the Senior Debt. No payment or distribution to the Senior Representative or any of the other Senior Creditors pursuant to the provisions of this Subordinated Note shall entitle the Subordinated Lender to exercise any rights of subrogation in respect thereof, nor shall the Subordinated Lender have any right of reimbursement, restitution, exoneration, contribution or indemnification whatsoever from any property or assets of DIVA or any of the other guarantors, sureties or providers of collateral security for the Senior Debt, or any right to participate in any claim or remedy of the Senior Representative or any of the other Senior Creditors against DIVA, whether or not such claim, remedy or right arises in equity or under contract, statute or common law (including, without limitation, the right to take or receive from DIVA, directly or indirectly, in cash or other property or by setoff or in any other manner, payment or security on account of such claim, remedy or right), until all of the Senior Debt shall have been paid in full. The holders of the Senior Debt may, at any time and from time to time, without any consent of or notice to the Subordinated Lender or any other holder of the Subordinated Debt and without impairing or releasing the obligations of the Subordinated Lender hereunder: (i) change the manner, place or terms of payment of, or change or extend the time of payment of, or renew payment or change or extend the time or payment of, or renew or alter, the Senior Debt (including any change in the rate of interest thereon), or amend, supplement or otherwise modify in any manner any instrument, agreement or other document under which any of the Senior Debt is outstanding; (ii) sell, exchange, release, not perfect and otherwise deal with any of the property or assets of any Person at any time pledged, assigned or mortgaged to secure the Senior Debt; (iii) release any Person liable in any manner under or in respect of the Senior Debt; (iv) exercise or refrain from exercising any rights against DIVA or any of its Subsidiaries or any other Person; (v) apply to the Senior Debt any sums from time to time received by or on behalf of the Senior Representative or any of the other Senior Creditors; and (vi) sell, assign, transfer or exchange any of the Senior Debt. Each of DIVA and the Subordinated Lender will, if reasonably requested by the Senior Representative or either of the trustees for the Senior Notes, further mark their respective books of account in such a manner as shall be effective to give proper notice of the effect of the subordination I-7 provisions of this Subordinated Note. Each of DIVA and the Subordinated Lender will, at its sole expense and at any time and from time to time, promptly execute and deliver all further instruments and documents, and take all further actions, that may be necessary or that the Senior Representative or the trustee under the Indenture may reasonably deem desirable and may request in order to protect any right or interest granted or purported to be granted under the subordination provisions of this Subordinated Note or to enable the Senior Representative or any of the other Senior Creditors to exercise and enforce its rights and remedies hereunder. The foregoing provisions regarding subordination are and are intended solely for the purpose of defining the relative rights of the holders of the Senior Debt, on the one hand, and the holders of the Subordinated Debt, on the other hand. Such provisions are for the benefit of the holders of the Senior Debt and shall inure to the benefit of, and shall be enforceable by, the Senior Representative, on behalf of itself and the other Senior Creditors, directly against the holders of the Subordinated Debt, and no holder of the Senior Debt shall be prejudiced in its right to enforce the subordination of any of the Subordinated Debt by any act or failure to act by DIVA or any Person in custody of its property or assets. The subordination provisions herein shall constitute a continuing offer to each and every holder of Senior Debt from time to time and such holders are intended third party beneficiaries hereof. Nothing contained in the foregoing provisions is intended to or shall impair, as between DIVA and the holders of the Subordinated Debt, the obligations of DIVA to such holders. DIVA agrees to pay, upon demand therefor, all of the reasonable and properly documented out-of-pocket costs and expenses (including, without limitation, reasonable fees and expenses of counsel) incurred by the Senior Representative or any of the other Senior Creditors in enforcing the provisions of this Subordinated Note. DIVA hereby waives promptness, diligence, presentment for payment, demand, notice of dishonor and protest and any other notice with respect to this Subordinated Note. None of the rights or interests of the Subordinated Lender in this Subordinated Note may be assigned or otherwise transferred thereby to any Person without the prior written consent of DIVA and the Senior Representative. No amendment, waiver or modification of this Subordinated Note (including, without limitation, the subordination provisions hereof), and no consent to any departure herefrom, shall be effective unless the same shall be in writing and signed by the Subordinated Lender and, if any such amendment, waiver or modification of this Subordinated Note (including, without limitation, the subordination provisions hereof) could adversely affect the rights or interests of the Senior Representative or any of the other Senior Creditors under or in respect of this Subordinated Note, the Indenture or any of the other agreements, instruments or other documents evidencing or otherwise setting forth the terms of any of the Senior Debt in any manner, signed by the Senior I-8 Representative, and then, in each case, such waiver, modification or consent shall be effective only in the specific instance and for the specific purpose for which given; provided that the trustee for the Senior Notes shall not be required to consent to any such amendment, waiver or modification that would adversely affect the rights or interests of any of the Senior Creditors. No failure on the part of the Subordinated Lender or the Senior Representative or any of the other Senior Creditors to exercise, and no delay in exercising, any right, power or privilege hereunder shall operate as a waiver thereof or a consent thereto; nor shall a single or partial exercise of any such right, power or privilege preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The remedies provided herein are cumulative and are not exclusive of any remedies provided by applicable law. This Subordinated Note shall be governed by, and construed in accordance with, the laws of the State of New York, excluding (to the fullest extent a New York court would permit) any rule of law that would cause application of the laws of any jurisdiction other than the State of New York. DIVA SYSTEMS CORPORATION By ________________________________________ Name: Title: EX-4.2 5 SPECIMEN 12 5/8% SENIOR DISCOUNT NOTE DUE 2008 EXHIBIT 4.2 THE INDEBTEDNESS EVIDENCED BY THIS INSTRUMENT IS SUBORDINATED TO THE PRIOR PAYMENT IN FULL IN CASH OF ALL OF SENIOR INDEBTEDNESS (AS DEFINED BELOW) PURSUANT TO THE TERMS OF THIS SUBORDINATED NOTE AND TO THE EXTENT PROVIDED HEREIN. FORM OF SUBORDINATED NOTE Dated: ___________, ____ FOR VALUE RECEIVED, the undersigned DIVA SYSTEMS CORPORATION, a Delaware corporation ("DIVA"), HEREBY PROMISES TO PAY TO THE ORDER OF _______________, _______________ [lender] or its permitted registered assigns F(the "Subordinated Lender"), the principal amount of [SPECIFY PRINCIPAL AMOUNT EVIDENCED BY THIS NOTE IN WORDS] DOLLARS ($__________) on __________ __, ____. Interest shall accrue on the principal amount outstanding from time to time under this Subordinated Note, from and including the date of issuance hereof until such principal amount is paid in full, at a rate per annum (computed on the basis of a 365/366-day year) equal to __%. Accrued and unpaid interest shall be added automatically to the principal amount outstanding under this Subordinated Note and shall become a part thereof. Capitalized terms not otherwise defined in this Subordinated Note shall have the same meanings as specified therefor in the Indenture (as hereinafter defined). Both principal and interest are payable in lawful money of the United States of America to the Subordinated Lender, at its offices at __________, __________, __________ or at such other location as shall be designated by the Subordinated Lender in a written notice to DIVA and the Senior Representative (as hereinafter defined), in same day funds. The loan made by the Subordinated Lender to DIVA hereunder, and all payments and prepayments made on account of principal hereof, shall be recorded by the Subordinated Lender and, prior to any transfer hereof, endorsed on the grid attached hereto that is part of this Subordinated Note; provided that the failure of the Subordinated Lender to make any such recordation or endorsement shall not affect the obligations of DIVA under this Subordinated Note. Subject to the provisions of the Indenture, the principal amount outstanding under this Subordinated Note may, at the option of DIVA, be prepaid at any time, in whole or in part, without penalty or premium. The aggregate principal amount owing to the Subordinated Lender from time to time under this Subordinated Note, all accrued and unpaid interest thereof, and any other indebtedness - ----------------------------- The stated maturity date of each of the Subordinated Notes shall be no earlier than the later of (a) March 1, 2008 and (b) the payment in full cash of all Senior Notes. None of the Subordinated Notes shall have any other scheduled or mandatory redemption or repurchase dates. evidenced by or otherwise owing in respect of this Subordinated Note (collectively, the "Subordinated Debt") is and shall be subordinate and junior in right of payment and otherwise, to the extent and in the manner hereinafter set forth, to the prior payment in full of all of the Senior Indebtedness (as hereinafter defined), whether now or hereafter existing; provided that the Subordinated Debt may be repaid in whole or in part at any time from the proceeds of the sale of Capital Stock (as defined in the Indenture) (other than Disqualified Stock (as defined in the Indenture)) of the Company after the date of this Subordinated Note. For all purposes of this Subordinated Note, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and the plural forms of the terms defined): "Indenture" means the Indenture dated as of February 19, 1998 between DIVA Systems Corporation and The Bank of New York relating to the 12% Senior Discount Notes due 2008, as amended, supplemented or otherwise modified from time to time. "Senior Creditors" means the trustee under the Indenture and the holders from time to time of Senior Debt. "Senior Notes" means the 12% Senior Discount Notes due 2008 issued under the Indenture, as such notes may be amended, supplemented or otherwise modified from time to time. "Senior Debt" means (i) all obligations of DIVA, whether now or hereafter existing, under or in respect of the Indenture and the Senior Notes, whether direct or indirect, absolute or contingent, and whether for principal, interest (including, without limitation, interest accruing after the filing of a petition initiating any Insolvency Proceeding (as hereinafter defined), whether or not such interest accrues after the filing of such petition for purposes of any applicable Insolvency Laws (as hereinafter defined), or is an allowed claim in such Insolvency Proceeding), premium, fees, indemnification payments, contract causes of action, costs, expenses or otherwise and (ii) any and all extensions, modifications, substitutions, amendments, renewals, refinancings, replacements and refundings of any or all of the obligations referred to in clause (i) of this definition, and any instrument or agreement evidencing or otherwise setting forth the terms of any Indebtedness or other obligations incurred in any such extension, modification, substitution, amendment, renewal, refinancing, replacement or refunding. "Senior Representative" means the trustee for the Senior Notes or the holders of a majority in aggregate principal amount at maturity of the outstanding Senior Notes. In the event of any dissolution, winding up, liquidation, arrangement, reorganization, adjustment, protection, relief or composition of DIVA or its debts, whether voluntary or involuntary, in any bankruptcy, insolvency, arrangement, reorganization, receivership, relief or other similar action or proceeding under the United States Federal Bankruptcy Code or any other federal or state bankruptcy or insolvency laws or any similar requirements of law of any other jurisdiction covering the protection of creditors' rights or the relief of debtors (collectively, the "Insolvency Laws"), or upon an assignment for the benefit of creditors or any other marshalling of the property, assets and liabilities of DIVA or otherwise (each, an "Insolvency Proceeding"), the Senior Creditors shall be entitled to receive payment in full in cash of all of the Senior Debt before the Subordinated Lender is entitled to receive any payment or distribution of any kind or character on account of all or any of the Subordinated Debt, and, to that end, any payment or distribution of any kind or character (whether in cash, property or securities) that otherwise would be payable or deliverable upon or with respect to the Subordinated Debt in any such Insolvency Proceeding (including, without limitation, any payment that may be payable by reason of any other Indebtedness of DIVA being subordinated to payment of the Subordinated Debt) shall be paid or delivered forthwith directly to the Senior Representative, for the ratable account of the Senior Creditors, in the same form as so received (with any necessary endorsement or assignment), for application (in the case of cash) to, or to be held as collateral (in the case of noncash property or securities) for, the payment or prepayment of the Senior Debt until all of the Senior Debt shall have been paid in full in cash. No payment or distribution of any property or assets of DIVA of any kind or character (including, without limitation, any payment that may be payable by reason of any other Indebtedness of DIVA being subordinated to payment of the Subordinated Debt) shall be made by or on behalf of DIVA for or on account of any Subordinated Debt, unless and until all of the Senior Debt shall have been paid in full in cash or unless such payment is expressly permitted to be made under Section 4.04 of the Indenture; provided that the Subordinated Debt may be repaid in whole or in part at any time from the proceeds of the sale of Capital Stock (other than Disqualified Stock) of the Company after the date of this Subordinated Note. Furthermore, so long as the Senior Debt shall not have been paid in full in cash, the Subordinated Lender shall not (a) ask, demand, sue for, take or receive from DIVA, directly or indirectly, in cash or other property or by setoff or in any manner (including, without limitation, from or by way of collateral), payment of all or any of the Subordinated Debt, except to the extent that such payment is expressly permitted to be made under Section 4.04 of the Indenture, (b) commence, or join with any creditor other than the Senior Representative in commencing, or directly or indirectly cause DIVA to commence, or assist DIVA in commencing, any Insolvency Proceeding, or (c) request or accept any collateral or other security for the Subordinated Debt. If the Subordinated Lender, in contravention hereof, shall commence, prosecute or participate in any Insolvency Proceeding, then the Senior Representative may intervene and interpose as a defense or plea the terms of this Subordinated Note in its own name or in the name of the Subordinated Lender. Until such time as all of the Senior Debt has been paid in full in cash, if any Insolvency Proceeding is commenced by or against DIVA: (i) the Senior Representative is hereby irrevocably authorized and empowered (in its own name or in the name of the Subordinated Lender or otherwise), but shall have no obligation, to demand, sue for, collect and receive every payment or distribution otherwise payable to the Subordinated Lender in respect of this Subordinated Note and give acquittance therefor, and to file claims and proofs of claim and take such other actions (including, without limitation, voting the Subordinated Debt or enforcing any security interest or other lien securing payment of the Subordinated Debt) as it may deem necessary or advisable for the exercise or enforcement of any of the rights or interests of the Senior Representative or any of the other Senior Creditors under this Subordinated Note; and (ii) the Subordinated Lender shall duly and promptly take such action as the Senior Representative may reasonably request (a) to collect the Subordinated Debt for the account of the Senior Representative, for the ratable benefit of the Senior Creditors, and to file appropriate claims or proofs of claim in respect of the Subordinated Debt, (b) to execute and deliver to the Senior Representative such powers of attorney, assignments or other instruments as the Senior Representative may reasonably request in order to enable the Senior Representative to enforce any and all claims with respect to, and any security interests and other liens securing payment of, the Subordinated Debt and (c) to collect and receive any and all payments or distributions that may be payable or deliverable upon or with respect to the Subordinated Debt. All payments or distributions upon or with respect to the Subordinated Debt that are received by the Subordinated Lender contrary to the provisions of this Subordinated Note shall be received in trust for the benefit of the Senior Representative and the Senior Creditors, shall be segregated from other property or funds of the Subordinated Lender and shall be paid or delivered forthwith directly to the Senior Representative, for the account of the Senior Creditors, in the same form as so received (with any necessary endorsement or assignment), to be applied (in the case of cash) to, or held as collateral (in the case of noncash property or securities) for, the payment or prepayment of the Senior Debt until all of the Senior Debt shall have been paid in full in cash. To the extent that DIVA, the Subordinated Lender or any of their respective Subsidiaries or any other guarantor of or provider of collateral for the Senior Debt shall make any payment on the Senior Debt that is subsequently invalidated, declared to be fraudulent or preferential or set aside or is required to be repaid to a trustee, receiver or any other party under any applicable Insolvency Law or equitable cause (any such payment being a "Voided Payment"), then to the extent of such Voided Payment, that portion of the Senior Debt that had been previously satisfied by such Voided Payment shall be reinstated and continue in full force and effect as if such Voided Payment had never been made. To the extent that the Subordinated Lender shall have received any payments subsequent to the date of the initial receipt of such Voided Payment by the Senior Representative or any of the other Senior Creditors and such payments have not been invalidated, declared to be fraudulent or preferential or set aside or required to be repaid to a trustee, receiver or any other party under any applicable Insolvency Law or equitable cause, the Subordinated Lender shall be obligated and hereby agrees that any such payment so made or received shall be deemed to have been received in trust for the benefit of the Senior Representative and the other Senior Creditors, and the Subordinated Lender hereby agrees to pay to the Senior Representative, upon demand, the full amount so received by the Subordinated Lender during such period of time to the extent necessary to fully restore to the Senior Representative and the other Senior Creditors the amount of such Voided Payment, which amount shall be applied as set forth in the immediately preceding paragraph. The Senior Representative is hereby authorized to demand specific performance of the subordination provisions of this Subordinated Note, whether or not DIVA shall have complied with any of the provisions hereof applicable to it, at any time when the Subordinated Lender shall have failed to comply with any of the subordination provisions of this Subordinated Note. The Subordinated Lender hereby irrevocably waives any defense based on the adequacy of a remedy at law which might be asserted as a bar to such remedy of specific performance. The Subordinated Lender will not: (i) Cancel or otherwise discharge any of the Subordinated Debt (except upon payment in full of all of the Senior Debt or, at any time and from time to time prior thereto, to the extent that such payment is expressly permitted to be made under Section 4.04 of the Indenture or is made from the proceeds of the sale of Capital Stock (other than Disqualified Stock) of the Company after the date of this Subordinated Note, (ii) convert or exchange any of the Subordinated Debt into or for any other Indebtedness (except to the extent expressly permitted by the Indenture), or (iii) convert or exchange any of the Subordinated Debt into or for any Capital Stock of DIVA (except to the extent expressly permitted by the Indenture); (ii) Sell, assign, pledge, encumber or otherwise dispose of any of the Subordinated Debt; or (iii) Permit the terms of any of the Subordinated Debt to be amended, waived, supplemented or otherwise modified in such a manner as could have an adverse effect upon the rights or interests of the Senior Representative or any of the other Senior Creditors under this Subordinated Note, the Indenture or any of the other agreements, instruments or other documents evidencing or otherwise setting forth the terms of any of the Senior Debt. No payment or distribution to the Senior Representative or any of the other Senior Creditors pursuant to the provisions of this Subordinated Note shall entitle the Subordinated Lender to exercise any rights of subrogation in respect thereof, nor shall the Subordinated Lender have any right of reimbursement, restitution, exoneration, contribution or indemnification whatsoever from any property or assets of DIVA or any of the other guarantors, sureties or providers of collateral security for the Senior Debt, or any right to participate in any claim or remedy of the Senior Representative or any of the other Senior Creditors against DIVA, whether or not such claim, remedy or right arises in equity or under contract, statute or common law (including, without limitation, the right to take or receive from DIVA, directly or indirectly, in cash or other property or by setoff or in any other manner, payment or security on account of such claim, remedy or right), until all of the Senior Debt shall have been paid in full. The holders of the Senior Debt may, at any time and from time to time, without any consent of or notice to the Subordinated Lender or any other holder of the Subordinated Debt and without impairing or releasing the obligations of the Subordinated Lender hereunder: (i) change the manner, place or terms of payment of, or change or extend the time of payment of, or renew payment or change or extend the time or payment of, or renew or alter, the Senior Debt (including any change in the rate of interest thereon), or amend, supplement or otherwise modify in any manner any instrument, agreement or other document under which any of the Senior Debt is outstanding; (ii) sell, exchange, release, not perfect and otherwise deal with any of the property or assets of any Person at any time pledged, assigned or mortgaged to secure the Senior Debt; (iii) release any Person liable in any manner under or in respect of the Senior Debt; (iv) exercise or refrain from exercising any rights against DIVA or any of its Subsidiaries or any other Person; (v) apply to the Senior Debt any sums from time to time received by or on behalf of the Senior Representative or any of the other Senior Creditors; and (vi) sell, assign, transfer or exchange any of the Senior Debt. Each of DIVA and the Subordinated Lender will, if reasonably requested by the Senior Representative or either of the trustees for the Senior Notes, further mark their respective books of account in such a manner as shall be effective to give proper notice of the effect of the subordination provisions of this Subordinated Note. Each of DIVA and the Subordinated Lender will, at its sole expense and at any time and from time to time, promptly execute and deliver all further instruments and documents, and take all further actions, that may be necessary or that the Senior Representative or the trustee under the Indenture may reasonably deem desirable and may request in order to protect any right or interest granted or purported to be granted under the subordination provisions of this Subordinated Note or to enable the Senior Representative or any of the other Senior Creditors to exercise and enforce its rights and remedies hereunder. The foregoing provisions regarding subordination are and are intended solely for the purpose of defining the relative rights of the holders of the Senior Debt, on the one hand, and the holders of the Subordinated Debt, on the other hand. Such provisions are for the benefit of the holders of the Senior Debt and shall inure to the benefit of, and shall be enforceable by, the Senior Representative, on behalf of itself and the other Senior Creditors, directly against the holders of the Subordinated Debt, and no holder of the Senior Debt shall be prejudiced in its right to enforce the subordination of any of the Subordinated Debt by any act or failure to act by DIVA or any Person in custody of its property or assets. The subordination provisions herein shall constitute a continuing offer to each and every holder of Senior Debt from time to time and such holders are intended third party beneficiaries hereof. Nothing contained in the foregoing provisions is intended to or shall impair, as between DIVA and the holders of the Subordinated Debt, the obligations of DIVA to such holders. DIVA agrees to pay, upon demand therefor, all of the reasonable and properly documented out-of-pocket costs and expenses (including, without limitation, reasonable fees and expenses of counsel) incurred by the Senior Representative or any of the other Senior Creditors in enforcing the provisions of this Subordinated Note. DIVA hereby waives promptness, diligence, presentment for payment, demand, notice of dishonor and protest and any other notice with respect to this Subordinated Note. None of the rights or interests of the Subordinated Lender in this Subordinated Note may be assigned or otherwise transferred thereby to any Person without the prior written consent of DIVA and the Senior Representative. No amendment, waiver or modification of this Subordinated Note (including, without limitation, the subordination provisions hereof), and no consent to any departure herefrom, shall be effective unless the same shall be in writing and signed by the Subordinated Lender and, if any such amendment, waiver or modification of this Subordinated Note (including, without limitation, the subordination provisions hereof) could adversely affect the rights or interests of the Senior Representative or any of the other Senior Creditors under or in respect of this Subordinated Note, the Indenture or any of the other agreements, instruments or other documents evidencing or otherwise setting forth the terms of any of the Senior Debt in any manner, signed by the Senior Representative, and then, in each case, such waiver, modification or consent shall be effective only in the specific instance and for the specific purpose for which given; provided that the trustee for the Senior Notes shall not be required to consent to any such amendment, waiver or modification that would adversely affect the rights or interests of any of the Senior Creditors. No failure on the part of the Subordinated Lender or the Senior Representative or any of the other Senior Creditors to exercise, and no delay in exercising, any right, power or privilege hereunder shall operate as a waiver thereof or a consent thereto; nor shall a single or partial exercise of any such right, power or privilege preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The remedies provided herein are cumulative and are not exclusive of any remedies provided by applicable law. This Subordinated Note shall be governed by, and construed in accordance with, the laws of the State of New York, excluding (to the fullest extent a New York court would permit) any rule of law that would cause application of the laws of any jurisdiction other than the State of New York. DIVA SYSTEMS CORPORATION By _______________________________ Name: Title: EX-10.1 6 FORM OF INDEMNIFICATION AGREEMENT EXHIBIT 10.1 DIVA SYSTEMS CORPORATION INDEMNIFICATION AGREEMENT This INDEMNIFICATION AGREEMENT is made as of the ____ day of _____________, 1997 by and between DIVA Systems Corporation, a Delaware corporation (the "Corporation"), and the individual whose name appears on the signature page hereof (such individual being referred to herein as the "Indemnified Representative" and, together with other persons who may execute similar agreements, as "Indemnified Representatives"). WHEREAS, the Indemnified Representative currently is and will be in the future serving in one or more capacities as a director, officer, employee, or agent the Corporation or, at the request of the Corporation, as a director, officer, employee, agent fiduciary, or trustee of, or in a similar capacity for, another corporation, partnership, joint venture, trust, employee benefit plan, or other entity, and in so doing is and will be performing a valuable service to or on behalf of the Corporation; WHEREAS, the Board of Directors of the Corporation has determined that, in order to attract and retain qualified individuals, the Corporation will attempt to maintain, at its sole expense, liability insurance to protect persons serving the Corporation and its subsidiaries from certain liabilities. Although the furnishing of such insurance has been a customary and widespread practice among United States based corporations and other business enterprises, the Corporation believes that, given current market conditions and trends, such insurance may be available to it in the future only at higher premiums and with more exclusions. At the same time, directors, officers, and other persons in service to corporations or business enterprises are being increasingly subjected to expensive and time-consuming litigation relating to, among other things, matters that traditionally would have been brought only against the Corporation or business enterprise itself; WHEREAS, the Indemnified Representative is willing to continue to serve and to undertake additional duties and responsibilities for and on behalf of the Corporation on the condition that he or she be indemnified contractually by the Corporation; and WHEREAS, as an inducement to the Indemnified Representative to continue to serve the Corporation, and in consideration for such continued service, the Corporation has agreed to indemnify the Indemnified Representative upon the terms set forth herein. NOW, THEREFORE, in consideration of the promises and mutual covenants contained herein, and intending to be legally bound hereby, the Corporation and the Indemnified Representative agree as follows. 1. Agreement to Serve. The Indemnified Representative agrees to serve or ------------------ continue to serve for or on behalf of the Corporation in each Official Capacity (as hereinafter defined) held now or in the future for so long as the Indemnified Representative is duly elected or appointed or until such time as the Indemnified Representative tenders a resignation in writing. This Agreement shall not be deemed an employment contract between the Corporation or any of its subsidiaries and any Indemnified Representative who is an employee of the Corporation or any of its subsidiaries. The Indemnified Representative specifically acknowledges that the Indemnified Representative's employment with the Corporation or any of its subsidiaries, if any, is at will, and that the Indemnified Representative may be discharged at any time for any reason, with or without cause, except as may be otherwise provided in any written employment contract between the Indemnified Representative and the Corporation or any of its subsidiaries, other applicable formal severance policies duly adopted by the board of directors of the Indemnified Representative's employer, or, with respect to service as a director of the Corporation, by the Corporation's Certificate of Incorporation, by-laws, and the Delaware General Corporation Law. The foregoing notwithstanding, this Agreement shall continue in force after the Indemnified Representative has ceased to serve in any Official Capacity for or on behalf of the Corporation or any of its subsidiaries. 2. Indemnification. --------------- (a) Except as provided in Section 3 and 5 hereof, the Corporation shall indemnify the Indemnified Representative to the fullest extent permitted or authorized under the Corporation's certificate of incorporation, by-laws, or Board resolutions or, if greater, by applicable law, against any Liability (as hereinafter defined) incurred by or assessed against the Indemnified Representative in connection with any Proceeding (as hereinafter defined) in which the Indemnified Representative may be involved, as a party or otherwise, by reason of the fact that the Indemnified Representative is or was serving in any Official Capacity held now or in the future or that arises out of or relates to the Indemnified Representative's service in any Official Capacity, including, without limitation, any Liability resulting from actual or alleged breach or neglect of duty, error, misstatement, misleading statement, omission, negligence, act giving rise to strict or product liability, act giving rise to liability for environmental contamination, or other act or omission, whether occurring prior to or after the date of this Agreement. As used in this Agreement. (1) "Liability" means any damage, judgment, amount paid in settlement, fine, penalty, punitive damage, or expense of any nature (including attorneys' fees and expenses); (2) "Proceeding" means any threatened, pending, or completed action, suit, appeal, arbitration, investigation, or other proceeding of any nature, whether civil, criminal, administrative, or investigative, whether formal or informal, and whether brought by or in the right of the Corporation, a class of its security holders, or any other party; and (3) "Official Capacity" means service to the Corporation as a director or officer or, at the request of the Corporation, as a director, officer, employee, agent, fiduciary, or trustee of, or in a similar capacity for, another corporation, partnership, joint venture, trust, employee benefit plan (including a plan qualified under the Employee Retirement Income Security Act of 1974), or other entity. -2- (b) Notwithstanding Section 2(a) hereof, except for a Proceeding brought pursuant to Section 5(d) of this Agreement, the Corporation shall not indemnify the Indemnified Representative under this Agreement for any Liability incurred in a Proceeding initiated by the Indemnified Representative (except with respect to Liabilities in connection with such a Proceeding that relate to counter-claims or other claims brought against the Indemnified Representative, or to claims for declaratory relief or to claims brought because of procedural rules encouraging joinder of claims) unless the Proceeding is authorized, either before or after commencement of the Proceeding, by the majority vote of a quorum of the Board of Directors of the Corporation. (c) If and to the extent the Corporation has a directors and officers liability insurance policy, the Corporation shall include as a named insured the Indemnified Representative under such policy during the period of the Indemnified Representative's employment by the Corporation and for two years therafter. 3. Exclusions. ---------- (a) The Corporation shall not be liable under this Agreement to make any payment in connection with any Liability incurred by the Indemnified Representative: (1) to the extent payment for such Liability is made to the Indemnified Representative under an insurance policy obtained by the Corporation; (2) to the extent payment is made to the Indemnified Representative for such Liability by the Corporation under its Certification of Incorporation, by-laws, the Delaware General Corporation Law, or otherwise than pursuant to this Agreement; (3) to the extent such Liability is determined in a final determination pursuant to Section 5(d) hereof to be based upon or attributable to the Indemnified Representative gaining any personal profit to which such Indemnified Representative was not legally entitled; (4) for any claim by or on behalf of the Corporation for recovery of profits resulting from the purchase and sale or sale and purchase by such Indemnified Representative of equity securities of the Corporation pursuant to Section 16(b) of the Securities Exchange Act of 1934, as amended; (5) directly attributable to the conduct of the Indemnified Representative that has been determined in a final determination pursuant to Section 5(d) hereof to constitute bad faith or active and deliberate dishonesty, in either such case material to the cause of action or claim at issue in the Proceeding, or (6) to the extent such indemnification has been determined in a final determination pursuant to Section 5(d) hereof to be unlawful. -3- (b) Any act, omission, liability, knowledge, or other fact of or relating to any other person, including any other person who is also an Indemnified Representative, shall not be imputed to the Indemnified Representative for the purposes of determining the applicability of any exclusion set forth herein. (c) The termination of a proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent shall not, of itself, create a presumption that the Indemnified Representative is not entitled to indemnification under this Agreement. 4. Advancement of Expenses. Notwithstanding any other provision of this ----------------------- Agreement, the Corporation shall pay any Liability in the nature of an expense (including attorneys' fees and expenses) incurred in good faith by the Indemnified Representative in connection with any Proceeding within thirty (30) days of receipt of a demand for payment by the Indemnified Representative; provided, however, that the Indemnified Representative shall repay such amount if it shall ultimately be determined, pursuant to Section 5(d) hereof, that the Indemnified Representative is not entitled to be indemnified by the Corporation pursuant to this Agreement. The financial ability of the Indemnified Representative to repay an advance shall not be a prerequisite to the making of such advance. 5. Indemnification Procedure. ------------------------- (a) The Indemnified Representative shall use his best reasonable efforts to notify promptly the Secretary of the Corporation of the commencement of any Proceeding or the occurrence of any event which might give rise to a Liability under this Agreement, but the failure to so notify the Corporation shall not relieve the Corporation of any obligation which it may have to the Indemnified Representative under this Agreement or otherwise. (b) The Corporation shall be entitled, upon notice to the Indemnified Representative, to assume the defense of any Proceeding with counsel reasonably satisfactory to the Indemnified Representative involved in such Proceeding or, if there be more than one (1) Indemnified Representatives involved in such Proceeding, to a majority of the Indemnified Representatives involved in such Proceeding. If, in accordance with the foregoing, the Corporation defends the Proceeding, the Corporation shall not be liable for the expenses (including attorneys' fees and expenses) of the Indemnified Representative incurred in connection with the defense of such Proceeding subsequent to the required notice, unless (i) such expenses (including attorneys' fees) have been authorized by the Corporation or (ii) the Corporation shall not in fact have employed counsel reasonably satisfactory to such Indemnified Representative, or to the majority of Indemnified Representative if more than one (1) is involved, to assume the defense of such Proceeding or (iii) counsel for the Indemnified Representative shall have provided a written legal opinion that there may be a conflict of interest between such Indemnified Representative and other persons represented by legal counsel selected by the Corporation, in any of which events the Indemnified Representative shall be entitled to have the expenses of separate legal counsel paid by the Corporation. The foregoing notwithstanding, the Indemnified Representative may elect to retain counsel at the Indemnified Representative's own cost and expense to participate in the defense of such Proceeding. -4- (c) The Corporation shall not be required to obtain the consent of the Indemnified Representative to the settlement of any Proceeding which the Corporation has undertaken to defend if the Corporation assumes full and sole responsibility for such settlement and the settlement grants the Indemnified Representative a complete and unqualified release in respect of the potential Liability. The Corporation shall not be liable for any amount paid by an Indemnified Representative in settlement of any Proceeding that is not defended by the Corporation, unless the Corporation has consented to such settlement, which consent shall not be unreasonably withheld. (d) Except as set forth herein, any dispute concerning the right to indemnification or advancement of expenses under this Agreement and any other dispute arising hereunder, including but not limited to matters of validity, interpretation, application, and enforcement, shall be determined exclusively by and through final and binding arbitration in Sacramento, California, or other location mutually agreed to, each party hereto expressly and conclusively waiving its, his or her right to proceed to a judicial determination with respect to such matter; provided, however, that in the event that a claim for indemnification against liabilities arising under the Securities Act of 1933 (the "Act") (other than the payment by the Corporation of expenses incurred or paid by a director, officer, or controlling person of the Corporation in the successful defense of any action, suit, or proceeding) is asserted by a director, officer, or controlling person in connection with securities being registered under the Act, the Corporation will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of competent jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The arbitration shall be conducted in accordance with the commercial arbitration rules then in effect of the American Arbitration Association before a panel of three (3) arbitrators, one (1) of whom shall be selected by the Corporation, the second of whom shall be selected by the Indemnified Representative, and the third of whom shall be selected by the other two (2) arbitrators. Each arbitrator selected as provided herein is required to be serving or to have served as a director or an executive officer of a corporation whose shares of common stock, during at least one year of such service, were quoted in the NASDAQ National Market System or listed on the New York Stock Exchange or the American Stock Exchange. The Corporation shall reimburse the Indemnified Representative for the expenses (including attorneys' fees) incurred in prosecuting or defending such arbitration to the full extent of such expenses if the Indemnified Representative is awarded 50% or more of the monetary value of his claim or, if not, to the extent such expenses are determined by the arbitrators to be allocable to the Corporation. It is expressly understood and agreed by the parties that a party may compel arbitration pursuant to this Section 5(d) through an action for specific performance and that any award entered by the arbitrators may be enforced, without further evidence or proceedings, in any court of competent jurisdiction. (e) Upon a payment under this Agreement to the Indemnified Representative with respect to any Liability, the Corporation shall be subjugated to the extent of such payment to all of the rights of the Indemnified Representative to recover against any person with respect to such Liability, and the Indemnified Representative shall execute all documents and instruments reasonably required and shall take such other reasonable actions (at the Corporation's expense) as may reasonably be necessary -5- to secure such rights including the execution of such documents as may reasonably be necessary for the Corporation to bring suit to enforce such rights. 6. Contribution. If the indemnification provided for in this Agreement ------------ is unavailable for any reason to hold harmless an Indemnified Representative in respect of any Liability or portion thereof the Corporation shall contribute to such Liability or portion thereof in such proportion as is appropriate to reflect the relative benefits received by the Corporation and the Indemnified Representative from the transaction giving rise to the Liability. 7. Non-Exclusivity. The rights granted to the Indemnified Representative --------------- pursuant to this Agreement shall not be deemed exclusive of any other rights to which the Indemnified Representative may be entitled under statute, the provisions of any certificate of incorporation, by-laws, or agreement, a vote of stockholders or directors, or otherwise, both as to action in an Official Capacity and in any other capacity. 8. Reliance on Provisions. The Indemnified Representative shall be ---------------------- deemed to be acting in any Official Capacity in reliance upon the rights of indemnification provided by this Agreement and the indemnification provisions of the Corporation's Certificate of Incorporation and by-laws. 9. Severability and Reformation. Any provision of this Agreement which ---------------------------- is determined to be invalid or unenforceable in any jurisdiction or under any circumstances shall be ineffective only to the extent of such invalidity or unenforceability and shall be deemed reformed to the extent necessary to conform to the applicable law of such jurisdiction and still give maximum effect to the intent of the parties hereto, which is to provide full and complete indemnification and advancement protection to the Indemnified Representative. Any such determination shall not invalidate or render unenforceable the remaining provisions hereof and shall not invalidate or render unenforceable such provision in any other jurisdiction or under any other circumstances. 10. Notices. Any notice, claim, request, or demand required or permitted ------- hereunder shall be in writing and shall be deemed given if delivered personally or sent by telegram or by registered or certified mail, first class, postage prepaid: (i) if to the Corporation to DIVA Systems Corporation, at its principal executive offices, Attention: Secretary, or (ii) if to any Indemnified Representative, to the address of such Indemnified Representative listed on the signature page hereof, or to such other address as any party hereto shall have specified in a notice duly given in accordance with this Section 10, provided that reasonable steps are taken to assure that the notice is actually received by the Person to be notified. 11. Amendments: Binding Effect. No amendment, modification, termination, --------------------------- or cancellation of this Agreement shall be effective as to the Indemnified Representative unless signed in writing by the Corporation and the Indemnified Representative. This Agreement shall be binding upon the Corporation and its successors and assigns and shall inure to the benefit of the Indemnified Representative's heirs, executors, administrators, and personal representatives. -6- 12. Governing Law. This Agreement shall be governed by and construed in ------------- accordance with the laws of the State of Delaware, without regard to the conflict of laws provisions thereof. -7- IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the day and year first set forth above. (Corporate Seal) DIVA SYSTEMS CORPORATION --------------------------------------- INDEMNIFIED REPRESENTATIVE --------------------------------------- Name Address --------------------------------------- --------------------------------------- --------------------------------------- -8- EX-10.2 7 EMPLOYMENT AGREEMENT DATED JUNE 15, 1995 EXHIBIT 10.2 EMPLOYMENT AGREEMENT -------------------- This Employment Agreement is entered into as of June 15, 1995 (the "Effective Date"), by and between DIVA Systems Corporation, a Delaware corporation (the "Company"), and Alan H. Bushell (the "Executive"). WHEREAS, the Company desires to employ the Executive as of the Effective Date and the Executive desires to accept employment with the Company on the terms and conditions set forth below; NOW, THEREFORE, in consideration of the foregoing recital and the respective covenants and agreements of the parties contained in this document, the Company and the Executive agree as follows: 1. Employment and Duties. During the Employment Period (as defined in --------------------- Section 2 below), the Executive will serve as President and Chief Operating Officer of the Company. The duties and responsibilities of the Executive shall include the duties and responsibilities for the Executive's corporate offices and positions as set forth in the Company's bylaws from time to time in effect and such other duties and responsibilities as the Chief Executive Officer of the Company may from time to time reasonably assign to the Executive, in all cases to be consistent with the Executive's corporate offices and positions. The Executive shall perform faithfully the executive duties assigned to him to the best of his ability. The Executive shall be appointed to serve as a director of the Company, and, if elected, the Executive shall serve in such capacity without additional compensation. The Executive shall be nominated for director in any election of the Company's directors for as long as Executive serves as President and/or Chief Operating Officer during the Employment Period. 2. Employment Period. The employment period shall begin upon the ----------------- Effective Date and shall continue indefinitely (the "Employment Period"), unless sooner terminated pursuant to the provisions of this Agreement. 3. Place of Employment. The Executive's services shall be performed at ------------------- the Company's principal executive offices in Menlo Park, California. The parties acknowledge, however, that the Executive may be required to travel in connection with the performance of his duties hereunder. 4. Base Salary. For all services to be rendered by the Executive ----------- pursuant to this Agreement, the Company agrees to pay the Executive beginning August 1, 1995 through December 31, 1996 (the "Initial Base Salary Period") a base salary (the "Initial Base Salary") at an annual rate of not less than $170,588, as adjusted for any salary increases, as provided below. After December 31, 1996, the Company shall pay the Executive a base salary (the "Base Salary") at an annual rate of not less than $200,000, as adjusted for any salary increases, as provided below. The Initial Base Salary and Base Salary shall be payable in equal bi-monthly amounts. The Company agrees to review the Initial Base Salary on June 1, 1996, and the Base Salary at least once annually thereafter and to make such increases therein as the board of directors of the Company (the "Board of Directors") may approve; provided, however, that during the Initial Base Salary Period, all salary increases shall be based upon a percentage increase of the Base Salary amount, and thereafter shall be based upon a percentage increase of the Base Salary amount as adjusted for any prior salary increases. 5. Founder's Stock; "Tag Along" Right. ---------------------------------- (a) Founder's Stock. The Company shall issue the Executive six --------------- hundred thousand (600,000) shares of the Company's Common Stock for $0.01 per share for an aggregate purchase price of six thousand dollars ($6,000) and twelve thousand (12,000) shares of Series A Preferred Stock for one dollar ($1) per share for an aggregate purchase price of twelve thousand dollars ($12,000) (shares and price post-September 1, 1995 stock split). (b) "Tag Along" Right. In the event that Paul M. Cook, Rufus W. ----------------- Lumry, or any entity affiliated with such individuals (collectively, the "Principal Holders") intends to transfer (other than to an affiliate) any shares of equity securities of the Company to a buyer who owns or will acquire as a result of the sale of voting stock (or securities convertible into voting stock) equal to 1% or more of the Company's outstanding equity securities, the Executive will have the right to sell a pro rata portion of his shares of the Company's equity securities to the buyer in such transaction. In the event that any of the Principal Holders intend to purchase voting stock (or securities convertible into voting stock), the Executive shall have the right to sell to such Principal Holder(s) a pro rata portion of the voting stock (or securities convertible into voting stock) which such Principal Holder(s) proposes to acquire in such transaction. 6. Stock Option. ------------ (a) Initial Option. Effective as of the Effective Date, the Company -------------- shall grant the Executive an option (the "Option") to purchase 135,000 shares of the Company's Common Stock (the "Option Shares") at $0.01 per share (shares and price post-September 1, 1995 stock split). The Option shall vest as described in Section 6(c) herein and shall be subject to such other terms and conditions as are described in this Section 6. The Company shall provide the Executive the opportunity to accelerate his ability to exercise the Option, subject to the Company's repurchase option, as described in Section 6(b) herein. (b) "Early Exercise" of Option. The Company shall grant the Executive ------------------------- the opportunity to accelerate the exercise of his Option (an "Early Exercise") pursuant to a Restricted Stock Purchase Agreement (the "RSPA"). The Option Shares acquired pursuant to the RSPA shall be subject to the Company's right of repurchase (the "Repurchase Option"). The Option Shares shall vest and be released from the Repurchase Option based on the same vesting schedule as provided for vesting of the Option in Section 6(c) herein. The purchase price of the Option Shares pursuant to an Early Exercise may be made at the time of exercise by delivery of cash or a promissory note with principal and interest due in five years from the date of such exercise. (c) Vesting. The Option Shares shall vest and become exercisable (or, ------- in the case of an Early Exercise, the Repurchase Option shall lapse) every three months beginning from the date of grant on June 1, 1995, such that all of the Option Shares shall be fully vested (or, in the case of an Early Exercise, not be subject to the Repurchase Option) within 5 years from the date of grant. In addition, in the event of a Change in Control (as defined below), the unvested portion of the Option (or, in the case of an Early Exercise, the Option Shares subject to the Repurchase Option), if any, shall automatically accelerate (or, in the case of an Early Exercise, the Repurchase Option shall automatically lapse as to the Option Shares), and the Executive shall have the right to exercise all or any portion of such Option, in addition to any portion of the Option exercisable prior to such event (or, in the case of an Early Exercise, the Company's Repurchase Option shall completely lapse as to the Option Shares). For purposes of this Agreement, the term "Change of Control" shall mean the occurrence of any of the following events subsequent to the Effective Date: (i) Any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing forty percent (40%) or more of the total voting power represented by the Company's then outstanding voting securities; provided, however, that a Change in Control shall be deemed to occur in the event any one individual becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing thirty percent (30%) or more of the voting power represented by the Company's then outstanding voting securities; or (ii) A change in the composition of the Board of Directors of the Company occurring within a two-year period, as a result of which fewer than a majority of the directors are Incumbent Directors. "Incumbent Directors" shall mean directors who either (A) are directors of the Company as of the date hereof, or (B) are elected, or nominated for election, to the Board of Directors of the Company with the affirmative votes of at least a majority of the Incumbent Directors at the time of such election or nomination (but shall not include an individual whose election or nomination is in connection with an actual or threatened proxy contest relating to the election of directors to the Company); or (iii) A merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all the Company's assets. (d) Option Provisions. The Option shall be granted under the 1995 ----------------- ---- Stock Option Plan (the "Stock Plan") and, except as expressly provided otherwise - ----------------- in this Section 6, shall be subject to the terms and conditions of the Stock Plan and form of option agreement; provided, however, that the Company's Board of Directors may, in its discretion, grant the Option outside of the Stock Plan, and any such Option shall include such other terms as the Board of Directors may specify that are not inconsistent with the terms hereof. The Option will expire (or, in the case of an Early Exercise, the -3- vesting of the Option Shares will cease) on the first to occur of: (i) in the event the Executive's employment terminates for any reason other than upon resignation pursuant to Section 11, ninety (90) days after the date of such termination; (ii) in the event of a resignation pursuant to Section 11; or (iii) ten years from the date of grant of the Option. 7. Expenses. The Executive shall be entitled to prompt reimbursement by -------- the Company for all reasonable ordinary and necessary travel, entertainment, and other expenses incurred by the Executive during the Employment Period (in accordance with the policies and procedures established by the Company for its senior executive officers) in the performance of his duties and responsibilities under this Agreement; provided, that the Executive shall properly account for such expenses in accordance with Company policies and procedures. 8. Other Benefits. During the Employment Period, the Executive shall be -------------- entitled to participate in employee benefit plans or programs of the Company, if any, to the extent that his position, tenure, salary, age, health and other qualifications make him eligible to participate, subject to the rules and regulations applicable thereto. As soon as reasonably practicable, the Company shall use its best efforts to establish a defined contribution plan under Section 401(k) of the Internal Revenue Code. The medical and dental benefits provided to the Executive shall be at least equivalent to such benefits the Executive received from CellNet Data Systems, Inc. The Company shall assume the Executive's current COBRA payments until comparable employee benefits can be provided under the Company's plans or programs. 9. Vacations and Holidays. The Executive shall be entitled to four (4) ---------------------- weeks paid vacation and Company holidays in accordance with the Company's policies in effect from time to time for its senior executive officers. 10. Other Activities. The Executive shall devote substantially all of his ---------------- working time and efforts during the Company's normal business hours to the business and affairs of the Company and its subsidiaries and to the diligent and faithful performance of the duties and responsibilities duly assigned to him pursuant to this Agreement, except for vacations, holidays and sickness. However, the Executive may devote a reasonable amount of his time to civic, community, or charitable activities and, with the prior written approval of the Board of Directors, to serve as a director of other corporations and to other types of business or public activities not expressly mentioned in this paragraph. 11. Resignation. In the event (i) the Executive's Initial Base Salary or ----------- Base Salary, as adjusted for any salary increases, is less than eighty percent (80%) of the annual salary (including cash bonuses) of any Chief Executive Officer other than Paul Cook, or (ii) the number of the Executive's Option Shares which vest (or, in the case of an Early Exercise, the number of the Executive's Option Shares which are released from the Repurchase right lapses) in any year is less than seventy percent (70%) of the number of the Company's shares subject to option which vest (or which are released from the Company's right to repurchase) of any Chief Executive Officer other than Paul M. Cook, the Executive shall have the right to resign from employment with the Company (a "Voluntary -4- Resignation"). Upon providing the Company reasonable notice of a Voluntary Resignation, the Executive shall be entitled to payment of his current salary and vesting of his Option (or the lapse of the Company's Repurchase Option) for twelve (12) months from the date of such resignation. 12. Termination of Executive's Employment. The Company may terminate the ------------------------------------- Executive's employment for cause by giving the Executive 30 days' advance notice in writing. For all purposes under this Agreement, "Cause" shall mean (i) willful failure by the Executive to substantially perform his duties hereunder, other than a failure resulting from the Executive's complete or partial incapacity due to physical or mental illness or impairment, (ii) a willful act by the Executive which constitutes gross misconduct and which is injurious to the Company, (iii) a willful breach by the Executive of a material provision of this Agreement, or (iv) a material and willful violation of a federal or state law or regulation applicable to the business of the Company. No act, or failure to act, by the Executive shall be considered "willful" unless committed without good faith without a reasonable belief that the act or omission was in the Company's best interest. No compensation or benefits will be paid or provided to the Executive under this Agreement on account of a termination for Cause, or for periods following the date when such a termination of employment is effective. The Executive's rights under the benefit plans of the Company shall be determined under the provisions of those plans. The Company may also terminate the Executive's employment without cause by giving the Executive 30 days' advance notice in writing. In the event the Executive's employment is terminated for any reason other than for Cause, the Executive shall be entitled to the compensation and benefits provided pursuant to a Voluntary Resignation under Section 11 above. 13. Proprietary Information. During the Employment Period and thereafter, ----------------------- the Executive shall not, without the prior written consent of the Board of Directors, disclose or use for any purpose (except in the course of his employment under this Agreement and in furtherance of the business of the Company or any of its affiliates or subsidiaries) any confidential information or proprietary data of the Company. As an express condition of the Executive's employment with the Company, the Executive agrees to execute confidentiality agreements as requested by the Company, including but not limited to the Company's form of Employee Agreement which is attached hereto as Exhibit A and incorporated herein by reference. 14. Non-Solicitation. The Executive covenants and agrees with the Company ---------------- that during his employment with the Company and for a period expiring one (1) year after the date of termination of such employment, he will not solicit any of the Company's then-current employees to terminate their employment with the Company or to become employed by any firm, company or other business enterprise with which the Executive may then be connected. 15. Right to Advice of Counsel. The Executive acknowledges that he has -------------------------- consulted with counsel and is fully aware of his rights and obligations under this Agreement. 16. Successors. The Company will require any successor (whether direct or ---------- indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the -5- same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such assumption agreement prior to the effectiveness of any such succession shall entitle the Executive to the benefits described in Section 11 of this Agreement. 17. Arbitration. Any dispute or controversy arising under or in connection ----------- with this Agreement shall be settled exclusively by arbitration in San Jose, California, in accordance with the rules of the American Arbitration Association then in effect by an arbitrator selected by both parties within 10 days after either party has notified the other in writing that it desires a dispute between them to be settled by arbitration. In the event the parties cannot agree on such arbitrator within such 10-day period, each party shall select an arbitrator and inform the other party in writing of such arbitrator's name and address within 5 days after the end of such 10-day period and the two arbitrators so selected shall select a third arbitrator within 15 days thereafter; provided, however, that in the event of a failure by either party to select an arbitrator and notify the other party of such selection within the time period provided above, the arbitrator selected by the other party shall be the sole arbitrator of the dispute. Each party shall pay its own expenses associated with such arbitration, including the expense of any arbitrator selected by such party and the Company will pay the expenses of the jointly selected arbitrator. The decision of the arbitrator or a majority of the panel of arbitrators shall be binding upon the parties and judgment in accordance with that decision may be entered in any court having jurisdiction thereover. Punitive damages shall not be awarded. 18. Absence of Conflict. The Executive represents and warrants that his ------------------- employment by the Company as described herein shall not conflict with and will not be constrained by any prior employment or consulting agreement or relationship. 19. Assignment. This Agreement and all rights under this Agreement shall ---------- be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective personal or legal representatives, executors, administrators, heirs, distributees, devisees, legatees, successors and assigns. This Agreement is personal in nature, and neither of the parties to this Agreement shall, without the written consent of the other, assign or transfer this Agreement or any right or obligation under this Agreement to any other person or entity; except that the Company may assign this Agreement to any of its affiliates or wholly-owned subsidiaries, provided, that such assignment will -------- not relieve the Company of its obligations hereunder. If the Executive should die while any amounts are still payable to the Executive hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Executive's devisee, legatee, or other designee or, if there be no such designee, to the Executive's estate. 20. Notices. For purposes of this Agreement, notices and other ------- communications provided for in this Agreement shall be in writing and shall be delivered personally or sent by United States certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: Alan H. Bushell 137 Stone Pine Lane Menlo Park, CA 94025 -6- If to the Company: DIVA Systems Corporation 333 Ravenswood Avenue Menlo Park, CA 94025 Attn: Secretary or to such other address or the attention of such other person as the recipient party has previously furnished to the other party in writing in accordance with this paragraph. Such notices or other communications shall be effective upon delivery or, if earlier, three days after they have been mailed as provided above. 21. Integration. This Agreement and the Exhibit hereto represent the ----------- entire agreement and understanding between the parties as to the subject matter hereof and supersede all prior or contemporaneous agreements whether written or oral. No waiver, alteration, or modification of any of the provisions of this Agreement shall be binding unless in writing and signed by duly authorized representatives of the parties hereto. 22. Waiver. Failure or delay on the part of either party hereto to ------ enforce any right, power, or privilege hereunder shall not be deemed to constitute a waiver thereof. Additionally, a waiver by either party or a breach of any promise hereof by the other party shall not operate as or be construed to constitute a waiver of any subsequent waiver by such other party. 23. Severability. Whenever possible, each provision of this Agreement ------------ will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability will not affect any other provision or any other jurisdiction, but this Agreement will be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been contained herein. 24. Headings. The headings of the paragraphs contained in this Agreement -------- are for reference purposes only and shall not in any way affect the meaning or interpretation of any provision of this Agreement. 25. Applicable Law. This Agreement shall be governed by and construed in -------------- accordance with the internal substantive laws, and not the choice of law rules, of the State of California. 26. Counterparts. This Agreement may be executed in one or more ------------ counterparts, none of which need contain the signature of more than one party hereto, and each of which shall be deemed to be an original, and all of which together shall constitute a single agreement. -7- IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the case of the Company by its duly authorized officer, as of the day and year first above written. DIVA SYSTEMS CORPORATION By: /s/ PAUL M. COOK ----------------------------------------- Paul M. Cook Chairman and Chief Executive Officer EXECUTIVE: /s/ ALAN H. BUSHELL ----------------------------------------- Alan H. Bushell President and Chief Operating Officer -8- EX-10.3 8 1995 STOCK PLAN AND FORMS OF AGREEMENTS EXHIBIT 10.3 DIVA SYSTEMS CORPORATION 1995 STOCK PLAN STOCK OPTION AGREEMENT (NO EARLY EXERCISE; CUSTOM VESTING) Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Option Agreement. 1. NOTICE OF STOCK OPTION GRANT Optionee Name: Optionee Address: ____________________________________________________________ ____________________________________________________________ You have been granted an option to purchase Common Stock of the Company, subject to the terms and conditions of the Plan and this Option Agreement, as follows: Grant Number __________________ Date of Grant __________________ Total Number of Shares Granted ______ Exercise Price per Share $ ______ Total Exercise Price $ ______ Vesting Commencement Date ______ Type of Option: ______ Incentive Stock Option ______ Nonstatutory Stock Option Term/Expiration Date: ______ Years from _______ VESTING SCHEDULE: _____% of the Shares subject to the Option shall vest six (6) months after the Vesting Commencement Date, and 5% of the Shares subject to the Option shall vest each three (3) month period after the Vesting Commencement Date, so that all of the Shares shall be vested _______(___) months after the Vesting Commencement Date. TERMINATION PERIOD: This Option may be exercised for 30 days after termination of employment or consulting relationship, or such longer period as may be applicable upon death or Disability of Optionee as provided in the Plan, but in no event later than the Term/Expiration Date as provided above. 2. AGREEMENT 1. GRANT OF OPTION. DIVA Systems Corporation, a Delaware corporation (the "COMPANY"), hereby grants to the Optionee named in the Notice of Grant (the "OPTIONEE"), an option (the "OPTION") to purchase a total number of shares of Common Stock (the "SHARES") set forth in the Notice of Grant, at the exercise price per share set forth in the Notice of Grant (the "EXERCISE PRICE") subject to the terms, definitions and provisions of the 1995 Stock Plan (the "PLAN") adopted by the Company, which is incorporated herein by reference. Capitalized terms not otherwise defined herein shall have the respective meanings set forth for them. If designated in the Notice of Grant as an Incentive Stock Option, this Option is intended to qualify as an Incentive Stock Option as defined in Section 422 of the Code. However, if this Option is intended to be an Incentive Stock Option, to the extent that it exceeds the $100,000 rule of Code Section 422(d) it shall be treated as a Nonstatutory Stock Option. 2. EXERCISE OF OPTION. This Option shall be exercisable during its term in accordance with the Exercise Schedule set out in the Notice of Grant and with the provisions of Section 9 of the Plan as follows: (i) RIGHT TO EXERCISE. (a) Subject to subsections 2(i)(b) through 2(i)(d) below, this Option shall be exercisable cumulatively according to the vesting schedule set out in the Notice of Grant. For purposes of this Stock Option Agreement, Shares subject to this Option shall vest based on Optionee's Continuous Status as an Employee or Consultant to the Company. (b) This Option may not be exercised for a fraction of a share. 2 (c) In the event of Optionee's death, disability or other termination of employment, the exercisability of the Option is governed by Sections 6, 7 and 8 below, subject to the limitation contained in subsection 2(i)(d). (d) In no event may this Option be exercised after the date of expiration of the term of this Option as set forth in the Notice of Grant. (ii) METHOD OF EXERCISE. This Option shall be exercisable by written notice (in the form attached as EXHIBIT A) which shall state the election to exercise the Option, the number of Shares in respect of which the Option is being exercised, and such other representations and agreements with respect to such shares of Common Stock as may be required by the Company pursuant to the provisions of the Plan. Such written notice shall be signed by the Optionee and, together with the Investment Representation Statement attached as EXHIBIT B signed by the Optionee (and, if the Optionee resides in a community property state, executed by the Optionee's spouse), This Option shall be deemed to be exercised upon receipt by the Company of such documentation accompanied by the Exercise Price. No Shares will be issued pursuant to the exercise of an Option unless such issuance and such exercise shall comply with all relevant provisions of law and the requirements of any stock exchange upon which the Shares may then be listed. Assuming such compliance, for income tax purposes the Shares shall be considered transferred to the Optionee on the date on which the Option is exercised with respect to such Shares. 3. OPTIONEE'S REPRESENTATIONS. In the event the Shares purchasable pursuant to the exercise of this Option have not been registered under the Securities Act of 1933, as amended, at the time this Option is exercised, Optionee shall, if required by the Company, concurrently with the exercise of all or any portion of this Option, deliver to the Company his Investment Representation Statement in the form attached hereto as EXHIBIT B and, if applicable, shall review the applicable rules of the Commissioner of Corporations attached to such Investment Representation Statement. 4. METHOD OF PAYMENT. Payment of the Exercise Price shall be by any of the following, or a combination thereof, at the election of the Optionee: (i) cash; (ii) check; or 3 (iii) surrender of other shares of Common Stock of the Company which (A) in the case of Shares acquired pursuant to the exercise of a Company option, have been owned by the Optionee for more than six (6) months on the date of surrender, and (B) have a fair market value on the date of surrender equal to the Exercise Price of the Shares as to which the Option is being exercised; or (iv) delivery of a properly executed exercise notice together with such other documentation as the Board and the broker, if applicable, shall require to effect an exercise of the Option and delivery to the Company of the sale or the exercise price. 5. RESTRICTIONS ON EXERCISE. This Option may not be exercised until such time as the Plan has been approved by the stockholders of the Company, or if the issuance of such Shares upon such exercise or the method of payment of consideration for such shares would constitute a violation of any applicable federal or state securities or other law or regulation, including any rule under Part 207 of Title 12 of the Code of Federal Regulations ("REGULATION G") as promulgated by the Federal Reserve Board. As a condition to the exercise of this Option, the Company may require Optionee to make any representation and warranty to the Company as may be required by any applicable law or regulation. 6. TERMINATION OF RELATIONSHIP. In the event of termination of Optionee's Continuous Status as an Employee or Consultant, Optionee may, to the extent otherwise so entitled at the date of such termination (the "TERMINATION DATE"), exercise this Option during the Termination Period set out in the Notice of Grant. To the extent that Optionee was not entitled to exercise this Option at the date of such termination, or if Optionee does not exercise this Option within the time specified herein, the Option shall terminate. 7. DISABILITY OF OPTIONEE. Notwithstanding the provisions of Section 6 above, in the event of termination of Optionee's Continuous Status as an Employee or Consultant as a result of total and permanent disability (as defined in Section 22(e)(3) of the Code), Optionee may, but only within twelve (12) months from the date of termination of employment (but in no event later than the date of expiration of the term of this Option as set forth in Section 10 below), exercise the Option to the extent otherwise so entitled at the date of such termination. To the extent that Optionee was not entitled to exercise the Option at the date of termination, or if Optionee does not exercise such Option (to the extent otherwise so entitled) within the time specified herein, the Option shall terminate. 8. DEATH OF OPTIONEE. In the event of termination of Optionee's Continuous Status as an Employee or Consultant as a 4 result of the death of Optionee, the Option may be exercised at any time within twelve (12) months following the date of death (but in no event later than the date of expiration of the term of this Option as set forth in Section 10 below), by Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent the Optionee could exercise the Option at the date of death. 9. NON-TRANSFERABILITY OF OPTION. This Option may not be transferred in any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of Optionee only by Optionee. The terms of this Option shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee. 10. TERM OF OPTION. This Option may be exercised only within the term set out in the Notice of Grant, and may be exercised during such term only in accordance with the Plan and the terms of this Option. The limitations set out in Section 7 of the Plan regarding Options designated as Incentive Stock Options and granted to more than ten percent (10%) stockholders shall apply to this Option. 11. TAXATION UPON EXERCISE OF OPTION. Optionee understands that, upon exercising a nonstatutory Option, he or she will recognize income for tax purposes in an amount equal to the excess of the then fair market value of the Shares over the exercise price. However, the timing of this income recognition may be deferred for up to six months if Optionee is subject to Section 16 of the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"). If the Optionee is an employee, the Company will be required to withhold from Optionee's compensation, or collect from Optionee and pay to the applicable taxing authorities an amount equal to a percentage of this compensation income. Additionally, the Optionee may at some point be required to satisfy tax withholding obligations with respect to the disqualifying disposition of an Incentive Stock Option. The Optionee shall satisfy his or her tax withholding obligation arising upon the exercise of this Option out of Optionee's compensation or by payment to the Company. 12. TAX CONSEQUENCES. Set forth below is a brief summary as of the date of this Option of some of the federal and California tax consequences of exercise of this Option and disposition of the Shares. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES. (i) EXERCISE OF INCENTIVE STOCK OPTION. If this Option qualifies as an Incentive Stock Option ("ISO"), there will be no 5 regular federal income tax liability or California income tax liability upon the exercise of the Option, although the excess, if any, of the fair market value of the Shares on the date of exercise over the Exercise Price will be treated as an adjustment to the alternative minimum tax for federal tax purposes and may subject the Optionee to the alternative minimum tax in the year of exercise. (ii) EXERCISE OF NONSTATUTORY STOCK OPTION. There may be a regular federal income tax liability and California income tax liability upon the exercise of a Nonstatutory Stock Option ("NSO"). The Optionee will be treated as having received compensation income (taxable at ordinary income tax rates) equal to the excess, if any, of the fair market value of the Shares on the date of exercise over the Exercise Price. If Optionee is an employee, the Company will be required to withhold from Optionee's compensation or collect from Optionee and pay to the applicable taxing authorities an amount equal to a percentage of this compensation income at the time of exercise. (iii) DISPOSITION OF SHARES. In the case of an NSO, if Shares are held for at least one year, any gain realized on disposition of the Shares will be treated as long-term capital gain for federal and California income tax purposes. In the case of an ISO, if Shares transferred pursuant to the Option are held for at least one year after exercise and are disposed of at least two years after the Date of Grant, any gain realized on disposition of the Shares will also be treated as long-term capital gain for federal and California income tax purposes. If Shares purchased under an ISO are disposed of within such one- year period or within two years after the Date of Grant, any gain realized on such disposition will be treated as compensation income (taxable at ordinary income rates) to the extent of the difference between the Exercise Price and the lesser of (1) the fair market value of the Shares on the date of exercise, or (2) the sale price of the Shares. 6 (iv) NOTICE OF DISQUALIFYING DISPOSITION OF ISO SHARES. If the Option granted to Optionee herein is an ISO, and if Optionee sells or otherwise disposes of any of the Shares acquired pursuant to the ISO on or before the later of (1) the date two years after the Date of Grant, or (2) the date one year after the date of exercise, the Optionee shall immediately notify the Company in writing of such disposition. Optionee agrees that Optionee may be subject to income tax withholding by the Company on the compensation income recognized by the Optionee. DIVA SYSTEMS CORPORATION A DELAWARE CORPORATION By: --------------------------------------------- Title: ------------------------------------------ OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE OPTION HEREOF IS EARNED ONLY BY CONTINUING CONSUL TANCY OR EMPLOYMENT AT THE WILL OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT NOTHING IN THIS AGREEMENT, NOR IN THE COMPANY'S STOCK OPTION PLAN WHICH IS INCORPORATED HEREIN BY REFERENCE, SHALL CONFER UPON OPTIONEE ANY RIGHT WITH RESPECT TO CONTINUATION OF EMPLOYMENT OR CONSULTANCY BY THE COMPANY, NOR SHALL IT INTERFERE IN ANY WAY WITH HIS RIGHT OR THE COMPANY'S RIGHT TO TERMINATE HIS EMPLOYMENT OR CONSULTANCY AT ANY TIME, WITH OR WITHOUT CAUSE. Optionee acknowledges receipt of a copy of the Plan and represents that he or she is familiar with the terms and provisions thereof, and hereby accepts this Option subject to all of the terms and provisions thereof. Optionee has reviewed the Plan and this Option in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Option and fully under stands all provisions of the Option. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Administrator upon any questions arising under the Plan or this Option. Dated: ---------------------------------- Optionee 7 EXHIBIT A 1995 STOCK PLAN EXERCISE NOTICE DIVA Systems Corporation 333 Ravenswood Avenue, Building 203 Menlo Park, California 94025 Attention: Chief Financial Officer 1. EXERCISE OF OPTION. Effective as of today, ___________________, the undersigned ("OPTIONEE") hereby elects to exercise Optionee's option to purchase _________ shares of the Common Stock (the "SHARES") of DIVA Systems Corporation (the "COMPANY") under and pursuant to the 1995 Stock Plan, as amended (the "PLAN") and the [ ] Incentive [ ] Nonstatutory Stock Option Agreement dated __________________ (the "OPTION AGREEMENT"). 2. REPRESENTATIONS OF OPTIONEE. Optionee acknowledges that Optionee has received, read and understood the Plan and Option Agreement and agrees to abide by and be bound by their terms and conditions. 3. RIGHTS AS STOCKHOLDER. Until the stock certificate evidencing such Shares is issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to the optioned Stock, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued) such stock certificate promptly after the Option is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 12 of the Plan. Optionee shall enjoy rights as a stockholder until such time as Optionee disposes of the Shares. Upon such exercise, Optionee shall have no further rights as a holder of the Shares so purchased except the right to receive payment for the Shares so purchased in accordance with the provisions of this Agreement, and Optionee shall forthwith cause the certificate(s) evidencing the Shares so purchased to be surrendered to the Company for transfer or cancellation. 4. MARKET STAND-OFF AGREEMENT. Optionee hereby agrees that if so requested by the Company or any representative of the underwriters in connection with any registration of the offering of any securities of the Company under the 1933 Act, Optionee shall not sell or otherwise transfer any Shares or other securities of the Company during the 180-day period following the effective date of a registration statement of the Company filed under the 1933 Act; provided, however, that such restriction shall only apply to the first registration statement of the Company to become effective under the 1933 Act which includes securities to be sold on behalf of the Company to the public in an underwritten public offering. The Company may impose stop-transfer instructions with respect to securities subject to the foregoing restrictions until the end of such 180-day period. 5. RIGHT OF FIRST REFUSAL. (i) GENERAL. Before any of the Shares may be sold or otherwise transferred (including transfer by gift or operation of law), the Company or its assignee(s) shall have a right of first refusal to purchase the Shares on the terms and conditions set forth in this Section (the "RIGHT OF FIRST REFUSAL"). (ii) NOTICE OF PROPOSED TRANSFER. The Optionee shall deliver to the Company a written notice (the "NOTICE") stating: (i) the Optionee's bona fide intention to sell or otherwise transfer such Shares (the "OFFERED SHARES"); (ii) the name of each proposed purchaser or other transferee ("PROPOSED TRANSFEREE"); (iii) the number of Offered Shares to be transferred to each Proposed Transferee; and (iv) the bona fide cash price or other consideration for which the Optionee proposes to transfer the Offered Shares (the "OFFERED PRICE"), and the Optionee shall offer the Offered Shares at the Offered Price to the Company or its assignee(s). (iii) EXERCISE OF RIGHT OF FIRST REFUSAL. At any time within 30 days after receipt of the Notice, the Company or its assignee(s) may, by giving written notice to the Optionee, elect to purchase all, but not less than all, of the Offered Shares, at the purchase price determined in accordance with subsection 5(iv) below. (iv) PURCHASE PRICE. The purchase price ("PURCHASE PRICE") for the Offered Shares purchased by the Company or its assignee(s) under this Section shall be the Offered Price. If the Offered Price includes consideration other than cash, the cash equivalent value of the non-cash consideration shall be determined by the Board of Directors of the Company in good faith. (v) PAYMENT. Payment of the Purchase Price shall be made, at the option of the Company or its assignee(s), in cash (by check), by cancellation of all or a portion of any outstanding indebtedness of the Optionee to the Company (or, in the case of repurchase by an assignee, to the assignee), or by any combination thereof within forty (40) days after receipt of the Notice or in the manner and at the times set forth in the Notice. (vi) OPTIONEE'S RIGHT TO TRANSFER. If all of the Offered Shares proposed in the Notice to be transferred to a given Proposed Transferee are not purchased by the Company or its assignee(s) as provided in this Section, then the Optionee may sell or otherwise transfer the Shares to that Proposed Transferee at the Offered Price or at a higher price, provided that such sale or other transfer (i) is consummated within 120 days after the date of the Notice, (ii) is in accordance with all the terms of this Agreement and (iii) is effected in accordance with any applicable securities laws and the Proposed Transferee agrees in writing that the provisions of this Agreement shall continue to apply to the Offered Shares in the hands of such Proposed Transferee. If the Shares described in the Notice are not transferred to the Proposed Transferee within such period, a new Notice shall be given to the Company, and the Company or its assignees shall again be offered the Rights of First Refusal before any Shares held by the Optionee may be sold or otherwise transferred. (vii) EXCEPTION FOR CERTAIN TRANSFERS. Anything to the contrary contained in this Section notwithstanding, the transfer of any or all of the Offered Shares during the Optionee's lifetime or on the Optionee's death by will or intestacy to (i) the Optionee's immediate family, (ii) a trust for the benefit of the Optionee or the Optionee's immediate family (iii) an affiliate of the Optionee or (iv) the Optionee's partners through a distribution shall be exempt from the provisions of this Section. "IMMEDIATE FAMILY" as used herein shall mean spouse, lineal descendant or antecedent, father, mother, brother or sister. In such case, the transferee or other recipient shall receive and hold the Offered Shares so transferred subject to the provisions of this Section, and there shall be no further transfer of such Offered Shares except in accordance with the terms of this Section. (viii) TERMINATION OF RIGHT OF FIRST REFUSAL. The Right of First Refusal under Section 5 shall not apply to and shall terminate immediately before the i) the closing of the Company's initial public offering of Common Stock with proceeds to the Company greater than $10,000,000 pursuant to a registration statement filed with and declared effective by the Securities and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended (the "SECURITIES ACT") 6. TAX CONSULTATION. Optionee understands that Optionee may suffer adverse tax consequences as a result of Optionee's purchase 3 or disposition of the Shares. Optionee represents that Optionee has consulted with any tax consultants Optionee deems advisable in connection with the purchase or disposition of the Shares and that Optionee is not relying on the Company for any tax advice. 7. RESTRICTIVE LEGENDS AND STOP-TRANSFER ORDERS. (a) LEGENDS. Optionee understands and agrees that the Company shall cause the legends set forth below or legends substantially equivalent thereto, to be placed upon any certificate(s) evidencing ownership of the Shares together with any other legends that may be required by state or federal securities laws: THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT") AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER THE ACT OR, IN THE OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER OF THESE SECURITIES, SUCH OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION IS IN COMPLIANCE THEREWITH. THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER AND RIGHT OF FIRST REFUSAL OPTIONS HELD BY THE ISSUER OR ITS ASSIGNEE(S) AS SET FORTH IN THE EXERCISE NOTICE BETWEEN THE ISSUER AND THE ORIGINAL HOLDER OF THESE SHARES, A COPY OF WHICH MAY BE OBTAINED AT THE PRINCIPAL OFFICE OF THE ISSUER. SUCH TRANSFER RESTRICTIONS AND RIGHT OF FIRST REFUSAL ARE BINDING ON TRANSFEREES OF THESE SHARES. Optionee understands that transfer of the Shares may be restricted by Section 260.141.11 of the Rules of the California Corporations Commissioner, a copy of which is attached to EXHIBIT B, the Investment Representation Statement, and if so the Shares will bear the following additional legend: IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES. (b) STOP-TRANSFER NOTICES. Optionee agrees that, in order to ensure compliance with the restrictions referred to 4 herein, the Company may issue appropriate "stop transfer" instructions to its transfer agent, if any, and that, if the Company transfers its own securities, it may make appropriate notations to the same effect in its own records. (c) REFUSAL TO TRANSFER. The Company shall not be required (i) to transfer on its books any Shares that have been sold or otherwise transferred in violation of any of the provisions of this Agreement or (ii) to treat as owner of such Shares or to accord the right to vote or pay dividends to any purchaser or other transferee to whom such Shares shall have been so transferred. 8. SUCCESSORS AND ASSIGNS. The Company may assign any of its rights under this Agreement to single or multiple assignees, and this Agreement shall inure to the benefit of the successors and assigns of the Company. Subject to the restrictions on transfer herein set forth, this Agreement shall be binding upon Optionee and his or her heirs, executors, administrators, successors and assigns. 9. INTERPRETATION. Any dispute regarding the interpretation of this Agreement shall be submitted by Optionee or by the Company forthwith to the Company's Board of Directors or the committee thereof that administers the Plan, which shall review such dispute at its next regular meeting. The resolution of such a dispute by the Board or committee shall be final and binding on the Company and on Optionee. 10. GOVERNING LAW; SEVERABILITY. This Agreement shall be governed by and construed in accordance with the laws of the State of California excluding that body of law pertaining to conflicts of law. Should any provision of this Agreement be determined by a court of law to be illegal or unenforceable, the other provisions shall nevertheless remain effective and shall remain enforceable. 11. NOTICES. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit in the United States mail by certified mail, with postage and fees prepaid, addressed to the other party at its address as shown below beneath its signature, or to such other address as such party may designate in writing from time to time to the other party. 12. FURTHER INSTRUMENTS. The parties agree to execute such further instruments and to take such further action as may be reasonably necessary to carry out the purposes and intent of this Agreement. 13. DELIVERY OF PAYMENT. Optionee herewith delivers to the Company the full Exercise Price for the Shares. 5 14. ENTIRE AGREEMENT. The Plan and Notice of Grant/Option Agreement are incorporated herein by reference. This Agreement, the Plan, the Option Agreement and the Investment Representation Statement constitute the entire agreement of the parties and supersede in their entirety all prior undertakings and agreements of the Company and Optionee with respect to the subject matter hereof. 6 Submitted by: Accepted by: OPTIONEE: DIVA SYSTEMS CORPORATION, A DELAWARE CORPORATION By: ------------------------------------ (signature) Its: ----------------------------------- ADDRESS: ADDRESS: 333 Ravenswood Avenue, Building 203 Menlo Park, California 94025 7 EXHIBIT B INVESTMENT REPRESENTATION STATEMENT OPTIONEE : COMPANY : DIVA SYSTEMS CORPORATION SECURITY : COMMON STOCK AMOUNT : DATE : In connection with the purchase of the above-listed Securities, the undersigned Optionee represents to the Company the following: (a) Optionee is aware of the Company's business affairs and financial condition and has acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the securities. Optionee is acquiring these securities for investment for Optionee's own account only and not with a view to, or for resale in connection with, any "distribution" thereof within the meaning of the Securities Act of 1933, as amended (the "SECURITIES ACT"). (b) Optionee acknowledges and understands that the securities constitute "restricted securities" under the Securities Act and have not been registered under the Securities Act in reliance upon a specific exemption therefrom, which exemption depends upon, among other things, the bona fide nature of Optionee's investment intent as expressed herein. In this connection, Optionee understands that, in the view of the Securities and Exchange Commission, the statutory basis for such exemption may be unavailable if Optionee's representation was predicated solely upon a present intention to hold these Securities for the minimum capital gains period specified under tax statutes, for a deferred sale, for or until an increase or decrease in the market price of the Securities, or for a period of one year or any other fixed period in the future. Optionee further understands that the Securities must be held indefinitely unless they are subsequently registered under the Securities Act or an exemption from such registration is available. Optionee further acknowledges and understands that the Company is under no obligation to register the securities. Optionee understands that the certificate evidencing the securities will be imprinted with a legend which prohibits the transfer of the Securities unless they are registered or such registration is not required in the opinion of counsel satisfactory to the Company, if applicable a legend prohibiting their transfer without the consent of the Commissioner of Corporations of the State of California, and any other legend required under applicable state securities laws. (c) Optionee is familiar with the provisions of Rule 701 and Rule 144, each promulgated under the Securities Act, which, in substance, permit limited public resale of "restricted securities" acquired, directly or indirectly from the issuer thereof, in a non- public offering subject to the satisfaction of certain conditions. Rule 701 provides that if the issuer qualifies under Rule 701 at the time of the grant of the Option to the Optionee, the exercise will be exempt from registration under the Securities Act. In the event the Company becomes subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, ninety (90) days thereafter (or such longer period as any market stand-off agreement may require) the securities exempt under Rule 701 may be resold, subject to the satisfaction of certain of the conditions specified by Rule 144, including: (1) the resale being made through a broker in an unsolicited "broker's transaction" or in transactions directly with a market maker (as said term is defined under the Securities Exchange Act of 1934); and, in the case of an affiliate, (2) the availability of certain public information about the Company, (3) the amount of securities being sold during any three month period not exceeding the limitations specified in Rule 144(e), and (4) the timely filing of a Form 144, if applicable. In the event that the Company does not qualify under Rule 701 at the time of grant of the Option, then the securities may be resold in certain limited circumstances subject to the provisions of Rule 144, which requires the resale to occur not less than two years after the party has purchased, and made full payment for, within the meaning of Rule 144, the securities to be sold; and, in the case of an affiliate, or of a non-affiliate who has held the securities less than three years, the satisfaction of the conditions set forth in sections (1), (2), (3) and (4) of the paragraph immediately above. (d) Optionee further understands that in the event all of the applicable requirements of Rule 701 or 144 are not satisfied, registration under the Securities Act, compliance with Regulation A, or some other registration exemption will be required; and that, notwithstanding the fact that Rules 144 and 701 are not exclusive, the Staff of the Securities and Exchange Commis sion has expressed its opinion that persons proposing to sell private placement securities other than in a registered offering and otherwise than pursuant to Rules 144 or 701 will have a substantial burden of proof in establishing that an exemption from registration is available for such offers or sales, and that such persons and their respective brokers who participate in such transactions do so at their own risk. Optionee understands that no assurances can be given that any such other registration exemption will be available in such event. (e) Optionee understands that the certificate evidencing the Securities will, if required, be imprinted with a legend which prohibits the transfer of the Securities without the consent of the Commissioner of Corporations of California. If such prohibition is applicable, Optionee has read the applicable Commissioner's Rules with respect to such restriction, a copy of which is attached. Date: ------------------- --------------------------------------------- (Signature of Optionee) 2 ATTACHMENT 1 STATE OF CALIFORNIA - CALIFORNIA ADMINISTRATIVE CODE ---------------------------------------------------- Title 10. Investment - Chapter 3. Commissioner of Corporations 260.141.11: Restriction on Transfer. (a) The issuer of any security upon ---------- ----------------------- which a restriction on transfer has been imposed pursuant to Sections 260.102.6, 260.141.10 or 260.534 shall cause a copy of this section to be delivered to each issuee or transferee of such security at the time the certificate evidencing the security is delivered to the issuee or transferee. (b) It is unlawful for the holder of any such security to consummate a sale or transfer of such security, or any interest therein, without the prior written consent of the Commissioner (until this condition is removed pursuant to Section 260.141.12 of these rules), except: (1) to the issuer; (2) pursuant to the order or process of any court; (3) to any person described in Subdivision (i) of Section 25102 of the Code or Section 260.105.14 of these rules; (4) to the transferror's ancestors, descendants or spouse, or any custodian or trustee for the account of the transferrer or the transferror's ancestors, descendants, or spouse; or to a transferee by a trustee or custodian for the account of the transferee or the transferee's ancestors, descendants or spouse; (5) to holders of securities of the same class of the same issuer; (6) by way of gift or donation inter vivos or on death; (7) by or through a broker-dealer licensed under the Code (either acting as such or as a finder) to a resident of a foreign state, territory or country who is neither domiciled in this state to the knowledge of the broker-dealer, nor actually present in this state if the sale of such securities is not in violation of any securities law of the foreign state, territory or country concerned; (8) to a broker-dealer licensed under the Code in a principal transaction, or as an underwriter or member of an underwriting syndicate or selling group; (9) if the interest sold or transferred is a pledge or other lien given by the purchaser to the seller upon a sale of the security for which the Commissioner's written consent is obtained or under this rule not required; (10) by way of a sale qualified under Sections 25111, 25112, 25113 or 25121 of the Code, of the securities to be transferred, provided that no order under Section 25140 or subdivision (a) of Section 25143 is in effect with respect to such qualification; (11) by a corporation to a wholly owned subsidiary of such corporation, or by a wholly owned subsidiary of a corporation to such corporation; (12) by way of an exchange qualified under Section 25111, 25112 or 25113 of the Code, provided that no order under Section 25140 or subdivision (a) of Section 25143 is in effect with respect to such qualification; (13) between residents of foreign states, territories or countries who are neither domiciled nor actually present in this state; (14) to the State Controller pursuant to the Unclaimed Property Law or to the administrator of the unclaimed property law of another state; or (15) by the State Controller pursuant to the Unclaimed Property Law or by the administrator of the unclaimed property law of another state if, in either such case, such person (i) discloses to potential purchasers at the sale that transfer of the securities is restricted under this rule, (ii) delivers to each purchaser a copy of this rule, and (iii) advises the Commissioner of the name of each purchaser; (16) by a trustee to a successor trustee when such transfer does not involve a change in the beneficial ownership of the securities; (17) by way of an offer and sale of outstanding securities in an issuer transaction that is subject to the qualification requirement of Section 25110 of the Code but exempt from that qualification requirement by subdivision (f) of Section 25102; provided that any such transfer is on the condition that any certificate evidencing the security issued to such transferee shall contain the legend required by this section. (c) The certificates representing all such securities subject to such a restriction on transfer, whether upon initial issuance or upon any transfer thereof, shall bear on their face a legend, prominently stamped or printed thereon in capital letters of not less than 10-point size, reading as follows: "IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES." 3 EX-10.4 9 REGISTRATION RIGHTS AGREEMENT DATED 02/19/1998 EXHIBIT 10.4 ________________________________________________________________________________ REGISTRATION RIGHTS AGREEMENT Dated February 19, 1998 between DIVA SYSTEMS CORPORATION and MERRILL LYNCH & CO., MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED, CHASE SECURITIES INC. and MORGAN STANLEY & CO. INCORPORATED ________________________________________________________________________________ REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made and entered --------- into February 19, 1998, among DIVA SYSTEMS CORPORATION, a Delaware corporation (the "Company") on the one hand, and MERRILL LYNCH & CO., MERRILL LYNCH, PIERCE, ------- FENNER & SMITH INCORPORATED, CHASE SECURITIES INC. and MORGAN STANLEY & CO. INCORPORATED, on the other hand (the "Initial Purchasers"). ------------------ This Agreement is made pursuant to the Units Purchase Agreement, dated February 11, 1998, between the Company and the Initial Purchasers (the "Purchase -------- Agreement"), which provides for the sale by the Company to the Initial - --------- Purchasers of 404,998 Units (the "Initial Purchaser Units"), each consisting of ----------------------- one 12% Senior Discount Note due 2008 with a principal amount at maturity of $1,000 (a "Note") and three warrants (each a "Warrant"), each entitling the ---- ------- holder thereof to purchase one share of Common Stock, par value $0.001 per share, of the Company (the "Common Stock"). In order to induce the Initial ------------ Purchasers to enter into the Purchase Agreement, the Company has agreed to provide to the Initial Purchasers and their direct and indirect transferees the registration rights set forth in this Agreement. The execution of this Agreement is a condition to the closing under the Units Purchase Agreement. Pursuant to the terms of an exchange offer memorandum and accompanying Transmittal Form from the Company to the holders (the "Exchange Noteholders") of -------------------- its 13% Subordinated Discount Note due 2006, the Company has agreed to issue to the Exchange Noteholders an aggregate of 58,002 Units (the "Exchange Noteholder ------------------- Units"), each consisting of one Note and three Warrants. In order to induce the - ----- Exchange Noteholders to exchange their 13% Subordinated Discount Notes due 2006 for Units, the Company has agreed to provide to the Exchange Noteholders and their direct and indirect transferees the registration rights set forth in this Agreement. The Notes included in the Initial Purchaser Units and the Notes included in the Exchange Noteholder Units are collectively referred to herein as the "Notes". ----- In consideration of the foregoing, the parties hereto agree as follows: 1. Definitions. ----------- As used in this Agreement, the following capitalized defined terms shall have the following meanings: "Business Day" shall have the meaning specified in the Indenture. ------------ "Closing Date" shall mean the Closing Date as defined in the Purchase ------------ Agreement. 2 "Company" shall have the meaning set forth in the preamble and shall also ------- include the Company's successors. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended ------------ from time to time. "Exchange Noteholders" shall have the meaning set forth in the preamble. -------------------- "Exchange Offer" shall mean the exchange offer by the Company of Exchange -------------- Securities for Registrable Securities pursuant to Section 2(a) hereof. "Exchange Offer Registration" shall mean a registration under the --------------------------- Securities Act effected pursuant to Section 2(a) hereof. "Exchange Offer Registration Statement" shall mean an exchange offer ------------------------------------- registration statement on Form S-4 (or, if applicable, on another appropriate form) and all amendments and supplements to such registration statement, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "Exchange Securities" shall mean securities issued by the Company under the ------------------- Indenture containing terms identical to the Notes (except that (i) interest thereon shall accrue from the last date on which interest was paid on the Notes or, if no such interest has been paid, from March 1, 2003 and (ii) the interest rate per annum on the Exchange Securities shall be 12%; provided that if by February 19, 1999 the Company has not consummated the Exchange Offer or caused the Shelf Registration Statement to be declared effective, interest (in addition to interest otherwise due on the Exchange Securities after such date) will accrue at a rate of 0.5% per annum on the Exchange Securities) and to be offered to Holders of Notes in exchange for Notes pursuant to the Exchange Offer. "Holder" shall mean each of the Initial Purchasers and each of the Exchange ------ Noteholders, for so long as it owns any Registrable Securities, and each of its successors, assigns and direct and indirect transferees who become registered owners of Registrable Securities under the Indenture; provided that for purposes of Sections 4 and 5 of this Agreement, the term "Holder" shall include Participating Broker-Dealers (as defined in Section 4(a)). "Indenture" shall mean the Indenture relating to the Notes dated as of --------- February 19, 1998, between the Company and The Bank of New York, as trustee, and as the same may be amended from time to time in accordance with the terms thereof. "Initial Purchasers" shall have the meaning set forth in the preamble. ------------------ 3 "Majority Holders" shall mean, at any time, the Holders of a majority of ---------------- the aggregate principal amount at maturity of Registrable Securities outstanding at such time; provided that whenever the consent or approval of Holders of a specified percentage of Registrable Securities is required hereunder, Registrable Securities held by the Company or any of its affiliates (as such term is defined in Rule 405 under the Securities Act) (other than the Initial Purchasers or subsequent holders of Registrable Securities if such subsequent holders are deemed to be such affiliates solely by reason of their holding of such Registrable Securities) shall not be counted in determining whether such consent or approval was given by the Holders of such required percentage or amount. "Person" shall mean an individual, partnership, corporation, trust or ------ unincorporated organization, or a government or agency or political subdivision thereof. "Prospectus" shall mean the prospectus included in a Registration ---------- Statement, including any preliminary prospectus, and any such prospectus as amended or supplemented by any prospectus supplement, including a prospectus supplement with respect to the terms of the offering of any portion of the Registrable Securities covered by a Shelf Registration Statement, and by all other amendments and supplements to such prospectus, and in each case including all material incorporated by reference therein. "Purchase Agreement" shall have the meaning set forth in the preamble. ------------------ "Registrable Securities" shall mean the Notes; provided, however, that the ---------------------- Notes shall cease to be Registrable Securities (i) when a Registration Statement with respect to such Notes shall have been declared effective under the Securities Act and such Notes shall have been disposed of or exchanged pursuant to such Registration Statement, (ii) when such Notes have been sold to the public pursuant to Rule 144(k) (or any similar provision then in force, but not Rule 144A) under the Securities Act or (iii) when such Notes shall have ceased to be outstanding. "Registration Expenses" shall mean any and all expenses incident to --------------------- performance of or compliance by the Company with this Agreement, including without limitation: (i) all SEC, stock exchange or National Association of Securities Dealers, Inc. registration and filing fees, (ii) all fees and expenses incurred in connection with compliance with state securities or blue sky laws (including reasonable fees and disbursements of one counsel for any underwriters or Holders in connection with blue sky qualification of any of the Exchange Securities or Registrable Securities), (iii) all expenses incurred in the preparation, printing and distribution of any Registration Statement, any Prospectus, any amendments or supplements thereto, any underwriting agreements, securities sales agreements and other documents relating to the performance of and compliance with this Agreement, in each case to the extent not paid or payable by any other Person, (iv) all rating agency fees, (v) all fees and disbursements relating to the qualification of the Indenture under applicable securities laws, (vi) the fees and disbursements of the Trustee and its counsel, (vii) the fees and disbursements of counsel for the Company and, in the case of a Shelf Registration Statement, the reasonable fees and disbursements of one counsel for the Holders (which counsel shall be selected by 4 the Majority Holders and which counsel may also be counsel for the Initial Purchasers) and (viii) the fees and disbursements of the independent public accountants of the Company, including the expenses of any special audits or "cold comfort" letters required by or incident to such performance and compliance, but excluding fees and expenses of counsel to the underwriters (other than fees and expenses set forth in clause (ii) above) or the Holders (other than fees and expenses set forth in clause (vii) above) or accountants to the Holders and underwriting discounts and commissions and transfer taxes, if any, relating to the sale, disposition or exchange of Registrable Securities by a Holder. "Registration Statement" shall mean any registration statement of the ---------------------- Company that covers any of the Exchange Securities or Registrable Securities pursuant to the provisions of this Agreement and all amendments and supplements to any such Registration Statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "SEC" shall mean the Securities and Exchange Commission. --- "Securities Act" shall mean the Securities Act of 1933, as amended from -------------- time to time. "Shelf Registration" shall mean a registration effected pursuant to Section ------------------ 2(b) hereof. "Shelf Registration Statement" shall mean a "shelf" registration statement ---------------------------- of the Company pursuant to the provisions of Section 2(b) of this Agreement which covers all of the Registrable Securities (but no other securities unless approved by the Majority Holders whose Registrable Securities are covered by such Shelf Registration Statement) on an appropriate form under Rule 415 under the Securities Act, or any similar rule that may be adopted by the SEC, and all amendments and supplements to such registration statement, including post- effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "Trustee" shall mean the trustee with respect to the Notes under the ------- Indenture. "Underwritten Registration" or "Underwritten Offering" shall mean a ------------------------- --------------------- registration in which Registrable Securities are sold to an Underwriter (as hereinafter defined) for reoffering to the public. 2. Registration Under the Securities Act. (a) To the extent not ------------------------------------- prohibited by any applicable law or applicable interpretations of the Staff of the SEC, the Company shall use its best efforts to cause to be filed an Exchange Offer Registration Statement covering the offer by the Company to the Holders to exchange all of the Registrable Securities for Exchange Securities and to have such Registration Statement remain effective until the closing of the Exchange Offer. The Company shall commence the Exchange Offer promptly after the Exchange Offer Registration Statement has been declared effective by the SEC and use its best efforts to have the Exchange Offer consummated not 5 later than 60 days after such effective date. The Company shall commence the Exchange Offer by mailing the related exchange offer Prospectus and accompanying documents to each Holder stating, in addition to such other disclosures as are required by applicable law: (i) that the Exchange Offer is being made pursuant to this Registration Rights Agreement and that all Registrable Securities validly tendered will be accepted for exchange; (ii) the dates of acceptance for exchange (which shall be a period of at least 20 Business Days from the date such notice is mailed) (the "Exchange Dates"); --------------- (iii) that any Registrable Security not tendered will remain outstanding and continue to accrete in value as provided in the Indenture until March 1, 2003, and thereafter will accrue interest, but will not retain any rights under this Registration Rights Agreement; (iv) that Holders electing to have a Registrable Security exchanged pursuant to the Exchange Offer will be required to surrender such Registrable Security, together with the enclosed letters of transmittal, to the institution and at the address (located in the Borough of Manhattan, The City of New York) specified in the notice prior to the close of business on the last Exchange Date; and (v) that Holders will be entitled to withdraw their election, not later than the close of business on the last Exchange Date, by sending to the institution and at the address (located in the Borough of Manhattan, The City of New York) specified in the notice a telegram, telex, facsimile transmission or letter setting forth the name of such Holder, the principal amount of Registrable Securities delivered for exchange and a statement that such Holder is withdrawing his election to have such Notes exchanged. As soon as practicable after the last Exchange Date, the Company shall: (i) accept for exchange Registrable Securities or portions thereof tendered and not validly withdrawn pursuant to the Exchange Offer; and (ii) deliver, or cause to be delivered, to the Trustee for cancellation all Registrable Securities or portions thereof so accepted for exchange by the Company and issue, and cause the Trustee to promptly authenticate and mail to each Holder, an Exchange Security equal in principal amount at maturity to the principal amount at maturity of the Registrable Securities surrendered by such Holder. The Company shall use its best efforts to complete the Exchange Offer as provided above and shall comply with the applicable requirements of the Securities Act, the Exchange Act and other applicable laws and regulations in connection with the Exchange Offer. The Exchange Offer shall not be subject to any conditions, other than that the Exchange Offer does not violate applicable law 6 or any applicable interpretation of the Staff of the SEC. The Company shall inform the Initial Purchasers of the names and addresses of the Holders to whom the Exchange Offer is made, and the Initial Purchasers shall have the right, subject to applicable law, to contact such Holders and otherwise facilitate the tender of Registrable Securities in the Exchange Offer. (b) In the event that (i) the Company determines that the Exchange Offer Registration provided for in Section 2(a) above is not available or may not be consummated as soon as practicable after the last Exchange Date because it would violate applicable law or applicable interpretations of the Staff of the SEC, (ii) the Exchange Offer is not for any other reason consummated by February 19, 1999 or (iii) the Exchange Offer has been completed and, upon request of the Initial Purchasers based on the written opinion of counsel for the Initial Purchasers a Registration Statement must be filed and a Prospectus must be delivered by the Initial Purchasers in connection with any offering or sale of Registrable Securities (other than in situations covered by Section 2(f) below), the Company shall use its best efforts to cause to be filed as soon as practicable after such determination, date or notice of such opinion of counsel is given to the Company, as the case may be, a Shelf Registration Statement providing for the sale by the Holders of all of the Registrable Securities, in the case of clause (i) or (ii) above, or by the Initial Purchasers, in the case of clause (iii) above, and to have such Shelf Registration Statement declared effective by the SEC. Subject to the penultimate paragraph of Section 3 hereof, the Company agrees to use its best efforts to keep the Shelf Registration Statement continuously effective until the second anniversary of the Closing Date or any shorter period that terminates when all of the Registrable Securities covered by the Shelf Registration Statement have been sold pursuant to the Shelf Registration Statement or all of the Notes cease for any reason to be Registrable Securities. The Company further agrees to supplement or amend the Shelf Registration Statement if required by the rules, regulations or instructions applicable to the registration form used by the Company for such Shelf Registration Statement or by the Securities Act or by any other rules and regulations thereunder for shelf registration or if reasonably requested by a Holder with respect to information relating to such Holder, and, subject to the penultimate paragraph of Section 3 hereof, to use its best efforts to cause any such amendment to become effective and such Shelf Registration Statement to become usable as soon as thereafter practicable. The Company agrees to furnish to the Holders of Registrable Securities copies of any such supplement or amendment promptly after its being used or filed with the SEC. (c) The Company shall pay all Registration Expenses in connection with the registration pursuant to Section 2(a) or Section 2(b). Each Holder shall pay all underwriting discounts and commissions and transfer taxes, if any, relating to the sale or disposition of such Holder's Registrable Securities pursuant to the Shelf Registration Statement. (d) An Exchange Offer Registration Statement pursuant to Section 2(a) hereof or a Shelf Registration Statement pursuant to Section 2(b) hereof will not be deemed to have become effective unless it has been declared effective by the SEC; provided, however, that, if, after it has been declared effective, the offering of Registrable Securities pursuant to a Shelf Registration Statement is 7 interfered with by any stop order, injunction or other order or requirement of the SEC or any other governmental agency or court, such Registration Statement will be deemed not to have become effective during the period of such interference until the offering of Registrable Securities pursuant to such Registration Statement may legally resume. As provided for in the Indenture, the Notes will accrete in value through March 1, 2003 and thereafter will accrue interest at the rate of 12% per annum payable semiannually in arrears on March 1 and September 1 of each year commencing September 1, 2003; provided that if by February 19, 1999 the Company has not consummated the Exchange Offer or caused the Shelf Registration Statement to be declared effective, interest (in addition to interest otherwise due on the Exchange Securities after March 1, 2003) will accrue at a rate of 0.5% per annum of the Accreted Value (as defined in the Indenture) on the preceding Semi-Annual Accrual Date (as defined in the Indenture) and be payable in cash semiannually on March 1 and September 1 of each year, commencing September 1, 1999, until the Exchange Offer is consummated or the Shelf Registration Statement is declared effective. (e) Without limiting the remedies available to the Initial Purchasers and the Holders, the Company acknowledges that any failure by the Company to comply with its obligations under Section 2(a) and Section 2(b) hereof may result in material irreparable injury to the Initial Purchasers or the Holders for which there is no adequate remedy at law, that it will not be possible to measure damages for such injuries precisely and that, in the event of any such failure, any Initial Purchaser or any Holder may obtain such relief as may be required to specifically enforce the Company's obligations under Section 2(a) and Section 2(b) hereof. (f) In the event that, at any time after consummation of the Exchange Offer or the effectiveness of the Shelf Registration Statement, any Initial Purchaser, or any successor thereto, in its opinion, becomes an Affiliate (as such term is defined in Rule 144 under the Securities Act) of the Company, or any successor thereto, the Company (or its successor) shall use its best efforts to cause to be filed as soon as practicable after receiving notice thereof from any such Initial Purchaser (or any successor thereto) a shelf registration statement (the "Resale Registration Statement") under the Securities Act providing for the sale ----------------------------- by such Initial Purchaser (or any successor thereto) of all Notes or Exchange Securities it acquires from time to time in connection with market-making activities and to have such shelf registration statement declared effective by the SEC. The provisions of this Agreement concerning the Shelf Registration Statement shall apply to any Resale Registration Statement as if such Registration Statement were the Shelf Registration Statement filed pursuant to Section 2(b) hereof (except that the Company (or its successor) will use its best efforts to keep the Resale Registration Statement effective until the earlier of (i) the date on which no Notes or Exchange Securities remain outstanding and (ii) such time as such Initial Purchaser shall, in its opinion, have ceased to be an Affiliate of the Company, as evidenced by written notice, which shall be sent promptly upon such event). Notwithstanding the foregoing, the Company shall not be required to maintain the effectiveness of any Resale Registration Statement if such Initial Purchaser shall have ceased to make a market in the Notes or the Exchange Securities. 8 3. Registration Procedures. In connection with the obligations of the ----------------------- Company with respect to the Registration Statements pursuant to Section 2(a) and Section 2(b) hereof, the Company shall as expeditiously as is practicable: (a) prepare and file with the SEC a Registration Statement on the appropriate form under the Securities Act, which form (x) shall be selected by the Company and (y) shall, in the case of a Shelf Registration, be available for the sale of the Registrable Securities by the selling Holders thereof and (z) shall comply as to form in all material respects with the requirements of the applicable form and include all financial statements required by the SEC to be filed therewith, and use its best efforts to cause such Registration Statement to become effective and remain effective in accordance with Section 2 hereof; (b) prepare and file with the SEC such amendments and post-effective amendments to each Registration Statement as may be necessary to keep such Registration Statement effective for the applicable period and cause each Prospectus to be supplemented by any required prospectus supplement and, as so supplemented, to be filed pursuant to Rule 424 under the Securities Act; to keep each Prospectus current during the period described under Section 4(3) and Rule 174 under the Securities Act that is applicable to transactions by brokers or dealers with respect to the Registrable Notes or Exchange Notes; (c) in the case of a Shelf Registration, furnish to each Holder of Registrable Securities, to counsel for the Initial Purchasers, to counsel for the Holders and to each Underwriter of an Underwritten Offering of Registrable Securities, if any, without charge, as many copies of each Prospectus, including each preliminary Prospectus, and any amendment or supplement thereto and such other documents as such Holder or Underwriter may reasonably request, in order to facilitate the public sale or other disposition of the Registrable Securities; and the Company consents to the use of such Prospectus and any amendment or supplement thereto in accordance with applicable law by each of the selling holders of Registrable Securities and any such Underwriters in connection with the offering and sale of the Registrable Securities covered by and in the manner described in such Prospectus or any amendment or supplement thereto in accordance with applicable law; (d) use its best efforts to register or qualify the Registrable Securities under all applicable state securities or "blue sky" laws of such jurisdictions as any Holder of Registrable Securities covered by a Registration Statement shall reasonably request in writing by the time the applicable Registration Statement is declared effective by the SEC, to cooperate with such Holders in connection with any filings required to be made with the National Association of Securities Dealers, Inc. and do any and all other acts and things which may be reasonably necessary or advisable to enable such Holder to consummate the disposition in each such jurisdiction of such Registrable Securities owned by such Holder; provided, however, that the Company shall not be required to (i) qualify as a foreign corporation or as a dealer in securities in any jurisdiction where it would not otherwise be required to qualify but for this Section 3(d), (ii) file any general consent to service of process or (iii) subject itself to taxation in any such jurisdiction if it is not so subject; 9 (e) in the case of a Shelf Registration, notify each Holder of Registrable Securities, counsel for the Holders and counsel for the Initial Purchasers promptly and, if requested by any such Holder or counsel, confirm such advice in writing (i) when a Shelf Registration Statement has become effective and when any post-effective amendment thereto has been filed and becomes effective, (ii) of any request by the SEC or any state securities authority for amendments and supplements to a Shelf Registration Statement and Prospectus or for additional information after the Shelf Registration Statement has become effective, (iii) of the issuance by the SEC or any state securities authority of any stop order suspending the effectiveness of a Shelf Registration Statement or the initiation of any proceedings for that purpose, (iv) if, between the effective date of a Shelf Registration Statement and the closing of any sale of Registrable Securities covered thereby, the representations and warranties of the Company contained in any underwriting agreement, securities sales agreement or other similar agreement, if any, relating to the offering cease to be true and correct in all material respects or if the Company receives any notification with respect to the suspension of the qualification of the Registrable Securities for sale in any jurisdiction or the initiation of any proceeding for such purpose, (v) of the happening of any event during the period a Shelf Registration Statement is effective which makes any statement made in such Registration Statement or the related Prospectus untrue in any material respect or which requires the making of any changes in such Registration Statement or Prospectus in order to make the statements therein not misleading and (vi) of any determination by the Company that a post-effective amendment to a Registration Statement would be appropriate; (f) make every reasonable effort to obtain the withdrawal of any order suspending the effectiveness of a Registration Statement at the earliest possible moment and provide notice as promptly as practicable to each Holder of the withdrawal of any such order; (g) in the case of a Shelf Registration, furnish to each Holder of Registrable Securities, without charge, at least one conformed copy of each Registration Statement and any post-effective amendment thereto (without documents incorporated therein by reference or exhibits thereto, unless requested); (h) in the case of a Shelf Registration, cooperate with the selling Holders of Registrable Securities to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold and not bearing any restrictive legends and enable such Registrable Securities to be in such denominations (consistent with the provisions of the Indenture) and registered in such names as the selling Holders may reasonably request at least two business days prior to the closing of any sale of Registrable Securities; (i) in the case of a Shelf Registration, upon the occurrence of any event contemplated by Section 3(e)(v) or (vi) hereof, use its best efforts to prepare and file with the SEC a supplement or post-effective amendment to a Registration Statement or the related Prospectus or any document incorporated therein by reference or file any other required document so that, as thereafter delivered to the purchasers of the Registrable Securities, such Prospectus will not contain any untrue statement 10 of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. The Company agrees to notify the Holders to suspend use of the Prospectus as promptly as practicable after the occurrence of such an event, and the Holders hereby agree to suspend use of the Prospectus until the Company has amended or supplemented the Prospectus to correct such misstatement or omission; (j) a reasonable time prior to the filing of any Registration Statement, any Prospectus, any amendment to a Registration Statement or amendment or supplement to a Prospectus or any document which is to be incorporated by reference into a Registration Statement or a Prospectus after initial filing of a Registration Statement, provide copies of such document to the Initial Purchasers and their counsel (and, in the case of a Shelf Registration Statement, the Holders and their joint counsel) and make such of the representatives of the Company as shall be reasonably requested by the Initial Purchasers or their counsel (and, in the case of a Shelf Registration Statement, the Holders or their joint counsel) available for discussion of such document, and shall not at any time file or make any amendment to the Registration Statement, any Prospectus or any amendment of or supplement to a Registration Statement or a Prospectus or file any document which is to be incorporated by reference into a Registration Statement or a Prospectus, of which the Initial Purchasers and their counsel (and, in the case of a Shelf Registration Statement, the Holders and their counsel) shall not have previously been advised and furnished a copy or to which the Initial Purchasers or their counsel (and, in the case of a Shelf Registration Statement, the Holders or their counsel) shall reasonably object without unreasonable delay; (k) obtain a CUSIP number for all Exchange Securities or Registrable Securities, as the case may be, not later than the effective date of a Registration Statement; (l) cause the Indenture to be qualified under the Trust Indenture Act of 1939, as amended (the "TIA"), in connection with the registration of the --- Exchange Securities or Registrable Securities, as the case may be, cooperate with the Trustee and the Holders to effect such changes to the Indenture as may be required for the Indenture to be so qualified in accordance with the terms of the TIA and execute, and use its best efforts to cause the Trustee to execute, all documents as may be required to effect such changes and all other forms and documents required to be filed with the SEC to enable the Indenture to be so qualified in a timely manner; (m) in the case of a Shelf Registration, make available for inspection by a representative of the Holders of the Registrable Securities, any Underwriter participating in any disposition pursuant to such Shelf Registration Statement, and one firm of attorneys and accountants designated by the Holders, at reasonable times and in a reasonable manner, all financial and other records, pertinent documents and properties of the Company as shall reasonably be requested, and cause the respective officers, directors and employees of the Company to supply all information reasonably requested by any such representative, Underwriter, attorney or accountant in connection with a Shelf Registration Statement; provided, however, that any such representative, Underwriter, attorney or accountant agrees in writing to keep confidential any records, documents or other information (collectively, 11 "Information") received from the Company and designated by the Company as ----------- confidential and to use such Information obtained pursuant to this provision only in connection with the transaction for which such Information was obtained, and not for any other purpose; provided further, however, that the foregoing confidentiality obligation shall not apply to the extent that (i) such Information (x) is available to the public, (y) subject to clause (z) below, is already in such representative's, Underwriters', attorney's or accountant's possession prior to receipt from the Company and such person does not otherwise have any obligation to keep such Information confidential or (z) is obtained by such representative, Underwriter, attorney or accountant from a third person who, insofar as is known to such representative, Underwriter, attorney or accountant after due inquiry, is not required to keep such Information confidential or (ii) disclosure of such Information is required by court or administrative order after the exhaustion of all appeals therefrom; (n) in the case of a Shelf Registration, use its best efforts to cause all Registrable Securities to be listed on any securities exchange or any automated quotation system on which similar securities issued by the Company are then listed if requested by the Majority Holders, to the extent such Registrable Securities satisfy applicable listing requirements; (o) if reasonably requested by any Holder of Registrable Securities covered by a Registration Statement, (i) promptly incorporate in a Prospectus supplement or post-effective amendment such information with respect to such Holder as such Holder reasonably requests to be included therein and (ii) make all required filings of such Prospectus supplement or such post-effective amendment as soon as practicable after the Company has received notification of the matters to be incorporated in such filing; and (p) in the case of a Shelf Registration, enter into such customary agreements and take all such other customary actions in connection therewith (including those requested by the Holders of a majority of the Registrable Securities being sold) in order to expedite or facilitate the disposition of such Registrable Securities including, but not limited to, an Underwritten Offering and in such connection, (i) to the extent possible, make such representations and warranties to the Holders and any Underwriters of such Registrable Securities with respect to the business of the Company and its subsidiaries, the Registration Statement, Prospectus and documents incorporated by reference or deemed incorporated by reference, if any, in each case, in form, substance and scope as are customarily made by issuers to underwriters in underwritten offerings and confirm the same if and when requested, (ii) obtain opinions of counsel to the Company (which counsel and opinions, in form, scope and substance, shall be reasonably satisfactory to the Holders of a majority in principal amount at maturity of the Registrable Securities to be sold in such Underwritten Offering and any Underwriters and their respective counsel) addressed to each selling Holder and Underwriter of Registrable Securities, covering the matters customarily covered in opinions requested in underwritten offerings, (iii) obtain "cold comfort" letters from the independent certified public accountants of the Company (and, if necessary, any other certified public accountant of any subsidiary of the Company, or of any business acquired by the Company for which financial statements and financial data are or are required to be included in the Registration Statement) 12 addressed to each selling Holder and Underwriter of Registrable Securities, such letters to be in customary form and covering matters of the type customarily covered in "cold comfort" letters in connection with underwritten offerings, and (iv) deliver such documents and certificates as may be reasonably requested by the Holders of a majority in principal amount at maturity of the Registrable Securities being sold or the Underwriters, and which are customarily delivered in underwritten offerings, to evidence the continued validity of the representations and warranties of the Company made pursuant to clause (i) above and to evidence compliance with any customary conditions contained in an underwriting agreement; provided that the Company shall be required to use its best efforts to make an Underwritten Offering only upon the request of Holders of at least (1) 25% of the aggregate principal amount at maturity of the Registrable Securities outstanding at the time such request is delivered to the Company and (2) 10% of the aggregate principal amount at maturity of the Notes outstanding on the date hereof. In the case of any Underwritten Offering, the Company shall provide written notice to the Holders of all Registrable Securities of such Underwritten Offering at least 30 days prior to the filing of a prospectus supplement for such Underwritten Offering, (y) specifying a date, which shall be no earlier than 10 days following the date of such notice, by which each such Holder must inform the Company of its intent to participate in such Underwritten Offering and (z) including the instructions such Holder must follow in order to participate in such Underwritten Offering. In the case of a Shelf Registration Statement, the Company may require each Holder of Registrable Securities to furnish to the Company such information regarding the Holder and the proposed distribution by such Holder of such Registrable Securities as the Company may from time to time reasonably request in writing. In the case of a Shelf Registration Statement, each Holder agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 3(e)(v) hereof, such Holder will forthwith discontinue disposition of Registrable Securities pursuant to a Shelf Registration Statement until such Holder's receipt of the copies of the supplemented or amended Prospectus contemplated by Section 3(i) hereof, and, if so directed by the Company, such Holder will deliver to the Company (at the Company's expense) all copies in its possession, other than permanent file copies then in such Holder's possession, of the Prospectus covering such Registrable Securities current at the time of receipt of such notice. If the Company shall give any such notice to suspend the disposition of Registrable Securities pursuant to a Shelf Registration Statement, the Company shall extend the period during which the Shelf Registration Statement shall be maintained effective pursuant to this Agreement by the number of days during the period from and including the date of the giving of such notice to and including the date when the Holders shall have received copies of the supplemented or amended Prospectus necessary to resume such dispositions. In addition, the Company may, for a good-faith business purpose, provide the Holders with notice of the suspension of the disposition of Registrable Securities pursuant to a Shelf Registration Statement. The Company may give any such notice pursuant to the preceding sentence only twice during any 365 day period and any such suspensions may not exceed 30 days for each 13 suspension and there may not be more than two suspensions in effect during any 365 day period (which may be consecutive). The Holders of Registrable Securities covered by a Shelf Registration Statement who desire to do so may sell such Registrable Securities in an Underwritten Offering, subject to such terms and conditions as shall be established by the Underwriters thereof. In any such Underwritten Offering, the investment banker or investment bankers and manager or managers (the "Underwriters") that will administer the offering will be selected by the - ------------- Majority Holders of the Registrable Securities included in such offering, subject to the approval of the Company, which approval shall not be unreasonably withheld. 4. Participation of Broker-Dealers in Exchange Offer. (a) The Staff of the ------------------------------------------------- SEC has taken the position that any broker-dealer that receives Exchange Securities for its own account in the Exchange Offer in exchange for Notes that were acquired by such broker-dealer as a result of market-making or other trading activities (a "Participating Broker-Dealer"), may be deemed to be an --------------------------- "underwriter" within the meaning of the Securities Act and must deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of such Exchange Securities. The Company understands that it is the position of the Staff of the SEC that if the Prospectus contained in the Exchange Offer Registration Statement includes a plan of distribution containing a statement to the above effect and the means by which Participating Broker-Dealers may resell the Exchange Securities, without naming the Participating Broker-Dealers or specifying the amount of Exchange Securities owned by them, such Prospectus may be delivered by Participating Broker-Dealers to satisfy their prospectus delivery obligation under the Securities Act in connection with resales of Exchange Securities for their own accounts, so long as the Prospectus otherwise meets the requirements of the Securities Act. (b) In light of the above, notwithstanding the other provisions of this Agreement, the Company agrees that the provisions of this Agreement as they relate to a Shelf Registration shall also apply to an Exchange Offer Registration to the extent, and with such reasonable modifications thereto as may be, reasonably requested by the Initial Purchasers or by one or more Participating Broker-Dealers, in each case as provided in clause (ii) below, in order to expedite or facilitate the disposition of any Exchange Securities by Participating Broker-Dealers consistent with the positions of the Staff recited in Section 4(a) above; provided that: (i) the Company shall not be required to amend or supplement the Prospectus contained in the Exchange Offer Registration Statement, as would otherwise be contemplated by Section 3(i), for a period exceeding 180 days after the last Exchange Date (as such period may be extended pursuant to the penultimate paragraph of Section 3 of this Agreement) and Participating Broker-Dealers shall not be authorized by the Company to deliver and shall not deliver such Prospectus after such period in connection with the resales contemplated by this Section 4; and 14 (ii) the application of the Shelf Registration procedures set forth in Section 3 of this Agreement to an Exchange Offer Registration, to the extent not required by the positions of the Staff of the SEC or the Securities Act and the rules and regulations thereunder, will be in conformity with the reasonable request to the Company by the Initial Purchasers or with the reasonable request in writing to the Company by one or more broker-dealers who certify to the Initial Purchasers and the Company in writing that they anticipate that they will be Participating Broker-Dealers; and provided further that, in connection with such application of the Shelf Registration procedures set forth in Section 3 to an Exchange Offer Registration, the Company shall be obligated (x) to deal only with one entity representing the Participating Broker-Dealers as a whole, which shall be Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") unless it elects not to act as such representative, (y) --------------- to pay the fees and expenses of only one counsel representing the Participating Broker-Dealers, which shall be counsel to the Initial Purchasers unless such counsel elects not to so act and (z) to cause to be delivered only one, if any, "cold comfort" letter with respect to the Prospectus in the form existing on the last Exchange Date and with respect to each subsequent amendment or supplement, if any, effected during the period specified in clause (i) above. (c) No Initial Purchaser shall have any liability to the Company or any Holder with respect any request that it may make pursuant to Section 4(b) above. 5. Indemnification and Contribution. (a) The Company shall indemnify and -------------------------------- hold harmless each Initial Purchaser, each Holder (in its capacity as a Holder), including Participating Broker-Dealers, their respective affiliates, and their respective directors, officers, employees, agents and each Person, if any, who controls any of such parties within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act as follows: (i) against any and all loss, liability, claim, damage and expense whatsoever (which, in the case of legal fees, will be reasonable), as incurred, arising out of any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement (or any amendment thereto) pursuant to which Exchange Securities or Registrable Securities were registered under the Securities Act, including all documents incorporated therein by reference, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading or arising out of any untrue statement or alleged untrue statement of a material fact contained in any Prospectus (or any amendment or supplement thereto) or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; (ii) against any and all loss, liability, claim, damage and expense whatsoever (which, in the case of legal fees, will be reasonable), as incurred, to the extent of the aggregate amount paid in settlement of any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or of any claim whatsoever based 15 upon any such untrue statement or omission, or any such alleged untrue statement or omission; provided that (subject to Section 5(d) below) any such settlement is effected with the written consent of the Company; and (iii) against any and all expenses whatsoever, as incurred (including reasonable fees and disbursements of counsel chosen by any indemnified party), reasonably incurred in investigating, preparing or defending against any litigation, or any investigation or proceeding by any court or governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, to the extent that any such expense is not paid under subparagraph (i) or (ii) of this Section 5(a); provided, however, that this indemnity agreement shall not apply to any loss, liability, claim, damage or expense to the extent arising out of an untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with written information furnished to the Company by the Initial Purchasers, any Holder (in its capacity as a Holder), including Participating Broker-Dealers, expressly for use in the Registration Statement (or any amendment or supplement thereto) or the Prospectus (or any amendment or supplement thereto). The foregoing indemnity with respect to any untrue statement contained in or any omission from a Prospectus shall not inure to the benefit of any Initial Purchaser, any Holder (in its capacity as a Holder), including Participating Broker-Dealers (or any person who controls such party within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act) from whom the person asserting any such loss, liability, claim, damage or expense purchased any of the Notes that are the subject thereof, was not sent or given a copy of such Prospectus (as amended or supplemented) by such Initial Purchaser or such selling Holder (in its capacity as a Holder) to the extent such Initial Purchaser or such selling Holder (in its capacity as a Holder) was required by law to deliver such Prospectus as amended or supplemented, at or prior to the written confirmation of the sale of such Notes and the untrue statement contained in or the omission from such Prospectus was corrected in such amended or supplemented Prospectus, unless such failure resulted from noncompliance by the Company with its obligations hereunder to furnish Initial Purchaser or such Holder (in its capacity as a Holder), as the case may be, with copies of such Prospectus as amended or supplemented. (b) In the case of a Shelf Registration, each Holder (in its capacity as a Holder) agrees, severally and not jointly, to indemnify and hold harmless the Company, each Initial Purchaser and the other selling Holders (in their capacity as Holders) and each of their respective directors and officers (including each officer of the Company who signed the Registration Statement) and each Person, if any, who controls the Company, any Initial Purchaser or any other selling Holder (in their capacity as Holders) within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, against any and all loss, liability, claim, damage and expense whatsoever described in the indemnity contained in Section 5(a) hereof, as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements or omissions, made in the Registration Statement (or any amendment thereto) or the Prospectus (or any amendment or supplement thereto) 16 in reliance upon and in conformity with written information furnished to the Company by such Holder (in its capacity as a Holder), as the case may be, expressly for use in the Registration Statement (or any amendment thereto), or the Prospectus (or any amendment or supplement thereto); provided, however, that no such Holder (in its capacity as a Holder) shall be liable for any claims hereunder in excess of the amount of net proceeds received by such Holder (in its capacity as a Holder) from the sale of Registrable Securities pursuant to such Shelf Registration Statement. (c) In case any action shall be commenced involving any person in respect of which indemnity may be sought pursuant to either paragraph (a) or paragraph (b) above, such person (the "indemnified party") shall give notice in writing as promptly as reasonably practicable to each person against whom such indemnity may be sought (the "indemnifying party"), but failure to so notify an indemnifying party shall not relieve such indemnifying party from any liability hereunder to the extent it is not materially prejudiced as a result thereof and in any event shall not relieve it from any liability which it may have otherwise than on account of this indemnity agreement. An indemnifying party may participate at its own expense in the defense of such action; provided, however, that counsel to the indemnifying party shall not (except with the consent of the indemnified party) also be counsel to the indemnified party. In no event shall the indemnifying party or parties be liable for the fees and expenses of more than one counsel (in addition to any local counsel) for all indemnified parties in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances. No indemnifying party shall, without the prior written consent of the indemnified parties, settle or compromise or consent to the entry of any judgment with respect to any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever in respect of which indemnification or contribution could be sought under this Section 5 hereof (whether or not the indemnified parties are actual or potential parties thereof), unless such settlement, compromise or consent (i) includes an unconditional release of each indemnified party from all liability arising out of such litigation, investigation, proceeding or claim and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any indemnified party. (d) If at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel, such indemnifying party agrees that it shall be liable for any settlement of the nature contemplated by Section 5(a)(ii) hereof effected without its written consent if (i) such settlement is entered into more than 45 days after receipt by such indemnifying party of the aforesaid request, (ii) such indemnifying party shall have received notice of the terms of such settlement at least 30 days prior to such settlement being entered into and (iii) such indemnifying party shall not have reimbursed such indemnified party in accordance with such request prior to the date of such settlement. (e) If the indemnification provided for in any of the indemnity provisions set forth in this Section 5 is for any reason unavailable to or insufficient to hold harmless an indemnified party in respect of any losses, liabilities, claims, damages or expenses referred to therein, then each 17 indemnifying party shall contribute to the aggregate amount of such losses, liabilities, claims, damages and expenses incurred by such indemnified party, as incurred, (i) in such proportion as is appropriate to reflect the relative benefits received by such indemnifying party or parties on the one hand, and such indemnified party or parties on the other hand, from the offering of the Exchange Securities or Registrable Securities included in such offering or (ii) if the allocation provided by clause (i) is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of such indemnifying party or parties on the one hand, and such indemnified party or parties on the other hand, in connection with the statements or omissions which resulted in such losses, liabilities, claims, damages or expenses, as well as any other relevant equitable considerations. The relative fault of such indemnifying party or parties on the one hand, and such indemnified party or parties, on the other hand shall be determined by reference to, among other things, whether any such untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by such indemnifying party or parties or such indemnified party or parties and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company, the Initial Purchasers and the Holders (in their capacity as Holders) of the Registrable Securities agree that it would not be just and equitable if contribution pursuant to this Section 5 were determined by pro rata allocation (even if the Initial Purchasers were treated as one entity, and the Holders (in their capacity as Holders) were treated as one entity, for such purpose) or by another method of allocation which does not take account of the equitable considerations referred to above in Section 5. The aggregate amount of losses, liabilities, claims, damages and expenses incurred by an indemnified party and referred to above in this Section 5 shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 5, each person, if any, who controls an Initial Purchaser or Holder within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act shall have the same rights to contribution as such Initial Purchaser or Holder (in its capacity as a Holder), and each director of the Company, each officer of the Company who signed the Registration Statement, and each person, if any, who controls the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act shall have the same rights to contribution as the Company. The parties hereto agree that any underwriting discount or commission or reimbursement of fees paid to any Initial Purchaser pursuant to the Purchase Agreement shall not be deemed to be a benefit received by any Initial Purchaser in connection with the offering of the Exchange Securities or Registrable Securities in such offering. (f) In connection with any underwriter Offering of Registrable Securities permitted by this Agreement, the Company will also indemnify the underwriters, if any, and each Person, if any, who also controls any of them within the meaning of Section 15 of the Securities Act or Section 20 of the 18 Exchange Act to the same extent as provided in this Section 5 with respect to the indemnification of the Holders, if requested in connection with any Registration Statement. 6. Miscellaneous. (a) No Inconsistent Agreements. The Company has not ------------- -------------------------- entered into, and on or after the date of this Agreement will not enter into, any agreement which is inconsistent with the rights granted to the Holders of Registrable Securities in this Agreement or otherwise conflicts with the provisions hereof. The rights granted to the Holders hereunder do not in any way conflict with and are not inconsistent with the rights granted to the holders of the Company's other issued and outstanding securities under any such agreements. (b) Amendments and Waivers. The provisions of this Agreement, including the ---------------------- provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given unless the Company has obtained the written consent of Holders of at least a majority in aggregate principal amount of the outstanding Registrable Securities affected by such amendment, modification, supplement, waiver or consent; provided, however, that no amendment, modification, supplement, waiver or consents to any departure from the provisions of Section 5 hereof shall be effective as against any Holder of Registrable Securities unless consented to in writing by such Holder. (c) Notices. All notices and other communications provided for or permitted ------- hereunder shall be made in writing by hand-delivery, registered first-class mail, telex, telecopier, or any courier guaranteeing overnight delivery (i) if to a Holder, at the most current address given by such Holder to the Company by means of a notice given in accordance with the provisions of this Section 6(c), which address initially is, with respect to the Initial Purchasers, the address set forth in the Purchase Agreement; and (ii) if to the Company, initially at the Company's address set forth in the Purchase Agreement and thereafter at such other address, notice of which is given in accordance with the provisions of this Section 6(c). All such notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five business days after being deposited in the mail, postage prepaid, if mailed; when answered back, if telexed; when receipt is acknowledged, if telecopied; and on the next business day if timely delivered to an air courier guaranteeing overnight delivery. Copies of all such notices, demands, or other communications shall be concurrently delivered by the person giving the same to the Trustee, at the address specified in the Indenture. (d) Successors and Assigns. This Agreement shall inure to the benefit of ---------------------- and be binding upon the successors, assigns and transferees of each of the parties, including, without limitation and without the need for an express assignment, subsequent Holders; provided that nothing herein shall be deemed to permit any assignment, transfer or other disposition of Registrable Securities in violation of the terms of the Purchase Agreement. If any transferee of any Holder shall acquire Registrable Securities, in any manner, whether by operation of law or otherwise, such Registrable Securities shall be held subject to all of the terms of this Agreement, and by taking and holding such Registrable Securities such person shall be conclusively deemed to have agreed to be bound by and to perform all of the terms and provisions of this Agreement and such person shall be entitled to receive the benefits hereof. The Initial Purchasers (in their capacities as Initial Purchasers) shall have no liability or obligation to the Company with respect to any failure by any other Holder to comply with, or any breach by any other Holder of, any of the obligations of such Holder under this Agreement. (e) Purchases and Sales of Notes. The Company shall not, and shall use its ---------------------------- best efforts to cause its affiliates (as defined in Rule 405 under the Securities Act) not to, purchase and then resell or otherwise transfer any Notes. (f) Third Party Beneficiary. The Holders shall be third party beneficiaries ------------------------ to the agreements made hereunder between the Company, on the one hand, and the Initial Purchasers, on the other hand, and shall have the right to enforce such agreements directly to the extent it deems such enforcement necessary or advisable to protect its rights or the rights of Holders hereunder. (g) Counterparts. This Agreement may be executed in any number of ------------ counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. (h) Headings. The headings in this Agreement are for convenience of -------- reference only and shall not limit or otherwise affect the meaning hereof. (i) Governing Law. This Agreement shall be governed by and construed in ------------- accordance with the internal laws of the State of New York. (j) Severability. In the event that any one or more of the provisions ------------- contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. DIVA SYSTEMS CORPORATION By: /s/ Alan H. Bushell -------------------- Name: Alan H. Bushell Title: President, Chief Operating Officer, Chief Financial Officer and Secretary Confirmed and accepted as of the date first above written: MERRILL LYNCH & CO. MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED CHASE SECURITIES INC. MORGAN STANLEY & CO. INCORPORATED By: Merrill Lynch, Pierce, Fenner & Smith Incorporated For itself and on behalf of the other Initial Purchasers By: /s/ Lisa Craig ------------------------------- Name: Lisa Craig Title: Authorized Signatory EX-10.5 10 WARRANT AGREEMENT DATED 02/19/1998 EXHIBIT 10.5 - -------------------------------------------------------------------------------- WARRANT AGREEMENT between DIVA SYSTEMS CORPORATION and THE BANK OF NEW YORK Dated as of February 19, 1998 - -------------------------------------------------------------------------------- TABLE OF CONTENTS PAGE ARTICLE I CERTAIN DEFINITIONS ARTICLE II ORIGINAL ISSUE OF WARRANTS
Section 2.1. Form of Warrant Certificates................................ 7 Section 2.2. Restrictive Legends......................................... 9 Section 2.3. Execution and Delivery of Warrant Certificates.............. 11 Section 2.4. Certificated Warrants....................................... 12
ARTICLE III EXERCISE PRICE, EXERCISE AND REPURCHASE OF WARRANTS
Section 3.1. Exercise Price.............................................. 12 Section 3.2. Exercise; Restrictions on Exercise.......................... 12 Section 3.3. Method of Exercise; Payment of Exercise Price............... 13 Section 3.4. Repurchase Offers........................................... 14
ARTICLE IV ADJUSTMENTS
Section 4.1. Adjustments................................................. 18 Section 4.2. Notice of Adjustment........................................ 25 Section 4.3. Statement on Warrants....................................... 26 Section 4.4. Notice of Consolidation, Merger, Etc........................ 26 Section 4.5. Fractional Interests........................................ 26 Section 4.6. Initial Public Offering..................................... 27
ARTICLE V DECREASE IN EXERCISE PRICE ARTICLE VI LOSS OR MUTILATION ARTICLE VII RESERVATION AND AUTHORIZATION OF COMMON SHARES ARTICLE VIII WARRANT TRANSFER BOOKS; RESTRICTIONS ON TRANSFER
Section 8.1. Transfer and Exchange....................................... 28 Section 8.2. Book-Entry Provisions for the Global Warrants............... 29 Section 8.3. Special Transfer Provisions................................. 31 Section 8.4. Surrender of Warrant Certificates........................... 34
ARTICLE IX WARRANT HOLDERS Section 9.1. Warrant Holder Deemed Not a Shareholder..................... 34 Section 9.2. Right of Action............................................. 35 ARTICLE X REMEDIES
Section 10.1. Defaults................................................... 35 Section 10.2. Payment Obligations........................................ 35 Section 10.3. Remedies; No Waiver........................................ 35
ARTICLE XI THE WARRANT AGENT
Section 11.1. Duties and Liabilities..................................... 36 Section 11.2. Right to Consult Counsel................................... 37 Section 11.3. Compensation; Indemnification.............................. 37 Section 11.4. No Restrictions on Actions................................. 38 Section 11.5. Discharge or Removal; Replacement Warrant Agent............ 38 Section 11.6. Successor Warrant Agent.................................... 39
ARTICLE XII MISCELLANEOUS
Section 12.1. Monies Deposited with the Warrant Agent.................... 39 Section 12.2. Payment of Taxes........................................... 40 Section 12.3. No Merger, Consolidation or Sale of Assets of the Company.. 40 Section 12.4. Reports to Holders......................................... 40 Section 12.5. Notices; Payment........................................... 41 Section 12.6. Binding Effect............................................. 42 Section 12.7. Counterparts............................................... 42 Section 12.8. Amendments................................................. 42 Section 12.9. Headings................................................... 42 Section 12.10. Common Shares Legend....................................... 42 Section 12.11. Third Party Beneficiaries.................................. 44 Section 12.12. Termination................................................ 44 Section 12.13. Governing Law.............................................. 44 Section 12.14. Registration Rights........................................ 45
iv EXHIBIT A FORM OF WARRANT CERTIFICATE EXHIBIT B FORM OF CERTIFICATE TO BE DELIVERED IN CONNECTION WITH TRANSFERS PURSUANT TO REGULATION S EXHIBIT C-1 FORM OF CERTIFICATE TO BE DELIVERED BY TRANSFEROR IN CONNECTION WITH TRANSFERS OTHER THAN TO QIBS OR NON-US PERSONS EXHIBIT C-2 FORM OF CERTIFICATE TO BE DELIVERED BY TRANSFEREES IN CONNECTION WITH TRANSFERS TO INSTITUTIONAL ACCREDITED INVESTORS EXHIBIT D FORM OF CERTIFICATE APPENDIX A LIST OF FINANCIAL EXPERTS WARRANT AGREEMENT WARRANT AGREEMENT, dated as of February 19, 1998 (this "Agreement"), --------- between DIVA Systems Corporation, a Delaware corporation (the "Company"), and ------- THE BANK OF NEW YORK, a New York banking corporation (the "Warrant Agent"). ------------- W I T N E S S E T H: - - - - - - - - - - WHEREAS, pursuant to the terms of a Units Purchase Agreement dated February 11, 1998 (the "Purchase Agreement"), among the Company and Merrill ------------------ Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill ------- Lynch") and the other purchasers named on Schedule A to the Purchase Agreement (collectively, the "Initial Purchasers"), the Company has agreed to issue and ------------------ sell to the Initial Purchasers an aggregate of 1,214,994 warrants (the "Initial ------- Purchaser Warrants"), each warrant (a "Warrant") initially entitling the holder - ------------------ ------- thereof to purchase one share of Common Stock (as defined below) of the Company at an exercise price of $.01 per Common Share (as defined below), as part of 404,998 units (the "Units"), each Unit consisting of one 12 5/8% Senior Discount ----- Note due 2008 of the Company (each a "Note" and collectively, the "Notes") to be ---- ----- issued pursuant to the provisions of an Indenture, dated as of February 19, 1998, between the Company and The Bank of New York, as trustee (the "Indenture"), and three Warrants; --------- WHEREAS, pursuant to the terms of an exchange offer memorandum and accompanying Transmittal Form from the Company to the holders of the Company's outstanding 1996 Notes (the "Exchange Noteholders"), the Company has agreed to -------------------- issue to the Exchange Noteholders an aggregate of 174,006 Warrants (the "Exchange Warrants" and, together with the Initial Purchaser Warrants, the - ------------------ "Warrants"), as part of 58,002 Units; - --------- WHEREAS, the Notes and the three Warrants included in each Unit will automatically become separately transferable at the close of business upon the earliest to occur of (i) the date that is six months after the Closing Date (as defined below), (ii) the commencement of an exchange offer with respect to the Notes undertaken pursuant to the Notes Registration Rights Agreement (as defined below), (iii) the effectiveness of a shelf registration statement with respect to resales of the Notes, (iv) the commencement of an Offer to Purchase the Notes (as defined below), and (v) such earlier date as determined by Merrill Lynch in its sole discretion (the "Separation Date"); and --------------- WHEREAS, the Company desires to engage the Warrant Agent to act on the Company's behalf, and the Warrant Agent desires to act on behalf of the Company, in connection with the issuance of the Warrant Certificates (as defined below) and the other matters as provided herein, including, without limitation, for the purpose of defining the terms and provisions of the Warrants and the respective rights and obligations thereunder of the 2 Company and the record holders thereof (together with the holders of shares of Common Stock (or other securities) received upon exercise thereof, the "Holders"). ------- NOW, THEREFORE, in consideration of the foregoing and of the mutual agreements contained herein and in the Purchase Agreement, the Company and the Warrant Agent hereby agree as follows: ARTICLE I CERTAIN DEFINITIONS "Actual SRTC Shares" means the total number of (i) Common Shares which may be purchased or subscribed for upon exercise, exchange or conversion of rights, options, warrants or convertible or exchangeable securities (including the Company's Series AA Preferred Stock) issued or issuable in connection with the SRTC Transaction and (ii) Common Shares issued or issuable in connection with the SRTC Transaction. "Additional SRTC Shares" means the number of Actual SRTC Shares, if any, in excess of 1,969,112 shares. "Affiliate" means, as applied to any Person, any other Person directly or indirectly controlling, controlled by, or under direct or indirect common control with, such Person. For purposes of this definition, "control" (including, with correlative meanings, the terms "controlling," "controlled by" and "under common control with"), as applied to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise. "Agent Members" has the meaning specified in Section 8.2 hereof. "Auditors" means, at any time, the independent auditors of the Company at such time. "Board" means the board of directors of the Company from time to time. "Business Day" means a day except a Saturday, Sunday or other day on which commercial banks in The City of New York, or in the city of the corporate trust office of the Warrant Agent, are authorized by law to close. "Cedel Bank" means Cedel Bank, societe anonyme. 3 "Certificated Warrants" has the meaning specified in Section 2.1 hereof. "Certificate for Surrender" means the form on the reverse side of the Warrant Certificate substantially in the form of Exhibit A hereto. "Closing Date" means the date hereof. "Commission" means the United States Securities and Exchange Commission. "Common Shares" means the shares of the Common Stock of the Company. "Common Stock" means the Common Stock, par value $0.001 per share, of the Company. "Company" has the meaning specified in the preamble to this Agreement. "Current Market Value" has the meaning specified in Section 4.1(f) hereof. "Default" has the meaning specified in Section 10.1 hereof. "Depositary" means The Depository Trust Company, its nominees and their respective successors. "Euroclear" means Morgan Guaranty Trust Company of New York, Brussels office, as operator of the Euroclear System. "Exchange Act" means the United States Securities Exchange Act of 1934, as amended. "Exchange Noteholders" has the meaning specified in the recitals to this Agreement. "Exercise Price" has the meaning specified in Section 3.1 hereof. "Expiration Date" means March 1, 2008. "Final Surrender Time" has the meaning specified in Section 3.4 hereof. "Financial Expert" means one of the Persons listed in Appendix A hereto; provided, however, that solely for purposes of valuing Common Shares or Rights to be issued 4 to employees, directors or consultants under plans approved by the Board, Financial Expert shall also include a Valuation Advisor. "Global Warrants" has the meaning specified in Section 2.1 hereof. "Holders" has the meaning specified in the recitals to this Agreement. "IAI Certificated Warrants" has the meaning specified in Section 2.1 hereof. "Indenture" has the meaning specified in the recitals to this Agreement. "Independent Financial Expert" means a Financial Expert that does not, and whose directors, executive officers and 5% stockholders do not, have a direct or indirect financial interest in the Company or any of its subsidiaries or Affiliates, which has not been for at least five years and, at the time it is called upon to give independent financial advice to the Company, is not (and none of its directors, executive officers or 5% stockholders is) a promoter, director, or officer of the Company or any of its subsidiaries or Affiliates. The Independent Financial Expert may be compensated and indemnified by the Company for opinions or services it provides as an Independent Financial Expert. "Institutional Accredited Investor" shall mean an institution that is an "accredited investor" as that term is defined in Rule 501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act. "Legended Regulation S Global Warrant" has the meaning specified in Section 2.1 hereof. "Non-U.S. Person" means a person who is not a U.S. person as defined in Rule 902 of Regulation S. "Notes" has the meaning specified in the recitals to this Agreement. "Notice Date" has the meaning specified in Section 3.4(b) hereof. "Offer to Purchase the Notes" means an Offer to Purchase (as defined in the Indenture) the Notes pursuant to the Indenture. "Officer" means, with respect to the Company, (i) the Chairman of the Board, the Chief Executive Officer, the President, any Vice President, the Chief Operating Officer, the Chief Financial Officer, and (ii) the Treasurer or any Assistant Treasurer, the Secretary or any Assistant Secretary. 5 "Officers' Certificate" means a certificate signed by one Officer listed in clause (i) of the definition thereof and one Officer listed in clause (ii) of the definition thereof; provided, however, that any such certificate may be signed by any two of the Officers listed in clause (i) of the definition thereof in lieu of being signed by one Officer listed in clause (i) of the definition thereof and one Officer listed in clause (ii) of the definition thereof. "Offshore Certificated Warrants" has the meaning specified in Section 2.1 hereof. "Opinion of Counsel" means a written opinion signed by legal counsel who may be an employee of or counsel to the Company. "Person" means an individual, a corporation, a partnership, a limited liability company, an association, a trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "Private Placement Legend" means the legend set forth on the Warrant Certificates in the form set forth in Section 2.2(a) hereof. "Purchase Agreement" has the meaning specified in the recitals to this Agreement. "QIB" means a "qualified institutional buyer" as defined in Rule 144A. "Regulation S" means Regulation S under the Securities Act. "Regulation S Global Warrant" has the meaning specified in Section 2.1 hereof. "Relevant Value" has the meaning specified in Section 3.4(d) hereof. "Repurchase Event" means, and shall be deemed to occur on, any date when the Company (i) consolidates with or merges into or with another Person (but only where holders of the Common Stock receive consideration in exchange for all or part of such Common Stock) if the Common Stock (or other securities) thereafter issuable upon exercise of the Warrants are not registered under the Exchange Act, provided, that a "Repurchase Event" shall not be deemed to have occurred if the holders of at least 50% of the Company's Common Stock immediately prior to the consummation of such merger or consolidation, together with their affiliates, continue to hold at least 50% of the Company's Common Stock immediately after such consummation or (ii) sells all or substantially all of its assets to, another Person, if the Common Stock (or other securities) thereafter issuable upon exercise of the Warrants are not 6 registered under the Exchange Act; provided that in each case a "Repurchase Event" shall not be deemed to have occurred if the consideration for such transaction consists solely of cash. "Repurchase Notice" has the meaning specified in Section 3.4(a) hereof. "Repurchase Obligation" has the meaning specified in Section 10.2 hereof. "Repurchase Offer" has the meaning specified in Section 3.4(b) hereof. "Repurchase Price" has the meaning specified in Section 3.4(d) hereof. "Restricted Certificated Warrants" has the meaning specified in Section 2.1 hereof. "Restricted Global Warrant" has the meaning specified in Section 2.1 hereof. "Right" means any right, option, warrant or convertible or exchangeable security entitling the holder to subscribe for or acquire one or more Common Shares, excluding the Warrants. "Rule 144A" means Rule 144A under the Securities Act. "Securities Act" means the United States Securities Act of 1933, as amended. "Separation Date" has the meaning specified in the recitals to this Agreement. "Spread" means, with respect to any Warrant, the Current Market Value of the Common Shares subject to such Warrant, less the Exercise Price of such Warrant, in each case as adjusted as provided herein. "SRTC" means Sarnoff Real Time Corp., a Delaware corporation. "SRTC Transaction" means the merger of SRTC with and into the Company pursuant to the Agreement and Plan of Reorganization dated January 15, 1998 between the Company and SRTC. "Subscription Form" means the form on the reverse side of the Warrant Certificate substantially in the form of Exhibit A hereto. "Underlying Securities" shall mean the Common Shares (or other securities) issuable upon exercise of the Warrants. 7 "Units" has the meaning specified in the recitals to this Agreement. "Unlegended Regulation S Global Warrant" has the meaning specified in Section 2.1 hereof. "Valuation Advisor" means a Person engaged in the business of valuing the common stock of non-public companies that has made at least 10 such valuations within the two years prior to such Person's selection by the Company. "Valuation Date", for any Repurchase Offer, means the date five Business Days prior to the Notice Date for such Repurchase Offer. "Value Certificate" has the meaning specified in Section 3.4(d) hereof. "Value Report" has the meaning specified in Section 4.1(k) hereof. "Warrant" has the meaning specified in the recitals to this Agreement. "Warrant Agent" has the meaning specified in the preamble to this Agreement. "Warrant Certificates" has the meaning specified in Section 2.1 hereof. "Warrant Registration Rights Agreement" means the Warrant Registration Rights Agreement, dated as of February 19, 1998, between the Company and the Initial Purchasers named therein. "Warrant Registration Statement" has the meaning specified in Section 3 of the Warrant Registration Rights Agreement. "1996 Notes" means the Company's 13% Subordinated Discount Notes due 2006. ARTICLE II ORIGINAL ISSUE OF WARRANTS Section 2.1. Form of Warrant Certificates. Certificates ------------ ---------------------------- representing the Warrants (the "Warrant Certificates") shall be substantially in -------------------- the form attached hereto as 8 Exhibit A, shall be dated the date on which such Warrant Certificates are countersigned by the Warrant Agent and shall have such insertions as are appropriate or required or permitted by this Agreement and may have such letters, numbers or other marks of identification and such legends and endorsements stamped, printed, lithographed or engraved thereon as the Company may deem appropriate and as are not inconsistent with the provisions of this Agreement, or as may be required to comply with any law or with any rule or regulation pursuant thereto or with any rule or regulation of any securities exchange on which the Warrants may be listed, or to conform to usage. Warrants offered and sold in reliance on Rule 144A shall be issued initially in the form of one or more permanent global Warrant Certificates in definitive, fully registered form, substantially in the form set forth in Exhibit A (the "Restricted Global Warrant"), deposited with the Warrant Agent, ------------------------- as custodian for, and registered in the name of the nominee for, the Depositary, duly executed by the Company and countersigned by the Warrant Agent as hereinafter provided. The aggregate number of Warrants represented by the Restricted Global Warrant may from time to time be increased or decreased by adjustments made on the records of the Warrant Agent, as custodian for the Depositary, or its nominee, as provided in Section 2.4 and Section 8.3 hereof. Warrants offered and sold in offshore transactions in reliance on Regulation S shall be issued initially in the form of one or more permanent global Warrant Certificates in definitive, fully registered form, substantially in the form set forth in Exhibit A (the "Legended Regulation S Global Warrant"), ------------------------------------ deposited with the Warrant Agent, as custodian for, and registered in the name of, the Depositary or its nominee for the accounts of Euroclear and Cedel Bank, duly executed by the Company and countersigned by the Warrant Agent as hereinafter provided. Prior to February 19, 1999, beneficial interests in the Legended Regulation S Global Warrant may be only held through Euroclear and Cedel Bank. At any time on or after February 19, 1999, upon receipt by the Warrant Agent and the Company of a certificate substantially in the form of Exhibit D hereto, one or more global Warrants in registered form substantially in the form set forth in Exhibit A (the "Unlegended Regulation S Global Warrant" -------------------------------------- and together with the Legended Regulation S Global Warrant, the "Regulation S ------------ Global Warrants") shall be deposited with the Warrant Agent, as custodian for, - --------------- and registered in the name of the nominee for, the Depositary, duly executed by the Company and countersigned by the Warrant Agent as hereinafter provided, and the Warrant Agent shall reflect on its books and records the date and a decrease in the Legended Regulation S Global Warrant in an amount equal to the beneficial interest in number of Warrants evidenced by the Legended Regulation S Global Warrant transferred. The aggregate number of Warrants represented by the Regulation S Global Warrant may from time to time be increased or decreased by adjustments made on the records of the Warrant Agent, as custodian for the Depositary, or its nominee, as provided in Section 2.4 and Section 8.3 hereof. 9 Warrants delivered to Institutional Accredited Investors who are not QIBs shall be in registered form substantially in the form set forth in Exhibit A ("IAI Certificated Warrants"). ------------------------- Warrants issued pursuant to Section 2.4 and Section 8.2(b) in exchange for interests in the Restricted Global Warrant shall be issued in the form of permanent Warrant Certificates in registered form, substantially in the form set forth in Exhibit A (the "Restricted Certificated Warrants" and, together with -------------------------------- IAI Certificated Warrants, the "U.S. Certificated Warrants"). Warrants issued -------------------------- pursuant to Section 2.4 and Section 8.2(b) in exchange for interests in the Regulation S Global Warrant shall be issued in the form of permanent Warrant Certificates in registered form, substantially in the form set forth in Exhibit A (the "Offshore Certificated Warrants"). The Offshore Certificated Warrants ------------------------------ and the U.S. Certificated Warrants are sometimes collectively herein referred to as the "Certificated Warrants". The Restricted Global Warrant and the --------------------- Regulation S Global Warrant are sometimes herein collectively referred to as the "Global Warrants". --------------- The definitive Warrant Certificates shall be typed, printed, lithographed or engraved or produced by any combination of these methods or may be produced in any other manner permitted by the rules of any securities exchange on which the Warrants may be listed, all as determined by the officers executing such Warrant Certificates, as evidenced by their execution of such Warrant Certificates. Section 2.2. Restrictive Legends. (a) The Warrant Certificates, ------------ ------------------- other than the Unlegended Regulation S Global Warrants, shall bear substantially the following legend, as applicable, on the face thereof: THE WARRANTS REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR ANY STATE OR OTHER SECURITIES LAWS, AND, ACCORDINGLY, MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. BY ITS ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) OR (B) IT IS NOT A U.S. PERSON AND IS ACQUIRING THE WARRANTS REPRESENTED BY THIS CERTIFICATE IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH REGULATION S UNDER THE SECURITIES ACT OR (C) IT ACQUIRED THIS CERTIFICATE DIRECTLY FROM DIVA SYSTEMS CORPORATION (THE "COMPANY") IN A 10 TRANSACTION EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, OR (D) PROVIDED THAT THIS CERTIFICATE HAS NOT BEEN ACQUIRED BY SUCH HOLDER IN THE INITIAL DISTRIBUTION OF THE WARRANTS, IT IS AN INSTITUTIONAL "ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(a)(1), (2), (3) OR (7) OF REGULATION D UNDER THE SECURITIES ACT); (2) AGREES THAT IT WILL NOT, WITHIN THE TIME PERIOD REFERRED TO UNDER RULE 144(k) TAKING INTO ACCOUNT THE PROVISIONS OF RULE 144(d), IF APPLICABLE (THE "RESALE RESTRICTION TERMINATION DATE"), RESELL OR OTHERWISE TRANSFER THE WARRANTS REPRESENTED BY THIS CERTIFICATE EXCEPT (A) TO THE COMPANY OR ANY SUBSIDIARY THEREOF, (B) TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A UNDER THE SECURITIES ACT, (C) OUTSIDE THE UNITED STATES IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH RULE 904 UNDER THE SECURITIES ACT, (D) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OR (E) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT; (3) AGREES THAT THE WARRANTS REPRESENTED BY THIS CERTIFICATE MAY NOT BE EXERCISED DURING THE 180-DAY PERIOD BEGINNING ON THE DAY OF THE COMPANY'S INITIAL PUBLIC OFFERING SUBJECT TO CERTAIN EXCEPTIONS; AND (4) AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THE WARRANTS REPRESENTED BY THIS CERTIFICATE ARE TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND; PROVIDED THAT THE COMPANY AND THE WARRANT AGENT SHALL HAVE THE RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER (I) PURSUANT TO CLAUSE (C) OR (D) TO REQUIRE THE DELIVERY OF ANY OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM, AND (II) IN EACH OF THE FOREGOING CASES, TO REQUIRE THAT A CERTIFICATION OF TRANSFER IN THE FORM APPEARING ON THE OTHER SIDE OF THIS SECURITY IS COMPLETED AND DELIVERED BY THE TRANSFEROR TO THE WARRANT AGENT. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION," "UNITED STATES" AND "U.S. PERSON" HAVE THE MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES ACT. THE WARRANT AGREEMENT CONTAINS A PROVISION REQUIRING THE WARRANT 11 AGENT TO REFUSE TO REGISTER ANY TRANSFER OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IN VIOLATION OF THE FOREGOING RESTRICTIONS. (b) Each Global Warrant shall also bear the following legend on the face thereof: UNLESS THIS WARRANT CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY TO DIVA SYSTEMS CORPORATION OR THE WARRANT AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (AND ANY PAYMENT HEREON IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF THE DEPOSITORY TRUST COMPANY OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN ARTICLE VIII OF THE WARRANT AGREEMENT. (c) Each Warrant Certificate issued prior to the Separation Date shall bear the following legend on the face thereof: THE WARRANTS EVIDENCED BY THIS CERTIFICATE ARE INITIALLY ISSUED AS PART OF AN ISSUANCE OF UNITS, EACH OF WHICH CONSISTS OF ONE 12 5/8% SENIOR DISCOUNT NOTE DUE 2008 OF DIVA SYSTEMS CORPORATION (COLLECTIVELY, THE "NOTES") AND THREE WARRANTS EACH INITIALLY ENTITLING THE HOLDER THEREOF TO PURCHASE ONE SHARE OF VOTING COMMON STOCK, PAR VALUE $0.001 PER SHARE, OF DIVA SYSTEMS CORPORATION. PRIOR TO THE CLOSE OF BUSINESS UPON THE EARLIEST TO OCCUR 12 OF (i) AUGUST 19, 1998, (ii) THE COMMENCEMENT OF AN EXCHANGE OFFER WITH RESPECT TO THE NOTES, (iii) THE EFFECTIVENESS OF A SHELF REGISTRATION STATEMENT WITH RESPECT TO THE NOTES, (iv) THE COMMENCEMENT OF AN OFFER TO PURCHASE THE NOTES (AS SUCH TERM IS DEFINED IN THE WARRANT AGREEMENT REFERRED TO HEREIN), AND (v) SUCH EARLIER DATE AS DETERMINED BY MERRILL LYNCH & CO., MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED IN ITS SOLE DISCRETION. THE WARRANTS EVIDENCED BY THIS CERTIFICATE MAY NOT BE TRANSFERRED OR EXCHANGED SEPARATELY FROM, BUT MAY BE TRANSFERRED OR EXCHANGED ONLY TOGETHER WITH, THE NOTES. Section 2.3. Execution and Delivery of Warrant Certificates. ------------ ---------------------------------------------- Warrant Certificates evidencing 1,389,000 Warrants, each Warrant to purchase initially one Common Share, may be executed, on or after the date of this Agreement, by the Company and delivered to the Warrant Agent for countersignature, and the Warrant Agent shall thereupon countersign and deliver such Warrant Certificates upon the order and at the written direction of the Company signed by its Chief Executive Officer or other duly authorized executive officer to the purchasers thereof on the date of issuance. The Warrant Agent is hereby authorized to countersign and deliver Warrant Certificates as required by this Section 2.3 or by Section 3.3, Article VI or Article VIII hereof. The Warrant Certificates shall be executed on behalf of the Company by its Chairman of the Board, Chief Executive Officer, President, any Vice President or other duly authorized executive officer of the Company either manually or by facsimile signature printed thereon. The Warrant Certificates shall be countersigned by manual signature of the Warrant Agent and shall not be valid for any purpose unless so countersigned. In case any officer or director of the Company whose signature shall have been placed upon any of the Warrant Certificates shall cease to be such officer or director of the Company before countersignature by the Warrant Agent and the issuance and delivery thereof, such Warrant Certificates may nevertheless be countersigned by the Warrant Agent and issued and delivered with the same force and effect as though such person had not ceased to be such officer or director of the Company. Section 2.4. Certificated Warrants. Beneficial owners of interests ------------ --------------------- in a Global Warrant may receive Certificated Warrants (which, except as set forth in Section 8.3(d), shall bear the Private Placement Legend) in accordance with the procedures of the Warrant Agent and the Depositary; provided, however, that beneficial owners of interests in the Regulation S Global Warrant may not receive Offshore Certificated Warrants in exchange for such interests prior to the date one year from the Closing Date. In connection with the execution and 13 delivery of such Certificated Warrants, the Warrant Agent shall reflect on its books and records the date and a decrease in the number of Warrants represented by the relevant Global Warrant equal to the number of such Certificated Warrants and the Company shall execute and the Warrant Agent shall countersign and deliver to said beneficial owners one or more Certificated Warrants in an equal aggregate number. ARTICLE III EXERCISE PRICE, EXERCISE AND REPURCHASE OF WARRANTS Section 3.1. Exercise Price. Each Warrant Certificate shall, when ------------ -------------- countersigned by the Warrant Agent, initially entitle the Holder thereof, subject to the provisions of this Agreement, to purchase the number of Common Shares indicated thereon at a purchase price of $.01 per Common Share, subject to adjustment as provided in Section 4.1 and Article V hereof (the "Exercise -------- Price"). - ----- Section 3.2. Exercise; Restrictions on Exercise. At any time after ------------ ---------------------------------- one year after the Closing Date and on or before the Expiration Date, any outstanding Warrants may be exercised on any Business Day; provided that the Warrant Registration Statement is, at the time of exercise, effective and available for the exercise of the Warrants or the exercise of such Warrants is exempt from the registration requirements of the Securities Act; provided further that, to the extent required by the managing underwriter of the Initial Public Offering, no Warrants may be exercised or transferred during the period from the date of the final prospectus for such Initial Public Offering until the date that is 180-days after such date. Any Warrants not exercised by 5:00 p.m., New York City time, on the Expiration Date shall expire and all rights of the Holders of such Warrants shall terminate. Additionally, pursuant to Section 4.1(j)(ii) hereof, the Warrants shall expire and all rights of the Holders of such Warrants shall terminate in the event the Company merges or consolidates with or sells all or substantially all of its property and assets to a Person (other than an Affiliate of the Company) if the consideration payable to holders of Common Stock in exchange for their Common Stock in connection with such merger, consolidation or sale consists solely of cash or in the event of the dissolution, liquidation or winding up of the Company. Section 3.3. Method of Exercise; Payment of Exercise Price. In ------------ --------------------------------------------- order to exercise all or any of the Warrants represented by a Warrant Certificate, the Holder thereof must surrender for exercise the Warrant Certificate to the Warrant Agent at its corporate trust office address set forth in Section 12.5 hereof, with the Subscription Form set forth on the reverse of the Warrant Certificate duly executed, together with payment in full of the Exercise Price then in effect for each Common Share (or other securities) issuable upon exercise of the Warrants as to which the Warrant Certificate is surrendered for exercise; such payment may be made in cash or by certified or official bank or bank cashier's check payable to the order of the 14 Company and shall be made to the Warrant Agent at its corporate trust office address set forth in Section 12.5 hereof prior to the close of business on the date the Warrant Certificate is surrendered to the Warrant Agent for exercise. Notwithstanding the foregoing, the Exercise Price may be paid by surrendering additional Warrants to the Warrant Agent having an aggregate Spread equal to the aggregate Exercise Price of the Warrants being exercised. All payments received upon exercise of Warrants shall be delivered to the Company by the Warrant Agent as instructed in writing by the Company. If less than all the Warrants represented by a Warrant Certificate are exercised or surrendered (in connection with a cashless exercise), such Warrant Certificate shall be surrendered and a new Warrant Certificate of the same tenor and for the number of Warrants which were not exercised or so surrendered shall be executed by the Company and delivered to the Warrant Agent and the Warrant Agent shall countersign the new Warrant Certificate, registered in such name or names as may be directed in writing by the Holder, and shall deliver the new Warrant Certificate to the Person or Persons entitled to receive the same. Global Warrants will be exercised by accordance with the procedures of the Warrant Agent and the Depositary. Upon the exercise of any Warrants following the surrender of a Warrant Certificate in conformity with the foregoing provisions, the Warrant Agent shall instruct the Company to transfer promptly to the Holder or, upon the written order of the Holder of such Warrant Certificate, appropriate evidence of ownership of any Common Shares or other security or property to which it is entitled as a result of such exercise, registered or otherwise placed in such name or names as may be directed in writing by the Holder, and to deliver such evidence of ownership to the Person or Persons entitled to receive the same and fractional shares, if any, or an amount in cash, in lieu of any fractional shares, if any, as provided in Section 4.5 hereof; provided that the Holder of such Warrant shall be responsible for the payment of any transfer taxes required as the result of any change in ownership of such Warrants or the issuance of such Common Shares other than to the Holder of such Warrants and any such transfer shall comply with applicable law. Upon the exercise of a Warrant or Warrants, the Warrant Agent is hereby authorized and directed to requisition from any transfer agent of the Common Shares (and all such transfer agents are hereby irrevocably authorized to comply with all such requests) certificates (bearing the legend set forth in Section 12.10 hereof, if applicable, unless a registration statement with the Commission relating to such Common Shares shall then be in effect or the Company and the Holder exercising such Warrant or Warrants otherwise agree) for the necessary number of Common Shares to which said Holder may be entitled. The Company shall enter, or shall cause any transfer agent of the Common Shares to enter, the name of the Person entitled to receive the Common Shares upon exercise of the Warrants into the Company's register of shareholders within 14 days of such exercise. A Warrant shall be deemed to have been exercised immediately prior to the close of business on the date of the surrender for exercise, as provided above, of the Warrant Certificate representing such Warrant and, for all purposes under this Agreement, the Person entitled to receive any Common Shares deliverable upon such exercise shall, as between such Person and the Company, be deemed to be the Holder of such Common Shares of record as of the close of 15 business on such date and shall be entitled to receive, and the Warrant Agent shall deliver to such Person, any Common Shares to which such Person would have been entitled had such Person been the registered holder on such date. Section 3.4. Repurchase Offers. (a) Notice of Repurchase Event. ------------ ----------------- -------------------------- Within five Business Days following the occurrence of a Repurchase Event, the Company shall give notice (a "Repurchase Notice") to the Holders of the Warrants ----------------- and the Warrant Agent that such event has occurred. (b) Repurchase Offers Generally. Following the occurrence of a --------------------------- Repurchase Event, the Company shall offer to repurchase for cash all outstanding Warrants pursuant to the provisions of this Section 3.4 (a "Repurchase Offer"). ---------------- The Company shall give notice of a Repurchase Offer in accordance with Section 3.4(f) hereof. Each date on which the Company gives any such notice is referred to as the "Notice Date." The Repurchase Offer shall commence on the Notice Date ----------- for such Repurchase Offer and shall expire at 5:00 p.m., New York City time, on a date determined by the Company (the "Final Surrender Time") that is at least -------------------- 30 but not more than 60 days after the Notice Date. Once a Repurchase Event has occurred, there is no limit on the number of Repurchase Offers that the Company may make. (c) Repurchase Offers. (i) In any Repurchase Offer, the Company ----------------- shall offer to purchase for cash at the Repurchase Price all Warrants outstanding on the Notice Date for such Repurchase Offer that are properly tendered to the Warrant Agent on or prior to the Final Surrender Time for such Repurchase Offer. (ii) Each Holder may, but shall not be obligated to, accept such Repurchase Offer by tendering to the Warrant Agent, on or prior to the Final Surrender Time for such Repurchase Offer, the Warrant Certificates evidencing the Warrants such Holder desires to have repurchased in such offer, together with a completed Certificate for Surrender in substantially the form attached to the Warrant Certificate. A Holder may withdraw all or a portion of the Warrants tendered to the Warrant Agent at any time prior to the Final Surrender Time for such Repurchase Offer. If less than all the Warrants represented by a Warrant Certificate shall be tendered, such Warrant Certificate shall be surrendered and a new Warrant Certificate of the same tenor and for the number of Warrants which were not tendered shall be executed by the Company and delivered to the Warrant Agent and the Warrant Agent shall countersign the new Warrant Certificate, registered in such name or names as may be directed in writing by the Holder, and shall deliver the new Warrant Certificate to the Person or Persons entitled to receive the same; provided that the Holder of such Warrants shall be responsible for the payment of any transfer taxes required as the result of any change in ownership of such Warrants and any such transfer shall comply with applicable law. 16 (d) Repurchase Price. (i) The purchase price (the "Repurchase ---------------- ---------- Price") for each Warrant properly tendered to the Warrant Agent pursuant to a Repurchase Offer shall be equal to the value (the "Relevant Value") on the -------------- Valuation Date relating thereto of the Common Shares issuable, and other securities or property of the Company which would have been delivered, upon exercise of Warrants had the Warrants been exercised (regardless of whether the Warrants are then exercisable), less the Exercise Price in effect on the Notice Date for such Repurchase Offer. (ii) The Relevant Value of the Common Shares and other securities or property issuable upon exercise of all the Warrants, on any Valuation Date shall be: (1) (A) If the Common Shares (or other securities) are registered under the Exchange Act, the average of the daily market prices (on the stock exchange that is the primary trading market for the Common Shares (or other securities)) of the Common Shares (or other securities) for the 20 consecutive trading days immediately preceding such Valuation Date or, (B) if the Common Shares (or other securities) have been registered under the Exchange Act for less than 20 consecutive trading days before such date, then the average of the daily market prices for all of the trading days before such date for which daily market prices are available, in the case of each of (A) and (B), as certified to the Warrant Agent by the Chief Executive Officer, the President, any Vice President or the Chief Financial Officer of the Company (the "Value Certificate"). The market price for ----------------- each such trading day shall be: (A) in the case of a security listed or admitted to trading on any national securities exchange, the closing sales price on such day, or if no sale takes place on such day, the average of the closing bid and asked prices on such day, (B) in the case of a security not then listed or admitted to trading on any national securities exchange, the last reported sale price on such day, or if no sale takes place on such day, the average of the closing bid and asked prices on such day, as reported by a reputable quotation source designated by the Company, (C) in the case of a security not then listed or admitted to trading on any national securities exchange and as to which no such reported sale price or bid and asked prices are available, the average of the reported high bid and low asked prices on such day, as reported by a reputable quotation service, or a newspaper of general circulation in the Borough of Manhattan, City and State of New York customarily published on each Business Day, designated by the Company, or, if there shall be no bid and asked prices on such day, the average of the high bid and low asked prices, as so reported, on the most recent day (not more than 30 days prior to the date in question) for which prices have been so reported and (D) if there are no bid and asked prices reported during the 30 days prior to the date in question, the Relevant Value shall be determined as if the Common Shares (or other securities) were not registered under the Exchange Act; or 17 (2) If the Common Shares (or other securities) are not registered under the Exchange Act or if the value cannot be computed under clause (1) above, the value set forth in the Value Report (as defined below) as determined by an Independent Financial Expert, which shall be selected by the Board in accordance with Section 3.4(e) hereof, and retained on customary terms and conditions, using one or more valuation methods that the Independent Financial Expert, in its best professional judgment, determines to be most appropriate but without giving effect to any discount for lack of liquidity, the fact that the Company has no class of equity securities registered under the Exchange Act or the fact that the Common Shares and other securities or property issuable upon exercise of the Warrants represent a minority interest in the Company. The Company shall use its best efforts to cause the Independent Financial Expert to deliver to the Company, with a copy to the Warrant Agent, within 45 days of the appointment of the Independent Financial Expert in accordance with Section 3.4(e) hereof, a value report (the "Value Report") stating the Relevant ------------ Value of the Common Shares and other securities or property of the Company, if any, being valued as of the Valuation Date and containing a brief statement as to the nature and scope of the methodologies upon which the determination of Relevant Value was made. The Warrant Agent shall have no duty with respect to the Value Report of any Independent Financial Expert, except to keep it on file and available for inspection by the Holders. The determination as to Relevant Value in accordance with the provisions of this Section 3.4(d) shall be conclusive on all Persons. (e) Selection of Independent Financial Expert. If clause (d)(ii)(2) ----------------------------------------- of this Section 3.4 is applicable, the Board of Directors of the Company shall select an Independent Financial Expert not more than five Business Days following a Repurchase Event. Within two Business Days following its selection of an Independent Financial Expert, the Company shall deliver to the Warrant Agent a notice setting forth the name of the Independent Financial Expert. (f) Notice of Repurchase Offer. Each notice of a Repurchase Offer (an -------------------------- "Offer Notice") given by the Company pursuant to Section 3.4(b) shall be given ------------ by the Company directly to all Holders of the Warrants, with a copy to the Warrant Agent, shall be given simultaneously with the Repurchase Notice (or, in the event that the Relevant Value of the Common Shares or other securities or property issuable upon exercise of all the Warrants cannot be determined pursuant to Section 3.4(d)(ii)(1), then such Offer Notice shall be given within five Business Days after the Company receives the Value Report with respect to such offer) and shall specify (A) the Final Surrender Time for such Repurchase Offer, (B) the manner in which Warrants may be surrendered to the Warrant Agent for repurchase by the Company, (C) the Repurchase Price at which the Warrants will be repurchased by the Company, (D) if applicable, the name of the Independent Financial Expert whose valuation of the Common Shares and other securities or property was utilized in connection with 18 determining such Repurchase Price and (E) that payment of the Repurchase Price will be made by the Warrant Agent. Each such notice shall be accompanied by a Certificate for Surrender for Repurchase Offer in substantially the form attached to the Warrant Certificate and a copy of the Value Report, if any. (g) Payment for Warrants. Upon surrender for repurchase of any -------------------- Warrants in conformity with the provisions of this Section 3.4, the Warrant Agent shall thereupon promptly notify the Company of such surrender. On or before the Final Surrender Time for any Repurchase Offer, the Company shall deposit with the Warrant Agent funds sufficient to make payment for the Warrants tendered to the Warrant Agent and not withdrawn. After receipt of such deposit from the Company, the Warrant Agent shall make payment, by delivering a check in such amount as is appropriate, to such Person or Persons as it may be directed in writing by the Holder surrendering such Warrants, net of any transfer taxes required to be paid in the event that the check is to be delivered to a Person other than the Holder. (h) Compliance with Laws. Notwithstanding anything contained in this -------------------- Section 3.4, if the Company is required to comply with laws, regulations and securities exchange or clearing procedures, rules or regulations in connection with making any Repurchase Offer, such laws, regulations, procedures or rules shall govern the making of such Repurchase Offer. ARTICLE IV ADJUSTMENTS Section 4.1. Adjustments. The Exercise Price and the number of ------------ ----------- Common Shares issuable upon exercise of each Warrant shall be subject to adjustment from time to time as follows: (a) Divisions; Consolidations; Reclassifications. In case the Company -------------------------------------------- shall, on or before the Expiration Date, (i) issue shares of any class or series of its capital stock in payment of a dividend or other distribution with respect to its Common Stock, (ii) subdivide its issued and outstanding Common Shares, (iii) consolidate its issued and outstanding Common Shares into a smaller number of shares, or (iv) issue shares of any class or series of its capital stock in a reclassification or conversion of its Common Shares (other than a reclassification in connection with a merger, consolidation or other business combination which will be governed by Section 4.1(j)), then the number of Common Shares purchasable upon exercise of each Warrant immediately prior to the record date for such issue or distribution or the effective date of such subdivision, consolidation, reclassification or conversion shall be adjusted so that the Holder of each Warrant shall thereafter be entitled to 19 receive the kind and number of Common Shares or other securities which such Holder would have been entitled to receive after the happening of any of the events described above had such Warrant been exercised immediately prior to the happening of such event or any record date with respect thereto. An adjustment made pursuant to this Section 4.1(a) shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event. (b) Rights; Options; Warrants. (i) In case the Company shall issue ------------------------- Rights (other than an issuance of convertible or exchangeable securities subject to Section 4.1(a) or of Additional SRTC Shares subject to clause (ii) below) to all holders of its Common Shares, entitling them to subscribe for or purchase Common Shares at a price per share which is lower (at the record date for such issuance) than the then Current Market Value per Common Share, then the number of Common Shares thereafter purchasable upon the exercise of each Warrant shall be adjusted and shall be determined by multiplying the number of Common Shares theretofore purchasable upon exercise of each Warrant by a fraction, the numerator of which shall be the sum of (A) the number of Common Shares outstanding immediately prior to the issuance of such Rights, plus (B) the number of additional Common Shares which may be purchased or subscribed for upon exercise, exchange or conversion of such Rights, and the denominator of which shall be the sum of (x) the number of Common Shares outstanding immediately prior to the issuance of such Rights, plus (y) the number of shares which the total consideration received by the Company for such Rights so offered would purchase at the then Current Market Value per Common Share. Except as otherwise provided above, such adjustment shall be made whenever such Rights are issued, and shall become effective retroactively immediately after the record date for the determination of shareholders entitled to receive such Rights. (ii) In case the Company shall issue Additional SRTC Shares, then the number of Common Shares thereafter purchasable upon the exercise of each Warrant shall be adjusted and shall be determined by adding to the number of Common Shares theretofore purchasable upon the exercise of each Warrant a number of Common Shares equal to the Existing Fraction multiplied by (A) the number of Additional SRTC Shares divided by (B) one minus the Existing Fraction. For purposes of this clause (ii), the term "Existing Fraction" shall mean a fraction, the numerator of which is the number of Common Shares purchasable upon the exercise of each Warrant and the denominator of which is the number of Common Shares outstanding, in each case immediately prior to the issuance of the Additional SRTC Shares. (c) Issuance of Common Shares at Lower Values. In case the Company ----------------------------------------- shall sell and issue any Common Share or Right (excluding (i) any Right issued in any of the transactions described in Section 4.1(a) or (b) above, (ii) Common Shares issued pursuant to any Right issued in any transaction described in Section 4.1(a) or (b) above, (iii) any Common 20 Shares or Rights issued as consideration (A) when any corporation or business is acquired, merged into or becomes part of the Company or a subsidiary of the Company or (B) in good faith in connection with any other business collaboration, in each case in an arm's-length transaction between the Company and a Person other than an Affiliate of the Company and (iv) Common Shares issued upon the exercise of Rights outstanding on the Closing Date and disclosed in the Offering Memorandum) at a price per Common Share (determined in the case of any such Right, by dividing (x) the total consideration receivable by the Company in consideration of the sale and issuance of such Right, plus the total consideration payable to the Company upon exercise, conversion or exchange thereof, by (y) the total number of Common Shares covered by such Right) that is lower than the Current Market Value per Common Share in effect immediately prior to such sale or issuance, then the number of Common Shares thereafter purchasable upon the exercise of each Warrant shall be adjusted and shall be determined by multiplying the number of Common Shares theretofore purchasable upon exercise of such Warrant by a fraction, the numerator of which shall be the number of Common Shares outstanding immediately after such sale or issuance and the denominator of which shall be the number of Common Shares outstanding immediately prior to such sale or issuance plus the number of Common Shares which the aggregate consideration received (determined as provided below) for such sale or issuance would purchase at such Current Market Value per Common Share. For purposes of this Section 4.1(c), the Common Shares which the holder of any such Right shall be entitled to subscribe for or purchase shall be deemed to be issued and outstanding as of the date of such sale and issuance and the consideration received by the Company therefor shall be deemed to be the consideration received by the Company for such Right, plus the consideration or premiums stated in such Right to be paid for the Common Shares covered thereby. No adjustment in the number of Common Shares purchasable upon the exercise of each Warrant shall be made upon the subsequent issue of shares of Common Stock upon the exercise or conversion of a Right. In case the Company shall sell and issue any Right together with one or more other securities as part of a unit at a price per unit, then in determining the "price per Common Share" and the "consideration received by the Company" for purposes of the first sentence of this Section 4.1(c), the Board shall determine, in good faith, the fair value of the Right then being sold as part of such unit. (d) Distributions of Debt, Assets, Subscription Rights or Convertible ----------------------------------------------------------------- Securities. In case the Company shall make a distribution to all holders of its - ---------- Common Shares of evidences of its indebtedness, or assets, or other distributions (excluding distributions or dividends referred to in Section 4.1(a) above and excluding distributions in connection with the dissolution, liquidation or winding-up of the Company which shall be governed by Section 4.1(j) and distributions of securities referred to in Section 4.1(a), Section 4.1(b) or Section 4.1(c)), then, in each case, the number of Common Shares purchasable after such record date upon the exercise of each Warrant shall be determined by multiplying the number of Common Shares purchasable upon the exercise of such Warrant immediately prior to such 21 record date by a fraction, the numerator of which shall be the Current Market Value per Common Share immediately prior to the record date for such distribution and the denominator of which shall be the Current Market Value per Common Share immediately prior to the record date for such distribution less the then fair value (as determined in good faith by the Board) of the evidences of its indebtedness, or assets or other distributions so distributed attributable to one Common Share. Such adjustment shall be made whenever any such distribution is made, and shall become effective on the date of distribution retroactive to the record date for the determination of shareholders entitled to receive such distribution. (e) Expiration of Rights, Options and Conversion Privileges. Upon the ------------------------------------------------------- expiration of any rights, options, warrants or conversion or exchange privileges (including, without limitation, any Rights) that have previously resulted in an adjustment hereunder, if any such right, option, warrant or conversion or exchange privilege shall not have been exercised, exchanged or converted, the Exercise Price and the number of Common Shares issuable upon the exercise of each Warrant shall, upon such expiration, be readjusted and shall thereafter, upon any future exercise, be such as they would have been had they been originally adjusted (or had the original adjustment not been required, as the case may be) as if (i) the only Common Shares so issued were the Common Shares, if any, actually issued or sold upon the exercise, exchange or conversion of such rights, options, warrants or conversion or exchange rights (including, without limitation, any Rights) and (ii) such Common Shares, if any, were issued or sold for the consideration actually received by the Company upon such exercise, exchange or conversion plus the consideration, if any, actually received by the Company for issuance, sale or grant of all such rights, options, warrants or conversion or exchange rights (including, without limitation, any Rights) whether or not exercised. (f) Current Market Value. For the purposes of any computation under -------------------- this Article IV, the "Current Market Value" per Common Share or of any other -------------------- security (herein collectively referred to as a "security") at any date herein specified shall be: (i) if the security is not registered under the Exchange Act, the value of the security (1) most recently determined as of a date within the six months (one year with respect to issuances to employees, directors or consultants under plans approved by the Board) preceding such date by an Independent Financial Expert selected by the Company in accordance with the criteria for such valuation set out in Section 4.1(k), or (2) if no such determination shall have been made within such six-month (or one-year) period or if the Company so chooses, determined as of such a date by an Independent Financial Expert selected by the Company in accordance with the criteria for such valuation set out in Section 4.1(k), or (ii) if the security is registered under the Exchange Act, the average of the daily market prices of the security for the 20 consecutive trading days immediately 22 preceding such date or, if the security has been registered under the Exchange Act for less than 20 consecutive trading days before such date, then the average of the daily market prices for all of the trading days before such date for which daily market prices are available; provided, however, that with respect to issuances to employees, directors or consultants under plans approved by the Board, Current Market Value for purposes of this clause (ii) shall be the market price of the security for such date or the trading day immediately preceding such date. The market price for each such trading day shall be: (A) in the case of a security listed or admitted to trading on any national securities exchange or a national market system, including without limitation the Nasdaq National Market, the closing sales price, regular way, on such day, or if no sale takes place on such day, the average of the closing bid and asked prices on such day on the principal national securities exchange on which such security is listed or admitted, as determined by the Board, in good faith, (B) in the case of a security not then listed or admitted to trading on any national securities exchange, the last reported sale price on such day, or if no sale takes place on such day, the average of the closing bid and asked prices on such day, as reported by a reputable quotation source designated by the Company, (C) in the case of a security not then listed or admitted to trading on any national securities exchange and as to which no such reported sale price or bid and asked prices are available, the average of the reported high bid and low asked prices on such day, as reported by a reputable quotation service, or a newspaper of general circulation in the Borough of Manhattan, City and State of New York customarily published on each Business Day, designated by the Company, or, if there shall be no bid and asked prices on such day, the average of the high bid and low asked prices, as so reported, on the most recent day (not more than 30 calendar days prior to the date in question) for which prices have been so reported and (D) if there are no bid and asked prices reported during the 30 calendar days prior to the date in question, the Current Market Value of the security shall be determined as if the security were not registered under the Exchange Act. (g) Consideration Received. For purposes of any computation ---------------------- respecting consideration received pursuant to this Section 4.1, the following shall apply: (i) in the case of the issuance of Common Shares for cash, the consideration shall be the amount of such cash, provided that in no case shall any deduction be made for any commissions, discounts or other expenses incurred by the Company for any underwriting of the issue or otherwise in connection therewith; (ii) in the case of the issuance of Common Shares for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to be the fair market value thereof as determined in good faith by the Board (irrespective of the accounting treatment thereof), whose determination shall be conclusive and 23 described in reasonable detail in a board resolution which shall be provided as soon as practicable thereafter to the Warrant Agent; and (iii) in the case of the issuance of rights, options, warrants or securities convertible into or exchangeable for Common Shares (including, without limitation, any Rights), the aggregate consideration received therefor shall be deemed to be the consideration received by the Company for the issuance of such rights, options, warrants or securities convertible into or exchangeable for Common Shares, plus the additional minimum consideration, if any, to be received by the Company upon the exercise, conversion or exchange thereof (the consideration in each case to be determined in the same manner as provided in clauses (i) and (ii) of this Section 4.1(g)). (h) De Minimis Adjustments. No adjustment in the number of Common ---------------------- Shares purchasable hereunder shall be required unless such adjustment would require an increase or decrease of at least one percent (1%) in the number of Common Shares purchasable upon the exercise of each Warrant; provided, however, that any adjustments which by reason of this Section 4.1(h) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations shall be made to the nearest one-thousandth of a share. (i) Adjustment of Exercise Price. Whenever the number of Common ---------------------------- Shares purchasable upon the exercise of each Warrant is adjusted, as herein provided, the Exercise Price per Common Share payable upon exercise of such Warrant shall be adjusted (calculated to the nearest $.0001) so that it shall equal the price determined by multiplying such Exercise Price immediately prior to such adjustment by a fraction the numerator of which shall be the number of Common Shares purchasable upon the exercise of each Warrant immediately prior to such adjustment and the denominator of which shall be the number of Common Shares so purchasable immediately thereafter. Following any adjustment to the Exercise Price pursuant to this Article IV, the amount payable, when adjusted, shall never be less than the par value per Common Share at the time of such adjustment. If, after an adjustment, a Holder of a Warrant upon exercise of it may receive shares of two or more classes in the capital of the Company, the Company shall determine the allocation of the adjusted Exercise Price between such classes of shares in a manner that the Board deems fair and equitable to the Holders. After such allocation, the exercise privilege and the Exercise Price of each class of shares shall thereafter be subject to adjustment on terms comparable to those applicable to Common Shares in this Article IV. Such adjustment shall be made successively whenever any event listed above shall occur. 24 (j) Consolidation, Merger, Etc. (i) Subject to the provisions of -------------------------- subsection (ii) below of this Section 4.1(j), in case of the consolidation of the Company with, or merger of the Company with or into, or of the sale of all or substantially all of the properties and assets of the Company to, any Person, and in connection therewith consideration is payable to holders of Common Shares (or other securities or property purchasable upon exercise of Warrants) in exchange therefor, the Warrants shall remain subject to the terms and conditions set forth in this Agreement and each Warrant shall, after such consolidation, merger or sale, entitle the Holder to receive upon exercise the number of shares in the capital or other securities or property (including cash) of or from the Person resulting from such consolidation or surviving such merger or to which such sale shall be made or of the parent of such Person, as the case may be, that would have been distributable or payable on account of the Common Shares (or other securities purchasable upon exercise of Warrants) if such Holder's Warrants had been exercised immediately prior to such merger, consolidation or sale (or, if applicable, the record date therefor); and in any such case the provisions of this Agreement with respect to the rights and interests thereafter of the Holders of Warrants shall be appropriately adjusted by the Board in good faith so as to be applicable, as nearly as may reasonably be, to any shares, other securities or any property thereafter deliverable on the exercise of the Warrants. (ii) Notwithstanding the foregoing, (x) if the Company merges or consolidates with, or sells all or substantially all of its property and assets to, another Person (other than an Affiliate of the Company) and consideration is payable to holders of Common Shares in exchange for their Common Shares in connection with such merger, consolidation or sale which consists solely of cash, or (y) in the event of the dissolution, liquidation or winding up of the Company, then the Holders of Warrants shall be entitled to receive distributions on the date of such event on an equal basis with holders of Common Shares (or other securities issuable upon exercise of the Warrants) as if the Warrants had been exercised immediately prior to such event, less the Exercise Price. Upon receipt of such payment, if any, the rights of a Holder shall terminate and cease and such Holder's Warrants shall expire. If the Company has made a Repurchase Offer that has not expired at the time of such transaction, the holders of the Warrants will be entitled to receive the higher of (i) the amount payable to the holders of the Warrants described above and (ii) the Repurchase Price payable to the holders of the Warrants pursuant to such Repurchase Offer. In case of any such merger, consolidation or sale of assets, the surviving or acquiring Person and, in the event of any dissolution, liquidation or winding up of the Company, the Company shall deposit promptly with the Warrant Agent the funds, if any, necessary to pay the Holders of the Warrants. After receipt of such deposit from such Person or the Company and after receipt of surrendered Warrant Certificates, the Warrant Agent shall make payment by 25 delivering a check in such amount as is appropriate (or, in the case of consideration other than cash, such other consideration as is appropriate) to such Person or Persons as it may be directed in writing by the Holder surrendering such Warrants. (k) If required pursuant to Section 4.1(f)(i), the Current Market Value shall be deemed to be equal to the value set forth in the Value Report (as defined below) as determined by an Independent Financial Expert, which shall be selected by the Board not more than ten Business Days following the occurrence of any event referred to in Sections 4(b), 4(c) or 4(d), and retained on customary terms and conditions, using one or more valuation methods that the Independent Financial Expert, in its professional judgment, determines to be most appropriate. The Company shall cause the Independent Financial Expert to deliver to the Company, with a copy to the Warrant Agent, within 45 days of the appointment of the Independent Financial Expert, a value report (the "Value ----- Report") stating the value of the Common Shares and other securities or property - ------ of the Company, if any, being valued as of the Valuation Date and containing a brief statement as to the nature and scope of the examination or investigation upon which the determination of value was made. The Warrant Agent shall have no duty with respect to the Value Report of any Independent Financial Expert, except to keep it on file and available for inspection by the Holders. The determination as to Current Market Value in accordance with the provisions of this Section 4.1(k) shall be conclusive on all Persons. The Independent Financial Expert shall consult with management of the Company in order to allow management to comment on the proposed value prior to delivery to the Company of any Value Report. (l) When No Adjustment Required. Without limiting any other exception --------------------------- contained in this Section 4.1, and in addition thereto, no adjustment need be made for: (i) exercises or conversions of any Rights outstanding on the date hereof; (ii) issuances of Actual SRTC Shares to the extent the number of such shares does not exceed 1,969,112; (iii) issuances of Rights or Common Shares to employees, directors or consultants of the Company or any of its subsidiaries (to the extent that all such securities issued after the date hereof do not represent an aggregate equity value in excess of 15% of the equity value of the Company on a fully diluted basis at such time, as determined in good faith by the Board) and any such Rights have an exercise price at least equal to the fair market value of the Common Shares on the date of issuance, as determined in good faith by the Board; 26 (iv) rights to purchase Common Shares pursuant to a Company plan for reinvestment of dividends or interest; (v) a change in the par value of the Common Shares (including a change from par value to no par value or vice versa); (vi) issuances of Rights or Common Shares in bona fide public offerings or private placements pursuant to Section 4(2) of the Securities Act, Regulation D thereunder or Regulation S, involving at least one investment bank of national reputation (provided any such private placement is to 10 or more beneficial holders); and (vii) issuances of Rights or Common Stock in connection with the establishment of commercial bank facilities. To the extent the Warrants become convertible into cash, no adjustment need be made thereafter as to the cash. Interest will not accrue on the cash. Section 4.2. Notice of Adjustment. Whenever the number of Common ------------ -------------------- Shares purchasable upon the exercise of each Warrant or the Exercise Price is adjusted, as herein provided, the Company shall cause the Warrant Agent promptly to mail, by first-class mail, postage prepaid, at the expense of the Company, to each Holder notice of such adjustment or adjustments and shall deliver to the Warrant Agent a certificate of the Auditors setting forth the number of Common Shares (or other securities) purchasable upon the exercise of each Warrant and the Exercise Price after such adjustment, setting forth a brief statement of the facts requiring such adjustment and setting forth the computation by which such adjustment was made. Such certificate shall be conclusive evidence of the correctness of such adjustment except in the case of manifest error. The Warrant Agent shall be entitled to rely on such certificate and shall be under no duty or responsibility with respect to any such certificate, except to exhibit the same, from time to time, to any Holder desiring an inspection thereof during reasonable business hours upon reasonable notice. The Warrant Agent shall not at any time be under any duty or responsibility to any Holders to determine whether any facts exist which may require any adjustment of the Exercise Price or the number of Common Shares purchasable on exercise of the Warrants or any of the other adjustments set forth in Section 4.1, or with respect to the nature or extent of any such adjustment when made, or with respect to the method employed in making such adjustment, or the validity or value (or the kind or amount) of any Common Shares (or other securities) which may be purchasable on exercise of the Warrants. The Warrant Agent shall not be responsible for any failure of the Company to make any cash payment or to issue, transfer or deliver any Common Shares or share certificates (or other securities) upon the exercise of any Warrant. 27 Section 4.3. Statement on Warrants. Irrespective of any adjustment ------------ --------------------- in the Exercise Price or the number or kind of shares purchasable upon the exercise of the Warrants, Warrants theretofore or thereafter issued may continue to express the same price and number and kind of shares as are stated in the Warrants initially issuable pursuant to this Agreement. Section 4.4. Notice of Consolidation, Merger, Etc. In case at any ------------ ------------------------------------ time after the date hereof and prior to 5:00 p.m., New York City time, on the Expiration Date, there shall be any (i) consolidation or merger involving the Company or sale, transfer or other disposition of all or substantially all of the Company's property, assets or business (except a merger or other reorganization in which the Company shall be the surviving corporation and holders of Common Shares (or other securities purchasable upon exercise of the Warrants) receive no consideration in respect of their shares) or (ii) any other transaction contemplated by Section 4.1(j)(ii) above, then, in any one or more of such cases, the Company shall cause to be mailed to the Warrant Agent and shall cause the Warrant Agent to mail, at the Company's expense, to each Holder of a Warrant, at the earliest practicable time (and, in any event, not less than 20 days before any date set for definitive action), notice of the date on which such reorganization, sale, consolidation, merger, dissolution, liquidation or winding up shall take place, as the case may be. Such notice shall also set forth such facts as shall indicate the effect of such action (to the extent such effect may be known at the date of such notice) on the Exercise Price and the kind and amount of the Common Shares and other securities, money and other property deliverable upon exercise of the Warrants. Such notice shall also specify the date as of which the holders of record of the Common Shares or other securities or property issuable upon exercise of the Warrants shall be entitled to exchange their shares for securities, money or other property deliverable upon such reorganization, sale, consolidation, merger, dissolution, liquidation or winding up, as the case may be. Section 4.5. Fractional Interests. If more than one Warrant shall ------------ -------------------- be presented for exercise in full at the same time by the same Holder, the number of full Common Shares which shall be issuable upon such exercise thereof shall be computed on the basis of the aggregate number of Common Shares purchasable on exercise of the Warrants so presented. The Company shall not be required to issue fractional Common Shares upon the exercise of Warrants. If any fraction of a Common Share would, except for the provisions of this Section 4.5, be issuable on the exercise of any Warrant (or specified portion thereof), the Company may pay an amount in cash calculated by it to be equal to the then Current Market Value per Common Share multiplied by such fraction computed to the nearest whole cent. Section 4.6. Initial Public Offering. Notwithstanding anything to ------------ ----------------------- the contrary herein contained, if the Company conducts an initial public offering of equity securities (other than Common Shares), the Company will give the Holders the opportunity to convert such Warrants into warrants to purchase such equity securities and such Common Shares or such other securities that have been received by the Holders upon the exercise of Warrants into such 28 equity securities. Such conversion opportunity will be on terms and conditions determined to be fair and reasonable by the Board. ARTICLE V DECREASE IN EXERCISE PRICE The Board, in its sole discretion, shall have the right at any time, or from time to time, to decrease the Exercise Price of the Warrants and/or increase the number of shares issuable upon the exercise of the Warrants. ARTICLE VI LOSS OR MUTILATION Upon receipt by the Company and the Warrant Agent of evidence satisfactory to them of the ownership and the loss, theft, destruction or mutilation of any Warrant Certificate and of indemnity or bond satisfactory to them and (in the case of mutilation) upon surrender and cancellation thereof, then, in the absence of notice to the Company or the Warrant Agent that the Warrants represented thereby have been acquired by a bona fide purchaser, the Company shall execute and the Warrant Agent shall countersign and deliver to the registered Holder of the lost, stolen, destroyed or mutilated Warrant Certificate, in exchange for or in lieu thereof, a new Warrant Certificate of the same tenor and for a like aggregate number of Warrants. Upon the issuance of any new Warrant Certificate under this Article VI, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and other expenses (including the fees and expenses of the Warrant Agent) in connection therewith. Every new Warrant Certificate executed and delivered pursuant to this Article VI in lieu of any lost, stolen or destroyed Warrant Certificate shall constitute a contractual obligation of the Company whether or not the allegedly lost, stolen or destroyed Warrant Certificates shall be at any time enforceable by anyone and shall be entitled to the benefits of this Agreement equally and proportionately with any and all other Warrant Certificates duly executed and delivered hereunder. The provisions of this Article VI are exclusive and shall preclude (to the extent lawful) all other rights or remedies with respect to the replacement of mutilated, lost, stolen, or destroyed Warrant Certificates. 29 ARTICLE VII RESERVATION AND AUTHORIZATION OF COMMON SHARES The Company shall at all times reserve and keep available such number of its authorized but unissued Common Shares deliverable upon exercise of the Warrants as will be sufficient to permit the exercise in full of all outstanding Warrants and will cause appropriate evidence of ownership of such Common Shares to be delivered to the Warrant Agent upon its request for delivery thereof upon the exercise of the Warrants. The Company covenants that all Common Shares of the Company that may be issued upon the exercise of the Warrants will, upon issuance, be duly authorized, validly issued, fully paid and not subject to any calls for funds and free from pre-emptive rights and all taxes, liens, charges and security interests with respect to the issue thereof. ARTICLE VIII WARRANT TRANSFER BOOKS; RESTRICTIONS ON TRANSFER Section 8.1. Transfer and Exchange. The Warrant Certificates shall --------------------- be issued in registered form only. The Warrant Agent shall keep at its office a register for the registration of Warrant Certificates and transfers or exchanges of Warrant Certificates as herein provided and other appropriate data as determined by the Warrant Agent. The Company shall, upon reasonable notice to the Warrant Agent, have access to such register during the Warrant Agent's regular business hours. All Warrant Certificates issued upon any registration of transfer or exchange of Warrant Certificates shall be the valid obligations of the Company, evidencing the same obligations, and entitled to the same benefits under this Agreement, as the Warrant Certificates surrendered for such registration of transfer or exchange. The Warrants shall initially be issued as part of the issuance of the Units. Prior to the Separation Date, the Warrants may not be transferred or exchanged separately from, but may be transferred or exchanged only together with, the Notes issued as part of such Units. A Holder may transfer its Warrants only by complying with the terms of this Agreement. No such transfer shall be effected until, and such transferee shall succeed to the rights of a Holder only upon, final acceptance and registration of the transfer by the Warrant Agent in the register. Prior to the registration of any transfer of Warrants by a Holder as provided herein, the Company, the Warrant Agent, and any agent of the Company may treat the person in whose name the Warrants are registered as the owner thereof for all purposes 30 and as the person entitled to exercise the rights represented thereby, any notice to the contrary notwithstanding. Furthermore, any holder of a Global Warrant shall, by acceptance of such Global Warrant, agree that transfers of beneficial interests in such Global Warrant may be effected only through a book- entry system maintained by the holder of such Global Warrant (or its agent), and that ownership of a beneficial interest in the Warrants represented thereby shall be required to be reflected in a book-entry. When Warrant Certificates are presented to the Warrant Agent with a request to register the transfer or to exchange them for an equal amount of Warrants, the Warrant Agent shall register such transfer or make such exchange as requested if its requirements for such transactions are met. To permit registrations of transfers and exchanges, the Company shall execute Warrant Certificates at the Warrant Agent's request. No service charge shall be made for any registration of transfer or exchange of Warrants, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any registration of transfer of Warrants. Section 8.2. Book-Entry Provisions for the Global Warrants. (a) ------------ --------------------------------------------- The Restricted Global Warrant and the Legended Regulation S Global Warrant initially shall (i) be registered in the name of the Depositary for such Global Warrant or the nominee of such Depositary, (ii) be delivered to the Warrant Agent as custodian for such Depositary and (iii) bear legends as set forth in Section 2.2 hereof. Members of, or participants in, the Depositary ("Agent Members") shall ------------- have no rights under this Agreement with respect to the Global Warrants held on their behalf by the Depositary or the Warrant Agent as its custodian, and the Depositary may be treated by the Company, the Warrant Agent and any agent of the Company or the Warrant Agent as the absolute owner of each such Global Warrant for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Warrant Agent or any agent of the Company or the Warrant Agent, from giving effect to any written certification, proxy or other authorization furnished by the Depositary or impair, as between the Depositary and its Agent Members, the operation of customary practices governing the exercise of the rights of a Holder of any Warrants. (b) Transfers of a Global Warrant shall be limited to transfers of such Global Warrant in whole, but not in part, to the Depositary, its successors or their respective nominees. Interests of beneficial owners in the Global Warrants may be transferred in accordance with the rules and procedures of the Depositary and the provisions of Section 8.3 hereof. U.S. Certificated Warrants and Offshore Certificated Warrants shall be transferred to beneficial owners in exchange for their beneficial interests in the Restricted Global Warrant or the Regulation S Global Warrant, as the case may be, (i) if the Depositary notifies the Company that it is unwilling or unable to continue as Depositary for any such Global Warrant and a successor depositary is not appointed by the Company within 90 days of such notice, 31 (ii) if there is a Default or (iii) upon the request of the beneficial owner in accordance with the rules and procedures of the Depositary and the provisions of Section 8.3 hereof; provided that Offshore Certificated Warrants shall not be transferred in exchange for the Legended Regulation S Global Warrant prior to one year after the Closing Date. (c) Any beneficial interest in one of the Global Warrants that is transferred to a person who takes delivery in the form of an interest in any other Global Warrant will, upon transfer, cease to be an interest in the first Global Warrant and become an interest in the other Global Warrant and, accordingly, will thereafter be subject to all transfer restrictions, if any, and other procedures applicable to beneficial interests in such other Global Warrant for as long as it remains such an interest. (d) In connection with the transfer of the entire Restricted Global Warrant or Regulation S Global Warrant to beneficial owners pursuant to paragraph (b) of this Section 8.2, the Restricted Global Warrant or the Regulation S Global Warrant, as the case may be, shall be surrendered to the Warrant Agent for cancellation, and the Company shall execute, and the Warrant Agent shall countersign and deliver, to each beneficial owner identified by the Depositary in exchange for its beneficial interest in the Restricted Global Warrant or the Regulation S Global Warrant, as the case may be, U.S. Certificated Warrants or Offshore Certificated Warrants, as the case may be, representing, in the aggregate, the number of Warrants theretofore represented by the Restricted Global Warrant or the Regulation S Global Warrant, as the case may be. (e) In connection with the transfer of a portion of the beneficial interests in the Restricted Global Warrant or the Unlegended Regulation S Global Warrant to beneficial owners pursuant to paragraph (b) of this Section 8.2, the Warrant Agent shall reflect on its books and records the date and a decrease in the amount of Warrants represented by the Restricted Global Warrant or Unlegended Regulation S Global Warrant in an amount equal to the amount of Warrants represented by the beneficial interest in the Restricted Global Warrant or Unlegended Regulation S Global Warrant to be transferred, and the Company shall execute, and the Warrant Agent shall countersign and deliver, to each beneficial owner identified by the Depositary in exchange for its beneficial interest in the Restricted Global Warrant or the Unlegended Regulation S Global Warrant, as the case may be, U.S. Certificated Warrants or Offshore Certificated Warrants, as the case may be, of like tenor and amount. (f) Any Certificated Warrant delivered in exchange for an interest in a Global Warrant pursuant to paragraph (b) or (e) of this Section shall, except as otherwise provided by paragraph (d) of Section 8.3 hereof, bear the Private Placement Legend. (g) The registered holder of a Global Warrant may grant proxies and otherwise authorize any person, including Agent Members and persons that may hold interests 32 through Agent Members, to take any action which a Holder is entitled to take under this Agreement or the Warrants. Section 8.3. Special Transfer Provisions. The following provisions ------------ --------------------------- shall apply: (a) Transfers to QIBs. The following provisions shall apply with ----------------- respect to the registration of any proposed transfer of Warrants to a QIB (excluding non-U.S. Persons): (i) If the Warrants to be transferred are represented by Restricted Certificated Warrants or by an interest in the Restricted Global Warrant or the Legended Regulation S Global Warrant, the Warrant Agent shall register the transfer if such transfer is being made by a proposed transferor who has checked the box provided for on the form of Warrant Certificate stating, or has otherwise advised the Company and the Warrant Agent in writing, that the sale has been made in compliance with the provisions of Rule 144A to a transferee who has signed the certification provided for on the form of Warrant Certificate stating, or has otherwise advised the Company and the Warrant Agent in writing, that it is purchasing the Warrants for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is a QIB within the meaning of Rule 144A, and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Company as it has requested pursuant to Rule 144A or has determined not to request such information and that it is aware that the transferor is relying upon its foregoing representations in order to claim the exemption from registration provided by Rule 144A. (ii) If the proposed transferee is an Agent Member, and the Warrants to be transferred are represented by Restricted Certificated Warrants or by an interest in the Regulation S Global Warrant, upon receipt by the Warrant Agent of the documents referred to in clause (i) above, as applicable, and instructions given in accordance with the Depositary's and the Warrant Agent's procedures, the Warrant Agent shall reflect on its books and records the date and an increase in the amount of Warrants represented by the Restricted Global Warrant in an amount equal to the amount of Warrants represented by the Certificated Warrants or the interest in the Legended Regulation S Global Warrant, as the case may be, to be transferred, and the Warrant Agent shall cancel the Certificated Warrants or decrease the amount of the Regulation S Global Warrant so transferred. (b) Transfers to Non-U.S. Persons at Any Time. The following ----------------------------------------- provisions shall apply with respect to the registration of any proposed transfer of Warrants to a Non-U.S. Person: 33 (i) The Warrant Agent shall register any proposed transfer of Warrants to a Non-U.S. Person only upon receipt of a certificate substantially in the form of Exhibit B from the proposed transferor. (ii) If the proposed transferee is an Agent Member and the Warrants to be transferred are represented by Certificated Warrants or an interest in the Restricted Global Warrant, upon receipt by the Warrant Agent of the documents referred to in clause (i) above and instructions given in accordance with the Depositary's and the Warrant Agent's procedures, the Warrant Agent shall reflect on its books and records the date and an increase in the number of Warrants represented by the Regulation S Global Warrant in an amount equal to the number of Warrants represented by the Certificated Warrants or the Restricted Global Warrant, as the case may be, to be transferred, and the Warrant Agent shall cancel the Certificated Warrant or decrease the amount of Warrants represented by the Restricted Global Warrant so transferred. (c) Transfers to Any Other Person. The following provisions shall ----------------------------- apply with respect to the registration of any proposed transfer of Warrants to any Person not specified in paragraphs (a) and (b) above (including any Institutional Accredited Investor which is not a QIB). (i) The Warrant Agent shall register any proposed transfer of Warrants to any such Person if (x) the transferor has delivered to the Warrant Agent and the Company a certificate substantially in the form of Exhibit C-1 hereto and, if required by paragraph (d) thereof, an Opinion of Counsel to the effect set forth therein and (y) the proposed transferee has delivered to the Warrant Agent and the Company a certificate substantially in the form of Exhibit C-2 hereto if such transferee is an Institutional Accredited Investor that is not a QIB. (ii) If the proposed transferor is an Agent Member holding a beneficial interest in the Restricted Global Warrant or the Regulation S Global Warrant, upon receipt by the Warrant Agent and the Company of the documents referred to in clause (i) above and instructions given in accordance with the Depositary's and the Warrant Agent's procedures, the Company shall execute and the Warrant Agent shall countersign Certificated Warrants in an amount equal to the number of Warrants represented by the Restricted Global Warrant or the Regulation S Global Warrant, if any, as the case may be, to be transferred and the Warrant Agent shall decrease the number of Warrants represented by the Restricted Global Warrant or the Regulation S Global Warrant so transferred. (d) Private Placement Legend. Upon the transfer, exchange or ------------------------ replacement of Warrant Certificates not bearing the Private Placement Legend, the Warrant Agent shall 34 deliver Warrant Certificates that do not bear the Private Placement Legend. Upon the transfer, exchange or replacement of Warrant Certificates bearing the Private Placement Legend, the Warrant Agent shall deliver only Warrant Certificates that bear the Private Placement Legend unless either (i) the circumstances contemplated by the third sentence of the third paragraph of Section 2.1 exist or (ii) there is delivered to the Warrant Agent an opinion of counsel reasonably satisfactory to the Company and its counsel and the Warrant Agent to the effect that neither such legend nor the related restrictions on transfer are required in order to maintain compliance with the provisions of the Securities Act. (e) Transfers of Interests in the Legended Regulation S Global ---------------------------------------------------------- Warrant. The Registrar shall register the transfer of any interest in the Legended Regulation S Global Warrant (x) if the proposed transferee is a Non- U.S. Person and the proposed transferor has delivered to the Registrar a certificate substantially in the form of Exhibit B hereto or (y) if the proposed transferee is a QIB and the proposed transferor has complied with the provisions of Section 8.3(a) hereof. (f) Transfers of Interests in the Unlegended Regulation S Global ------------------------------------------------------------ Warrant or Offshore Certificated Warrants. The Warrant Agent shall register the - ----------------------------------------- transfer of any interest in the Unlegended Regulation S Global Warrant or any Offshore Certificated Warrants without requiring any additional certification. (g) General. (i) By its acceptance of any Warrants represented by a ------- Warrant Certificate bearing the Private Placement Legend, each Holder of such Warrants acknowledges the restrictions on transfer of such Warrants set forth in this Agreement and in the Private Placement Legend and agrees that it will transfer such Warrants only as provided in this Agreement. The Warrant Agent shall not register a transfer of any Warrants unless such transfer complies with the restrictions on transfer of such Warrants set forth in this Agreement and is in compliance with applicable laws and applicable rules, regulations and procedures of any securities exchange or clearing agency in effect from time to time. In connection with any transfer of Warrants, each Holder agrees by its acceptance of Warrants to furnish the Warrant Agent or the Company such certifications, legal opinions or other information as either of them may reasonably require to confirm that such transfer is being made pursuant to an exemption from, or a transaction not subject to, the registration requirements of the Securities Act or any other applicable laws of any foreign jurisdiction; provided that the Warrant Agent shall not be required to determine (but may rely on a determination made by the Company with respect to) the sufficiency of any such certifications, legal opinions or other information. (ii) The Warrant Agent shall retain copies of all letters, notices and other written communications received pursuant to Section 8.2 hereof or this Section 8.3. The Company shall have the right to inspect and make copies of all such letters, notices 35 or other written communications at any reasonable time upon the giving of reasonable written notice to the Warrant Agent. Section 8.4. Surrender of Warrant Certificates. Any Warrant ------------ --------------------------------- Certificate surrendered for registration of transfer, exchange or exercise of the Warrants represented thereby shall, if surrendered to the Company, be delivered to the Warrant Agent, and all Warrant Certificates surrendered or so delivered to the Warrant Agent shall be promptly canceled by the Warrant Agent and shall not be reissued by the Company and, except as provided in this Article VIII in case of an exchange, Article III hereof in case of the exercise of less than all the Warrants represented thereby or Article VI in case of a mutilated Warrant Certificate, no Warrant Certificate shall be issued hereunder in lieu thereof. The Warrant Agent shall deliver to the Company from time to time or otherwise dispose of such canceled Warrant Certificates as the Company may direct in writing. ARTICLE IX WARRANT HOLDERS Section 9.1. Warrant Holder Deemed Not a Shareholder. The Company ------------ --------------------------------------- and the Warrant Agent may deem and treat the registered Holder(s) of the Warrant Certificates as the absolute owner(s) thereof (notwithstanding any notation of ownership or other writing thereon made by anyone), for the purpose of any exercise thereof and for all other purposes, and neither the Company nor the Warrant Agent shall be affected by any notice to the contrary. Accordingly, the Company and/or the Warrant Agent shall not, except as ordered by a court of competent jurisdiction as required by law, be bound to recognize any equitable or other claim to or interest in the Warrants on the part of any person other than such registered Holder, whether or not it shall have express or other notice thereof. Prior to the valid exercise of the Warrants, no Holder of a Warrant Certificate, as such, shall be entitled to any rights of a shareholder of the Company, including, without limitation, the right to vote or to consent to any action of the shareholders, to receive dividends or other distributions, to exercise any preemptive right or to receive any notice of meetings of shareholders and, except as otherwise provided in this Agreement, shall not be entitled to receive any notice of any proceedings of the Company. Section 9.2. Right of Action. All rights of action with respect to ------------ --------------- this Agreement are vested in the Holders of the Warrants, and any Holder of any Warrant, without the consent of the Warrant Agent or the Holders of any other Warrant, may, on such Holder's own behalf and for such Holder's own benefit, enforce, and may institute and maintain any suit, action or proceeding against the Company suitable to enforce, or otherwise in respect of, 36 such Holder's right to exercise such Warrants in the manner provided in the Warrant Certificate representing such Warrants and in this Agreement. ARTICLE X REMEDIES Section 10.1. Defaults. It shall be deemed to be a "Default" with ------------- -------- ------- respect to the Company's (or its successor's) obligations under this Agreement if: (a) a Repurchase Event occurs and the Company (or its successor) shall fail to make a Repurchase Offer pursuant to Section 3.4 hereof; or (b) the Company (or its successor) shall fail to purchase the Warrants pursuant to the Repurchase Offer in accordance with the provisions of Section 3.4 hereof. Section 10.2. Payment Obligations. Upon the happening of a Default ------------- ------------------- under this Agreement, the Company shall be obligated to increase the amount otherwise payable pursuant to Section 3.4(d) hereof in respect of the Repurchase Offer to which such Default relates by an amount equal to interest thereon at a rate per annum equal to 12 5/8% from the date of the Default to the date of payment, which interest shall compound quarterly (all such payment obligations in respect of such Repurchase Offer, together with all such increased amounts, being the "Repurchase Obligation"). --------------------- Section 10.3. Remedies; No Waiver. Notwithstanding any other ------------- ------------------- provision of this Warrant Agreement, if a Default occurs and is continuing, the Holders of the Warrants may pursue any available remedy to collect the Repurchase Obligation or to enforce the performance of any provision of this Warrant Agreement. A delay or omission by any Holder of a Warrant in exercising, or a failure to exercise, any right or remedy arising out of a Default shall not impair the right or remedy or constitute a waiver of or acquiescence in the Default. All remedies are cumulative to the extent permitted by law. ARTICLE XI THE WARRANT AGENT Section 11.1. Duties and Liabilities. The Company hereby appoints ------------- ---------------------- the Warrant Agent to act as agent of the Company as set forth in this Agreement. The Warrant 37 Agent hereby accepts the agency established by this Agreement and agrees to perform the same upon the terms and conditions herein set forth, by all of which the Company and the Holders of Warrants, by their acceptance thereof, shall be bound. The Warrant Agent shall not, by countersigning Warrant Certificates or by any other act hereunder, be deemed to make any representations as to the validity or authorization of the Warrants or the Warrant Certificates (except as to its countersignature thereon) or of any Common Shares issued upon exercise of any Warrant, or as to the accuracy of the computation of the Exercise Price or the number or kind or amount of Common Shares deliverable upon exercise of any Warrant or the correctness of the representations of the Company made in the certificates that the Warrant Agent receives. The Warrant Agent shall not be accountable for the use or application by the Company of the proceeds of the exercise of any Warrant. The Warrant Agent shall not have any duty to calculate or determine any adjustments with respect to either the Exercise Price or the kind and amount of Common Shares receivable by Holders upon the exercise of Warrants required from time to time and the Warrant Agent shall have no duty or responsibility in determining the accuracy or correctness of such calculation. The Warrant Agent shall not be (a) liable for any recital or statement of fact contained herein or in the Warrant Certificates or for any action taken, suffered or omitted by it in good faith without gross negligence in the belief that any Warrant Certificate or any other documents or any signatures are genuine or properly authorized, (b) responsible for any failure on the part of the Company to comply with any of its covenants and obligations contained in this Agreement or in the Warrant Certificates or (c) liable for any act or omission in connection with this Agreement except for its own gross negligence, bad faith or willful misconduct. The Warrant Agent is hereby authorized to accept instructions with respect to the performance of its duties hereunder from the Chairman of the Board, Chief Executive Officer, any Vice President or other executive officer of the Company and to apply to any such officer for instructions (which instructions will be promptly given in writing when requested) and the Warrant Agent shall not be liable for any action taken or suffered to be taken by it in good faith without gross negligence in accordance with the instructions of any such officer; provided, however, that, in its discretion, the Warrant Agent may, in lieu thereof, accept other evidence of such or may require such further or additional evidence as it may deem reasonable. The Warrant Agent shall not be liable for any action taken with respect to any matter in the event it requests instructions from the Company as to that matter and does not receive such instructions within a reasonable period of time after the request therefor. The Warrant Agent may execute and exercise any of the rights and powers hereby vested in it or perform any duty hereunder either itself or by or through its attorneys, agents or employees, and the Warrant Agent shall not be answerable or accountable for any act, default, neglect or misconduct of any such attorneys, agents or employees; provided that reasonable care has been exercised with respect to the retention of any such attorney, agent or employee. The Warrant Agent shall not be under any obligation or duty to institute, appear in or defend any action, suit or legal proceeding in respect hereof, unless first indemnified to its 38 reasonable satisfaction. The Warrant Agent shall promptly notify the Company in writing of any claim made or action, suit or proceeding instituted against it arising out of or in connection with this Agreement. The Company will perform, execute, acknowledge and deliver or cause to be delivered all such further acts, instruments and assurances as are consistent with this Agreement and as may reasonably be required by the Warrant Agent in order to enable it to carry out or perform its duties under this Agreement. The Warrant Agent shall act solely as agent of the Company hereunder. The Warrant Agent shall not be liable except for the failure to perform such duties as are specifically set forth herein, and no implied covenants or obligations shall be read into this Agreement against the Warrant Agent, whose duties and obligations shall be determined solely by the express provisions hereof. Section 11.2. Right to Consult Counsel. The Warrant Agent may at ------------- ------------------------ any time consult with legal counsel of its selection (who may be legal counsel for the Company), and the opinion or advice of such counsel shall be full and complete authorization and protection to the Warrant Agent and the Warrant Agent shall incur no liability or responsibility to the Company or to any Holder for any action taken, suffered or omitted by it in good faith without gross negligence in accordance with the written opinion or advice of such counsel. Section 11.3. Compensation; Indemnification. The Company agrees ------------- ----------------------------- promptly to pay the Warrant Agent from time to time and in any case within 30 days of receipt of an invoice, compensation for its services hereunder as the Company and the Warrant Agent may agree from time to time, and to reimburse it upon its request upon furnishing reasonable supporting documentation for reasonable fees or expenses and reasonable counsel fees and expenses incurred in connection with the execution and administration of this Agreement, and further agrees to indemnify the Warrant Agent and save it harmless against any losses, liabilities or reasonable expenses arising out of or in connection with the acceptance and administration of this Agreement, including, without limitation, the reasonable costs and expenses of investigating or defending any claim of such liability, except that the Company shall have no liability hereunder to the extent that any such loss, liability or expense results from the Warrant Agent's own gross negligence, bad faith or willful misconduct. The obligations of the Company under this Section 11.3 shall survive the exercise and the expiration of the Warrants, the termination of this Agreement and the resignation or removal of the Warrant Agent in respect of services or expenses incurred in connection with the Warrants or this Agreement. Section 11.4. No Restrictions on Actions. Nothing in this Agreement ------------- -------------------------- shall be deemed to prevent the Warrant Agent and any shareholder, director, officer or employee of the 39 Warrant Agent from buying, selling or dealing in any of the Warrants or other securities of the Company or becoming pecuniarily interested in transactions in which the Company may be interested, or contracting with or lending money to the Company or otherwise acting as fully and freely as though it were not the Warrant Agent under this Agreement. Nothing herein shall preclude the Warrant Agent from acting in any other capacity for the Company or for any other legal entity. Section 11.5. Discharge or Removal; Replacement Warrant Agent. The ------------- ----------------------------------------------- Warrant Agent may resign from its position as such and be discharged from all further duties and liabilities hereunder (except liability arising as a result of the Warrant Agent's own negligence, bad faith or willful misconduct), after giving one month's prior written notice to the Company. The Company may at any time remove the Warrant Agent upon one month's written notice specifying the date when such discharge shall take effect, and the Warrant Agent shall thereupon in like manner be discharged from all further duties and liabilities hereunder, except as aforesaid. The Warrant Agent shall mail to each Holder of a Warrant, at the Company's expense, a copy of said notice of resignation or notice of removal, as the case may be. Upon such resignation or removal the Company shall appoint in writing a new warrant agent. If the Company shall fail to make such appointment within a period of 30 days after it has been notified in writing of such resignation by the resigning Warrant Agent or after such removal, then the resigning or removed Warrant Agent or the Holder of any Warrant may apply to any court of competent jurisdiction for the appointment of a new warrant agent. After 30 days from receipt of, or giving, notice, as the case may be, and pending appointment of a successor to the original Warrant Agent, either by the Company or by such a court, the duties of the Warrant Agent shall be carried out by the Company. Any new warrant agent, whether appointed by the Company or by such a court, shall be a bank or trust company doing business under the laws of the United States or any state thereof, in good standing and having a combined capital and surplus of not less than $25,000,000. The combined capital and surplus of any such new warrant agent shall be deemed to be the combined capital and surplus as set forth in the most recent annual report of its condition published by such warrant agent prior to its appointment, provided that such reports are published at least annually pursuant to law or to the requirements of a federal or state supervising or examining authority. After acceptance in writing of such appointment by the new warrant agent, it shall be vested with the same powers, rights, duties and responsibilities as if it had been originally named herein as the Warrant Agent, without any further assurance, conveyance, act or deed; however, the original Warrant Agent shall in all events deliver and transfer to the successor Warrant Agent all property (including, without limitation, documents and recorded information), if any, at the time held hereunder by the original Warrant Agent and if for any reason it shall be necessary or expedient to execute and deliver any further assurance, conveyance, act or deed, the same shall be done at the expense of the Company and shall be legally and validly executed and delivered by the resigning or removed Warrant Agent. Not later than the effective date of any such appointment, the Company shall file notice thereof with the resigning or removed 40 Warrant Agent and shall forthwith cause a copy of such notice to be mailed by the successor Warrant Agent to each Holder of a Warrant. Failure to give any notice provided for in this Section 11.5, however, or any defect therein, shall not affect the legality or validity of the resignation of the Warrant Agent or the appointment of a new warrant agent, as the case may be. Section 11.6. Successor Warrant Agent. Any corporation into which ------------- ----------------------- the Warrant Agent or any new warrant agent may be merged or converted, or any corporation resulting from any consolidation to which the Warrant Agent or any new warrant agent shall be a party or any corporation succeeding to all or substantially all the corporate agency business of the Warrant Agent, shall be a successor Warrant Agent under this Agreement without any further act, provided that such corporation would be eligible for appointment as successor to the Warrant Agent under the provisions of Section 11.5 hereof. Any such successor Warrant Agent shall promptly cause notice of its succession as Warrant Agent to be mailed to each Holder of a Warrant. ARTICLE XII MISCELLANEOUS Section 12.1. Monies Deposited with the Warrant Agent. The Warrant ------------- --------------------------------------- Agent shall not be required to pay interest on any monies deposited pursuant to the provisions of this Agreement except such as it shall agree in writing with the Company to pay thereon. Any monies, securities or other property which at any time shall be deposited by the Company or on its behalf with the Warrant Agent pursuant to this Agreement shall be and are hereby assigned, transferred and set over to the Warrant Agent in trust for the purpose for which such monies, securities or other property shall have been deposited; but such monies, securities or other property need not be segregated from other funds, securities or other property except to the extent required by law. The Warrant Agent shall distribute any money deposited with it for payment and distribution to the Holders by mailing by first-class mail a check in such amount as is required by this Agreement to each such Holder at the address shown on the Warrant register of the Company, or as it may be otherwise directed in writing by such Holder, in accordance with the terms and conditions hereof. Any monies, securities or other property deposited with the Warrant Agent for payment or distribution to the Holders that remains unclaimed for two years after the date the monies, securities or other property was deposited with the Warrant Agent shall be delivered to the Company upon its request therefor. Section 12.2. Payment of Taxes. All Common Shares issuable upon the ------------- ---------------- exercise of Warrants shall be validly issued, fully paid and not subject to any calls for funds, and the Company shall pay any taxes and other governmental charges that may be imposed 41 under the laws of the United States of America or any political subdivision or taxing authority thereof or therein in respect of the issue or delivery thereof upon exercise of Warrants (other than income taxes imposed on the Holders). The Company shall not be required, however, to pay any tax or other charge imposed in connection with any transfer involved in the issue of any certificate for Common Shares (including other securities or property issuable upon the exercise of the Warrants) or payment of cash to any Person other than the Holder of a Warrant Certificate surrendered upon the exercise of a Warrant and in case of such transfer or payment, the Warrant Agent and the Company shall not be required to issue any share certificate or pay any cash until such tax or charge has been paid or it has been established to the Warrant Agent's and the Company's satisfaction that no such tax or charge is due. Section 12.3. No Merger, Consolidation or Sale of Assets of the ------------- ------------------------------------------------- Company. Except as otherwise provided herein, the Company will not merge into or - ------- consolidate with any other Person, or sell or otherwise transfer its property, assets and business substantially as an entirety to a successor of the Company, unless the Person resulting from such merger or consolidation, or such successor of the Company, shall expressly assume, by supplemental agreement satisfactory in form to the Warrant Agent and executed and delivered to the Warrant Agent, the due and punctual performance and observance of each and every covenant and condition of this Agreement or contained in the Warrants to be performed and observed by the Company. Section 12.4. Reports to Holders. At all times from and after the ------------- ------------------ earlier of (i) a consummation of a registered exchange offer or the effectiveness of a shelf registration statement with respect to the Notes and (ii) February 19, 1999 (such earlier date, the "Exchange Act Reporting Date"), whether or not the Company is then required to file reports with the Commission, the Company shall deliver for filing to the Commission all such reports and other information it would be required to file with the Commission by Section 13(a) or 15(d) under the Exchange Act if it were subject thereto. The Company shall supply the Warrant Agent and each Holder or shall supply to the Warrant Agent for forwarding to each such Holder, without cost to such Holder, copies of such reports and other information. At all times prior to the Exchange Act Reporting Date, the Company shall supply the Warrant Agent and each Holder or shall supply to the Warrant Agent for forwarding to each such Holder, without cost to such Holder, quarterly and annual reports substantially equivalent to those which would be required by the Exchange Act. In addition, at all times, upon the request of any Holder or any prospective purchaser of the Warrants designated by a Holder, the Company shall supply to such Holder or such prospective purchaser the information required under Rule 144A. Section 12.5. Notices; Payment. (a) Except as otherwise provided ------------- ---------------- in Section 12.5(b) hereof, any notice, demand or delivery authorized by this Agreement shall be sufficiently given or made when mailed, if sent by first class mail, postage prepaid, addressed 42 to any Holder of a Warrant at such Holder's last known address appearing on the register of the Company maintained by the Warrant Agent and to the Company or the Warrant Agent as follows: To the Company: DIVA Systems Corporation 333 Ravenswood Avenue, Building 205 Menlo Park, California 94025 Attention: Vice President and Treasurer To the Warrant Agent: The Bank of New York 101 Barclay Street 21 West New York, New York 10286 Attention: Corporate Trust Administration or such other address as shall have been furnished to the party giving or making such notice, demand or delivery. Any notice that is mailed in the manner herein provided shall be conclusively presumed to have been duly given when mailed, whether or not the Holder receives the notice. (b) Payment of the Exercise Price shall be made in accordance with the provisions of this Agreement at the office of the Warrant Agent set forth above, unless otherwise directed by the Warrant Agent and the Company. (c) Any notice required to be given by the Company to the Holders shall be made by mailing, to the Holders at their last known addresses appearing on the register maintained by the Warrant Agent. The Company hereby irrevocably authorizes the Warrant Agent, in the name and at the expense of the Company, to mail any such notice upon receipt thereof from the Company. Any notice that is mailed in the manner herein provided shall be conclusively presumed to have been duly given when mailed, whether or not the Holder receives the notice. Section 12.6. Binding Effect. This Agreement shall be binding upon ------------- -------------- and inure to the benefit of the Company and the Warrant Agent and their respective successors and assigns, and the Holders from time to time of the Warrants. Nothing in this Agreement is intended or shall be construed to confer upon any Person, other than the Company, the Warrant Agent and the Holders of the Warrants, any right, remedy or claim under or by reason of this Agreement or any part hereof. 43 Section 12.7. Counterparts. This Agreement may be executed manually ------------- ------------ or by facsimile in any number of counterparts, each of which shall be deemed an original, but all of which together constitute one and the same instrument. Section 12.8. Amendments. The Warrant Agent may, without the ------------- ---------- consent or concurrence of the Holders of the Warrants, by supplemental agreement or otherwise, join with the Company in making any changes or corrections in this Agreement that (a) are required to cure any ambiguity or to correct any defective or inconsistent provision or clerical omission or mistake or manifest error herein contained or (b) add to the covenants and agreements of the Company in this Agreement further covenants and agreements of the Company thereafter to be observed, or surrender any rights or power reserved to or conferred upon the Company in this Agreement; provided that in either case such changes or corrections do not and will not adversely affect, alter or change the rights, privileges or immunities of the Holders of Warrants. Upon the Warrant Agent's request, the Company shall promptly provide an Officer's Certificate and Opinion of Counsel which provide all conditions precedent to adoption of an amendment that have been satisfied. Section 12.9. Headings. The descriptive headings of the several ------------- -------- Sections of this Agreement are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof. Section 12.10. Common Shares Legend. Unless and until the Common -------------- -------------------- Shares issuable upon the exercise of the Warrants are registered under the Securities Act, or unless otherwise agreed by the Company and the Holder thereof, such Common Shares will bear a legend substantially to the following effect: THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR ANY STATE OR OTHER SECURITIES LAWS, AND ACCORDINGLY, MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. BY ITS ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) OR (B) IT IS NOT A U.S. PERSON AND IS ACQUIRING THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE IN AN OFFSHORE TRANSACTION IN 44 COMPLIANCE WITH REGULATION S UNDER THE SECURITIES ACT OR (C) IT ACQUIRED THIS CERTIFICATE DIRECTLY FROM DIVA SYSTEMS CORPORATION (THE "COMPANY") IN A TRANSACTION EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OR (D) IT IS AN INSTITUTIONAL "ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(a)(1), (2), (3) OR (7) OF REGULATION D UNDER THE SECURITIES ACT); (2) AGREES THAT IT WILL NOT, WITHIN THE TIME PERIOD REFERRED TO UNDER RULE 144(k), TAKING INTO ACCOUNT THE PROVISIONS OF RULE 144(d), IF APPLICABLE, UNDER THE SECURITIES ACT (THE "RESALE RESTRICTION TERMINATION DATE"), RESELL OR OTHERWISE TRANSFER THE COMMON SHARES REPRESENTED BY THIS CERTIFICATE EXCEPT (A) TO THE COMPANY OR ANY SUBSIDIARY THEREOF, (B) TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A UNDER THE SECURITIES ACT, (C) OUTSIDE THE UNITED STATES IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH RULE 904 UNDER THE SECURITIES ACT, (D) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OR (E) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT; AND (3) AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE ARE TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND; PROVIDED THAT THE COMPANY AND THE TRANSFER AGENT AND REGISTRAR SHALL HAVE THE RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER (I) PURSUANT TO CLAUSE (C) OR (D) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM, AND (II) IN EACH OF THE FOREGOING CASES, TO REQUIRE THAT THE OTHER SIDE OF THIS SECURITY IS COMPLETED AND DELIVERED BY THE TRANSFEROR TO THE TRANSFER AGENT AND REGISTRAR. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION," "UNITED STATES" AND "U.S. PERSON" HAVE THE MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES ACT. THE TRANSFER AGENT AND REGISTRAR HAS BEEN INSTRUCTED TO REFUSE TO REGISTER ANY TRANSFER OF THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE IN VIOLATION OF THE FOREGOING RESTRICTIONS. 45 Section 12.11. Third Party Beneficiaries. The Holders shall be -------------- ------------------------- third party beneficiaries to the agreements made hereunder between the Company, on the one hand, and the Warrant Agent, on the other hand, and each Holder shall have the right to enforce such agreements directly to the extent it deems such enforcement necessary or advisable to protect its rights or the rights of Holders hereunder. By acquiring Warrants, each Holder agrees to be bound by the obligations of Holders generally as set forth herein and as such obligations may be applicable to such Holder. Section 12.12. Termination. Except as otherwise specified herein, -------------- ----------- this Agreement shall terminate at 5:00 p.m. (New York City time) on the tenth anniversary of the Closing Date. Notwithstanding the foregoing, this Agreement shall terminate on any earlier date as of which all Warrants have been exercised. Section 12.13. Governing Law. This Agreement shall be governed by -------------- ------------- the laws of the State of New York. The Warrant Agent, the Company and the Holders agree to submit to the jurisdiction of the courts of the State of New York in any action or proceeding arising out of or relating to this Agreement or the Warrants. Section 12.14. Registration Rights. Each Warrant will be entitled to ------------- ------------------- the benefits, and subject to the term and conditions, of the Warrant Registration Rights Agreement, and each Holder shall be deemed to be a "Holder" as defined in the Warrant Registration Rights Agreement. 46 IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed, as of the day and year first above written. DIVA SYSTEMS CORPORATION By: /s/ Alan H. Bushell --------------------------------------------------- Name: Alan H. Bushell Title: President, Chief Operating Officer, Chief Financial Officer and Secretary THE BANK OF NEW YORK By: /s/ Vivian Georges --------------------------------------------------- Name: Vivian Georges Title: Assistant Vice President EXHIBIT A FORM OF WARRANT CERTIFICATE DIVA SYSTEMS CORPORATION [CUSIP] [CINS] [ISIN] No. _____ No. _____ WARRANTS TO PURCHASE COMMON SHARES This certifies that ______________, or its registered assigns, is the owner of ___________ Warrants, each of which represents the right to purchase, after February 19, 1999, from DIVA Systems Corporation (the "Company"), one ------- share of the Common Stock, par value $.001 per share, of the Company (the "Common Shares") at an exercise price (the "Exercise Price") of $.01 per Common - -------------- -------------- Share (subject to adjustment as provided in the Warrant Agreement hereinafter referred to below), upon surrender hereof at the office of The Bank of New York, or to its successor, as the warrant agent under the Warrant Agreement (any such warrant agent being herein called the "Warrant Agent"), or such other location ------------- contemplated by Section 12.5(b) of the Warrant Agreement, with the Subscription Form on the reverse hereof duly executed, with signature guaranteed as therein specified and simultaneous payment in full in cash or by certified or official bank or bank cashier's check payable to the order of the Company. Notwithstanding the foregoing, the Exercise Price may be paid by surrendering additional Warrants to the Warrant Agent having an aggregate Spread equal to the aggregate Exercise Price of the Warrants being exercised. At any time after one year after the Closing Date and on or before the Expiration Date, any outstanding Warrants may be exercised on any Business Day; provided that the Warrant Registration Statement is, at the time of exercise, effective and available for the exercise of Warrants or the exercise of such Warrants is exempt from the registration requirements of the Securities Act. This Warrant Certificate is issued under and in accordance with a Warrant Agreement dated as of February 19, 1998 (the "Warrant Agreement"), ----------------- between the Company and The Bank of New York, as Warrant Agent, and a Warrant Registration Rights Agreement dated as of February 19, 1998 (the "Warrant ------- Registration Rights Agreement"), between the Company and The Bank of New York, - ----------------------------- as Warrant Agent, and is subject to the Certificate of Incorporation and Bylaws of the Company and to the terms and provisions contained therein, to all of which terms and provisions the Holder of this Warrant Certificate consents by acceptance hereof. The terms of the Warrant Agreement and the Warrant Registration Rights Agreement are hereby incorporated herein by reference and made a part hereof. Reference is hereby made to the Warrant Agreement and the Warrant Registration Rights Agreement for a full description of the rights, limitations of rights, obligations, duties and immunities A-2 thereunder of the Company and the Holders of the Warrants. The summary of the terms of the Warrant Agreement and the Warrant Registration Rights Agreement contained in this Warrant Certificate is qualified in its entirety by express reference to the Warrant Agreement and the Warrant Registration Rights Agreement. All terms used in this Warrant Certificate that are defined in the Warrant Agreement and the Warrant Registration Rights Agreement shall have the meanings assigned to them in such agreements. A "Repurchase Event", as defined in the Warrant Agreement, shall be ---------------- deemed to occur on any date when the Company (i) consolidates with or merges into or with another Person (but only where holders of the Common Stock receive consideration in exchange for all or part of such Common Stock) if the Common Stock (or other Securities) thereafter issuable upon exercise of the Warrants are not registered under the Exchange Act, provided, that a "Repurchase Event" shall not be deemed to have occurred if the holders of at least 50% of the Company's Common Stock immediately prior to the consummation of such merger or consolidation, together with their affiliates, continue to hold at least 50% of the Company's Common Stock immediately after such consummation, or (ii) sells all or substantially all of its assets to another Person if the Common Stock (or other securities) thereafter issuable upon exercise of the Warrants are not registered under the Exchange Act, provided that in each case a "Repurchase Event" shall not be deemed to have occurred if the consideration for such transaction consists solely of cash. Following a Repurchase Event, the Company must make an offer to repurchase for cash all outstanding Warrants (a "Repurchase Offer"). If the ---------------- Company makes a Repurchase Offer, Holders may, until the expiration date of such offer, surrender all or part of their Warrants for repurchase by the Company. Warrants received by the Warrant Agent in proper form during a Repurchase Offer will, except as otherwise provided in the Warrant Agreement, be repurchased by the Company at a price in cash (the "Repurchase Price") equal to ---------------- the value on the Valuation Date relating thereto of the Common Shares issuable, and other securities or property of the Company which would have been delivered, upon exercise of the Warrants had the Warrants been exercised (whether or not the Warrants are then exercisable), less the Exercise Price in effect on the Notice Date for such Repurchase Offer. The value of such Common Shares and other securities will be, to the extent not otherwise provided in the Warrant Agreement, (i) if the Common Shares (or other securities) are registered under the Exchange Act, determined based upon the average of the daily market prices (as determined pursuant to Section 3.4(d)(ii)(1) of the Warrant Agreement) of the Common Shares (or other securities) for the 20 consecutive trading days immediately preceding such Valuation Date or (ii) if the Common Shares (or other securities) are not registered under the Exchange Act or if the value cannot be computed under clause (i) above, determined by the Independent Financial Expert (as defined in the Warrant Agreement), in each case as set forth in the Warrant Agreement. A-3 The "Valuation Date" as defined in the Warrant Agreement shall be -------------- deemed to occur on the date five Business Days prior to the date notice of the Repurchase Offer is first given. If the Company fails to make or complete a Repurchase Offer (a "Default") as required by the Warrant Agreement, it shall be obligated to - -------- increase the amount otherwise payable pursuant to the Warrant Agreement in respect of the Repurchase Offer by an amount equal to interest thereon at a rate per annum of 12 5/8% from the date of the Default to the date of payment, which interest shall compound quarterly. If the Company merges or consolidates with or into, or sells all or substantially all of its property and assets to, another Person and the consideration received by holders of Common Shares consists solely of cash, the Holders of Warrants shall be entitled to receive distributions on the date of such event on an equal basis with holders of Common Shares (or other securities issuable upon exercise of the Warrants) as if the Warrants had been exercised immediately prior to such event (less the Exercise Price). Upon receipt of such payment, if any, the rights of a Holder shall terminate and cease and such Holder's Warrants shall expire. The number of Common Shares purchasable upon the exercise of each Warrant and the price per share are subject to adjustment as provided in the Warrant Agreement. Except as stated in the immediately preceding paragraph and in the Warrant Agreement, in the event the Company merges or consolidates with, or sells all or substantially all of its assets to, another Person, each Warrant will, upon exercise, entitle the Holder thereof to receive the number of shares of capital stock or other securities or the amount of money and other property which the holder of the number of Common Shares (or other securities or property issuable upon exercise of a Warrant) purchasable upon the exercise of the Warrant is entitled to receive upon completion of such merger, consolidation or sale. As to any final fraction of a share which the same Holder of one or more Warrant Certificates would otherwise be entitled to purchase upon exercise thereof in the same transaction, the Company may pay the cash value thereof determined as provided in the Warrant Agreement. All Common Shares issuable by the Company upon the exercise of Warrants shall be validly issued, fully paid and not subject to any calls for funds, and the Company shall pay any taxes and other governmental charges that may be imposed under the laws of the United States of America or any political subdivision or taxing authority thereof or therein in respect of the issue or delivery thereof upon exercise of Warrants (other than income taxes imposed on the Holders). The Company shall not be required, however, to pay any tax or A-4 other charge imposed in connection with any transfer involved in the issue of any certificate for Common Shares (including other securities or property issuable upon the exercise of the Warrants) or payment of cash to any Person other than the Holder of a Warrant Certificate surrendered upon the exercise of a Warrant and in case of such transfer or payment, the Warrant Agent and the Company shall not be required to issue any share certificate or pay any cash until such tax or charge has been paid or it has been established to the Warrant Agent's and the Company's satisfaction that no such tax or charge is due. Subject to the restrictions on and conditions to transfer set forth in Articles II and VIII of the Warrant Agreement, this Warrant Certificate and all rights hereunder are transferable by the registered Holder hereof, in whole or in part, on the register of the Company maintained by the Warrant Agent for such purpose at the Warrant Agent's office in New York, New York, upon surrender of this Warrant Certificate duly endorsed, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Warrant Agent duly executed, with signatures guaranteed as specified in the attached Form of Assignment, by the registered Holder hereof or his attorney duly authorized in writing and by such other documentation required pursuant to the Warrant Agreement and upon payment of any necessary transfer tax or other governmental charge imposed upon such transfer. Upon any partial transfer, the Company will sign and issue and the Warrant Agent will countersign and deliver to such Holder a new Warrant Certificate or Certificates with respect to any portion not so transferred. Each taker and Holder of this Warrant Certificate, by taking and holding the same, consents and agrees that prior to the registration of transfer as provided in the Warrant Agreement, the Company and the Warrant Agent may treat the person in whose name the Warrants are registered as the absolute owner hereof for any purpose and as the Person entitled to exercise the rights represented hereby, any notice to the contrary notwithstanding. Accordingly, the Company and/or the Warrant Agent shall not, except as ordered by a court of competent jurisdiction as required by law, be bound to recognize any equitable or other claim to or interest in the Warrants on the part of any person other than such Registered Holder, whether or not it shall have express or other notice thereof. This Warrant Certificate may be exchanged at the office of the Warrant Agent maintained for such purpose in New York, New York, for Warrant Certificates representing the same aggregate number of Warrants, each new Warrant Certificate to represent such number of Warrants as the Holder hereof shall designate at the time of such exchange. Prior to the exercise of the Warrants represented hereby, the Holder of this Warrant Certificate, as such, shall not be entitled to any rights of a shareholder of the Company, including, without limitation, the right to vote or to consent to any action of the shareholders, to receive any distributions, to exercise any pre-emptive right or to receive any notice of meetings of shareholders, and shall not be entitled to receive any notice of any proceedings of the Company except as provided in the Warrant Agreement. A-5 This Warrant Certificate shall be void and all rights evidenced hereby shall cease on February 19, 2008, unless sooner terminated by the liquidation, dissolution or winding-up of the Company or as otherwise provided in the Warrant Agreement upon the consolidation or merger of the Company with, or sale of the Company to, another Person or unless such date is extended as provided in the Warrant Agreement. This Warrant Certificate shall not be valid for any purpose until it shall have been countersigned by the Warrant Agent. DIVA SYSTEMS CORPORATION By: ----------------------------------------- Name: Title: Dated: Countersigned: THE BANK OF NEW YORK, as Warrant Agent By: -------------------------------- Authorized Signatory FORM OF REVERSE OF WARRANT CERTIFICATE SUBSCRIPTION FORM (To be executed only upon exercise of Warrant) To: The Bank of New York, as Warrant Agent 101 Barclay Street 21 West New York, New York 10286 Attention: Corporate Trust Administration The undersigned irrevocably exercises ________ of the Warrants represented by this Warrant Certificate and herewith makes payment of $ _______ (such payment being in cash or by certified or official bank or bank cashier's check payable to the order or at the direction of DIVA Systems Corporation or, the exercise price may be paid by surrendering additional Warrants to the Warrant Agent having an aggregate Spread equal to the aggregate exercise price of the Warrants being exercised) all at the exercise price and on the terms and conditions specified in this Warrant Certificate and in the Warrant Agreement and the Warrant Registration Rights Agreement referred to herein and surrenders this Warrant Certificate and all right, title and interest therein to and directs that the Common Stock, par value $0.001 per share, of DIVA Systems Corporation (the "Common Shares") deliverable upon the exercise of such Warrants ------------- be registered or placed in the name and at the address specified below and delivered thereto. [THE FOLLOWING PROVISION TO BE INCLUDED ONLY ON OFFSHORE CERTIFICATED WARRANTS] The undersigned certifies that: Check One --------- [_] (a) (i) it is not a U.S. person (as defined in Rule 902 of Regulation S under the U.S. Securities Act of 1933, as amended) and the Warrants are not being exercised on behalf of a U.S. person. or -- [_] (ii) it is furnishing to the Warrant Agent a written opinion of counsel to the effect that the Warrants and the Common Shares issuable upon exercise of the Warrants have been registered under the U.S. Securities Act of 1933, as amended, or are exempt from registration thereunder. and (b) if an opinion is not being furnished, the undersigned is located outside the United States at the time of the exercise hereof. Dated: ------------------------------------------------ (Signature of Owner) ------------------------------------------------ (Street Address) ------------------------------------------------ (City) (State) (Zip Code) Signature Guaranteed By: ------------------------------------------------ Signatures must be guaranteed by an "eligible guarantor institution" meeting the requirements of the Warrant Agent, which requirements include membership or participation in the Security Transfer Agent Medallion Program ("STAMP") or such other "signature guarantee program" as may be determined by the Warrant Agent in addition to, or in substitution for, STAMP, all in accordance with the Securities Exchange Act of 1934, as amended. Securities and/or check or other property to be issued or delivered to: Please insert social security or identifying number: Name: Street Address: City, State and Zip Code: A-8 FORM OF CERTIFICATE FOR REPURCHASE OFFER (To be executed only upon repurchase of Warrant by DIVA Systems Corporation) To: The undersigned, having received prior notice of the consideration for which DIVA SYSTEMS CORPORATION will repurchase the Warrants represented by the within Warrant Certificate, hereby surrenders this Warrant Certificate for repurchase by DIVA SYSTEMS CORPORATION of the number of Warrants specified below for the consideration set forth in such notice. Dated: _________________________________ (Number of Warrants) _________________________________ (Signature of Owner) _________________________________ (Street Address) _________________________________ (City) (State) (Zip Code) Signature Guaranteed By: ____________________________________________________ Signatures must be guaranteed by an "eligible guarantor institution" meeting the requirements of the Warrant Agent, which requirements include membership or participation in the Security Transfer Agent Medallion Program ("STAMP") or such other "signature guarantee program" as may be determined by the Warrant Agent in addition to, or in substitution for, STAMP, all in accordance with the Securities Exchange Act of 1934, as amended. A-9 Securities and/or check to be issued to: Please insert social security or identifying number: Name: Street Address: City, State and Zip Code: A-10 FORM OF ASSIGNMENT In consideration of monies or other valuable consideration received from the Assignee(s) named below, the undersigned registered Holder of this Warrant Certificate hereby sells, assigns, and transfers unto the Assignee(s) named below (including the undersigned with respect to any Warrants constituting a part of the Warrants evidenced by this Warrant Certificate not being assigned hereby) all of the right of the undersigned under this Warrant Certificate, with respect to the number of Warrants set forth below: Name(s) of Assignee(s): _____________________________________ Address: ____________________________________________________ No. of Warrants: ____________________________________________ Please insert social security or other identifying number of assignee(s): and does hereby irrevocably constitute and appoint ________________________ the undersigned's attorney to make such transfer on the books of __________________ maintained for the purposes, with full power of substitution in the premises. [THE FOLLOWING PROVISION TO BE INCLUDED ON ALL CERTIFICATES EXCEPT UNLEGENDED REGULATION S GLOBAL WARRANTS AND UNLEGENDED OFFSHORE CERTIFICATED WARRANTS] In connection with any transfer of Warrants, the undersigned confirms that without utilizing any general solicitation or general advertising that: [Check One] ----------- [_] (a) these Warrants are being transferred in compliance with the exemption from registration under the U.S. Securities Act of 1933, as amended, provided by Rule 144A thereunder. or -- [_] (b) these Warrants are being transferred other than in accordance with (a) above and documents are being furnished which comply with the conditions of transfer set forth in this Warrant Certificate and the Warrant Agreement. or -- [_] (c) these Warrants are being transferred pursuant to an effective registration statement under the U.S. Securities Act of 1933, as amended. If none of the foregoing boxes is checked, the Warrant Agent shall not be obligated to register the Warrants in the name of any Person other than the Holder hereof unless and until the conditions to any such transfer of registration set forth herein and in Article VIII of the Warrant Agreement shall have been satisfied. Dated: _________________________________ (Signature of Owner) _________________________________ (Street Address) _________________________________ (City) (State) (Zip Code) Signature Guaranteed By: __________________________________________________ Signatures must be guaranteed by an "eligible guarantor institution" meeting the requirements of the Warrant Agent, which requirements include membership or participation in the Security Transfer Agent Medallion Program ("STAMP") or such other "signature guarantee program" as may be determined by the Warrant Agent in addition to, or in substitution for, STAMP, all in accordance with the Securities Exchange Act of 1934, as amended. TO BE COMPLETED BY PURCHASER IF (a) ABOVE IS CHECKED. The undersigned represents and warrants that it is purchasing the Warrant(s) for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is a "qualified institutional buyer" within the meaning of Rule 144A under the U.S. Securities Act of 1933, as amended, and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding Econophone, Inc. as the undersigned has requested pursuant to Rule 144A or has determined not to request such information and that it is aware that the A-12 transferor is relying upon the undersigned's foregoing representations in order to claim the exemption from registration provided by Rule 144A. Dated:________________ _______________________________________________ [NOTE: To be executed by an executive officer] EXHIBIT B Form of Certificate to be Delivered in Connection with Transfers Pursuant to Regulation S ---------------------------------- [Date] DIVA Systems Corporation 333 Ravenswood Avenue, Building 205 Menlo Park, California 94025 Attention: Vice President and Treasurer The Bank of New York 101 Barclay Street 21 West New York, New York 10286 Attention: Corporate Trust Administration Re: Warrants (the "Warrants") to Purchase -------- Common Shares of DIVA Systems Corporation (the "Company") ------- Ladies and Gentlemen: In connection with our proposed sale of _______________ Warrants, we hereby certify that such sale has been effected pursuant to and in accordance with Regulation S under the U.S. Securities Act of 1933, as amended (the "Securities Act"), and, accordingly, we represent that: - --------------- (1) the offer of the Warrants was not made to a person in the United States and not to a U.S. Person (as defined in Regulation S under the Securities Act); (2) at the time the buy order was originated, the transferee was outside the United States or we and any person acting on our behalf reasonably believed that the transferee was outside the United States; (3) no directed selling efforts (as such term is defined in Rule 902(b) of Regulation S under the Securities Act) have been made by us, any of our affiliates or any persons acting on our behalf in the United States in contravention of the requirements of Rule 903(b) or Rule 904(b) of Regulation S under the Securities Act, as applicable; and (4) the transaction is not part of a plan or scheme to evade the registration requirements of the Securities Act. You and the Company are entitled to rely upon this letter and are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceedings or official inquiry with respect to the matters covered hereby. Terms used in this certificate have the meanings set forth in Regulation S. Very truly yours, [Name of Transferor] By: ____________________________ Authorized Signature EXHIBIT C-1 Form of Certificate to be Delivered by Transferor in Connection with Transfers other than to QIBs or Non-US Persons ---------------------------------------------- [Date] DIVA Systems Corporation 333 Ravenswood Avenue, Building 205 Menlo Park, California 94025 Attention: Vice President and Treasurer The Bank of New York 101 Barclay Street 21 West New York, New York 10286 Attention: Corporate Trust Administration Re: Warrants (the "Warrants") to Purchase -------- Common Shares of DIVA Systems Corporation (the "Company") ------- Ladies and Gentlemen: We hereby certify that such transfer is being effected in compliance with the transfer restrictions applicable to the Warrants or interests therein transferred pursuant to and in accordance with the U.S. Securities Act of 1933, as amended (the "Securities Act"), and accordingly we hereby further certify -------------- that (check one): (a) [_] such transfer is being effected pursuant to and in accordance with Rule 144 under the Securities Act; or (b) [_] such transfer is being effected to the Company or a subsidiary thereof; or (c) [_] such transfer is being effected pursuant to an effective registration statement under the Securities Act; or (d) [_] such transfer is being effected pursuant to an exemption from the registration requirements of the Securities Act other than Rule 144A, Rule 144 or Rule 904 thereunder, and we hereby further certify that such transfer complies with the transfer restrictions applicable to the Warrants or interests therein transferred to Institutional Accredited Investors and in accordance with the requirements of the exemption claimed, which certification is supported by an Opinion of Counsel provided by us or the transferee (a copy of which we have attached to this certification), to the effect that such transfer is in compliance with the Securities Act. Upon consummation of the proposed transfer in accordance with the terms of the Warrant Agreement, the transferred Warrants or interests therein will be subject to the restrictions on transfer enumerated in the Private Placement Legend printed on the IAI Certificated Warrant and in the Warrant Agreement and the Securities Act. Very truly yours, [Name of Transferor] By:_____________________________________ Authorized Signature EXHIBIT C-2 Form of Certificate to be Delivered By Transferees in Connection with Transfers to Institutional Accredited Investors ----------------------------------------------- [Date] DIVA Systems Corporation 333 Ravenswood Avenue, Building 205 Menlo Park, California 94025 Attention: Vice President and Treasurer The Bank of New York 101 Barclay Street 21 West New York, New York 10286 Attention: Corporate Trust Administration Re: Warrants (the "Warrants") to Purchase -------- Common Shares of DIVA Systems Corporation (the "Company") ------- Dear Sirs: In connection with our proposed purchase of ___________ aggregate number of Warrants, we confirm that: 1. We understand that any subsequent transfer of the Warrants, any interest therein or the Common Shares issuable upon exercise of any Warrant (the "Warrant Shares") is subject to certain restrictions and conditions set -------------- forth in the Warrant Agreement dated as of February 19, 1998 relating to the Warrants (the "Warrant Agreement") and the Warrant Registration Rights ----------------- Agreement dated as of February 19, 1998 relating to the Warrants (the "Warrant Registration Rights Agreement") and the undersigned agrees to be -------------------------------------- bound by, and not to resell, pledge or otherwise transfer the Warrants or Warrant Shares except in compliance with, such restrictions and conditions and the U.S. Securities Act of 1933, as amended (the "Securities Act"). -------------- 2. We understand that the Warrants represented by this Warrant Certificate and, as of the date this Warrant Certificate was originally issued, the Warrant Shares have not been registered under the Securities Act, and accordingly may not be offered, sold, pledged or otherwise transferred within the United States or to, or for the account or benefit of, U.S. Persons except as set forth in the following sentence. We agree that we will not, within the time period referred to under Rule 144(k) of the Securities Act (taking into account the provisions of Rule 144(d) under the Securities Act, if applicable) under the Securities Act as in effect on the date of the transfer of this Warrant, resell or otherwise transfer the Warrants represented by this Warrant Certificate except (a) to DIVA Systems Corporation or any subsidiary thereof, (b) to a qualified institutional buyer in compliance with Rule 144A under the Securities Act, (c) outside the United States in an offshore transaction in compliance with Rule 904 under the Securities Act, (d) to an institutional accredited investor that, prior to such transfer, furnishes to you, to the Company and, in the case of the Warrant Shares, to the transfer agent and registrar therefor, a signed letter containing certain representations and agreements relating to the restrictions on transfer of the Warrants represented by this Warrant Certificate (the form of which letter can be obtained from the Warrant Agent) and an opinion of counsel acceptable to DIVA Systems Corporation and its counsel that such transfer is in compliance with the Securities Act) (e) pursuant to another exemption from the registration requirements of the Securities Act, provided that the transferee furnishes to you, to the Company and, in the case of the Warrant Shares, to the transfer agent and registrar therefor, as requested by you, the Company or the transfer agent and registrar, an opinion of counsel, certification and/or other information satisfactory to each such party (f) pursuant to an effective registration statement under the Securities Act and, in each case, in accordance with applicable state securities laws. 3. We understand that, on any proposed resale of any Warrants, any interest therein or Warrant Shares, we will be required to furnish to you and the Company such certifications, legal opinions and other information as you and the Company may reasonably require to confirm that the proposed sale complies with the foregoing restrictions. We further understand that the Warrants purchased by us will bear a legend to the foregoing effect. 4. We are an institutional "accredited investor" (as defined in Rule 501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act) and have such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of our investment in the Warrants, and we and any accounts for which we are acting are each able to bear the economic risk of our or its investment for an indefinite period of time. 5. We are acquiring the Warrants purchased by us for our own account or for one or more accounts (each of which is an institutional "accredited investor") as to each of which we exercise sole investment discretion. C2-3 You, the Company and, if applicable, the transfer agent and registrar for the Warrant Shares are entitled to rely upon this letter and are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceedings or official inquiry with respect to the matters covered hereby. Very truly yours, [Name of Transferee] By: ______________________________] Authorized Signature EXHIBIT D Form of Certificate ------------------- [Date] DIVA Systems Corporation 333 Ravenswood Avenue, Building 205 Menlo Park, California 94025 Attention: Vice President and Treasurer The Bank of New York 101 Barclay Street 21 West New York, New York 10286 Attention: Corporate Trust Administration Re: Warrants (the "Warrants") to Purchase -------- Common Shares of DIVA Systems Corporation (the "Company") ------- Dear Sirs: This letter relates to _______________ Warrants (the "Legended Warrants") ----------------- represented by a Warrant Certificate which bears a legend outlining restrictions upon transfer of such Legended Warrants. Pursuant to Section 2.1 of the Warrant Agreement dated as of February 19, 1998 (the "Warrant Agreement") relating to ----------------- the Warrants, we hereby certify that we are (or we will hold such securities on behalf of) a person outside the United States to whom the Warrants could be transferred in accordance with Rule 904 of Regulation S promulgated under the U.S. Securities Act of 1933, as amended. Accordingly, you are hereby requested to exchange the legended certificate for an unlegended certificate representing an identical number of Warrants, all in the manner provided for in the Warrant Agreement. You and the Company are entitled to rely upon this letter and are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceedings or official inquiry with respect to the matters covered hereby. Terms used in this certificate have the meanings set forth in Regulation S. Very truly yours, [Name of Holder] By:____________________________________________ Authorized Signature APPENDIX A LIST OF FINANCIAL EXPERTS - ------------------------- BankAmerica Robertson Stephens Bear, Stearns & Co., Inc. Broadview Associates LLC BT Alex.Brown CIBC Oppenheimer Corp. Cowen & Company Credit Suisse First Boston Corporation Deutsche Morgan Grenfell Inc. Dillon, Read & Co. Inc. Donaldson, Lufkin & Jenrette Securities Corporation Furman Selz, LLP Goldman, Sachs & Co. Hambrecht & Quist LLC Lazard Freres & Co. Lehman Brothers Merrill Lynch, Pierce, Fenner & Smith Incorporated Morgan Stanley & Co. Incorporated NationsBanc Montgomery Securities PaineWebber Incorporated Prudential Securities Inc. Salomon Brothers Inc Smith Barney Inc. EX-10.6 11 WARRANT REGISTRATION RIGHTS DATED 02/19/1998 EXHIBIT 10.6 ________________________________________________________________________________ WARRANT REGISTRATION RIGHTS AGREEMENT among MERRILL LYNCH & CO. MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED, CHASE SECURITIES INC. and MORGAN STANLEY & CO. INCORPORATED Dated as of February 19, 1998 ________________________________________________________________________________ WARRANT REGISTRATION RIGHTS AGREEMENT WARRANT REGISTRATION RIGHTS AGREEMENT, dated as of February 19, 1998 (this "Agreement"), among DIVA SYSTEMS CORPORATION, a Delaware corporation (the --------- "Company"), and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith ------- Incorporated ("Merrill Lynch"), Chase Securities Inc. and Morgan Stanley & Co. ------------- Incorporated (collectively, the "Initial Purchasers"). ------------------ Pursuant to the terms of a Units Purchase Agreement, dated February 11, 1998 (the "Purchase Agreement"), among the Company and the Initial ------------------ Purchasers, the Company has agreed to issue and sell to the Initial Purchasers an aggregate of 1,214,994 warrants (the "Initial Purchaser Warrants"), each -------------------------- warrant (a "Warrant") initially entitling the holder thereof to purchase one ------- share of Common Stock (as defined below) of the Company at an exercise price of $.01 per share, as part of 404,998 units (the "Units"), each Unit consisting of ----- one 12 5/8% Senior Discount Note due 2008 of the Company (each a "Note" and ---- collectively, the "Notes") to be issued pursuant to the provisions of an ----- Indenture dated as of February 19, 1998 (the "Indenture") between the Company, --------- as issuer, and The Bank of New York, as trustee, and three Warrants. Pursuant to the terms of an exchange offer memorandum and accompanying transmittal form from the Company to the holders of the Company's outstanding 1996 Notes (the "Exchange Noteholders"), the Company has agreed to issue to the Exchange - --------------------- Noteholders an aggregate of 174,006 Warrants (the "Exchange Warrants" and, ----------------- together with the Initial Purchaser Warrants, the "Warrants"), as part of 58,002 -------- Units. The Note and the three Warrants included in each Unit will become separately transferable at the close of business upon the earliest to occur of (i) the date that is six months following the Closing Date (as defined below), (ii) the commencement of an exchange offer with respect to the Notes undertaken pursuant to the Notes Registration Rights Agreement (as defined below), (iii) the effectiveness of a shelf registration statement with respect to resales of the Notes, (iv) the commencement of an Offer to Purchase the Notes (as defined below) and (v) such earlier date as determined by Merrill Lynch in its sole discretion (the "Separation Date"). --------------- In consideration of the foregoing and of the mutual agreements contained herein and in the Purchase Agreement, the Company and the Initial Purchasers hereby agree as follows: 1. Definitions. ----------- As used in this Agreement, the following capitalized defined terms shall have the following meanings: "Auditors" means, at any time, the independent auditors of the Company at such time. 2 "Board" means the board of directors of the Company from time to time. "Closing Date" means the date hereof. "Comfort Letter" has the meaning specified in Section 3 hereof. "Commission" means the United States Securities and Exchange Commission. "Common Stock" means the Common Stock, par value $0.001 per share, of the Company. "Common Shares" means the shares of the Common Stock of the Company. "Company" has the meaning specified in the preamble to this Agreement. "Company Shares" has the meaning specified in Section 2 hereof. "Cutback Notice" has the meaning specified in Section 2 hereof. "Exchange Noteholders" has the meaning specified in the preamble to this Agreement. "Expiration Date" means the second anniversary of the Closing Date. "Holders" means the record holders of the Warrants and the holders of Common Shares (or other securities) received upon exercise thereof. "Indenture" has the meaning specified in the recitals to this Agreement. "Initial Public Offering" means the first firmly underwritten initial public offering of the Common Stock of the Company registered under the Securities Act. "Initial Purchasers" has the meaning specified in the preamble to this Agreement. "Managing underwriter" has the meaning specified in Section 2 hereof. "Maximum Shares" has the meaning specified in Section 2 hereof. "Maximum Secondary Shares" has the meaning specified in Section 2 hereof. "Notes" has the meaning specified in the recitals to this Agreement. 3 "Notes Registration Rights Agreement" means the Registration Rights Agreement dated the Closing Date among the Company and the Initial Purchasers relating to the Notes. "Opinion" has the meaning specified in Section 3 hereof. "Other Shares" has the meaning specified in Section 2 hereof. "Piggy-back Registration Rights" has the meaning specified in Section 2 hereof. "Purchase Agreement" has the meaning specified in the recitals to this Agreement. "Registration Statement" has the meaning specified in Section 2 hereof. "Resale Shelf" has the meaning specified in Section 3 hereof. "Securities Act" means the United States Securities Act of 1933, as amended. "Shelf Expiration Date" has the meaning specified in Section 3 hereof. "Stockholder Rights Agreement" means the Stockholders Rights Agreement, dated February 19, 1998, among the Company and the holders of certain securities of the Company, as amended from time to time. "SRA Holders" means the holders of convertible securities of the Company entitled to registration rights with respect to the shares of Common Stock issued upon conversion of such securities pursuant to the Stockholders Rights Agreement. "Underlying Securities" means the Common Shares (or other securities) issuable upon the exercise of the Warrants pursuant to the Warrant Agreement. "Units" has the meaning specified in the recitals to this Agreement. "Warrant" has the meaning specified in the recitals to this Agreement. "Warrant Agent" means The Bank of New York, a bank and trust company organized under the laws of the State of New York, as warrant agent under the Warrant Agreement. 4 "Warrant Agreement" means the Warrant Agreement dated as of the Closing Date between the Company and the Warrant Agent. "Warrant Registration Statement" has the meaning specified in Section 3 hereof. "Warrant Shares" has the meaning specified in Section 2 hereof. "1996 Warrant Registration Rights Agreement" means the Warrant Registration Rights Agreement dated as of May 15, 1996 among the Company and Smith Barney Inc. and Toronto Dominion Securities (USA) Inc., as amended by Amendment No. 1 thereto dated as of February 19, 1998. "1996 Notes" means the Company's 13% Subordinated Discount Notes due 2006. "1996 Warrantholders" means the holders of securities the Company entitled to registration rights with respect to such securities pursuant to the 1996 Warrant Rights Agreement. 2. Piggy-Back Registration Rights. ------------------------------ (a) If prior to the Shelf Expiration Date, the Company proposes to file a registration statement with the Commission respecting an offering of any shares of Common Stock (or other securities issuable upon exercise of the Warrants) for cash (other than an offering registered solely on Form S-4 or S-8 or any successor form thereto and other than the initial public offering of shares of Common Stock (or other securities issuable upon exercise of the Warrants) if no stockholder of the Company participates therein), the Company shall give prompt written notice to all the Holders of Warrants or Common Shares or such other securities received upon exercise of Warrants at least 15 days prior to the initial filing of the registration statement relating to such offering (the "Registration Statement"). Each such Holder shall have the right, ---------------------- within 15 days after delivery of such notice, to request in writing that the Company include all or a portion of such of the Common Shares issuable upon exercise of such Holder's Warrants, such other securities as shall be issuable upon the exercise of the Warrants, or the Common Shares or such other securities previously received upon the exercise thereof pursuant to the Warrant Agreement, in each case to the extent that such Common Shares or other securities would be (upon issuance) or are, as the case may be, subject to restrictions on transfer ("Warrant Shares"), in such Registration Statement ("Piggy-back Registration -------------- ----------------------- Rights"). The Company shall include in such Registration Statement all of the - ------ Warrant Shares that a Holder has requested be included; provided, however, that -------- ------- the Company shall not be obligated to include in such Registration Statement any Warrant Shares of such Holder that will not be sold to the underwriters pursuant to Section 2(d) of this 5 Agreement if and to the extent that the Commission shall object in writing to the inclusion of such Warrant Shares in such Registration Statement. If the Holder of any such Warrant Shares has requested to sell its Warrant Shares to the underwriters of such offering pursuant to Section 2(d) of this Agreement and the underwriter for the public offering or the underwriter managing the public offering (in either case, the "managing underwriter") delivers a notice (a -------------------- "Cutback Notice") pursuant to Section 2(b) or 2(c) hereof, any Warrant Shares ------- ------ not included in such public offering due to any Cutback Notice shall be included in such Registration Statement (unless the Commission objects in writing to the inclusion of such Warrant Shares in such Registration Statement) but not sold to the underwriter(s) of such public offering under Section 2(d) of this Agreement, and will be subject to any restrictions on transfer set forth in the Warrant Agreement. The managing underwriter may deliver one or more Cutback Notices at any time prior to the execution of the underwriting agreement for the public offering. (b) If a proposed public offering is initiated other than pursuant to the exercise of demand registration rights of a stockholder of the Company pursuant to a contractual commitment of the Company and includes securities to be offered for the account of the Company ("Company Shares"), the provisions of -------------- this Section 2(b) shall be applicable if the managing underwriter delivers a Cutback Notice stating that, in its opinion, the number of Common Shares (other than Warrant Shares to be sold by the Holders) that selling stockholders propose to sell therein, whether or not such selling stockholders have the right to include shares therein, plus the number of Warrant Shares that the Holders have requested to be sold therein pursuant to Section 2(d) of this Agreement, plus the Company Shares, exceeds the maximum number of shares specified by the managing underwriter in such Cutback Notice that may be distributed without adversely affecting the price, timing or distribution of the Company Shares. Such maximum number of shares that may be so sold, excluding the Company Shares, are referred to as the "Maximum Shares." -------------- If the managing underwriter delivers such Cutback Notice, the number of shares that may be included in the offering shall be allocated as follows: (i) first, the Company Shares, (ii) second, the Warrant Shares held by Holders which have been requested to be included in such offering pursuant to Section 2(d) of this Agreement, together with the securities of the SRA Holders which have been requested to be included in such offering pursuant to the exercise of "piggy-back" registration rights under the Stockholder Rights Agreement and the securities of 1996 Warrantholders which have been requested to be included in such offering pursuant to the exercise of "piggy-back" registration rights under the 1996 Warrant Registration Rights Agreement (to be allocated on a pro rata basis based on the amount of shares of Common Shares sought to be registered by each such person), (iii) third, the securities of any other stockholders entitled to exercise "piggy-back" registration rights pursuant to contractual commitments of the Company, and (iv) fourth, any other Common Shares requested to be included in such offering. 6 (c) If a proposed public offering is either (A) initiated by stockholders of the Company by the exercise of demand registration rights of such stockholders pursuant to a contractual commitment of the Company or (B) entirely a secondary offering, the provisions of this Section 2(c) shall be applicable if the managing underwriter delivers a Cutback Notice stating that, in its opinion, the aggregate number of Warrant Shares and Other Shares proposed to be sold therein exceeds the maximum number of shares (the "Maximum Secondary ----------------- Shares") specified by the managing underwriter in such Cutback Notice that may - ------ be distributed without adversely affecting the price, timing or distribution of the Common Shares being distributed. If the managing underwriter delivers such Cutback Notice, the number of shares that may be included in the offering shall be allocated as follows: (i) if the registration is being made pursuant to the exercise of demand registration rights by 1996 Warrantholders, then (A) first, the securities of 1996 Warrantholders which have been requested to be included in such offering pursuant to the exercise of demand registration rights under the 1996 Warrant Registration Rights Agreement, (B) second, the Warrant Shares held by Holders which have been requested to be included in such offering pursuant to Section 2(d) of this Agreement, together with the securities of the SRA Holders which have been requested to be included in such offering pursuant to the exercise of "piggy-back" registration rights under the Stockholder Rights Agreement (to be allocated on a pro rata basis based on the amount of shares of Common Shares sought to be registered by each such person), (C) third, the securities of any other stockholders entitled to exercise "piggy-back" registration rights pursuant to contractual commitments of the Company, (D) fourth, the securities which the Company proposes to register, and (E) fifth, any other Common Shares requested to be included in such offering; (ii) if the registration is being made pursuant to the exercise of demand registration rights by SRA Holders, then (A) first, the Warrant Shares held by Holders which have been requested to be included in such offering pursuant to Section 2(d) of this Agreement, together with the securities of SRA Holders which have been requested to be included in such offering pursuant to the exercise of demand registration rights under the Stockholder Rights Agreement and the securities of the 1996 Warrantholders which have been requested to be included in such offering pursuant to the exercise of "piggy-back" registration rights under the 1996 Warrant Registration Rights Agreement (to be allocated on a pro rata basis based on the amount of shares of Common Shares sought to be registered by each such person), (B) second, the securities of any other stockholders entitled to exercise "piggy-back" registration rights pursuant to contractual commitments of the Company, (C) third, the securities which the Company proposes to register, and (D) fourth, any other Common Shares requested to be included in such offering; or 7 (iii) if the registration is being made pursuant to the exercise of demand registration rights by stockholders entitled to exercise demand registration rights pursuant to contractual commitments of the Company other than SRA Holders or 1996 Warrantholders, then (A) first, the securities of such stockholders which have been requested to be included in such offering pursuant to the exercise of demand registration rights under such contractual commitments with the Company, (B) second, the Warrant Shares held by Holders which have been requested to be included in such offering pursuant to Section 2(d) of this Agreement, together with the securities of SRA Holders which have been requested to be included in such offering pursuant to the exercise of demand registration rights under the Stockholder Rights Agreement and the securities of the 1996 Warrantholders which have been requested to be included in such offering pursuant to the exercise of "piggy-back" registration rights under the 1996 Warrant Registration Rights Agreement (to be allocated on a pro rata basis based on the amount of shares of Common Shares sought to be registered by each such person), (C) third, the securities of any other stockholders entitled to exercise "piggy-back" registration rights pursuant to contractual commitments of the Company, (D) fourth, the securities which the Company proposes to register, and (E) fifth, any other Common Shares requested to be included in such offering. (d) The underwriting agreement for such public offering shall provide that each requesting Holder shall have the right to sell its Warrant Shares (other than Warrant Shares excluded from such public offering pursuant to a Cutback Notice and the terms of Sections 2(b) and 2(c)) to the underwriters and that the underwriters shall purchase the Warrant Shares at the price paid by the underwriters for the Common Shares sold by the Company and/or other selling stockholders, as the case may be. Each Holder participating in such public offering shall (i) enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter(s) of such offering and (ii) be entitled to conduct due diligence, have its Warrant Shares listed, receive copies of the prospectus included in the Registration Statement relating to such offering and receive an Opinion and Comfort Letter upon effectiveness of any such Registration Statement, in each case in the same manner as provided for in Section 3(b)(i) through (iv) of this Agreement with respect to a Resale Shelf. 3. Shelf Registration. ------------------ (a) If only the Company sells Common Shares in an initial public offering or all of the Warrant Shares have not been registered under the Securities Act or sold in a public offering of Common Shares, the Company shall file pursuant to Rule 415 under the Securities Act a shelf registration statement on the appropriate form (the "Warrant Registration Statement") ------------------------------ covering the issuance of the Warrant Shares upon exercise of the Warrants and shall use its best efforts to cause the Warrant Registration Statement to become effective under 8 the Securities Act within 180 days after the closing date of the initial public offering of Common Shares; provided, however, that (1) in no -------- ------- event may the Warrant Registration Statement be declared effective prior to the first anniversary of the Closing Date and (2) if the Commission shall request that the Company register the resale of the Warrant Shares instead of the issuance thereof, the Warrant Registration Statement shall register such resale as opposed to such issuance. The Company shall use reasonable efforts to keep the Warrant Registration Statement continuously effective until the earlier of (i) such time as all Warrants have been exercised thereunder or all Warrant Shares have been sold thereunder, as the case may be, and (ii) the second anniversary of the Closing Date (the "Shelf Expiration Date"). Prior to filing --------------------- the Warrant Registration Statement or any amendment thereto, the Company shall provide a copy thereof to the Initial Purchasers and their counsel and afford them a reasonable time to comment thereon. (b) If the Warrant Registration Statement shall register the resale of the Warrant Shares (a "Resale Shelf") as provided in clause (2) of the proviso ------------ to the first sentence of Section 3(a) above, the Company agrees to: (i) make available for inspection by a representative of the Holders, any underwriter participating in any disposition pursuant to such Resale Shelf and attorneys and accountants designated by the Holders, at reasonable times and in a reasonable manner, financial and other records, documents and properties of the Company that are pertinent to the conduct of due diligence, and cause the officers, directors and employees of the Company to supply all information reasonably requested by any such representative, underwriter, attorney or accountant in connection with a Resale Shelf; (ii) use its best efforts to cause all Warrant Shares sold under a Resale Shelf to be listed on any securities exchange or any automated quotation system on which similar securities issued by the Company are then listed if requested by the Holders of Warrant Shares representing a majority of the Warrants originally issued, to the extent such Warrant Shares satisfy applicable listing requirements; (iii) provide copies of the prospectus included in such Resale Shelf to Holders that are selling Warrant Shares pursuant to such Resale Shelf; (iv) cause to be provided to the Holders and beneficial owners of Warrant Shares, upon the effectiveness of such Resale Shelf, a customary "10b-5" opinion of independent counsel (an "Opinion") and a customary "cold ------- comfort" letter of independent auditors (a "Comfort Letter"); -------------- (v) cause to be provided to the Holders and beneficial owners of Warrant Shares an Opinion and Comfort Letter with respect to each Form 10-K and Form 10-Q, 9 including any amendments thereto, that is incorporated by reference in such Resale Shelf; and (vi) notify the Holders, (A) when the Resale Shelf has become effective and when any post-effective amendment thereto has been filed and becomes effective, (B) of any request by the Commission or any state securities authority for amendments and supplements to the Resale Shelf or of any material request by the Commission or any state securities authority for additional information after the Resale Shelf has become effective, (C) of the issuance by the Commission or any state securities authority of any stop order suspending the effectiveness of the Resale Shelf or the initiation of any proceedings for that purpose, (D) if, between the effective date of the Resale Shelf and the closing of any sale of Warrant Shares covered thereby, the representations and warranties of the Company contained in any underwriting agreement, securities sales agreement or other similar agreement, including this Agreement, relating to disclosure cease to be true and correct in all material respects or if the Company receives any notification with respect to the suspension of the qualification of the Warrant Shares for sale in any jurisdiction or the initiation of any proceeding for such purpose, (E) of the happening of any event during the period the Resale Shelf is effective such that such Resale Shelf or the related prospectus contains an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make statements therein not misleading and (F) of any determination by the Company that a post-effective amendment to a Registration Statement would be appropriate. 4. Suspension. ---------- Notwithstanding the foregoing, during any consecutive 365-day period, the Company shall have the privilege to suspend availability of the Warrant Registration Statement and the related prospectus for one 60-consecutive-day period, except during the 60 days immediately prior to the Expiration Date, if the Board determines in good faith that there is a valid purpose for such suspension and provides notice of such determination (but not the purpose) to the Holders at their addresses appearing in the register of Warrants maintained by the Warrant Agent. 5. Blue Sky. -------- The Company shall use its reasonable best efforts to register or qualify the Underlying Securities proposed to be sold or issued pursuant to the Registration Statement or the Warrant Registration Statement under all applicable securities or "blue sky" laws of all jurisdictions in the United States in which any Holder of Warrants may or may be deemed to purchase Underlying Securities upon the exercise of Warrants or resale of the Warrant Shares, as the case may be, and shall use its reasonable best efforts to maintain such registration or 10 qualification through the earliest of (A) in the case of the Registration Statement, the date upon which all of the Warrant Shares have been sold or such other date as shall be required by applicable law, (B) the date upon which all Warrants have been exercised or all Warrant Shares have been resold, as the case may be, under the Warrant Registration Statement and (C) the Expiration Date; provided, however, that the Company shall not be required to (i) qualify as a - ----------------- foreign corporation or as a broker or a dealer in securities in any jurisdiction where it would not otherwise be required to qualify but for this Section 5, (ii) file any general consent to service of process or (iii) subject itself to taxation in any jurisdiction if it is not otherwise so subject. 6. Accuracy of Disclosure. ---------------------- The Company (and its successors) represents and warrants to each Holder (and each beneficial owner of a Warrant or Warrant Share) and agrees for the benefit of each Holder (and each beneficial owner of a Warrant or Warrant Share) that, except during any period in which the availability of the Warrant Registration Statement has been suspended, (i) the Warrant Registration Statement and the documents incorporated by reference therein will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein not misleading; and (ii) the prospectus delivered to such Holder upon its exercise of Warrants or pursuant to which such Holder sells its Warrant Shares, as the case may be, and the documents incorporated by reference therein will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. 7. Indemnity. --------- The Company hereby indemnifies each beneficial owner of a Warrant and each person, if any, who controls any beneficial owner of a Warrant within the meaning of either Section 15 of the Securities Act or Section 20 of the Securities Exchange Act of 1934 (the "Exchange Act"), or is under common control ------------ with, or is controlled by, any beneficial owner of a Warrant (whether or not it is, at the time the indemnity provided for in this Section 7 is sought, such a beneficial owner), from and against all losses, damages or liabilities which such beneficial owner or any such controlling or affiliated person suffers as a result of any breach, on the date of any exercise of a Warrant by such beneficial owner or the resale of any Warrant Share by such Holder, in either case pursuant to the Warrant Registration Statement, of the representations, warranties or agreements contained in Section 6. Each beneficial owner of a Warrant Share sold pursuant to a Resale Shelf or a Registration Statement, by accepting its beneficial ownership of a Warrant, hereby (i) agrees to provide the Company with information with respect to it that the Company reasonably requests in connection with any Resale Shelf or a Registration Statement, if applicable, and (ii) agrees, severally and not jointly, to indemnify the Company, its directors and officers and each person, if any, who controls the Company 11 within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act against any liability incurred by it or such controlling person as a result of any misstatement of information provided by such beneficial owner to the Company in writing expressly for inclusion in the Resale Shelf or a Registration Statement, if applicable. 8. Expenses. -------- All expenses incident to the Company's performance of or compliance with its obligations under this Agreement will be borne by the Company, regardless of whether a Registration Statement or Warrant Registration Statement becomes effective, including without limitation (i) all Commission or National Association of Securities Dealers, Inc. registration and filing fees, (ii) all reasonable fees and expenses incurred in connection with compliance with state securities or "blue sky" laws, (iii) all reasonable expenses of any persons incurred by or on behalf of the Company in preparing or assisting in preparing, word processing, printing and distributing any registration statement, any prospectus, any amendments or supplements thereto and other documents relating to the performance of and compliance with this Agreement, (iv) the reasonable fees (including legal fees and expenses) and disbursements of the Warrant Agent, (v) the reasonable fees and disbursements of counsel for the Company and (vi) the fees and disbursements, if any, of the Auditors but excluding (x) fees and disbursements of counsel retained by the participating Holders and (y) the Holders' share of underwriting discounts and commissions. 9. Miscellaneous. ------------- (a) No Inconsistent Agreements. Each of the Company and the Initial -------------------------- Purchasers represent to the other that it has not entered into, and agrees that on or after the date of this Agreement it will not enter into, any agreement which is inconsistent with the rights granted to the Holders of Warrants or Warrant Shares in this Agreement or otherwise conflicts with the provisions hereof. The Company represents that the rights granted to the Holders hereunder do not in any way conflict with and are not inconsistent with the rights granted to the holders of the Company's other issued and outstanding securities under any agreements. (b) Amendments and Waivers. The provisions of this Agreement, ---------------------- including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given unless the Company has obtained the written consent of Holders of at least a majority of the outstanding Warrants affected by such amendment, modification, supplement, waiver or consent; provided that any amendment, modification or supplement to -------- this Agreement which, in the good faith opinion of the Board of Directors of the Company (and evidenced by a resolution of such board), does not adversely affect any Holder, shall not be subject to such requirement for written consent. 12 (c) Notices. All notices and other communications provided for or ------- permitted hereunder shall be made in writing by hand-delivery, registered first- class mail, telex, telecopier, or any courier guaranteeing overnight delivery (i) if to a Holder, at the most current address given by such Holder to the Company by means of a notice given in accordance with the provisions of this Section 9(c); and (ii) if to the Company, initially at the Company's address set forth in the Indenture and thereafter at such other address, notice of which is given in accordance with the provisions of this Section 9(c). All such notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five business days after being deposited in the mail, postage prepaid, if mailed; when answered back, if telexed; when receipt is acknowledged, if telecopied; and on the next business day if timely delivered to an air courier guaranteeing overnight delivery. (d) Successors and Assigns. This Agreement shall inure to the benefit ---------------------- of and be binding upon the successors, assigns and transferees of each of the parties, including, without limitation, subsequent Holders; provided that -------- nothing herein shall be deemed to permit any assignment, transfer or other disposition of Warrants in violation of the terms of the Purchase Agreement, the Warrant Agreement or applicable law. If any transferee of any Holder shall acquire Warrants, in any manner, whether by operation of law or otherwise, such Warrants shall be held subject to all of the terms of this Agreement and the Warrant Agreement, and by taking and holding such Warrants such person shall be conclusively deemed to have agreed to be bound by and to perform all of the terms and provisions of this Agreement or the Warrant Agreement and such person shall be entitled to receive the benefits hereof. (e) Purchases and Sales of Warrants. The Company shall not, and shall ------------------------------- use its best efforts to cause its affiliates (as defined in Rule 405 under the Securities Act) not to, purchase and then resell or otherwise transfer any Warrants other than Warrants acquired and canceled. (f) Third Party Beneficiary. The Holders shall be third party ----------------------- beneficiaries to the agreements made hereunder among the Company and the Initial Purchasers, and each Holder shall have the right to enforce such agreements directly to the extent it deems such enforcement necessary or advisable to protect its rights or the rights of Holders hereunder. (g) Counterparts. This Agreement may be executed in any number of ------------ counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. 13 (h) Headings. The headings in this Agreement are for convenience of -------- reference only and shall not limit or otherwise affect the meaning hereof. (i) Governing Law. This Agreement shall be governed by the laws of ------------- the State of New York. (j) Severability. In the event that any one or more of the provisions ------------ contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby. (k) Waiver of Immunity. To the extent that the Company has or ------------------ hereafter may acquire any immunity from jurisdiction of any court or from any legal process (whether through service of notice, attachment prior to judgement, attachment in aid of execution, execution or otherwise) with respect to itself or its property, it hereby irrevocably waives such immunity in respect of its obligations under this Agreement to the fullest extent permitted by law. (l) Initial Public Offering. Notwithstanding anything to the contrary ----------------------- herein contained, if the Company conducts an initial public offering of equity securities (other than Common Shares), the Company will give the Holders the opportunity to convert such Warrants into warrants to purchase such equity securities and their Warrant Shares into such equity securities. Such conversion opportunity will be on terms and conditions determined to be fair and reasonable by the Company's Board of Directors. 14 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. DIVA SYSTEMS CORPORATION By: /s/ Alan H. Bushell -------------------- Name: Alan H. Bushell Title: President, Chief Operating Officer, Chief Financial Officer and Secretary Confirmed and accepted as of the date first above written: MERRILL LYNCH & CO. MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED CHASE SECURITIES INC. MORGAN STANLEY & CO. INCORPORATED By: Merrill Lynch, Pierce, Fenner & Smith Incorporated For itself and on behalf of the other Initial Purchasers By: /s/ Lisa Craig ------------------------------- Name: Lisa Craig Title: Authorized Signatory EX-10.7 12 WARRANT REGISTRATION RIGHTS DATED 05/15/1996 EXHIBIT 10.7 ================================================================================ WARRANT REGISTRATION RIGHTS AGREEMENT Dated as of May 15, 1996 By and Among DIVA SYSTEMS CORPORATION, SMITH BARNEY INC. and TORONTO DOMINION SECURITIES (USA) INC. ================================================================================ TABLE OF CONTENTS ----------------- PAGE
Section 1. Definitions...................................................... 1 Section 2. Registration Rights.............................................. 6 2.1 (a) Demand Registration After Public Equity Offering............ 6 (b) Effective Registration...................................... 6 (c) Restrictions on Sale by Holders............................. 7 (d) Underwritten Registrations.................................. 7 (e) Expenses.................................................... 8 (f) Priority in Demand Registration............................. 8 (g) Shelf Registration.......................................... 8 2.2 (a) Piggy-Back Registration..................................... 10 (b) Priority in Piggy-Back Registration......................... 11 2.3 Limitations, Conditions and Qualifications to Obligations Under Registration Covenants................................ 13 2.4 Restrictions on Sale by the Company and Others................... 14 2.5 Rule 144 and Rule 144A........................................... 15 2.6 Registration on Form S-3......................................... 15 Section 3. "Market Stand-Off" Agreement..................................... 16 Section 4. Registration Procedures.......................................... 16 Section 5. Indemnification and Contribution................................. 22 Section 6. Miscellaneous.................................................... 25 (a) No Inconsistent Agreements.................................. 25 (b) Amendments and Waivers...................................... 25 (c) Notices..................................................... 25 (d) Successors and Assigns...................................... 26 (e) Counterparts................................................ 26 (f) Headings.................................................... 26 (g) Governing Law; Jurisdiction................................. 26 (h) Severability................................................ 26 (i) Entire Agreement............................................ 26 (j) Attorneys' Fees............................................. 27 (k) Securities Held by the Company or Its Affiliates............ 27 (l) Remedies.................................................... 27
ii WARRANT REGISTRATION RIGHTS AGREEMENT THIS WARRANT REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made and entered into as of May 15, 1996, by and among DIVA SYSTEMS CORPORATION, a Delaware corporation (the "Company"), and SMITH BARNEY INC. and TORONTO DOMINION SECURITIES (USA) INC., (each a "Purchaser" and collectively, the "Purchasers"). This Agreement is made pursuant to the Purchase Agreement dated May 24, 1996, among the Company and the Purchasers (the "Purchase Agreement"), relating to, among other things, the sale by the Company to the Purchasers of an aggregate of 47,000 Units, each Unit consisting of $1,000 principal amount (subject to increase pursuant to Section 3.07(c) of the Indenture) at maturity of 13% Subordinated Discount Notes due May 15, 2006 and 47,000 Warrants, each initially exercisable for 20.2 shares of Common Stock, par value $.001 per share, of the Company. In order to induce the Purchasers to enter into the Purchase Agreement, the Company has agreed to provide to the Purchasers and the Holders (as defined herein), among other things, the registration rights for the Warrant Shares (as defined herein) set forth in this Agreement. The execution and delivery of this Agreement is a condition to the obligations of the Purchasers under the Purchase Agreement. In consideration of the foregoing, the parties hereto agree as follows: SECTION 1. DEFINITIONS. As used in this Agreement, the following defined terms shall have the following meanings: "Advice" has the meaning ascribed to such term in the last paragraph of Section 4 hereof. "Affiliate" means, when used with reference to any Person, any other Person directly or indirectly controlling, controlled by, or under direct or indirect common control with, the referent Person or such other Person, as the case may be. For the purposes of this definition, the term "control" when used with respect to any specified Person means the power to direct or cause the direction of management or policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "affiliated," "controlling" and "controlled" have meanings correlative of the foregoing. None of the Purchasers or any of their Affiliates shall be deemed to be an Affiliate of the Company or of any of its subsidiaries or Affiliates. "Business Day" shall mean a day that is not a Legal Holiday. "Capital Stock" means any and all shares, interests, participations, or other equivalents (however designated) of corporate stock of the Company, including each class of common stock and preferred stock of the Company, together with any warrants, rights, or options to purchase or acquire any of the foregoing. 1 "Common Stock" shall mean the Common Stock, no par value per share, of the Company. "Company" shall have the meaning ascribed to that term in the preamble of this Agreement and shall also include the Company's permitted successors and assigns. "Demand Registration" has the meaning ascribed to such term in Section 2.1(a) hereof. "DTC" has the meaning ascribed to such term in Section 4(i) hereof. "Effectiveness Date" shall mean, with respect to any Registration Statement, the 60th day after the Filing Date thereof. "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time. "Filing Date" shall mean (A) if no Registration Statement has been filed by the Company pursuant to this Agreement, the 30th day after the Trigger Date; provided, however, that if a Shelf Notice is given within 10 days of -------- ------- the Filing Date, then the Filing Date with respect to the Initial Shelf Registration shall be the 15th calendar day after the date of the giving of such Shelf Notice; and (B) in each other case (which may be applicable notwithstanding the consummation of an Exchange Offer), the 30th day after the delivery of a Shelf Notice. "Holder" shall mean each of the Purchasers, for so long as it owns any Warrant Shares, and each of its successors, assigns and direct and indirect transferees who become registered owners of such Warrant Shares. "Included Securities" has the meaning ascribed to such term in Section 2.1(a) hereof. "indemnified party" has the meaning ascribed to such term in Section 5(c) hereof. "indemnifying party" has the meaning ascribed to such term in Section 5(c) hereof. "Indenture" means the Indenture, of even date herewith, between the Company and The Bank of New York as Trustee, pursuant to which the Notes are issued. "Initial Shelf Registration" has the meaning ascribed to such term in Section 2(g)(i) hereof. "Inspectors" has the meaning ascribed to such term in Section 4(a) hereof. "Legal Holiday" shall mean a Saturday, a Sunday or a day on which banking institutions in New York, New York are required by law, regulation or executive order to remain closed. 2 "Notes" means the aggregate of $47,000,000 principal amount at maturity (subject to increase pursuant to Section 3.07(c) of the Indenture) of 13% Subordinated Discount Notes due May 15, 2006 of the Company issued under the Indenture. "Person" shall mean an individual, partnership, corporation, trust or unincorporated organization, or a government or agency or political subdivision thereof. "Piggy-Back Registration" has the meaning ascribed to such term in Section 2.2 hereof. "Prospectus" means the prospectus included in any Registration Statement (including, without limitation, any prospectus subject to completion and a prospectus that includes any information previously omitted from a prospectus filed as part of an effective registration statement in reliance upon Rule 430A promulgated under the Securities Act), as amended or supplemented by any prospectus supplement, and all other amendments and supplements to the Prospectus, including post-effective amendments, and all material incorporated by reference or deemed to be incorporated by reference in such Prospectus. "Public Equity Offering" means a primary public offering (whether or not underwritten, but excluding any offering pursuant to Form S-4 or S-8 under the Securities Act) of capital stock of the Company pursuant to an effective registration statement under the Securities Act. "Purchase Agreement" has the meaning ascribed to such term in the preamble hereof. "Purchasers" has the meaning ascribed to such term in the preamble hereof. "Registrable Securities" means any of (i) the Warrant Shares and (ii) any other securities issued or issuable with respect to any Registrable Securities by way of stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization or otherwise, unless, in each case, such Warrant Shares have been offered and sold to the Holder pursuant to an effective Registration Statement under the Securities Act declared effective prior to the exercisability of the Warrants and such securities may be sold to the public pursuant to Rule 144 without any restriction on the amount of securities which may be sold by such Holder. As to any particular Registrable Securities held by a Holder, such securities shall cease to be Registrable Securities when (i) a Registration Statement with respect to the offering of such securities by the Holder thereof shall have been declared effective under the Securities Act and such securities shall have been disposed of by such Holder pursuant to such Registration Statement, (ii) such securities may at the time of determination be sold to the public pursuant to Rule 144 without any restriction on the amount of securities which may be sold by such Holder or Rule 144(k) (or any similar provision then in force, but not Rule 144A) promulgated under the Securities Act without the lapse of any further time or the satisfaction of any condition, (iii) such securities shall have been otherwise transferred by such Holder and new certificates for such securities not bearing a legend restricting further transfer shall have been delivered by the Company or its transfer agent and subsequent disposition of such securities 3 shall not require registration or qualification under the Securities Act or any similar state law then in force or (iv) such securities shall have ceased to be outstanding. "Registration Expenses" shall mean all expenses incident to the Company's performance of or compliance with this Agreement, including, without limitation, all SEC and stock exchange or National Association of Securities Dealers, Inc. registration and filing fees and expenses, fees and expenses of compliance with securities or blue sky laws (including, without limitation, reasonable fees and disbursements of counsel for the underwriters in connection with blue sky qualifications of the Registrable Securities), printing expenses, messenger, telephone and delivery expenses, fees and disbursements of counsel for the Company and all independent certified public accountants, the fees and disbursements of underwriters customarily paid by issuers or sellers of securities (but not including any underwriting discounts or commissions or transfer taxes, if any, attributable to the sale of Registrable Securities by Holders of such Registrable Securities) and other reasonable out-of-pocket expenses of Holders (it being understood that Registration Expenses shall not include, as to the fees and expenses of counsel, the fees and expenses of more than one counsel for the Holders). "Registration Statement" shall mean any appropriate registration statement of the Company filed with the SEC pursuant to the Securities Act which covers any of the Registrable Securities pursuant to the provisions of this Agreement and all amendments and supplements to any such Registration Statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "Requisite Securities" shall mean a number of Registrable Securities equal to not less than 25% of the Registrable Securities held in the aggregate by all Holders; provided, however, that with respect to any -------- ------- action to be taken at the request of the Holders of the Registrable Securities prior to such time as the Warrants have expired pursuant to the terms thereof and of the Warrant Agreement, each Warrant outstanding shall be deemed to represent that number of Registrable Securities for which such Warrant would be then exercisable (without giving effect to the Cashless Exercise feature referred to in the Warrant Agreement). "Rule 144" shall mean Rule 144 promulgated under the Securities Act, as such Rule may be amended from time to time, or any similar rule (other than Rule 144A) or regulation hereafter adopted by the SEC providing for offers and sales of securities made in compliance therewith resulting in offers and sales by subsequent holders that are not affiliates of an issuer of such securities being free of the registration and prospectus delivery requirements of the Securities Act. "Rule 144A" shall mean Rule 144A promulgated under the Securities Act, as such Rule may be amended from time to time, or any similar rule (other than Rule 144) or regulation hereafter adopted by the SEC. "SEC" shall mean the Securities and Exchange Commission. 4 "Securities Act" shall mean the Securities Act of 1933, as amended from time to time. "Selling Holder" shall mean a Holder who is selling Registrable Securities in accordance with the provisions of Section 2.1 or 2.2. "Shelf Notice" shall have the meaning ascribed to such term in Section 2(g)(i) hereof. "Stockholder Rights Agreement" means the Stockholder Rights Agreement amended and restated as of May 15, 1996 by and among the Company and the other persons or entities party thereto, as amended or supplemented from time to time. "Trigger Date" means the earliest to occur of (i) the consummation of a Public Equity Offering, (ii) the Company or any of its subsidiaries shall effect any offering of debt securities and thereafter the Company shall be subject to the reporting requirements of Section 13 or 15 of the Exchange Act (whether pursuant to the Exchange Act or by contractual obligation) or (iii) May 15, 1999; provided, however, that May 15, 1999 shall not be a -------- ------- Trigger Date if, in the opinion of counsel to the Company (a copy of which shall be delivered to the Holders not later than the 30th day after May 15, 1999), the Registrable Securities may on and after such date be sold to the public pursuant to Rule 144(k) under the Securities Act (or any successor rule) without the lapse of any further time or the satisfaction of any conditions; provided, further, however, that if the opinion referred to in -------- ------- ------- the parenthetical to this proviso is not delivered to the Holders on or prior to the 30th day after May 15, 1999, then May 15, 1999 shall nonetheless be a Trigger Date; provided, further, still, however, that if -------- ------- ----- ------- such opinion is delivered prior to the Filing Date, then May 15, 1999 shall then be deemed not to be a Trigger Date and no action arising therefrom need be pursued. "Warrant Agent" means The Bank of New York and any successor Warrant Agent for the Warrants pursuant to the Warrant Agreement. "Warrant Agreement" means the Warrant Agreement dated as of May 15, 1996 between the Company and The Bank of New York, as warrant agent, as amended or supplemented from time to time in accordance with the terms thereof. "Warrants" means the warrants of the Company issued pursuant to the Warrant Agreement. "Warrant Share Prospectus" means the prospectus included in any Warrant Share Registration Statement (including, without limitation, any prospectus subject to completion and a prospectus that includes any information previously omitted from a prospectus filed as part of an effective registration statement in reliance upon Rule 430A promulgated under the Securities Act), as amended or supplemented by any prospectus supplement, and all other amendments and supplements to the Warrant Share Prospectus, including post-effective amendments, and all material incorporated by reference or deemed to be incorporated by reference in such Warrant Share Prospectus. 5 "Warrant Share Registration Statement" has the meaning ascribed to that term in Section 5(a) hereof. "Warrant Shares" means the shares of Common Stock deliverable upon exercise of the Warrants. SECTION 2. REGISTRATION RIGHTS. 2.1 (a) Demand Registration After Public Equity Offering. At any time ------------------------------------------------ and from time to time after the earlier of the occurrence of a Public Equity Offering and May 15, 2000, Holders owning, individually or in the aggregate, not less than the Requisite Securities may make a written request for registration under the Securities Act of their Registrable Securities (a "Demand Registration"). Within 90 days of the receipt of such written request for a Demand Registration, the Company shall file with the SEC and use its best efforts to cause to become effective under the Securities Act a Registration Statement with respect to such Registrable Securities. Any such request will specify the number of Registrable Securities proposed to be sold and will also specify the intended method of disposition thereof. The Company shall give written notice of such registration request to all other Holders of Registrable Securities within 15 days after the receipt thereof. Within 20 days after receipt by any Holder of Registrable Securities of such notice from the Company, such Holder may request in writing that such Holder's Registrable Securities be included in such Registration Statement and the Company shall include in such Registration Statement the Registrable Securities of any such Holder requested to be so included (the "Included Securities"). Each such request by such other Holders shall specify the number of Included Securities proposed to be sold and the intended method of disposition thereof. Subject to Sections 2.1(b) and 2.1(f) hereof, the Company shall be required to register Registrable Securities pursuant to this Section 2.1(a) on a maximum of three separate occasions. Subject to Section 2.1(f) hereof, no other securities of the Company except (i) Registrable Securities held by any Holder, (ii) equity securities to be offered and sold for the account of the Company and (iii) any equity securities of the Company held by the parties to the Stockholder Rights Agreement or by any Person having "piggy-back" registration rights pursuant to any contractual obligation of the Company shall be included in a Demand Registration; provided, -------- however, that no such securities for the account of the Company or any other - ------- person (other than the parties to the Stockholder Rights Agreement) shall be so included unless, in connection with any underwritten offering, the managing underwriter or underwriters confirm to the Holders of Registrable Securities to be included in such Demand Registration that the inclusion of such other securities will not be likely to affect the price at which the Registrable Securities may be sold. The inclusion of any such securities for the account of the Company or any other Person shall be on the same terms as that of the Registrable Securities. (b) Effective Registration. A Registration Statement will not be deemed ---------------------- to have been effected as a Demand Registration unless it has been declared effective by the SEC and the Company has complied in a timely manner and in all material respects with all of its obligations under this Agreement 6 with respect thereto; provided, however, that if, after such Registration -------- ------- Statement has become effective, the offering of Registrable Securities pursuant to such Registration Statement is or becomes the subject of any stop order, injunction or other order or requirement of the SEC or any other governmental or administrative agency or court that prevents, restrains or otherwise limits the sale of Registrable Securities pursuant to such Registration Statement for any reason not attributable to any Holder participating in such registration and such Registration Statement has not become effective within a reasonable time period thereafter (not to exceed 30 days), such Registration Statement will be deemed not to have been effected. If (i) a registration requested pursuant to this Section 2.1 is deemed not to have been effected or (ii) a Demand Registration does not remain effective under the Securities Act until at least the earlier of (A) an aggregate of 180 days after the effective date thereof or (B) the consummation of the distribution by the Holders of all of the Registrable Securities covered thereby, then such registration shall not count towards determining if the Company has satisfied its obligation to effect three Demand Registrations pursuant to this Section 2.1. For purposes of calculating the 180-day period referred to in the preceding sentence, any period of time during which such Registration Statement was not in effect shall be excluded. The Holders of Registrable Securities shall be permitted to withdraw all or any part of the Registrable Securities from a Demand Registration at any time prior to the effective date of such Demand Registration. (c) Restrictions on Sale by Holders. Each Holder of Registrable ------------------------------- Securities whose Registrable Securities are covered by a Registration Statement filed pursuant to this Section 2.1 and are to be sold thereunder agrees, if and to the extent reasonably requested by the managing underwriter or underwriters in an underwritten offering, not to effect any public sale or distribution of Registrable Securities or of securities of the Company of the same class as any securities included in such Registration Statement, including a sale pursuant to Rule 144 (except as part of such underwritten offering), during the 30 day- period prior to, and during the 120 day period beginning on, the closing date of each underwritten offering made pursuant to such Registration Statement, to the extent timely notified in writing by the Company or such managing underwriter or underwriters. The foregoing provisions of Section 2.1(c) shall not apply to any Holder of Registrable Securities if such Holder is prevented by applicable statute or regulation from entering into any such agreement; provided, however, that any -------- ------- such Holder shall undertake, in its request to participate in any such underwritten offering, not to effect any public sale or distribution of any Registrable Securities commencing on the date of sale of such Registrable Securities unless it has provided 45 days' prior written notice of such sale or distribution to the underwriter or underwriters. (d) Underwritten Registrations. If any of the Registrable Securities -------------------------- covered by a Demand Registration are to be sold in an underwritten offering, the investment banker or investment bankers and manager or managers that will manage the offering will be selected by the Holders of not less than a majority of the Registrable Securities to be sold thereunder and will be reasonably acceptable to the Company. 7 No Holder of Registrable Securities may participate in any underwritten registration pursuant to a Registration Statement filed under this Agreement unless such Holder (a) agrees to (i) sell such Holder's Registrable Securities on the basis provided in and in compliance with any underwriting arrangements approved by the Holders of not less than a majority of the Registrable Securities to be sold thereunder and (ii) comply with Rules 10b-6 and 10b-7 under the Exchange Act and (b) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents reasonably required under the terms of such underwriting arrangements; provided, however, that no Holder of Registrable Securities shall be required to enter into a custody or escrow agreement or power of attorney with respect to Registrable Securities to be sold in connection with such underwriting arrangements. (e) Expenses. The Company will pay all Registration Expenses in -------- connection with the registrations requested pursuant to Sections 2.1 and 2.2 hereof. Each Holder of Registrable Securities shall pay all underwriting discounts and commissions and transfer taxes, if any, relating to the sale or disposition of such Holder's Registrable Securities pursuant to a Registration Statement requested pursuant to this Section 2.1. (f) Priority in Demand Registration. In a registration pursuant to ------------------------------- Section 2.1 hereof involving an underwritten offering, if the managing underwriter or underwriters of such underwritten offering have informed, in writing, the Company and the Selling Holders who have requested such Demand Registration or who have sought inclusion therein that in such underwriter's or underwriters' opinion the total number of securities which the Selling Holders and any other Person desiring to participate in such registration intend to include in such offering is such as to adversely affect the success of such offering, including the price at which such securities can be sold, then the Company will be required to include in such registration only the amount of securities which it is so advised should be included in such registration. In such event, securities shall be registered in such registration in the following order of priority: (i) first, the securities which have been requested to be ----- included in such registration by the Holders of Registrable Securities pursuant to this Agreement (ii) second, provided that no securities sought to be included ------ by the Holders of Registrable Securities have been excluded from such registration, the securities of the other parties to the Stockholder Rights Agreement, (iii) third, provided that no securities sought to be included by the ----- Holders or the other parties to the Stockholder Rights Agreement have been excluded from such registration, the securities of other Persons entitled to exercise "piggy-back" registration rights pursuant to contractual commitments of the Company (pro rata based on the amount of securities sought to be registered by such Persons) and (iv) fourth, provided that no securities of any other ------ Person sought to be included therein have been excluded from such registration, securities to be offered and sold for the account of the Company. If any securities of a Holder have been excluded from a registration statement pursuant to the provisions of the foregoing paragraph, then such registration shall not count towards determining whether the Company has satisfied its obligation to effect three Demand Registrations pursuant to Section 2.1 hereof. 8 (g) Shelf Registration. ------------------ If, (x) because of any change in law or in currently prevailing interpretations of the staff of the SEC, the Company is not permitted to register the Registerable Securities or (y) any holder of Registerable Securities so requests, then the Company shall promptly deliver to the Holders and the Trustee written notice thereof (a "Shelf Notice"), the Company shall file a Shelf Registration (as defined below) on the following terms: (i) Shelf Registration. The Company shall file with the SEC a ------------------ Registration Statement for an offering to be made on a continuous basis pursuant to Rule 415 covering all of the Registerable Securities (the "Initial Shelf Registration") on or prior to the Filing Date. The Initial Shelf Registration shall be on Form S-1 or another appropriate form permitting registration of such Registerable Securities for resale by Holders in the manner or manners designated by them (including, without limitation, one or more underwritten offerings). The Company shall not permit any securities other than the Registerable Securities to be included in the Initial Shelf Registration or any Subsequent Shelf Registration (as defined below). The Company shall use its best efforts to cause the Initial Shelf Registration to be declared effective under the Securities Act on or prior to the Effectiveness Date and to keep the Initial Shelf Registration continuously effective under the Securities Act until the date which is 36 months from the Effectiveness Date) (the "Effectiveness Period"), or such shorter period ending when (i) all Registerable Securities covered by the Initial Shelf Registration have been sold in the manner set forth and as contemplated in the Initial Shelf Registration or (ii) a Subsequent Shelf Registration covering all of the Registerable Securities has been declared effective under the Securities Act; provided, however, that the Effectiveness Period shall be extended to the extent - -------- ------- required to permit dealers to comply with the applicable prospectus delivery requirements of Rule 174 under the Securities Act and as otherwise provided herein. (ii) Subsequent Shelf Registrations. If the Initial Shelf Registration ------------------------------ or any Subsequent Shelf Registration ceases to be effective for any reason at any time during the Effectiveness Period (other than because of the sale of all of the securities registered thereunder), the Company shall use its best efforts to obtain the prompt withdrawal of any order suspending the effectiveness thereof, and in any event shall within 45 days of such cessation of effectiveness to amend the Initial Shelf Registration in a manner to obtain the withdrawal of the order suspending the effectiveness thereof, or file an additional "shelf" Registration Statement pursuant to Rule 415 covering all of the Registerable Securities (a "Subsequent Shelf Registration"). If a Subsequent Shelf Registration is filed, the Company shall use its best efforts to cause the Subsequent Shelf Registration to be declared effective under the Securities Act as soon as practicable after such filing and to keep such Registration Statement continuously effective for a period equal to the number of days in the Effectiveness Period less the aggregate number of days during which the Initial Shelf Registration or any Subsequent Shelf Registration was previously continuously effective. As used herein the term "Shelf Registration" means the Initial Shelf Registration and any Subsequent Shelf Registration. 9 (iii) Supplements and Amendments. The Company shall promptly -------------------------- supplement and amend the Shelf Registration if required by the rules, regulations or instructions applicable to the registration form used for such Shelf Registration, if required by the Securities Act, or if reasonably requested by the Holders of a majority of the Registerable Securities covered by such Registration Statement or by any underwriter of such Registerable Securities. (iv) Hold-Back Agreements -------------------- (A) Restrictions on Public Sale by Holders of Registerable ------------------------------------------------------ Securities. Each Holder of Registerable Securities whose Registerable ---------- Securities are covered by a Shelf Registration filed pursuant to Section 2(g)(i) hereof (which Registerable Securities are not being sold in the underwritten offering described below) agrees, if requested (pursuant to a timely written notice) by the managing underwriter or underwriters in an underwritten offering, not to effect any public sale or distribution of any securities within the class of securities covered by such Shelf Registration or any similar class of securities of the Company, including a sale pursuant to Rule 144 or Rule 144A (except as part of such underwritten offering), during the period beginning 30 days prior to, and ending 120 days after, the closing date of each underwritten offering made pursuant to such Shelf Registration, to the extent timely notified in writing by the Company or by the managing underwriter or underwriters; provided, however, -------- ------- that each holder of Registerable Securities shall be subject to the hold- back restrictions of this Section 2(g)(iv)(A) only once during the term of this Agreement. The foregoing provisions shall not apply to any Holder of Registerable Securities if such Holder is prevented by applicable statute or regulation from entering into any such agreement; provided, however, -------- ------- that any such Holder shall undertake, in its request to participate in any such underwritten offering, not to effect any public sale or distribution of the class of securities covered by such Shelf Registration (except as part of such underwritten offering) during such period unless it has provided 45 days' prior written notice of such sale or distribution to the Company or the managing underwriter or underwriters, as the case may be. (B) Restrictions on the Company and Others. The Company agrees -------------------------------------- (1) not to effect any public or private sale or distribution (including, without limitation, a sale pursuant to Regulation D under the Securities Act) of any securities the same as or similar to those covered by a Shelf Registration filed pursuant hereto, or any securities convertible into or exchangeable or exercisable for such securities, during the 30 days prior to, and during the 120-day period beginning on, the commencement of an underwritten public distribution of Registerable Securities, where the managing underwriter or underwriters so requests; (2) to include in any agreements entered into by the Company on or after the date of this Agreement (other than any underwriting agreement relating to a public offering registered under the Securities Act) pursuant to which the Company issues or agrees to issue securities the same as or similar to the Registerable Securities a provision that each holder of such securities that are the same as or 10 similar to Registerable Securities issued at any time on or after the date of this Agreement agrees not to effect any public or private sale or distribution, or request or demand the registration, of any such securities (or any securities convertible into or exchangeable or exercisable for such securities) during the period referred to in clause (1) of this Section 2(g)(iv)(B), including any sale pursuant to Rule 144 or Rule 144A; and (3) not to grant or agree to grant any "piggy back registration" or other similar rights to any holder of the Company's or any of its subsidiaries' securities issued on or after the date of this Agreement with respect to any Registration Statement. 2.2 (a) Piggy-Back Registration. If at any time the Company proposes to ----------------------- file a Registration Statement under the Securities Act with respect to an offering by the Company for its own account or for the account of any of its securityholders of any class of its common equity securities (other than (i) a Registration Statement on Form S-4 or S-8 (or any substitute form that may be adopted by the SEC) or (ii) a Registration Statement filed in connection with an exchange offer or offering of securities solely to the Company's existing securityholders), then the Company shall give written notice of such proposed filing to the Holders of Registrable Securities as soon as practicable (but in no event fewer than 15 days before the anticipated filing date or 10 days if the Company is subject to filing reports under the Exchange Act and able to use Form S-3 under the Securities Act), and such notice shall offer such Holders the opportunity to register such number of shares of Registrable Securities as each such Holder may request in writing not later 15 days prior to the anticipated effective date of the Registration Statement (or eight days of the notice of the proposed filing if the Company is subject to filing reports under the Exchange Act and able to use Form S-3 under the Securities Act) after receipt of such written notice from the Company (which request shall specify the Registrable Securities intended to be disposed of by such Selling Holder and the intended method of distribution thereof) (a "Piggy-Back Registration"). The Company shall use its best efforts to keep such Piggy-Back Registration continuously effective under the Securities Act until at least the earlier of (A) 180 days after the effective date thereof or (B) the consummation of the distribution by the Holders of all of the Registrable Securities covered thereby. The Company shall use its best efforts to cause the managing underwriter or underwriters, if any, of such proposed offering to permit the Registrable Securities requested to be included in a Piggy-Back Registration to be included on the same terms and conditions as any similar securities of the Company or any other securityholder included therein and to permit the sale or other disposition of such Registrable Securities in accordance with the intended method of distribution thereof. Any Selling Holder shall have the right to withdraw its request for inclusion of its Registrable Securities in any Registration Statement pursuant to this Section 2.2 by giving written notice to the Company of its request to withdraw. The Company may withdraw a Piggy-Back Registration at any time prior to the time it becomes effective or the Company may elect to delay the registration; provided, -------- however, that the Company shall give prompt written notice thereof to - ------- participating Selling Holders. The Company will pay all Registration Expenses in connection with each registration of Registrable Securities requested pursuant to this Section 2.2, and each Holder of Registrable Securities shall pay all underwriting discounts and commissions and transfer taxes, if any, relating to the sale or disposition of such Holder's Registrable Securities pursuant to a Registration Statement effected pursuant to this Section 2.2. 11 No registration effected under this Section 2.2, and no failure to effect a registration under this Section 2.2, shall relieve the Company of its obligation to effect a registration upon the request of Holders of Registrable Securities pursuant to Section 2.1 hereof, and no failure to effect a registration under this Section 2.2 and to complete the sale of securities registered thereunder in connection therewith shall relieve the Company of any other obligation under this Agreement. (b) Priority in Piggy-Back Registration. In a registration pursuant to ----------------------------------- Section 2.2 hereof involving an underwritten offering, if the managing underwriter or underwriters of such underwritten offering have informed, in writing, the Company and the Selling Holders requesting inclusion in such offering that in such underwriter's or underwriters' opinion the total number of securities which the Company, the Selling Holders and any other Persons desiring to participate in such registration intend to include in such offering is such as to adversely affect the success of such offering, including the price at which such securities can be sold, then the Company will be required to include in such registration only the amount of securities which it is so advised should be included in such registration. In such event: (x) in cases only involving the registration for sale of securities for the Company's own account (other than pursuant to the exercise of piggyback rights herein and in other contractual commitments of the Company), securities shall be registered in such offering in the following order of priority: (i) first, the securities which ----- the Company proposes to register, (ii) second, provided that no securities ------ sought to be included by the Company have been excluded from such registration, the securities which have been requested to be included in such registration by the Holders of Registrable Securities pursuant to this Agreement and by the other parties to the Stockholder Rights Agreement in such proportion between the Holders and such parties to the Stockholder Rights Agreement such that one-third of the securities to be included shall be for the account of the Holders and two-thirds shall be for the account of the other parties to the Stockholder Rights Agreement (such one-third for the account of the Holders to be allocated among the Holders pro rata based on the amount of securities sought to be registered by the Holders) and (iii) third, provided that no securities sought ----- to be included by the Company or the Holders or the other parties to the Stockholder Rights Agreement have been excluded from such registration, the securities of other Persons entitled to exercise "piggy-back" registration rights pursuant to contractual commitments of the Company (pro rata based on the amount of securities sought to be registered by such Persons); (y) in cases not involving the registration for sale of securities for the Company's own account only or not for the account of any party to the Stockholder Rights Agreement, securities shall be registered in such offering in the following order of priority: (i) first, the securities of any Person whose exercise of a "demand" ----- registration right pursuant to a contractual commitment of the Company is the basis for the registration (provided that if such Person is a Holder of Registrable Securities, as among Holders of Registrable Securities there shall be no priority and Registrable Securities sought to be included by Holders of Registrable Securities shall be included pro rata based on the amount of securities sought to be registered by such Persons), (ii) second, provided that ------ no securities of such Person referred to in the immediately preceding clause (i) have been excluded from such registration, the securities which have been requested to be included in such registration by the Holders of Registrable Securities pursuant to this Agreement and by the other parties to the Stockholder Rights Agreement in 12 such proportion between the Holders and such parties to the Stockholder Rights Agreement such that one-third of the securities to be included shall be for the account of the Holders and two-thirds shall be for the account of the parties to the Stockholder Rights Agreement (such one-third for the account of the Holders to be allocated among the Holders pro rata based on the amount of securities sought to be registered by the Holders) and (iii) third, provided that no ----- securities of such Person referred to in the immediately preceding clause (i) or of the Holders or of the other parties to the Stockholder Rights Agreement have been excluded from such registration, securities of other Persons entitled to exercise "piggy-back" registration rights pursuant to contractual commitments (pro rata based on the amount of securities sought to be registered by such Persons) and (iv) fourth, provided that no securities of any other Person have ------ been excluded from such registration, the securities which the Company proposes to register; and (z) in cases involving the registration for sale of securities for the account of any other party to the Stockholder Rights Agreement, securities shall be registered in such offering in the following order of priority: (i) first, the securities which have been requested to be included in ----- such registration by the Holders of Registrable Securities pursuant to this Agreement and by the other parties to the Stockholder Rights Agreement in such proportion between the Holders and such parties to the Stockholder Rights Agreement such that one-third of the securities to be included shall be for the account of the Holders and two-thirds shall be for the account of the other parties to the Stockholder Rights Agreement (such one-third for the account of the Holders to be allocated among the Holders pro rata based on the amount of securities sought to be registered by the Holders), and (ii) second, provided ------ that no securities of the Holders or of the other parties to the Stockholder Rights Agreement have been excluded from such registration, securities of other Persons entitled to exercise "piggy-back" registration rights pursuant to contractual commitments (pro rata based on the amount of securities sought to be registered by such Persons) and (iii) third, provided that no securities of any ----- other Person has been excluded from such registration, the securities which the Company proposes to register. If, as a result of the provisions of this Section 2.2(b), any Selling Holder shall not be entitled to include all Registrable Securities in a Piggy- Back Registration that such Selling Holder has requested to be included, such Selling Holder may elect to withdraw his request to include Registrable Securities in such registration. 2.3 Limitations, Conditions and Qualifications to Obligations Under --------------------------------------------------------------- Registration Covenants. The obligations of the Company set forth in Sections 2.1 - ---------------------- and 2.2 hereof are subject to each of the following limitations, conditions and qualifications: (i) Subject to the next sentence of this paragraph, the Company shall be entitled to postpone, for a reasonable period of time, the filing or effectiveness of, or suspend the rights of any Holders to make sales pursuant to, any Registration Statement otherwise required to be prepared, filed and made and kept effective by it hereunder; provided, however, that -------- ------- the duration of such postponement or suspension may not exceed the earlier to occur of (A) 15 days after the cessation of the circumstances described in the next sentence of this paragraph on which such postponement or suspension is based or (B) 90 days after the date of the determination of the Board of Directors referred to in the next sentence, and the duration of such postponement or 13 suspension shall be excluded from the calculation of the 90-day period described in Section 2.1(b) hereof. Such postponement or suspension may be effected only if the Board of Directors of the Company determines reasonably and in good faith that the filing or effectiveness of, or sales pursuant to, such Registration Statement would materially impede, delay or interfere with any financing, offer or sale of securities, acquisition, corporate reorganization or other significant transaction involving the Company or any of its affiliates or require disclosure of material information which the Company has a bona fide business purpose for preserving as confidential, which financing, offer or sale of securities, acquisition, corporate reorganization or other significant transaction had been initiated at the time of the filing of such Registration Statement; provided, however, that the Company shall not be entitled to such -------- ------- postponement or suspension more than twice in any twelve-month period. If the Company shall so postpone the filing of a Registration Statement it shall, as promptly as possible, deliver a certificate signed by the Chief Executive Officer of the Company to the Selling Holders as to such determination, and the Selling Holders shall (y) have the right, in the case of a postponement of the filing or effectiveness of a Registration Statement, upon the affirmative vote of the Holders of not less than a majority of the Registrable Securities to be included in such Registration Statement, to withdraw the request for registration by giving written notice to the Company within 10 days after receipt of such notice or (z) in the case of a suspension of the right to make sales, receive an extension of the registration period equal to the number of days of the suspension. Any Demand Registration as to which the withdrawal election referred to in the preceding sentence has been effected shall not be counted for purposes of the three Demand Registrations the Company is required to effect pursuant to Section 2.1 hereof. (ii) The Company shall not be required by this Agreement to effect a Demand Registration within 90 days immediately following the effective date of any registration statement pertaining to a firmly underwritten offering of equity securities of the Company for its own account; provided, -------- however, that this clause (ii) shall not apply if the underwriter of such ------- offering consents to the request for such Demand Registration pursuant to Section 2.1(a). (iii) The Company shall not be required by this Agreement to effect a Demand Registration within 60 days immediately following the effective date of any registration statement pertaining to a firmly underwritten offering of equity securities of the Company for the account of any securityholder of the Company; provided, however, that this clause (ii) -------- ------- shall not apply if the underwriter of such offering consents to the request for such Demand Registration pursuant to Section 2.1(a). (iv) The Company's obligations shall be subject to the obligations of the Selling Holders, which the Selling Holders acknowledge, to furnish all information and materials and to take any and all actions as may be required under applicable federal and state securities laws and regulations to permit the Company to comply with all applicable requirements of the SEC and to obtain any acceleration of the effective date of such Registration Statement. 14 (v) The Company shall not be obligated to cause any special audit to be undertaken in connection with any registration pursuant to this Agreement unless such audit is required by the SEC or requested by the underwriters with respect to such registration. 2.4 Restrictions on Sale by the Company and Others. The Company ---------------------------------------------- covenants and agrees that (i) it shall not, and that it shall not cause or permit any of its subsidiaries to, effect any public sale or distribution of any securities of the same class as any of the Registrable Securities or any securities convertible into or exchangeable or exercisable for such securities (or any option or other right for such securities) during the 30-day period prior to, and during the 120-day period beginning on, the commencement of any underwritten offering of Registrable Securities pursuant to a Demand Registration which has been requested pursuant to this Agreement, or a Piggy- Back Registration which has been scheduled, prior to the Company or any of its subsidiaries publicly announcing its intention to effect any such public sale or distribution; (ii) the Company will not, and the Company will not cause or permit any subsidiary of the Company to, after the date hereof, enter into any agreement or contract that conflicts with or limits or prohibits the full and timely exercise by the Holders of Registrable Securities of the rights herein to request a Demand Registration or to join in any Piggy-Back Registration subject to the other terms and provisions hereof; and (iii) that it shall use its reasonable best efforts to secure the written agreement of each of its officers and directors to not effect any public sale or distribution of any securities of the same class as the Registrable Securities (or any securities convertible into or exchangeable or exercisable for any such securities), or any option or right for such securities during the period described in clause (i) of this Section 2.4. 2.5 Rule 144 and Rule 144A. The Company covenants that it will file ---------------------- the reports required to be filed by it under the Securities Act and the Exchange Act and the rules and regulations adopted by the SEC thereunder in a timely manner and, if at any time the Company is not required to file such reports, it will, upon the request of any Holder or beneficial owner of Registrable Securities, make available such information necessary to permit sales pursuant to Rule 144A under the Securities Act. The Company further covenants that it will take such further action as any Holder of Registrable Securities may reasonably request, all to the extent required from time to time to enable such Holder to sell Registrable Securities without registration under the Securities Act within the limitation of the exemptions provided by (a) Rule 144(k) and Rule 144A under the Securities Act, as such Rules may be amended from time to time, or (b) any similar rule or regulation hereafter adopted by the SEC (it being expressly understood that the foregoing shall not create any obligation on the part of the Company to file periodic reports or other reports under the Exchange Act at any time that it is not then required to file such reports pursuant to the Exchange Act). Upon the request of any Holder of Registrable Securities, the Company will in a timely manner deliver to such Holder a written statement as to whether it has complied with such information requirements. 2.6 Registration on Form S-3. (a) In addition to the rights set ------------------------ forth in Section 2.1 and 2.2 hereof, if a Holder requests that the Company file a registration statement on Form S-3 (or any successor to Form S-3) for a public offering of shares of Registrable Securities the reasonably anticipated aggregate price to the public of which would be at least $1,000,000, and the Company is a 15 registrant entitled to use Form S-3 to register the Shares for such an offering, the Company shall use its best efforts to cause such shares to be registered for the offering as soon as practicable on Form S-3 (or any successor form to Form S-3). (b) The Holders' right to register shares under Section 2.6 shall be shared pro rata among all Holders of Registrable Securities and all other holders of securities of the Company who have a right to request inclusion therein based on the number of shares of Registrable Securities held by each Holder. (c) Notwithstanding the foregoing, the Company shall not be obligated to take any action pursuant to this Section 2.6 in the following situations: (i) if the Company, within ten (10) days of the receipt of the request of the Holders, gives notice of its bona fide intention to effect the filing of a registration statement with the SEC within forty-five (45) days of receipt of such request (other than with respect to a registration statement relating to a Rule 145 transaction, an offering solely to employees or any other registration which is not appropriate for the registration of Registrable Securities); (ii) during the period starting with the date of filing of, and ending on a date ninety (90) days following the effective date of, a registration statement described in (i) above or pursuant to Section 2.1 or 2.2 hereof; provided, -------- however, that the Company is actively employing in good faith all reasonable - ------- efforts to cause such registration statement to become effective; provided, -------- however, that no other person or entity could require the Company to file a - ------- registration statement in such period; or (iii) more than once in any six month period. SECTION 3. "MARKET STAND-OFF" AGREEMENT. (a) Each Holder hereby agrees that it shall not, to the extent requested by the Company or an underwriter of securities of the Company, sell or otherwise transfer or dispose of any Registrable Securities or other shares of stock of the Company then owned by such Holder (other than to donees or partners of the Holder who agree to be similarly bound) for up to 180 days following the date of the final Prospectus in connection with the Registration Statement of the Company filed under the Securities Act; provided, however, that such agreement shall be applicable only to the first such registration statement of the Company that covers securities to be sold on its behalf to the public in an underwritten offering but not to Registrable Securities sold pursuant to such registration statement and that such agreement shall only be applicable if the underwriters request such agreement from each Holder. (b) In order to enforce the foregoing covenant, the Company shall have the right to place restrictive legends on the certificates representing the shares subject to this Section and to impose stop transfer instructions with respect to the Registrable Securities and such other shares of stock of each Holder (and the shares or securities of every other person subject to the foregoing restriction) until the end of such period. The provisions of this Section 3 shall be binding upon any transferee of any Registrable Securities. 16 SECTION 4. REGISTRATION PROCEDURES. In connection with the obligations of the Company with respect to any Registration Statement pursuant to Sections 2.1, 2.2 and 2.6 hereof, the Company shall, except as otherwise provided: (a) Prepare and file with the SEC as soon as practicable each such Registration Statement (but in any event on or prior to the date of filing thereof required under this Agreement) and cause such Registration Statement to become effective and remain effective as provided herein; provided, however, that before filing any such Registration Statement or -------- ------- any Prospectus (for registrations pursuant to Sections 2.1 and 2.2 hereof) or any amendments or supplements thereto (only for registrations pursuant to Section 2.1 hereof) (including documents that would be incorporated or deemed to be incorporated therein by reference, including such documents filed under the Exchange Act that would be incorporated therein by reference), the Company shall afford promptly to the Holders of the Registrable Securities covered by such Registration Statement, their counsel and the managing underwriter or underwriters, if any, an opportunity to review copies of all such documents proposed to be filed a reasonable time prior to the proposed filing thereof. The Company shall not file any Registration Statement or Prospectus (for registrations pursuant to Sections 2.1 and 2.2 hereof) or any amendments or supplements thereto (only for registrations pursuant to Section 2.1 hereof) if the Holders of a majority of the Registrable Securities covered by such Registration Statement, their counsel, or the managing underwriter or underwriters, if any, shall reasonably object in writing unless failure to file any such amendment or supplement would involve a violation of the Securities Act or other applicable law. (b) Prepare and file with the SEC such amendments and post-effective amendments to the Registration Statement as may be necessary to keep such Registration Statement continuously effective for the time periods prescribed hereby; cause the related Prospectus to be supplemented by any required prospectus supplement, and as so supplemented to be filed pursuant to Rule 424 (or any similar provisions then in force) promulgated under the Securities Act; and comply with the provisions of the Securities Act, the Exchange Act and the rules and regulations of the SEC promulgated thereunder applicable to it with respect to the disposition of all securities covered by such Registration Statement as so amended or in such prospectus as so supplemented. (c) Notify the Holders of Registrable Securities, their counsel and the managing underwriter or underwriters, if any, promptly (but in any event within two (2) Business Days), and confirm such notice in writing, (i) when a Prospectus or any prospectus supplement or post-effective amendment has been filed, and, with respect to a Registration Statement or any post-effective amendment, when the same has become effective (including in such notice a written statement that any Holder may, upon request, obtain, without charge, one conformed copy of such Registration Statement or post-effective amendment including financial statements and schedules and exhibits), (ii) of the issuance by the SEC of any stop order suspending the 17 effectiveness of such Registration Statement or of any order preventing or suspending the use of any preliminary prospectus or the initiation or threatening of any proceedings for that purpose, (iii) if at any time when a prospectus is required by the Securities Act to be delivered in connection with sales of the Registrable Securities the representations and warranties of the Company contained in any agreement (including any underwriting agreement) contemplated by Section 4(m) below, to the knowledge of the Company, cease to be true and correct in any material respect, (iv) of the receipt by the Company of any notification with respect to (A) the suspension of the qualification or exemption from qualification of the Registration Statement or any of the Registrable Securities covered thereby for offer or sale in any jurisdiction, or (B) the initiation of any proceeding for such purpose, (v) of the happening of any event, the existence of any condition or information becoming known that requires the making of any changes in such Registration Statement, Prospectus or documents so that, in the case of such Registration Statement, it will conform in all material respects with the requirements of the Securities Act and it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, not misleading, and that in the case of the Prospectus, it will conform in all material respects with the requirements of the Securities Act and it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and (vi) of the Company's reasonable determination that a post-effective amendment to such Registration Statement would be appropriate. (d) Use every reasonable effort to prevent the issuance of any order suspending the effectiveness of the Registration Statement or of any order preventing or suspending the use of a Prospectus or suspending the qualification (or exemption from qualification) of any of the Registrable Securities covered thereby for sale in any jurisdiction, and, if any such order is issued, to obtain the withdrawal of any such order at the earliest possible moment. (e) If requested by the managing underwriter or underwriters, if any, or the Holders of a majority of the Registrable Securities being sold in connection with an underwriting offering (only for registrations pursuant to Section 2.1 hereof), (i) promptly incorporate in a prospectus supplement or post-effective amendment such information as the managing underwriter or underwriters, if any, or such Holders reasonably request to be included therein to comply with applicable law, (ii) make all required filings of such prospectus supplement or such post-effective amendment as soon as practicable after the Company has received notification of the matters to be incorporated in such prospectus supplement or post- effective amendment, and (iii) supplement or make amendments to such Registration Statement. (f) Furnish to each Holder of Registrable Securities who so requests and to counsel for the Holders of Registrable Securities and each managing underwriter, if any, without charge, upon request, one conformed copy of the Registration Statement and each post-effective amendment thereto, including financial statements and schedules, and of all documents 18 incorporated or deemed to be incorporated therein by reference and all exhibits (including exhibits incorporated by reference). (g) Deliver to each Holder of Registrable Securities, their counsel and each underwriter, if any, without charge, as many copies of each Prospectus (including each form of prospectus) and each amendment or supplement thereto as such Persons may reasonably request; and, subject to the last paragraph of this Section 4, the Company hereby consents to the use of such Prospectus and each amendment or supplement thereto by each of the Holders of Registrable Securities and the underwriter or underwriters or agents, if any, in connection with the offering and sale of the Registrable Securities covered by such Prospectus and any amendment or supplement thereto. (h) Prior to any offering of Registrable Securities, to register or qualify, and cooperate with the Holders of Registrable Securities, the underwriter or underwriters, if any, and their respective counsel in connection with the registration or qualification (or exemption from such registration or qualification) of, such Registrable Securities for offer and sale under the securities or Blue Sky laws of such jurisdictions within the United States as the managing underwriter or underwriters reasonably request in writing, or, in the event of a non-underwritten offering, as the Holders of a majority of the Registrable Securities may request; provided, -------- however, that where Registrable Securities are offered other than through ------- an underwritten offering, the Company agrees to cause its counsel to perform Blue Sky investigations and file registrations and qualifications required to be filed pursuant to this Section 4(h); keep each such registration or qualification (or exemption therefrom) effective during the Effectiveness Period and do any and all other acts or things necessary or advisable to enable the disposition in such jurisdictions of the securities covered thereby; provided, however, that the Company will not be required -------- ------- to (A) qualify generally to do business in any jurisdiction where it is not then so qualified, (B) take any action that would subject it to general service of process in any such jurisdiction where it is not then so subject or (C) become subject to taxation in any jurisdiction where it is not then so subject. (i) Cooperate with the Holders of Registrable Securities and the managing underwriter or underwriters, if any, to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold, which certificates shall not bear any restrictive legends whatsoever and shall be in a form eligible for deposit with The Depository Trust Company ("DTC"); and enable such Registrable Securities to be in such denominations and registered in such names as the managing underwriter or underwriters, if any, or Holders may reasonably request at least two business days prior to any sale of Registrable Securities in a firm commitment underwritten public offering. (j) [Intentionally Omitted] 19 (k) Upon the occurrence of any event contemplated by Section 4(c)(v) or 4(c)(vi) above, as promptly as practicable prepare a supplement or post- effective amendment to the Registration Statement or a supplement to the related Prospectus or any document incorporated or deemed to be incorporated therein by reference, and, subject to Section 4(a) hereof, file such with the SEC so that, as thereafter delivered to the purchasers of Registrable Securities being sold thereunder, such Prospectus will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (l) Prior to the effective date of a Registration Statement, (i) provide the registrar for the Registrable Securities with certificates for such securities in a form eligible for deposit with DTC and (ii) provide a CUSIP number for such securities. (m) Enter into an underwriting agreement in form, scope and substance as is customary in underwritten offerings and take all such other actions as are reasonably requested by the managing underwriter or underwriters in order to expedite or facilitate the registration or disposition of such Registrable Securities in any underwritten offering to be made of the Registrable Securities in accordance with this Agreement, and in such connection, (i) make such representations and warranties to the underwriter or underwriters, with respect to the business of the Company and the subsidiaries of the Company, and the Registration Statement, Prospectus and documents, if any, incorporated or deemed to be incorporated by reference therein, in each case, in form, substance and scope as are customarily made by issuers to underwriters in underwritten offerings, and confirm the same if and when requested; (ii) use reasonable efforts to obtain opinions of counsel to the Company and updates thereof, addressed to the underwriter or underwriters covering the matters customarily covered in opinions requested in underwritten offerings and such other matters as may be reasonably requested by underwriters; (iii) use reasonable efforts to obtain "cold comfort" letters and updates thereof from the independent certified public accountants of the Company (and, if applicable, the subsidiaries of the Company) and, if necessary, any other independent certified public accountants of any subsidiary of the Company or of any business acquired by the Company for which financial statements and financial data are, or are required to be, included in the Registration Statement, addressed to each of the underwriters, such letters to be in customary form and covering matters of the type customarily covered in "cold comfort" letters in connection with underwritten offerings and such other matters as reasonably requested by the managing underwriter or underwriters and as permitted by the Statement of Auditing Standards No. 72; and (iv) if an underwriting agreement is entered into, the same shall contain customary indemnification provisions and procedures (or such other provisions and procedures acceptable to Holders of a majority of Registrable Securities covered by such Registration Statement and the managing underwriter or underwriters or agents) with respect to all parties to be indemnified pursuant to said Section. The above shall be done at each closing under such underwriting agreement, or as and to the extent required thereunder. 20 (n) Make available for inspection by a representative of the Holders of Registrable Securities being sold, any underwriter participating in any such disposition of Registrable Securities, if any, and any attorney or accountant retained by such representative of the Holders or underwriter (collectively, the "Inspectors"), at the offices where normally kept, during reasonable business hours, all financial and other records, pertinent corporate documents and properties of the Company and the subsidiaries of the Company, and cause the officers, directors and employees of the Company and the subsidiaries of the Company to supply all information in each case reasonably requested by any such Inspector in connection with such Registration Statement; provided, however, that all -------- ------- material non-public information shall be kept confidential by such Inspector, except to the extent that (i) the disclosure of such information is necessary or advisable to avoid or correct a misstatement or omission in the Registration Statement or in any Prospectus; provided, however, that -------- ------- prior notice is given to the Company, and the Company's legal counsel and such Holder's legal counsel concur that disclosure is required, (ii) the release of such information is ordered pursuant to a subpoena or other order from a court of competent jurisdiction, (iii) disclosure of such information is necessary or advisable in connection with any action, claim, suit or proceeding, directly or indirectly, involving or potentially involving such Inspector and arising out of, based upon, relating to or involving this Agreement or any of the transactions contemplated hereby or arising hereunder; provided, however, that prior notice shall be provided -------- ------- as soon as practicable to the Company of the potential disclosure of any information by such Inspector pursuant to clauses (ii) or (iii) of this sentence to permit the Company to obtain a protective order (or waive the provisions of this paragraph (n)) and that such Inspector shall take all actions as are reasonably necessary to protect the confidentiality of such information (if practicable) to the extent such action is otherwise not inconsistent with, an impairment of or in derogation of the rights and interests of the Holder or any Inspector, or (iv) such information has been made generally available to the public. (o) Comply with all applicable rules and regulations of the SEC and make generally available to its securityholders earnings statements satisfying the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder (or any similar rule promulgated under the Securities Act) no later than forty-five (45) days after the end of any 12 month period (or ninety (90) days after the end of any 12 month period if such period is a fiscal year) (i) commencing at the end of any fiscal quarter in which Registrable Securities are sold to an underwriter or to underwriters in a firm commitment or best efforts underwritten offering and (ii) if not sold to an underwriter or to underwriters in such an offering, commencing on the first day of the first fiscal quarter of the Company after the effective date of the relevant Registration Statement, which statements shall cover said 12 month periods. (p) Use its best efforts to cause all Registrable Securities relating to such Registration Statement to be listed on each securities exchange, if any, on which similar securities issued by the Company are then listed. 21 (q) Cooperate with the Selling Holders of Registrable Securities to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold and not bearing any restrictive legends and registered in such names as the selling Holders may reasonably request at least two business days prior to the closing of any sale of Registrable Securities. Each seller of Registrable Securities as to which any registration is being effected agrees, as a condition to the registration obligations with respect to such Holder provided herein, to furnish to the Company such information regarding such seller and the distribution of such Registrable Securities as the Company may, from time to time, reasonably request in writing to comply with the Securities Act and other applicable law. The Company may exclude from such registration the Registrable Securities of any seller for so long as such seller fails to furnish such information within a reasonable time after receiving such request. If the identity of a seller of Registrable Securities is to be disclosed in the Registration Statement, such seller shall be permitted to include all information regarding such seller as it shall reasonably request. Each Holder of Registrable Securities agrees by acquisition of such Registrable Securities that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 4(c)(ii), 4(c)(iv), 4(c)(v), or 4(c)(vi) hereof, such Holder will forthwith discontinue disposition of such Registrable Securities covered by the Registration Statement or Prospectus until such Holder's receipt of the copies of the supplemented or amended Prospectus contemplated by Section 4(k) hereof), or until it is advised in writing (the "Advice") by the Company that the use of the applicable prospectus may be resumed, and has received copies of any amendments or supplements thereto, and, if so directed by the Company, such Holder will, at the Company's expense, deliver to the Company all copies, other than permanent file copies, then in such Holder's actual possession of the Prospectus covering such Registrable Securities current at the time of receipt of such notice; provided, however, that nothing herein shall create any obligation on the part - -------- ------- of any Holder to undertake to retrieve or return any such Prospectus not within the actual possession of such Holder. In the event the Company shall give any such notice, the period of time for which a Registration Statement is required hereunder to be effective shall be extended by the number of days during such periods from and including the date of the giving of such notice to and including the date when each seller of Registrable Securities covered by such Registration Statement shall have received (x) the copies of the supplemented or amended Prospectus contemplated by Section 4(k) hereof or (y) the Advice. SECTION 5. INDEMNIFICATION AND CONTRIBUTION. (a) The Company agrees to indemnify and hold harmless each Holder and each Person, if any, who controls such Holder within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act, or is under common control with, or is controlled by, such Holder, from and against all losses, claims, damages and liabilities (including, without limitation, and subject to clause (c) of this Section 5 below, the reasonable legal fees and other reasonable out-of-pocket expenses actually incurred by any Holder or any such controlling or affiliated Person in connection with any suit, action or proceeding or any claim asserted), caused by, arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained 22 in any Registration Statement (or any amendment thereto) pursuant to which Registrable Securities were registered under the Securities Act or in any registration statement filed by the Company covering the issuance of Warrant Shares and resales thereof (a "Warrant Share Registration Statement"), or caused by any omission or alleged omission to state in any such Registration Statement or Warrant Share Registration Statement a material fact required to be stated therein or necessary to make the statements therein not misleading, or caused by any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus, Prospectus or Warrant Share Prospectus (as amended or supplemented if the Company shall have furnished any amendments or supplements thereto), or caused by any omission or alleged omission to state in any such preliminary prospectus, Prospectus or Warrant Share Prospectus a material fact required to be stated in any such preliminary prospectus, Prospectus or Warrant Share Prospectus or necessary to make the statements in any such preliminary prospectus, Prospectus or Warrant Share Prospectus in light of the circumstances under which they were made not misleading, except insofar as such losses, claims, damages or liabilities are caused by any such untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with information relating to any Holder furnished to the Company in writing by such Holder expressly for use in any such Registration Statement, Warrant Share Registration Statement or Prospectus; provided, -------- however, that the Company shall not be required to indemnify any such Person if - ------- such untrue statement or omission or alleged untrue statement or omission was contained or made in any preliminary prospectus and corrected in the Prospectus or such Warrant Share Prospectus, as the case may be, or any amendment or supplement thereto and the Prospectus or such Warrant Share Prospectus, as the case may be, does not contain any other untrue statement or omission or alleged untrue statement or omission of a material fact that was the subject matter of the related proceeding and any such loss, liability, claim, damage or expense suffered or incurred by such indemnified Person resulted from any action, claim or suit by any Person who purchased Registrable Securities which are the subject thereof from such indemnified Person and it is established in the related proceeding that such indemnified Person failed to deliver or provide a copy of the Prospectus or Warrant Share Prospectus, as the case may be (as amended or supplemented) to such Person with or prior to the confirmation of the sale of such Registrable Securities sold to such Person if required by applicable law, unless such failure to deliver or provide a copy of the Prospectus or Warrant Share Prospectus, as the case may be (as amended or supplemented) was a result of noncompliance by the Company with Section 4 hereof or as a result of the failure of the Company to provide such Prospectus or Warrant Share Prospectus, as the case may be. (b) Each Holder agrees, severally and not jointly, to indemnify and hold harmless the Company, its directors, its officers who sign any Registration Statement or Warrant Share Registration Statement, as the case may be, and each Person, if any, who controls the Company within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act to the same extent as the foregoing indemnity from the Company to such Holder, but only with reference to information relating to such Holder furnished to the Company in writing by such Holder expressly for use in any Registration Statement or Warrant Share Registration Statement, as the case may be (or any amendment thereto) or any Prospectus or Warrant Share Prospectus, as the case may be (or any amendment or supplement thereto). The liability of any Holder under this paragraph shall in no event exceed the proceeds received by such Holder from sales of Registrable Securities giving rise to such obligations. 23 (c) In case any suit, action, proceeding (including any governmental or regulatory investigation), claim or demand shall be instituted involving any Person in respect of which indemnity may be sought pursuant to either paragraph (a) or (b) above, such Person (the "indemnified party") shall promptly notify the Person against which such indemnity may be sought (the "indemnifying party") in writing and the indemnifying party, upon request of the indemnified party, shall retain counsel reasonably satisfactory to the indemnified party to represent the indemnified party and any others the indemnifying party may reasonably designate in such proceeding and shall pay the reasonable fees and expenses actually incurred of such counsel relating to such proceeding; provided, however, that the failure to so notify the indemnifying party shall - -------- ------- not relieve it of any obligation or liability which it may have hereunder or otherwise. In any such proceeding, any indemnified party shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (i) the indemnifying party and the indemnified party shall have mutually agreed to the contrary, (ii) the indemnifying party shall have failed to retain within a reasonable period of time counsel reasonably satisfactory to such indemnified party or parties or (iii) the named parties to any such proceeding (including any impleaded parties) include both such indemnified party or parties and the indemnifying parties or an affiliate of the indemnifying parties or such indemnified parties and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between the indemnifying party or parties and the indemnified party or parties. It is understood that the indemnifying parties shall not, in connection with any one such proceeding or separate but substantially similar or related proceedings in the same jurisdiction, arising out of the same general allegations or circumstances, be liable for the fees and expenses of more than one separate firm of attorneys (together with appropriate local counsel) at any time for such indemnified party or parties and that all such fees and expenses shall be reimbursed within reasonable time of the request after the incurrence thereof. Any such separate firm for the Holders and such control Persons of the Holders shall be designated in writing by Holders who sold a majority in interest of Registrable Securities sold by all such Holders and reasonably acceptable to the Company and any such separate firm for the Company, its directors, its officers and such control Persons of the Company shall be designated in writing by the Company and reasonably acceptable to the Holders. The indemnifying party shall not be liable for any settlement of any proceeding effected without its prior written consent (which consent shall not be unreasonably withheld or delayed) but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify and hold harmless the indemnified party from and against any loss or liability by reason of such settlement or judgment. No indemnifying party shall, without the prior written consent of the indemnified party (which consent shall not be unreasonably withheld), effect any settlement or compliance of any pending or threatened proceeding in respect of which any indemnified party is or could have been a party, or indemnity could have been sought hereunder by such indemnified party, unless such settlement or compliance includes an unconditional written release of such indemnified party in form and substance reasonably satisfactory to such indemnified party of such indemnified party from all liability on claims that are the subject matter of such proceeding. 24 (d) To the extent the indemnification provided for in paragraph (a) or (b) of this Section 5 is unavailable to, or insufficient to hold harmless, an indemnified party in respect of any losses, claims, damages or liabilities, then each indemnifying party under such paragraph, in lieu of indemnifying such indemnified party thereunder and in order to provide for just and equitable contribution, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities in such proportion as is appropriate to reflect (i) the relative benefits received by the Company on the one hand and the Holders on the other hand from the offering of such Registrable Securities or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, not only such relative benefits but also the relative fault of the Company on the one hand and the Holders on the other hand in connection with the statements or omissions or alleged statements or omissions that resulted in such losses, claims, damages or liabilities (or actions in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Holders on the other shall be deemed to be in the same proportion as the total proceeds from the offering (net of discounts and commissions but before deducting expenses) of the Warrants sold pursuant to the Purchase Agreement received by the Company bears to the total proceeds received by such Holder from the sale of Registrable Securities, as the case may be. The relative fault of the Company on the one hand and the Holders on the other hand shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or by the Holders and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission, and any other equitable considerations appropriate in the circumstances. (e) The Company and each Holder agree that it would not be just or equitable if contribution pursuant to this Section 5 were determined by pro rata --- ---- allocation or by any other method of allocation that does not take account of the equitable considerations referred to in Section 5(d) above. The amount paid or payable by an indemnified party as a result of the losses, claims, damages and liabilities referred to in Section 5(d) above shall be deemed to include, subject to the limitations set forth above, any reasonable legal or other expenses actually incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 5, in no event shall a Holder be required to contribute any amount in excess of the amount by which proceeds received by such Holder from sales of Registrable Securities exceeds the amount of any damages that such Holder has otherwise been required to pay or has paid by reason of such untrue or alleged untrue statement or omission or alleged omission. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. The remedies provided for in this Section 5 are not exclusive and shall not limit any rights or remedies which may otherwise be available to any indemnified party at law or in equity. (f) Any losses, claims, damages, liabilities or expenses for which an indemnified party is entitled to indemnification or contribution under this Section 5 shall be paid by the indemnifying party to the indemnified party as such losses, claims, damages, liabilities or expenses are incurred. The 25 indemnity and contribution agreements contained in this Section 5 and the representations and warranties of the Company set forth in this Agreement shall remain operative and in full force and effect, regardless of (i) any investigation made by or on behalf of any Purchaser or any person who controls a Purchaser, the Company, their respective directors or officers or any person controlling the Company and (ii) any termination of this Agreement. SECTION 6. MISCELLANEOUS. (a) No Inconsistent Agreements. The Company represents and warrants -------------------------- to the Holders that it has not entered into nor will the Company on or after the date of this Agreement enter into, or cause or permit any of its subsidiaries to enter into, any agreement which is inconsistent with the rights granted to the Holders of Registrable Securities in this Agreement or otherwise conflicts with the provisions hereof. The rights granted to the Holders hereunder do not in any way conflict with and are not inconsistent with the rights granted to the holders of the Company's other issued and outstanding securities, if any, under any such agreements. (b) Amendments and Waivers. The provisions of this Agreement may not ---------------------- be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given unless the Company has obtained the prior written consent of Holders of not less than a majority of the outstanding Registrable Securities affected by such amendment, modification, supplement, waiver or consent; provided, however, that Section 5 hereof and this Section -------- ------- 6(b) may not be amended, modified or supplemented without the prior written consent of each Holder (including any Person who was a Holder of Registrable Securities disposed of pursuant to any Registration Statement or a Warrant Share Registration Statement) affected by such amendment, modification or supplement. Notwithstanding the foregoing, a waiver or consent to departure from the provisions hereof that relates exclusively to the rights of Holders of Registrable Securities whose securities are being sold pursuant to a Registration Statement and that does not directly or indirectly affect, impair, limit or compromise the rights of other Holders of Registrable Securities may be given by the Holders of not less than a majority of the Registrable Securities proposed to be sold by such Holders pursuant to such Registration Statement. (c) Notices. All notices and other communications provided for or ------- permitted hereunder shall be made in writing by hand delivery, registered first- class mail, telex, telecopier, or any courier guaranteeing overnight delivery (i) if to a Holder, at the most current address of Holder as set forth in the register for the Warrants or the Warrant Shares, which address initially is, with respect to the Purchaser, the address set forth in the Purchase Agreement; and (ii) if to the Company, initially at the address set forth below the Company's name on the signature pages hereto and thereafter at such other address, notice of which is given in accordance with the provisions of this Section 6(c), with a copy to Wilson Sonsini Goodrich & Rosati, 650 Page Mill Road, Palo Alto, California 94304-1050, Attention: Barry E. Taylor, Esq., and thereafter at such other address notice of which is given in accordance with the provisions of this Section 6(c). 26 All such notices and communications shall be deemed to have been duly given: at the time delivered by hand, if Personally delivered; five Business Days after being deposited in the mail, postage prepaid, if mailed; when answered back, if telexed; when receipt is acknowledged, if telecopied; and on the next Business Day, if timely delivered to an air courier guaranteeing overnight delivery. (d) Successors and Assigns. This Agreement shall inure to the ---------------------- benefit of and be binding upon the successors, assigns and transferees of each of the parties, including, without limitation and without the need for an express assignment, subsequent Holders. If any transferee of any Holder shall acquire Warrants and/or Registrable Securities, in any manner, whether by operation of law or otherwise, such Warrants and/or Registrable Securities shall be held subject to all of the terms of this Agreement, and by taking and holding such Warrants and/or Registrable Securities such Person shall be conclusively deemed to have agreed to be bound by and to perform all of the terms and provisions of this Agreement and such Person shall be entitled to receive the benefits hereof. (e) Counterparts. This Agreement may be executed in any number of ------------ counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. (f) Headings. The headings in this Agreement are for convenience of -------- reference only and shall not limit or otherwise affect the meaning hereof. (g) GOVERNING LAW; JURISDICTION. THIS AGREEMENT SHALL BE GOVERNED BY --------------------------- AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, AS APPLIED TO CONTRACTS MADE AND PERFORMED WHOLLY WITHIN THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. (h) Severability. If any term, provision, covenant or restriction of ------------ this Agreement is held by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their best efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such that may be hereafter declared invalid, illegal, void or unenforceable. (i) Entire Agreement. This Agreement, together with the Purchase ---------------- Agreement and the Warrant Agreement, is intended by the parties as a final expression of their agreement, and is intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein and therein. This Agreement, the Purchase Agreement and the Warrant Agreement supersede all prior agreements and understandings between the parties with respect to such subject matter. 27 (j) Attorneys' Fees. As between the parties to this Agreement, in --------------- any action or proceeding brought to enforce any provision of this Agreement, or where any provision hereof is validly asserted as a defense, the successful party shall be entitled to recover reasonable attorneys' fees in addition to its costs and expenses and any other available remedy. (k) Securities Held by the Company or Its Affiliates. Whenever the ------------------------------------------------ consent or approval of Holders of a specified percentage of Registrable Securities or Warrants is required hereunder, Registrable Securities or Warrants held by the Company or by any of its affiliates (as such term is defined in Rule 405 under the Securities Act) shall not be counted (in either the numerator or the denominator) in determining whether such consent or approval was given by the Holders of such required percentage. (l) Remedies. In the event of a breach by the Company of any of its -------- obligations under this Agreement, each Holder, in addition to being entitled to exercise all rights provided herein, in the Purchase Agreement or granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Agreement. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of any of the provisions of this Agreement. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 28 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed, as of the day and year first above written. DIVA SYSTEMS CORPORATION By: /s/ Alan H. Bushell --------------------------------------------------- Name: Alan H. Bushell Title: President and Chief Operating Officer Address for Notice: Building 203 333 Ravenswood Avenue Menlo Park, California 94025 Facsimile No.: (415) 859-6959 SMITH BARNEY INC. By: /s/ Douglas Hurst ----------------------------------------------------------------------------- Name: Douglas Hurst Title: Managing Director TORONTO DOMINION SECURITIES (USA) INC. By: /s/ David S. McCaan --------------------------------------------------- Name: David S. McCaan Title: President 29 EX-10.8 13 WARRANT AGREEMENT DATED 05/15/1998 EXHIBIT 10.8 ================================================================================ WARRANT AGREEMENT Dated as of May 15, 1996 Between DIVA SYSTEMS CORPORATION and THE BANK NEW YORK as Warrant Agent ______________________ 47,000 Warrants to Purchase Common Stock Par Value $.001 Per Share ================================================================================ TABLE OF CONTENTS
Page ---- ARTICLE I. - ISSUANCE, FORM, EXECUTION, DELIVERY AND REGISTRATION OF WARRANT CERTIFICATES AND ADDITIONAL WARRANT CERTIFICATES... 1 Section 1.01. Issuance of Warrants................................. 1 Section 1.02. Form of Warrant Certificates......................... 1 Section 1.03. Execution of Warrant Certificates.................... 2 Section 1.04. Authentication and Delivery.......................... 2 Section 1.05 Temporary Warrant Certificates....................... 3 Section 1.06. Additional Warrants.................................. 3 Section 1.07. Registration......................................... 3 Section 1.08. Registration of Transfers and Exchanges.............. 4 Section 1.09. Lost, Stolen, Destroyed, Defaced or Mutilated Warrant Certificates........................................ 8 Section 1.10. Offices for Exercise, etc............................ 9 ARTICLE II. DURATION, EXERCISE OF WARRANTS AND EXERCISE PRICE.............. 9 Section 2.01. Duration of Warrants................................. 9 Section 2.02. Exercise, Exercise Price, Settlement and Delivery.... 10 Section 2.03 Cancellation of Warrant Certificates................. 12 Section 2.04. Notice of an Exercise Event.......................... 13 Section 2.05. Put Right............................................ 13 ARTICLE III. OTHER PROVISIONS RELATING TO RIGHTS OF HOLDERS OF WARRANTS.... 13 Section 3.01. Enforcement of Rights................................ 13 Section 3.02. Membership on the Board of Directors................. 14 Section 3.03. Rights on Proposed Change of Control................. 14 ARTICLE IV. CERTAIN COVENANTS OF THE COMPANY............................... 14 Section 4.01. Payment of Taxes..................................... 14 Section 4.02. Qualification Under the Securities Laws.............. 14 Section 4.03. Rules 144 and 144A................................... 15 ARTICLE V. ADJUSTMENTS..................................................... 15 Section 5.01. Adjustment of Exercise Rate; Notices................. 15 Section 5.02. Fractional Shares.................................... 19 Section 5.03. Certain Distributions................................ 19
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ARTICLE VI. CONCERNING THE WARRANT AGENT................................... 20 Section 6.01. Warrant Agent........................................ 20 Section 6.02. Conditions of Warrant Agent's Obligations............ 20 Section 6.03 Resignation and Appointment of Successor............. 23 ARTICLE VII. MISCELLANEOUS................................................. 24 Section 7.01. Amendment............................................ 24 Section 7.02. Notices and Demands to the Company and Warrant Agent....................................... 25 Section 7.03. Addresses for Notices to Parties and for Transmission of Documents........................... 25 Section 7.04. Notices to Holders................................... 25 Section 7.05. APPLICABLE LAW....................................... 25 Section 7.06. Persons Having Rights Under Agreement................ 25 Section 7.07. Headings............................................. 26 Section 7.08. Counterparts......................................... 26 Section 7.09. Inspection of Agreement.............................. 26
-ii- EXHIBIT A - Form of Warrant Certificate EXHIBIT B - Certificate To Be Delivered Upon Exchange or Registration of Transfer of Warrants EXHIBIT C - Transferee Letter of Representation -iii- INDEX OF DEFINED TERMS ----------------------
Defined Term Section - ------------ ------- Agreement........................................ Recitals Business Day..................................... 2.01 Capital Stock.................................... 5.01(o) Cashless Exercise................................ 2.02(c) Cashless Exercise Ratio.......................... 2.02(c) Change of Control................................ 2.02(a) Common Stock..................................... Recitals Company.......................................... Recitals Current Market Value............................. 5.01(o) Definitive Warrants.............................. 1.02 Distribution..................................... 5.03 Distribution Rights.............................. 5.03 Election To Exercise............................. 2.02(b) Exchange Act..................................... 5.01(n) Exercisability Date.............................. 2.02(a) Exercise Date.................................... 2.02(d) Exercise Event................................... 2.02(a) Exercise Price................................... 2.02(a) Exercise Price Per Share......................... 2.02(c) Exercise Rate.................................... 2.02(a) Expiration Date.................................. 2.01 Global Warrants.................................. 1.02 Indenture........................................ Recitals Independent Financial Expert..................... 5.01(n) Initial Purchaser................................ Recitals Notes............................................ Recitals Officers' Certificate............................ 1.08(f) Prospectus....................................... 4.02 Public Equity Offering........................... 2.02(a) Public Market.................................... 2.02(a) Registrar........................................ 1.07 Related Parties.................................. 6.02(e) Resale Restriction Termination Date.............. 1.08 Securities Act................................... 1.08 Shares........................................... 1.01 Time of Determination............................ 5.01(n) Trustee.......................................... Recitals Units............................................ Recitals Warrant Agent.................................... Recitals Warrant Agent Office............................. 1.10 Warrant Certificates............................. Recitals Warrant Exercise Office.......................... 2.02(b) Warrant Register................................. 1.07 Warrants......................................... Recitals
-iv- WARRANT AGREEMENT WARRANT AGREEMENT ("Agreement"), dated as of May 15, 1996 by DIVA SYSTEMS CORPORATION, a Delaware corporation (together with any successor thereto, the "Company"), and THE BANK OF NEW YORK, a New York banking corporation, not in its individual capacity but solely as warrant agent (with any successor Warrant Agent, the "Warrant Agent"). WHEREAS, the Company has entered into a purchase agreement dated May 24, 1996 with Smith Barney Inc. and Toronto Dominion Securities (USA) Inc. (collectively, the "Initial Purchasers") in which the Company has agreed to sell to the Initial Purchasers 47,000 units (the "Units") consisting in the aggregate of (i) $47,000,000 aggregate principal amount at maturity (subject to increase pursuant to certain conditions set forth in Section 3.07(c) of the Indenture) of 13% Subordinated Discount Notes due 2006 (the "Notes") of the Company to be issued under an indenture dated as of May 15, 1996 (the "Indenture"), between the Company and The Bank of New York, a New York banking corporation, as trustee (in such capacity, the "Trustee"), and (ii) 47,000 Warrants (the "Warrants" and the certificates evidencing the Warrants being hereinafter referred to as "Warrant Certificates"), each representing the right to purchase initially 20.2 shares of Common Stock, par value $.001 per share, of the Company (the "Common Stock"), subject to adjustment in accordance with the terms hereof; and WHEREAS, the Company desires the Warrant Agent to assist the Company in connection with the issuance, exchange, cancellation, replacement and exercise of the Warrants, and in this Agreement wishes to set forth, among other things, the terms and conditions on which the Warrants may be issued, exchanged, canceled, replaced and exercised; NOW, THEREFORE, the parties hereto agree as follows: ARTICLE I. ISSUANCE, FORM, EXECUTION, DELIVERY AND REGISTRATION OF WARRANT CERTIFICATES AND ADDITIONAL WARRANT CERTIFICATES SECTION 1.01. ISSUANCE OF WARRANTS. Warrants comprising part of the Units shall be originally issued in connection with the issuance of the Units. Each Warrant Certificate shall evidence the number of Warrants specified therein, and each Warrant evidenced thereby shall represent the right, subject to the provisions contained herein and therein, to purchase from the Company (and the Company shall issue and sell to such holder of the Warrant) 20.2 fully paid and non-assessable shares of the Company's Common Stock (the shares purchasable upon exercise of a Warrant being hereinafter referred to as the "Shares" and, where appropriate, such term shall also mean the other securities or property purchasable and deliverable upon exercise of a Warrant as provided in Article V) at the price specified herein and therein, in each case subject to adjustment as provided herein and therein. SECTION 1.02. FORM OF WARRANT CERTIFICATES. The Warrant Certificates will initially be issued either in global form (the "Global Warrants"), substantially in the form of Exhibit A hereto (including footnote 1 thereto). In --------- the future, Warrant Certificates may be issued in registered form as definitive Warrant certificates (the "Definitive Warrants"). The Warrant Certificates evidencing the Global Warrants or the Definitive Warrants to be delivered pursuant to this Agreement shall be substantially in the form set forth in Exhibit A attached hereto. Such Global Warrants shall represent --------- such of the outstanding Warrants as shall be specified therein and each shall provide that it shall represent the aggregate amount of outstanding Warrants from time to time endorsed thereon and that the aggregate amount of outstanding Warrants represented thereby may from time to time be reduced or increased, as appropriate. Any endorsement of a Global Warrant to reflect the amount of any increase or decrease in the amount of outstanding Warrants represented thereby shall be made by the Warrant Agent and Depositary (as defined below) in accordance with instructions given by the holder thereof. The Depository Trust Company shall act as the Depositary with respect to the Global Warrants until a successor shall be appointed by the Company and the Warrant Agent. Upon written request, a Warrant holder may receive from the Warrant Agent Definitive Warrants as set forth in Section 1.08 hereof. SECTION 1.03. EXECUTION OF WARRANT CERTIFICATES. The Warrant Certificates shall be executed on behalf of the Company by the chairman of its Board of Directors, its president or any vice president and attested by its secretary or assistant secretary, under its corporate seal. Such signatures may be the manual or facsimile signatures of the present or any future such officers. The seal of the Company may be in the form of a facsimile thereof and may be impressed, affixed, imprinted or otherwise reproduced on the Warrant Certificates. Typographical and other minor errors or defects in any such reproduction of the seal or any such signature shall not affect the validity or enforceability of any Warrant Certificate that has been duly countersigned and delivered by the Warrant Agent. In case any officer of the Company who shall have signed any of the Warrant Certificates shall cease to be such officer before the Warrant Certificate so signed shall be countersigned and delivered by the Warrant Agent or disposed of by the Company, such Warrant Certificate nevertheless may be countersigned and delivered or disposed of as though the person who signed such Warrant Certificate had not ceased to be such officer of the Company; and any Warrant Certificate may be signed on behalf of the Company by such persons as, at the actual date of the execution of such Warrant Certificate, shall be the proper officers of the Company, although at the date of the execution and delivery of this Agreement any such person was not such an officer. SECTION 1.04. AUTHENTICATION AND DELIVERY. Subject to the immediately following paragraph, Warrant Certificates shall be authenticated by manual signature and dated the date of authentication by the Warrant Agent and shall not be valid for any purpose unless so authenticated and dated. The Warrant Certificates shall be numbered and shall be registered in the Warrant Register (as defined in Section 1.07 hereof). Upon the receipt by the Warrant Agent of a written order of the Company, which order shall be signed by the chairman of its Board of Directors, its president or any vice president and attested by its secretary or assistant secretary, and shall specify the amount of Warrants to be authenticated, whether the Warrants are to be Global Warrants or Definitive Warrants, the date of such Warrants and such other information as the Warrant Agent may reasonably request, without any further action by the Company, the Warrant Agent is authorized, upon receipt from the Company at any time and from time to time of the Warrant Certificates, duly executed as provided in Section 1.03 hereof, to authenticate the Warrant Certificates and deliver them. Such authentication shall be by a duly authorized signatory of the Warrant Agent (although it shall not be necessary for the same signatory to sign all Warrant Certificates). In case any authorized signatory of the Warrant Agent who shall have authenticated any of the Warrant Certificates shall cease to be such authorized signatory before the Warrant Certificate shall be disposed of by the Company, such Warrant Certificate nevertheless may be delivered or disposed of as though the person who authenticated such Warrant Certificate had not ceased to be such authorized signatory of the Warrant Agent; and -2- any Warrant Certificate may be authenticated on behalf of the Warrant Agent by such persons as, at the actual time of authentication of such Warrant Certificates, shall be the duly authorized signatories of the Warrant Agent, although at the time of the execution and delivery of this Agreement any such person is not such an authorized signatory. The Warrant Agent's authentication on all Warrant Certificates shall be in substantially the form set forth in Annex A hereto. ------- SECTION 1.05 TEMPORARY WARRANT CERTIFICATES. Pending the preparation of definitive Warrant Certificates, the Company may execute, and the Warrant Agent shall authenticate and deliver, temporary Warrant Certificates, which are printed, lithographed, typewritten or otherwise produced, substantially of the tenor of the definitive Warrant Certificates in lieu of which they are issued and with such appropriate insertions, omissions, substitutions and other variations as the officers executing such Warrant Certificates may determine, as evidenced by their execution of such Warrant Certificates. If temporary Warrant Certificates are issued, the Company will cause definitive Warrant Certificates to be prepared without unreasonable delay. After the preparation of definitive Warrant Certificates, the temporary Warrant Certificates shall be exchangeable for definitive Warrant Certificates upon surrender of the temporary Warrant Certificates at any office or agency maintained by the Company for that purpose pursuant to Section 1.10 hereof. Subject to the provisions of Section 4.01 hereof, such exchange shall be without charge to the holder. Upon surrender for cancellation of any one or more temporary Warrant Certificates, the Company shall execute, and the Warrant Agent shall authenticate and deliver in exchange therefor, one or more definitive Warrant Certificates representing in the aggregate a like number of Warrants. Until so exchanged, the holder of a temporary Warrant Certificate shall in all respects be entitled to the same benefits under this Agreement as a holder of a definitive Warrant Certificate. SECTION 1.06. ADDITIONAL WARRANTS. In the event that the Company has not consummated an Initial Public Offering prior to May 15, 2000, the Company shall issue on May 15, 2000, to registered Holders of the Warrants on May 1, 2000, pro rata in accordance with the ratio of the number of Warrants then held by each such Holder to the aggregate number of Warrants then outstanding, additional Warrants exercisable in the aggregate into shares of the Company's Common Stock representing five percent (5%) of the outstanding Common Stock of the Company on a fully-diluted basis, (calculated to include all granted options, vested restricted stock and shares reserved under the Company's incentive stock plan and all outstanding securities which are by their terms convertible, exchangeable or exercisable into any of the foregoing) and otherwise on terms and conditions identical to those of the Warrants. SECTION 1.07. REGISTRATION. The Company will keep, at the office or agency maintained by the Company for such purpose, a register or registers in which, subject to such reasonable regulations as it may prescribe, the Company shall provide for the registration of, and registration of transfer and exchange of, Warrants as provided in this Article. Each person designated by the Company from time to time as a person authorized to register the transfer and exchange of the Warrants is hereinafter called, individually and collectively, the "Registrar." The Company hereby initially appoints the Warrant Agent as Registrar. Upon written notice to the Warrant Agent and any acting Registrar, the Company may appoint a successor Registrar for such purposes. The Company will at all times designate one person (who may be the Company and who need not be a Registrar) to act as repository of a master list of names and addresses of the holders of Warrants (the "Warrant -3- Register"). The Warrant Agent will act as such repository unless and until some other person is, by written notice from the Company to the Warrant Agent and the Registrar, designated by the Company to act as such. The Company shall cause each Registrar to furnish to such repository, on a current basis, such information as to all registrations of transfer and exchanges effected by such Registrar, as may be necessary to enable such repository to maintain the Warrant Register on as current a basis as is practicable. -4- SECTION 1.08. REGISTRATION OF TRANSFERS AND EXCHANGES. (a) Transfer and Exchange of Definitive Warrants. When Definitive -------------------------------------------- Warrants are presented to the Warrant Agent with a request: (i) to register the transfer of the Definitive Warrants; or (ii) to exchange such Definitive Warrants for an equal number of Definitive Warrants of other authorized denominations, the Warrant Agent shall register the transfer or make the exchange as requested if the requirements under this Warrant Agreement as set forth in this Section 1.08 hereof for such transactions are met; provided, however, that the -------- ------- Definitive Warrants presented or surrendered for registration of transfer or exchange: (x) shall be duly endorsed or accompanied by a written instruction of transfer in form satisfactory to the Company and the Warrant Agent, duly executed by the holder thereof or by his attorney, duly authorized in writing; and (y) in the case of Warrants the offer and sale of which have not been registered under the Securities Act of 1933, as amended (the "Securities Act"), and are presented for transfer or exchange prior to (x) the date which is three years after the later of the date of original issue and the last date on which the Company or any affiliate of the Company was the owner of such Warrant, or any predecessor thereto and (y) such other date, if any, as may be required by any subsequent change in applicable law (the "Resale Restriction Termination Date"), such Warrants shall be accompanied, in the sole discretion of the Company, by the following additional information and documents, as applicable, however, it being understood that the Warrant Agent need not determine which clause (A) through (D) below is applicable: (A) if such Warrant is being delivered to the Warrant Agent by a holder for registration in the name of such holder, without transfer, a certification from such holder to that effect (in substantially the form of Exhibit B hereto); or --------- (B) if such Warrant is being transferred to a qualified institutional buyer as defined in Rule 144A under the Securities Act (a "QIB") in accordance with Rule 144A under the Securities Act or pursuant to an exemption from registration in accordance with Rule 144 under the Securities Act or pursuant to an effective registration statement under the Securities Act, a certification to that effect (in substantially the form of Exhibit B hereto); or --------- (C) if such Warrant is being transferred to an "accredited investor" within the meaning of Rule 501(a) under the Securities Act (an "Accredited Investor"), delivery of a Certificate of Transfer in the form of Exhibit C hereto and an opinion of counsel and/or other --------- information satisfactory to the Company to the effect that such transfer is in compliance with the Securities Act; or (D) if such Warrant is being transferred in reliance on another exemption from the registration requirements of the Securities Act, a certification to that effect (in -5- substantially the form of Exhibit B hereto) and an opinion of --------- counsel reasonably acceptable to the Company to the effect that such transfer is in compliance with the Securities Act. (b) Restrictions on Transfer of a Definitive Warrant for a Beneficial ----------------------------------------------------------------- Interest in a Global Warrant. A Definitive Warrant may not be exchanged for a - ---------------------------- beneficial interest in a Global Warrant except upon satisfaction of the requirements set forth below. Upon receipt by the Warrant Agent of a Definitive Warrant, duly endorsed or accompanied by appropriate instruments of transfer, in form satisfactory to the Warrant Agent, together with: (A) certification, substantially in the form of Exhibit B hereto, that --------- such Definitive Warrant is being transferred to a QIB in accordance with Rule 144A under the Securities Act or to an Accredited Investor pursuant to another available exemption under such Act; and (B) written instructions directing the Warrant Agent to make, or to direct the Depositary to make, an endorsement on the Global Warrant to reflect an increase in the aggregate amount of the Warrants represented by the Global Warrant, then the Warrant Agent shall cancel such Definitive Warrant and cause, or direct the Depositary to cause, in accordance with the standing instructions and procedures existing between the Depositary and the Warrant Agent, the number of Warrants represented by the Global Warrant to be increased accordingly. If no Global Warrant is then outstanding, the Company shall issue and the Warrant Agent shall authenticate a new Global Warrant in the appropriate amount. (c) Transfer and Exchange of Global Warrants. The transfer and ---------------------------------------- exchange of Global Warrants or beneficial interests therein shall be effected through the Depositary, in accordance with this Warrant Agreement (including the restrictions on transfer set forth herein) and the procedures of the Depositary therefor. (d) Transfer of a Beneficial Interest in a Global Warrant for a ----------------------------------------------------------- Definitive Warrant. - ------------------ (i) Any person having a beneficial interest in a Global Warrant may upon request exchange such beneficial interest for a Definitive Warrant. Upon receipt by the Warrant Agent of written instructions or such other form of instructions as is customary for the Depositary from the Depositary or its nominee on behalf of any person having a beneficial interest in a Global Warrant and upon receipt by the Warrant Agent of a written order or such other form of instructions as is customary for the Depositary or the person designated by the Depositary as having such a beneficial interest containing registration instructions and, in the case of any such transfer or exchange prior to the Resale Restriction Termination Date, the following additional information and documents, however, it being understood that the Warrant Agent need not determine which clause (A) through (D) below is applicable: (A) if such beneficial interest is being transferred to the person designated by the Depositary as being the beneficial owner, a certification from such person to that effect (in substantially the form of Exhibit B hereto); or --------- (B) if such beneficial interest is being transferred to a QIB in accordance with Rule 144A under the Securities Act or pursuant to an exemption from registration in accordance -6- with Rule 144 under the Securities Act or pursuant to an effective registration statement under the Securities Act, a certification to that effect from the transferee or transferor (in substantially the form of Exhibit B hereto); or --------- (C) if such beneficial interest is being transferred to an Accredited Investor, delivery of a Certificate of Transfer in the form of Exhibit C hereto and an opinion of counsel and/or other information --------- satisfactory to the Company to the effect that such transfer is in compliance with the Securities Act; or (D) if such beneficial interest is being transferred in reliance on another exemption from the registration requirements of the Securities Act, a certification to that effect from the transferee or transferor (in substantially the form of Exhibit B hereto) and --------- an opinion of counsel from the transferee or transferor reasonably acceptable to the Company to the effect that such transfer is in compliance with the Securities Act, then the Warrant Agent will cause, in accordance with the standing instructions and procedures existing between the Depositary and the Warrant Agent, the aggregate amount of the Global Warrant to be reduced and, following such reduction, the Company will execute and, upon receipt of an authentication order in the form of an Officers' Certificate (as defined), the Warrant Agent will authenticate and deliver to the transferee a Definitive Warrant. (ii) Definitive Warrants issued in exchange for a beneficial interest in a Global Warrant pursuant to this Section 1.08(d) shall be registered in such names and in such authorized denominations as the Depositary, pursuant to instructions from its direct or indirect participants or otherwise, shall instruct the Warrant Agent in writing. The Warrant Agent shall deliver such Definitive Warrants to the persons in whose names such Warrants are so registered. (e) Restrictions on Transfer and Exchange of Global Warrants. -------------------------------------------------------- Notwithstanding any other provisions of this Warrant Agreement (other than the provisions set forth in subsection (f) of this Section 1.08), a Global Warrant may not be transferred as a whole except by the Depositary to a nominee of the Depositary or by a nominee of the Depositary to the Depositary or another nominee of the Depositary or by the Depositary or any such nominee to a successor Depositary or a nominee of such successor Depositary. (f) Authentication of Definitive Warrants in Absence of Depositary. -------------------------------------------------------------- If at any time: (i) the Depositary for the Warrants notifies the Company that the Depositary is unwilling or unable to continue as Depositary for the Global Warrant and a successor Depositary for the Global Warrant is not appointed by the Company within 90 days after delivery of such notice; or (ii) the Company, at its sole discretion, notifies the Warrant Agent in writing that it elects to cause the issuance of Definitive Warrants under this Warrant Agreement, then the Company will execute, and the Warrant Agent, upon receipt of an officers' certificate signed by two officers of the Company (one of whom must be the principal executive officer, principal financial officer or principal accounting officer) (an "Officers' Certificate") requesting the authentication and delivery of Definitive Warrants, will authenticate and deliver Definitive Warrants, in an aggregate number equal to the aggregate number of warrants represented by the Global Warrant, in exchange for such Global Warrant. -7- (g) Legends. ------- (i) Except as permitted by the following paragraph (ii), each Warrant Certificate evidencing the Global Warrants and the Definitive Warrants (and all Warrants issued in exchange therefor or substitution thereof) shall bear a legend substantially to the following effect: "THE SECURITY (OR ITS PREDECESSOR) EVIDENCED HEREBY WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER SECTION 5 OF THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND THE SECURITY EVIDENCED HEREBY MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF THE SECURITY EVIDENCED HEREBY IS HEREBY NOTIFIED THAT THE SELLER MAY BE RELYING ON THE EXEMPTION PROVIDED BY RULE 144A UNDER THE SECURITIES ACT. THE HOLDER OF THE SECURITY EVIDENCED HEREBY AGREES FOR THE BENEFIT OF THE COMPANY THAT (A) SUCH SECURITY MAY BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED, ONLY (1) (a) TO A PERSON WHO THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (b) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER THE SECURITIES ACT, (c) OUTSIDE THE UNITED STATES TO A FOREIGN PERSON IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 904 UNDER THE SECURITIES ACT OR (d) IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (AND BASED UPON AN OPINION OF COUNSEL IF THE COMPANY SO REQUEST), (2) TO THE COMPANY OR (3) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AND, IN EACH CASE, IN ACCORDANCE WITH THE APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER OF THE SECURITY EVIDENCED HEREBY OF THE RESALE RESTRICTIONS SET FORTH IN (1) ABOVE." (ii) Upon any sale or transfer of a Warrant pursuant to Rule 144 under the Securities Act in accordance with Section 1.08 hereof or under an effective registration statement under the Securities Act: (A) in the case of any Warrant that is a Definitive Warrant, the Warrant Agent shall permit the holder thereof to exchange such Warrant for a Definitive Warrant that does not bear the legends set forth above and rescind any related restriction on the transfer of such Warrant; and (B) any such Warrant represented by a Global Warrant shall not be subject to the provisions set forth in (i) above (such sales or transfers being subject only to the provisions of Section 1.08(c) hereof); provided, however, that with respect to any request for ----------------- an exchange of a Warrant that is represented by a Global Warrant for a Definitive Warrant -8- that does not bear the legends set forth above, which request is made in reliance upon Rule 144 under the Securities Act, the holder thereof shall certify in writing to the Warrant Agent that such request is being made pursuant to Rule 144 under the Securities Act (such certification to be substantially in the form of Exhibit B hereto). --------- (h) Cancellation and/or Adjustment of a Global Warrant. At such time -------------------------------------------------- as all beneficial interests in a Global Warrant have either been exchanged for Definitive Warrants, redeemed, repurchased or cancelled, such Global Warrant shall be returned to or retained and cancelled by the Warrant Agent. At any time prior to such cancellation, if any beneficial interest in a Global Warrant is exchanged for Definitive Warrants, redeemed, repurchased or cancelled, the number of Warrants represented by such Global Warrant shall be reduced and an endorsement shall be made on such Global Warrant, by the Warrant Agent to reflect such reduction. (i) Obligations with Respect to Transfers and Exchanges of Definitive ----------------------------------------------------------------- Warrants. - -------- (i) To permit registrations of transfers and exchanges, the Company shall execute, at the Warrant Agent's request, and the Warrant Agent shall authenticate Definitive Warrants and Global Warrants. (ii) All Definitive Warrants and Global Warrants issued upon any registration, transfer or exchange of Definitive Warrants or Global Warrants shall be the valid obligations of the Company, entitled to the same benefits under this Warrant Agreement as the Definitive Warrants or Global Warrants surrendered upon the registration of transfer or exchange. (iii) Prior to due presentment for registration of transfer of any Warrant, the Warrant Agent and the Company may deem and treat the person in whose name any Warrant is registered as the absolute owner of such Warrant, and neither the Warrant Agent nor the Company shall be affected by notice to the contrary. (j) Payment of Taxes. The Company will pay all documentary stamp ---------------- taxes attributable to the initial issuance of the Shares upon the exercise of Warrants; provided, however, that the Company shall not be required to pay any -------- ------- tax or taxes which may be payable in respect of any transfer involved in the issue of any Warrant Certificates or any certificates for the Shares in a name other than that of the registered holder of a Warrant Certificate surrendered upon the exercise of a Warrant, and the Company shall not be required to issue or deliver such Warrant Certificates unless or until the person or persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. (k) Indemnification. Each holder of a Warrant Certificate agrees to --------------- indemnify the Company and the Warrant Agent against any liability that may result from the transfer, exchange or assignment of such holder's Warrant Certificate in violation of any provision of this Agreement and/or applicable U.S. Federal or state securities law. SECTION 1.09. LOST, STOLEN, DESTROYED, DEFACED OR MUTILATED WARRANT CERTIFICATES. Upon receipt by the Company and the Warrant Agent (or any agent of the Company or the Warrant Agent, if requested by the Company) of evidence satisfactory to them of the loss, theft, destruction, defacement, or mutilation of any Warrant Certificate and of indemnity satisfactory to them and, in the case of mutilation or defacement, upon -9- surrender thereof to the Warrant Agent for cancellation, then, in the absence of notice to the Company or the Warrant Agent that such Warrant Certificate has been acquired by a bona fide purchaser or holder in due course, the Company shall execute, and an authorized signatory of the Warrant Agent shall manually authenticate and deliver, in exchange for or in lieu of the lost, stolen, destroyed, defaced or mutilated Warrant Certificate, a new Warrant Certificate representing a like number of Warrants, bearing a number or other distinguishing symbol not contemporaneously outstanding. Upon the issuance of any new Warrant Certificate under this Section, the Company may require the payment from the holder of such Warrant Certificate of a sum sufficient to cover any tax, stamp tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Warrant Agent and the Registrar) in connection therewith. Every substitute Warrant Certificate executed and delivered pursuant to this Section in lieu of any lost, stolen or destroyed Warrant Certificate shall constitute an additional contractual obligation of the Company, whether or not the lost, stolen or destroyed Warrant Certificate shall be at any time enforceable by anyone, and shall be entitled to the benefits of (but shall be subject to all the limitations of rights set forth in) this Agreement equally and proportionately with any and all other Warrant Certificates duly executed and delivered hereunder. The provisions of this Section 1.09 are exclusive with respect to the replacement of lost, stolen, destroyed, defaced or mutilated Warrant Certificates and shall preclude (to the extent lawful) any and all other rights or remedies notwithstanding any law or statute existing or hereafter enacted to the contrary with respect to the replacement of lost, stolen, destroyed, defaced or mutilated Warrant Certificates. The Warrant Agent is hereby authorized to authenticate in accordance with the provisions of this Agreement, and deliver the new Warrant Certificates required pursuant to the provisions of this Section. SECTION 1.10. OFFICES FOR EXERCISE, ETC. So long as any of the Warrants remain outstanding, the Company will designate and maintain in the Borough of Manhattan, The City of New York: (a) an office or agency where the Warrant Certificates may be presented for exercise or for the exercise of a Put (as defined in Section 2.05(a)), (b) an office or agency where the Warrant Certificates may be presented for registration of transfer and for exchange (including the exchange of temporary Warrant Certificates for definitive Warrant Certificates pursuant to Section 1.05 hereof), and (c) an office or agency where notices and demands to or upon the Company in respect of the Warrants or of this Agreement may be served. The Company may from time to time change or rescind such designation, as it may deem desirable or expedient; provided, however, that -------- ------- an office or agency shall at all times be maintained in the Borough of Manhattan, The City of New York, as provided in the first sentence of this Section. In addition to such office or offices or agency or agencies, the Company may from time to time designate and maintain one or more additional offices or agencies within or outside The City of New York, where Warrant Certificates may be presented for exercise or for registration of transfer or for exchange, and the Company may from time to time change or rescind such designation, as it may deem desirable or expedient. The Company will give to the Warrant Agent written notice of the location of any such office or agency and of any change of location thereof. The Company hereby designates the Warrant Agent at its principal corporate trust office in the Borough of Manhattan, The City of New York (the "Warrant Agent Office"), as the initial agency maintained for each such purpose. In case the Company shall fail to maintain any such office or agency or shall fail to give such notice of the location or of any change in the location thereof, presentations and demands may be made and notice may be served at the Warrant Agent Office and the Company appoints the Warrant Agent as its agent to receive all such presentations, surrenders, notices and demands. ARTICLE II. DURATION, EXERCISE OF WARRANTS AND EXERCISE PRICE -10- SECTION 2.01. DURATION OF WARRANTS. Subject to the terms and conditions established herein, the Warrants shall expire at 5:00 p.m., New York City time, on the earlier to occur of (i) 90 days after an Exercise Event which causes such Warrants to become exercisable and (ii) May 15, 2006 (unless otherwise extended pursuant to Section 2.05 hereof) (such earlier date, the "Expiration Date"). Each Warrant may be exercised on any Business Day (as defined below) on or after the Exercisability Date (as defined below) and on or prior to the close of business on the Expiration Date. Any Warrant not exercised before the close of business on the Expiration Date shall become void, and all rights of the holder under the Warrant Certificate evidencing such Warrant and under this Agreement shall cease. "Business Day" shall mean any day on which (i) banks in New York City, (ii) the principal national securities exchange or market on which the Common Stock is listed or admitted to trading and (iii) the principal national securities exchange or market, if any, on which the Warrants are listed or admitted to trading are open for business. SECTION 2.02. EXERCISE, EXERCISE PRICE, SETTLEMENT AND DELIVERY. (a) Subject to the provisions of this Agreement, a holder of Warrants shall have the right to purchase from the Company on or after the occurrence of an Exercise Event (the date of the occurrence of an Exercise Event, the "Exercisability Date") and on or prior to the close of business on the Expiration Date one (1) fully paid, registered and non-assessable Share, subject to adjustment in accordance with Article V hereof, at the purchase price of $.01 for each Warrant exercised (the "Exercise Price"). The number and kind of Shares for which a Warrant may be exercised (the "Exercise Rate") shall be subject to adjustment from time to time as set forth in Article V hereof. "Change of Control" means the occurrence of any of the following: (i) the sale, lease, transfer, conveyance or other disposition (other than by way of merger or consolidation), in one or a series of related transactions, of all or substantially all of the assets of the Company and its subsidiaries taken as a whole to any "person" (as such term is used in Section 13(d)(3) of the Exchange Act) other than the Principals or their Related Parties (as defined below), (ii) the adoption of a plan relating to the liquidation or dissolution of the Company and (iii) the consummation of any transaction (including any merger or consolidation) the result of which is that any "person" (as defined above), other than the Principals and their Related Parties, becomes the "beneficial owner" (as such term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act), directly or indirectly, of more than 50% of the Voting Stock of the Company or (iv) during any consecutive two-year period, individuals who at the beginning of such period constituted the Board of Directors of the Company (together with any new directors whose election to such Board of Directors or whose nomination for election by the stockholders of the Company was approved by a vote of a majority of the directors of the Company then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Board of Directors of the Company then in office. For purposes of the foregoing definition of Change of Control, the transfer (by lease, assignment, sale or otherwise, in a single transaction or series of related transactions) of all or substantially all of the properties or assets of one or more Subsidiaries of the Company, the Capital Stock of which constitutes all or substantially all of the properties and assets of the Company, shall be deemed to be the transfer of all or substantially all of the properties and assets of the Company. -11- "Exercise Event" means, with respect to each Warrant, the date of the earliest of: (1) the seventh day prior to the occurrence of a Change of Control, (2) the consummation of a Public Equity Offering, (3) 90 days prior to May 15, 2006 (unless extended pursuant to Section 2.05 hereof) and (4) the seventh day prior to Tag-Along Event. "Initial Public Offering" means a Public Equity Offering, underwritten by a nationally recognized underwriter pursuant to an effective registration statement under the Securities Act (i) the aggregate gross proceeds of which at least equal or exceed the greater of (A) $30,000,000 and (B) the fair market value of shares of the Common Stock of the Company representing in the aggregate five percent (5%) of the Common Stock of the Company on a fully-diluted basis, after giving effect to the Public Equity Offering, and (ii) the Common Stock offered thereby is registered on a national exchange. "Person" means an individual, partnership, corporation, unincorporated organization, trust or joint venture, or a governmental agency or political subdivision thereof. "Plan of Liquidation" means, with respect to any Person, a plan (including by operation of law) that provides for, contemplates or the effectuation of which is preceded or accompanied by (whether or not substantially contemporaneously) (i) the sale, lease, conveyance or other disposition of all or substantially all of the assets of such Person otherwise than as an entirety or substantially as an entirety and (ii) the distribution of all or substantially all of the proceeds of such sale, lease, conveyance or other disposition and all or substantially all of the remaining assets of such Person to holders of Capital Stock of such Person. "Principal" means Paul M. Cook, Rufus W. Lumry or Alan H. Bushell. "Public Equity Offering" means a primary public offering (whether or not underwritten, but excluding any offering pursuant to Form S-4 or S-8 under the Securities Act) of capital stock of the Company pursuant to an effective registration statement under the Securities Act. "Related Party" with respect to any Principal means (A) any spouse, parent or child of such Principal or (B) any trust, corporation, partnership or other entity, the beneficiaries, stockholders, partners, owners or Persons beneficially holding an 80% or more controlling interest of which consist of such Principal and/or such other Person referred to in the immediately preceding clause (A). "Tag-Along Event" means the triggering of a co-sale right of a holder of a Warrant pursuant to Section 6 of the Stockholder Rights Agreement amended and restated as of May 15, 1996. "Voting Stock" means, with respect to any Person, securities of any class or classes of Capital Stock of such Person entitling the holders thereof (whether at all times or only so long as no senior class of stock has voting power by reason of any contingency) to vote in the election of members of the Board of Directors of such Person. (b) Warrants may be exercised on or after the Exercisability Date by (i) surrendering at any office or agency maintained for that purpose by the Company pursuant to Section 1.10 (each a "Warrant Exercise Office") the Warrant Certificate evidencing such Warrants with the form of election to purchase Shares set forth on the reverse side of the Warrant Certificate (the "Election to Exercise") duly completed and signed by the registered holder or holders thereof or by the duly appointed legal representative thereof or by a duly authorized attorney, and in the case of a transfer, such signature shall be guaranteed by an eligible guarantor institution, and -12- (ii) paying in full the Exercise Price for each such Warrant exercised and any other amounts required to be paid pursuant to Section 1.08(j) hereof. (c) Simultaneously with the exercise of each Warrant, payment in full of the Exercise Price shall be made in cash or by certified or official bank check to be delivered to the office or agency where the Warrant Certificate is being surrendered. Notwithstanding the foregoing sentence, a Warrant may also be exercised solely by the surrender of the Warrant, and without the payment of the Exercise Price in cash, for such number of Shares equal to the product of (1) the number of Shares for which such Warrant is exercisable with payment of the Exercise Price as of the date of exercise and (2) the Cashless Exercise Ratio. For purposes of this Agreement, the "Cashless Exercise Ratio" shall equal a fraction, the numerator of which is the excess of the Current Market Value of the Common Stock on the date of exercise (calculated as set forth in Section 5.01(n) hereof) over the Exercise Price Per Share as of the date of exercise and the denominator of which is the Current Market Value of the Common Stock on the date of exercise (calculated as set forth in Section 5.01(n) hereof). An exercise of a Warrant in accordance with the immediately preceding sentences is herein called a "Cashless Exercise." Upon surrender of a Warrant Certificate representing more than one Warrant in connection with the holder's option to elect a Cashless Exercise, the number of Shares deliverable upon a Cashless Exercise shall be equal to the number of Warrants that the holder specifies is to be exercised pursuant to a Cashless Exercise multiplied by the Cashless Exercise Ratio. All provisions of this Agreement shall be applicable with respect to an exercise of a Warrant Certificate pursuant to a Cashless Exercise for less than the full number of Warrants represented thereby. "Exercise Price Per Share" means the Exercise Price divided by the number of Shares for which a Warrant is then exercisable (without giving effect to the Cashless Exercise option). No payment or adjustment shall be made on account of any dividends on the Shares issued upon exercise of a Warrant. (d) Upon such surrender of a Warrant Certificate and payment and collection of the Exercise Price at any Warrant Exercise Office (other than any Warrant Exercise Office that also is an office of the Warrant Agent), such Warrant Certificate and payment shall be promptly delivered to the Warrant Agent. The "Exercise Date" for a Warrant shall be the date when all of the items referred to in the first sentence of paragraphs (b) and (c) of this Section 2.02 are received by the Warrant Agent at or prior to 11:00 a.m., New York City time, on a Business Day and the exercise of the Warrants will be effective as of such Exercise Date. If any items referred to in the first sentence of paragraphs (b) and (c) are received after 11:00 a.m., New York City time, on a Business Day, the exercise of the Warrants to which such item relates will be effective on the next succeeding Business Day. Notwithstanding the foregoing, in the case of an exercise of Warrants on the Expiration Date (as defined in Section 2.01), if all of the items referred to in the first sentence of paragraphs (b) and (c) are received by the Warrant Agent at or prior to 5:00 p.m., New York City time, on such Expiration Date, the exercise of the Warrants to which such items relate will be effective on the Expiration Date. (e) Upon the exercise of a Warrant in accordance with the terms hereof, the receipt of a Warrant Certificate and payment of the Exercise Price (or election of the Cashless Exercise option), the Warrant Agent shall: (i) except to the extent exercise of the Warrant has been effected through Cashless Exercise, cause an amount equal to the Exercise Price to be paid to the Company by crediting the same to the account designated by the Company in writing to the Warrant Agent for that purpose; (ii) advise the Company immediately by telephone of the amount so deposited to the Company's account and promptly confirm such telephonic advice in writing; and (iii) as soon as practicable, advise the Company in writing of the number of Warrants exercised in accordance with the terms and conditions of this Agreement and the Warrant Certificates, the instructions of each exercising holder of the Warrant Certificates with respect to delivery of the Shares to which such holder is entitled upon such exercise, and such other information as the Company shall reasonably request. -13- (f) Subject to Section 5.02 hereof, as soon as practicable after the exercise of any Warrant or Warrants in accordance with the terms hereof, the Company shall issue or cause to be issued to or upon the written order of the registered holder of the Warrant Certificate evidencing such exercised Warrant or Warrants, a certificate or certificates evidencing the Shares to which such holder is entitled, in fully registered form, registered in such name or names as may be directed by such holder pursuant to the Election to Exercise, as set forth on the reverse of the Warrant Certificate. Such certificate or certificates evidencing the Shares shall be deemed to have been issued and any persons who are designated to be named therein shall be deemed to have become the holder of record of such Shares as of the close of business on the Exercise Date. After such exercise of any Warrant or Warrants, the Company shall also issue or cause to be issued to or upon the written order of the registered holder of such Warrant Certificate, a new Warrant Certificate, countersigned by the Warrant Agent pursuant to written instruction, evidencing the number of Warrants, if any, remaining unexercised unless such Warrants shall have expired. SECTION 2.03 CANCELLATION OF WARRANT CERTIFICATES. In the event the Company shall purchase or otherwise acquire Warrants, the Warrant Certificates evidencing such Warrants may thereupon be delivered to the Warrant Agent, and if so delivered, shall at the Company's written instruction be canceled by it and retired. The Warrant Agent shall cancel all Warrant Certificates properly surrendered for exchange, substitution, transfer or exercise. The Warrant Agent shall deliver such canceled Warrant Certificates to the Company. SECTION 2.04. NOTICE OF AN EXERCISE EVENT. The Company shall, to the extent reasonably practicable, not fewer than 30 days nor more than 60 days prior to the occurrence of an Exercise Event, send to the Warrant Agent and each holder of Warrants and to each beneficial owner of the Warrants to the extent that the Warrants are held of record by a depositary or other agent, by first- class mail, at the addresses appearing on the Warrant Register, a notice of the Exercise Event to occur, which notice shall describe the type of Exercise Event and the date of the proposed occurrence thereof and the date of expiration of the right to exercise the Warrants prominently set forth in the face of such notice. SECTION 2.05. PUT RIGHT. (a) In the event the Company has not consummated an Initial Public Offering prior to May 15, 2006, each holder of a Warrant shall have the right, at its election, (i) to require the Company to purchase the Warrants (the "Put") at the fair market value of the underlying Common Stock as determined by a nationally recognized investment banking firm selected by the Company (the "Put Price") or (ii) to extend the Expiration Date to May 15, 2011. On the extended Expiration Date, if applicable, each holder of a Warrant shall have the right to exercise the Put at the Put Price as determined on such date. (b) Any holder of a Warrant may require the Company to purchase such Warrant pursuant to the terms of Section 2.05(a) upon not less than 30 days' prior written notice by surrendering at any office or agency maintained for that purpose by the Company pursuant to Section 1.10 of the Warrant Certificate evidencing such Warrant. (c) Payment in full of the Put Price to each surrendering holder of a Warrant shall be made by the Company in immediately available funds, in cash or by certified or official bank check to be delivered to the office or agency where the Warrant Certificate is being surrendered no later than close of business on June 15, 2006 or, if the Expiration Date has been extended pursuant to Section 2.05(a)(ii), June 15, 2011. Warrants (i) outstanding on May 15, 2006, which are to be subject to a Put prior to or on June 15, 2006, shall automatically be deemed to be extended through June 15, 2006, and (ii) outstanding on May 15, 2011 shall automatically be -14- deemed to be extended through June 15, 2011, in each such case, for the purpose of enabling the holders thereof to exercise the Put. ARTICLE III OTHER PROVISIONS RELATING TO RIGHTS OF HOLDERS OF WARRANTS SECTION 3.01. ENFORCEMENT OF RIGHTS. (a) Notwithstanding any of the provisions of this Agreement, any holder of any Warrant Certificate, without the consent of the Warrant Agent, the holder of any Shares or the holder of any other Warrant Certificate, may, in and for his own behalf, enforce, and may institute and maintain any suit, action or proceeding against the Company suitable to enforce, his right to exercise the Warrant or Warrants evidenced by his Warrant Certificate in the manner provided in such Warrant Certificate and in this Agreement. (b) Except as set forth in this Article III or in the Stockholder Rights Agreement amended and restated as of May 15, 1996, neither the Warrants nor any Warrant Certificate shall entitle the holders thereof to any of the rights of a holder of Shares, including, without limitation, the right to vote or to receive any dividends or other payments or to consent or to receive notice as stockholders in respect of the meetings of stockholders or for the election of directors of the Company or any other matter, or any rights whatsoever as stockholders of the Company. SECTION 3.02. MEMBERSHIP ON THE BOARD OF DIRECTORS. The Company shall, not later than June 30, 1996, cause a person designated to the Company in writing by a representative of the holders of the Warrants to be elected to the Company's Board of Directors. If such person ceases to serve as a director for any reason, so long as at least forty-nine percent (49%) of the Warrants shall be beneficially owned by the holders acquiring Warrants directly from the Initial Purchasers, the Company shall include in the slate of nominees recommended by the Company's Board of Directors or management to shareholders for election as directors at each meeting of shareholders of the Company, at which directors are elected, one person designated by the holders of the Warrants holding a majority of the Warrants at the time of designation which person is reasonably satisfactory to the Company. The Company shall use its best efforts to cause to be voted in favor of the election of such designee, the shares for which the Company's management or Board of Directors holds proxies or is otherwise entitled to vote. In the event that any such designee shall cease to serve as a director for any reason during the period that this Section 3.02 is in effect, the vacancy resulting thereby shall be filled by a designee of the Warrant Holders reasonably acceptable to the Company. The Company shall compensate such designee on the same terms as other outside directors generally and shall provide all rights and benefits of indemnity to such designee as are provided such directors; provided, that any independent director selected for particular expertise in, or experience with, the Company's business or related industries, may be compensated at a rate reflecting such expertise or experience, without a requirement that the Company increase the compensation to any other director, including the designee of the holders of the Warrants. SECTION 3.03. RIGHTS ON PROPOSED CHANGE OF CONTROL. With respect to any proposed Change of Control (as defined in Section 2.02) which would require the approval of the Company's shareholders in accordance with the Company's organizational documents or applicable law (any such Change in Control, an "Approval Event"), the Company shall solicit the approval of the holders of the Warrants contemporaneously with seeking the approval of its Shareholders. The Company agrees not to consummate any proposed Approval -15- Event unless it obtains the approval of the requisite percentage of its shareholders, including the holders of the Warrants for the purpose of determining such percentage as though the Warrants had already been exercised. ARTICLE IV. CERTAIN COVENANTS OF THE COMPANY SECTION 4.01. PAYMENT OF TAXES. The Company will pay all documentary stamp taxes attributable to the initial issuance of Warrants and of the Shares upon the exercise of Warrants; provided, however, that the Company shall not be -------- ------- required to pay any tax or other governmental charge which may be payable in respect of any transfer or exchange of any Warrant Certificates or any certificates for Shares in a name other than the registered holder of a Warrant Certificate surrendered upon the exercise of a Warrant. In any such case, no transfer or exchange shall be made unless or until the person or persons requesting issuance thereof shall have paid to the Company the amount of such tax or other governmental charge or shall have established to the satisfaction of the Company that such tax or other governmental charge has been paid or an exemption is available therefrom. SECTION 4.02. QUALIFICATION UNDER THE SECURITIES LAWS. Prior to the occurrence of an Exercise Event arising as a result of a Public Equity Offering the Company will, if permitted by applicable law, take all such action as is necessary to cause the offer and sale by the Company of the Shares issuable upon exercise of the Warrants to be registered or otherwise qualified under the provisions of the Securities Act and pursuant to all applicable state securities laws and to provide for the issuance of all Shares delivered upon exercise of the Warrants pursuant to an effective registration statement under the Securities Act. So long as any unexpired Warrants which have become exercisable due to the occurrence of such an Exercise Event remain outstanding, the Company will file such amendments and/or supplements to any registration statement under the Securities Act or under any state securities laws covering the issuance of such Shares and supplement and keep current any prospectus forming a part of such registration statement as may be necessary to permit the Company to deliver to each person exercising a Warrant a prospectus meeting the requirements of Section 10(a)(3) of the Securities Act (a "Prospectus") and the regulations of the Securities and Exchange Commission and otherwise complying with the Securities Act and regulations thereunder, and as may be necessary to comply with any applicable state securities laws. The Company shall, upon the request of any holder of Warrants that may be required pursuant to the Securities Act to deliver a prospectus in connection with any sale or other disposition of Shares, include within the plan of distribution section of the Prospectus and in such other places in the Prospectus as may be necessary, all information necessary under the Securities Act to enable such holder to deliver such Prospectus in connection with sales or other dispositions of such Shares, and the Company shall also take such action as may be necessary under the Securities Act with respect to the related registration statement to enable such holder to effect such delivery in connection with such sale or other disposition. The Company further agrees to provide any holder who may be required to deliver a prospectus upon the sale or other disposition of such Shares, such number of copies of the Prospectus as such holder reasonably requests. The Warrant Agent shall have no duty to monitor when such registration or qualification is necessary nor shall the Warrant Agent be responsible for the Company's failure to comply with this Section 4.02. SECTION 4.03. RULES 144 AND 144A. The Company covenants that it will file the reports required to be filed by it under the Securities Act and the Exchange Act and the rules and regulations adopted by the Securities and Exchange Commission thereunder in a timely manner in accordance with the requirements of the Securities Act and the Exchange Act and, if at any time the Company is not required to file such reports, it will, upon the -16- request of any holder or beneficial owner of Warrants, make available such information necessary to permit sales pursuant to Rule 144A under the Securities Act. The Company further covenants that it will take such further action as any holder or beneficial owner of Warrants may reasonably request, all to the extent required from time to time to enable such holder or beneficial owner to sell Warrants without registration under the Securities Act within the limitation of the exemptions provided by (a) Rule 144(k) and Rule 144A under the Securities Act, as such Rules may be amended from time to time, or (b) any similar rule or regulation hereafter adopted by the Securities and Exchange Commission (it being expressly understood that the foregoing shall not create any obligation on the part of the Company to file periodic or other reports under the Exchange Act at any time that it is not then required to file such reports pursuant to the Exchange Act). ARTICLE V. ADJUSTMENTS SECTION 5.01. ADJUSTMENT OF EXERCISE RATE; NOTICES. The Exercise Rate is subject to adjustment from time to time as provided in this Section. (a) Adjustment for Change in Capital Stock. If, after the date -------------------------------------- hereof, the Company: (i) pays a dividend or makes a distribution on its Common Stock in shares of its Common Stock; (ii) subdivides its outstanding shares of Common Stock into a greater number of shares; (iii) combines its outstanding shares of Common Stock into a smaller number of shares; (iv) pays a dividend or makes a distribution on its Common Stock in shares of its Capital Stock (as defined below) (other than Common Stock or rights, warrants, or options for its Common Stock to the extent such issuance or distribution is covered by Section 5.03); or (v) issues by reclassification of its Common Stock any shares of its Capital Stock (other than rights, warrants or options for its Common Stock); then the Exercise Rate in effect immediately prior to such action shall be adjusted so that the holder of a Warrant thereafter exercised may receive the number of shares of Capital Stock of the Company which such holder would have owned immediately following such action if such holder had exercised the Warrant immediately prior to such action or immediately prior to the record date applicable thereto, if any (regardless of whether the Warrants are then exercisable and without giving effect to the Cashless Exercise option). The adjustment shall become effective immediately after the record date in the case of a dividend or distribution and immediately after the effective date in the case of a subdivision, combination or reclassification. In the event that such dividend or distribution is not so paid or made or such subdivision, combination or reclassification is not effected, the Exercise Rate shall again be adjusted to be the Exercise Rate which would then be in effect if such record date or effective date had not been so fixed. -17- If after an adjustment a holder of a Warrant upon exercise of such Warrant may receive shares of two or more classes of Capital Stock of the Company, the Exercise Rate shall thereafter be subject to adjustment upon the occurrence of an action taken with respect to any such class of Capital Stock as is contemplated by this Article V with respect to the Common Stock, on terms comparable to those applicable to Common Stock in this Article V. (b) Adjustment for Sale of Common Stock Below Current Market Value. -------------------------------------------------------------- If, after the date hereof, the Company sells any Common Stock or any securities convertible into or exchangeable or exercisable for the Common Stock (other than (1) pursuant to the exercise of the Warrants, (2) any security convertible into, or exchangeable or exercisable for, the Common Stock as to which the issuance thereof has previously been the subject of any required adjustment pursuant to this Article V or (3) the issuance of Common Stock upon the conversion, exchange or exercise of convertible, exchangeable or exercisable securities of the Company outstanding on the date of this Agreement (to the extent in accordance with the terms of such securities as in effect on the date of this Agreement) at a price per share less than the Current Market Value, the Exercise Rate shall be adjusted in accordance with the formula: E' = E x (O + N) --------------- (O + (N x P/M)) where: E' = the adjusted Exercise Rate; E = the current Exercise Rate; O = the number of shares of Common Stock outstanding on the date of sale of Common Stock at a price per share less than the Current Market Value to which this paragraph (b) applies; N = the number of shares of Common Stock so sold or the maximum stated number of shares of Common Stock issuable upon the conversion, exchange, or exercise of any such convertible, exchangeable or exercisable securities, as the case may be; P = the offering price per share pursuant to any such convertible, exchangeable or exercisable securities so sold or the sale price of the shares so sold, as the case may be; and M = the Current Market Value as of the Time of Determination or at the time of sale, as the case may be. The adjustment shall become effective immediately after the record date for the determination of stockholders entitled to receive the rights, warrants or options to which this paragraph (b) applies or upon consummation of the sale of Common Stock, as the case may be. To the extent that shares of Common Stock are not delivered after the expiration of such rights or warrants, the Exercise Rate shall be readjusted to the Exercise Rate which would otherwise be in effect had the adjustment made upon the issuance of such rights or warrants been made on the basis of delivery of only the number of shares of Common Stock actually delivered. In the event that such rights or warrants are not so issued, the Exercise Rate shall again be adjusted to be the Exercise Rate which would then be in effect if such date fixed for determination of stockholders entitled to receive such rights or warrants had not been so fixed. -18- No adjustment shall be made under this paragraph (b) if the application of the formula stated above in this paragraph (b) would result in a value of E' that is lower than the value of E. (c) Notice of Adjustment. Whenever the Exercise Rate is adjusted, the -------------------- Company shall promptly mail to holders of Warrants at the addresses appearing on the Warrant Register a notice of the adjustment. The Company shall file with the Warrant Agent and any other Registrar such notice and a certificate from the Company's independent public accountants briefly stating the facts requiring the adjustment and the manner of computing it. The certificate shall be conclusive evidence that the adjustment is correct. Neither the Warrant Agent nor any such Registrar shall be under any duty or responsibility with respect to any such certificate except to exhibit the same during normal business hours to any holder desiring inspection thereof. (d) Reorganization of Company; Special Distributions. If the Company, ------------------------------------------------ in a single transaction or through a series of related transactions, consolidates with or merges with or into any other person or transfers (by lease, assignment, sale or otherwise) all or substantially all of its properties and assets to another person or group of affiliated persons (other than a sale of all or substantially all of the assets of the Company in a transaction in which the holders of Common Stock immediately prior to such transaction do not receive securities, cash, or other assets of the Company or any other person) or is a party to a merger or binding share exchange which reclassifies or changes its outstanding Common Stock, the person obligated to deliver securities, cash or other assets upon exercise of Warrants shall enter into a supplemental warrant agreement. If the issuer of securities deliverable upon exercise of Warrants is an affiliate of the successor Company, that issuer shall join in the supplemental warrant agreement. The supplemental warrant agreement shall provide that the holder of a Warrant may exercise it for the kind and amount of securities, cash or other assets which such holder would have received immediately after the consolidation, merger, binding share exchange or transfer if such holder had exercised the Warrant immediately before the effective date of the transaction (whether or not the Warrants were then exercisable and without giving effect to the Cashless Exercise option), assuming (to the extent applicable) that such holder (i) was not a constituent person or an affiliate of a constituent person to such transaction; (ii) made no election with respect thereto; and (iii) was treated alike with the plurality of non-electing holders. The supplemental warrant agreement shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article V. The successor Company shall mail to holders of Warrants at the addresses appearing on the Warrant Register a notice briefly describing the supplemental warrant agreement. If this paragraph (d) applies paragraph (a) shall not apply. (e) Company Determination Final. Any determination that the Company --------------------------- or the Board of Directors of the Company must make pursuant to this Article V is conclusive, in the absence of manifest error. (f) Warrant Agent's Adjustment Disclaimer. The Warrant Agent has no ------------------------------------- duty to determine when an adjustment under this Article V should be made, how it should be made or what it should be. The Warrant Agent has no duty to determine whether a supplemental warrant agreement under paragraph (e) need be entered into or whether any provisions of any supplemental warrant agreement are correct. The Warrant Agent shall not be accountable for and makes no representation as to the validity or value of any securities or assets issued upon exercise of Warrants. The Warrant Agent shall not be responsible for the Company's failure to comply with this Article V. -19- (g) Adjustment for Tax Purposes. The Company may make such increases --------------------------- in the Exercise Rate, in addition to those otherwise required by this Section, as it considers to be advisable in order that any event treated for Federal income tax purposes as a dividend of stock or stock rights shall not be taxable to the recipients. (h) Underlying Shares. The Company shall at all times reserve and ----------------- keep available, free from preemptive rights, out of its authorized but unissued Common Stock or Common Stock held in the treasury of the Company, for the purpose of effecting the exercise of Warrants, the full number of Shares then deliverable upon the exercise of all Warrants then outstanding, and the shares so deliverable shall be fully paid and nonassessable and free from all liens and security interests. (i) Specificity of Adjustment. Irrespective of any adjustments in the ------------------------- number or kind of shares purchasable upon the exercise of the Warrants, Warrant Certificates theretofore or thereafter issued may continue to express the same number and kind of Shares per Warrant as are stated on the Warrant Certificates initially issuable pursuant to this Agreement. (j) Adjustments to Par Value. The Company shall make such adjustments ------------------------ to the par value of the Common Stock in order that, upon exercise of the Warrants, the Shares will be fully paid and non-assessable. (k) Voluntary Adjustment. The Company from time to time may increase -------------------- the Exercise Rate by any number and for any period of time (provided, that such -------- period is not less than 20 Business Days). Whenever the Exercise Rate is so increased, the Company shall mail to holders at the addresses appearing on the Warrant Register and file with the Warrant Agent a notice of the increase. The Company shall give the notice at least 15 days before the date the increased Exercise Rate takes effect. The notice shall state the increased Exercise Rate and the period it will be in effect. A voluntary increase in the Exercise Rate does not change or adjust the Exercise Rate otherwise in effect as determined by this Section 5.01. (l) No Other Adjustment for Dividends. Except as provided in this --------------------------------- Article V, no payment or adjustment will be made for dividends on any Common Stock. (m) Multiple Adjustments. After an adjustment to the Exercise Rate -------------------- under this Article V, any subsequent event requiring an adjustment under this Article V shall cause an adjustment to the Exercise Rate as so adjusted. (n) Definitions. ----------- "Capital Stock" means, with respect to any corporation, any and all shares, interests, rights to purchase, warrants, options, participations or other equivalents of or interests (however designated) in stock issued by that corporation. "Current Market Value" per share of Common Stock or of any other security at any date shall be (1) if the security is not registered under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), (i) the value of the security determined reasonably and in good faith by a disinterested majority of the Board of Directors of the Company and certified in a board resolution, or, if at the time there are not at least three disinterested members of the Board of Directors, by a nationally recognized investment banking firm or appraisal firm which is not an affiliate of the Company ("Independent Financial Expert"), or (2) if the security is registered -20- under the Exchange Act, the average of the daily closing bid prices for each Business Day during the period commencing 15 Business Days before such date and ending on the date one day prior to such date or, if the security has been registered under the Exchange Act for less than 15 consecutive Business Days before such date, then the average of the daily closing bid prices for all of the Business Days before such date for which daily closing bid prices are available. If the closing bid is not determinable for at least 10 Business Days in such period, the Current Market Value of the security shall be determined as if the security were not registered under the Exchange Act. "Time of Determination" means the time and date of the determination of stockholders entitled to receive rights, warrants, or options or a distribution, in each case, to which paragraph (b) applies. SECTION 5.02. FRACTIONAL SHARES. The Company will not be required to issue fractional Shares upon exercise of the Warrants or distribute Share certificates that evidence fractional Shares. In lieu of fractional Shares, there shall be paid to the registered holders of Warrant Certificates at the time Warrants evidenced thereby are exercised as herein provided an amount in cash equal to the same fraction of the Current Market Value, as defined in paragraph (n) of Section 5.01 of this Agreement, per Share on the Business Day preceding the date the Warrant Certificates evidencing such Warrants are surrendered for exercise. Such payments will be made by check or by transfer to an account maintained by such registered holder with a bank in The City of New York. If any holder surrenders for exercise more than one Warrant Certificate, the number of Shares deliverable to such holder may, at the option of the Company, be computed on the basis of the aggregate amount of all the Warrants exercised by such holder. SECTION 5.03. CERTAIN DISTRIBUTIONS. If at any time the Company grants, issues or sells options, convertible securities, or rights to purchase Capital Stock, warrants or other securities pro rata to the record holders of the Common Stock (the "Distribution Rights") or, without duplication, makes any dividend or otherwise makes any distribution ("Distribution") on shares of Common Stock (whether in cash, property, evidences of indebtedness or otherwise), then the Company shall grant, issue, sell or make to each registered holder of Warrants the aggregate Distribution Rights or Distribution, as the case may be, which such holder would have acquired if such holder had held the maximum number of Shares acquirable upon complete exercise of such holder's Warrants (regardless of whether the Warrants are then exercisable and without giving effect to the Cashless Exercise option) immediately before the record date for the grant, issuance or sale of such Distribution Rights or Distribution, as the case may be, or, if there is no such record date, the date as of which the record holders of Common Stock are to be determined for the grant, issue or sale of such Distribution Rights or Distribution, as the case may be. ARTICLE VI. CONCERNING THE WARRANT AGENT SECTION 6.01. WARRANT AGENT. The Company hereby appoints The Bank of New York as Warrant Agent of the Company in respect of the Warrants and the Warrant Certificates upon the terms and subject to the conditions herein and in the Warrant Certificates set forth; and The Bank of New York hereby accepts such appointment. The Warrant Agent shall have the powers and authority specifically granted to and conferred upon it in the Warrant Certificates and hereby and such further powers and authority to act on behalf of the Company -21- as the Company may hereafter grant to or confer upon it and it shall accept in writing. All of the terms and provisions with respect to such powers and authority contained in the Warrant Certificates are subject to and governed by the terms and provisions hereof. SECTION 6.02. CONDITIONS OF WARRANT AGENT'S OBLIGATIONS. The Warrant Agent accepts its obligations herein set forth upon the terms and conditions hereof and in the Warrant Certificates, including the following, to all of which the Company agrees and to all of which the rights hereunder of the holders from time to time of the Warrant Certificates shall be subject: (a) The Warrant Agent shall be entitled to compensation to be agreed upon with the Company in writing for all services rendered by it and the Company agrees promptly to pay such compensation and to reimburse the Warrant Agent for its reasonable out-of-pocket expenses (including reasonable fees and expenses of counsel) incurred without gross negligence or willful misconduct on its part in connection with the services rendered by it hereunder. The Company also agrees to indemnify the Warrant Agent and any predecessor Warrant Agent, their directors, officers, affiliates, agents and employees for, and to hold them and their directors, officers, affiliates, agents and employees harmless against, any loss, liability or expense of any nature whatsoever (including, without limitation, fees and expenses of counsel) incurred without gross negligence or willful misconduct on the part of the Warrant Agent, arising out of or in connection with its acting as such Warrant Agent hereunder and its exercise of its rights and performance of its obligations hereunder. The obligations of the Company under this Section 6.02 shall survive the exercise and the expiration of the Warrant Certificates and the resignation and removal of the Warrant Agent. (b) In acting under this Agreement and in connection with the Warrant Certificates, the Warrant Agent is acting solely as agent of the Company and does not assume any obligation or relationship of agency or trust for or with any of the owners or holders of the Warrant Certificates. (c) The Warrant Agent may consult with counsel of its selection and any advice or written opinion of such counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in accordance with such advice or opinion. (d) The Warrant Agent shall be fully protected and shall incur no liability for or in respect of any action taken or omitted to be taken or thing suffered by it in reliance upon any Warrant Certificate, notice, direction, consent, certificate, affidavit, opinion of counsel, instruction, statement or other paper or document reasonably believed by it to be genuine and to have been presented or signed by the proper parties. (e) The Warrant Agent, and its officers, directors, affiliates and employees ("Related Parties"), may become the owners of, or acquire any interest in, Warrant Certificates, shares or other obligations of the Company with the same rights that it or they would have it if were not the Warrant Agent hereunder and, to the extent permitted by applicable law, it or they may engage or be interested in any financial or other transaction with the Company and may act on, or as depositary, trustee or agent for, any committee or body of holders of shares or other obligations of the Company as freely as if it were not the Warrant Agent hereunder. Nothing in this Agreement shall be deemed to prevent the Warrant Agent or such Related Parties from acting in any other capacity for the Company. (f) The Warrant Agent shall not be under any liability for interest on, and shall not be required to invest, any monies at any time received by it pursuant to any of the provisions of this Agreement or of the Warrant Certificates. -22- (g) The Warrant Agent shall not be under any responsibility in respect of the validity of this Agreement (or any term or provision hereof) or the execution and delivery hereof (except the due execution and delivery hereof by the Warrant Agent) or in respect of the validity or execution of any Warrant Certificate (except its authentication thereof). (h) The recitals and other statements contained herein and in the Warrant Certificates (except as to the Warrant Agent's authentication thereon) shall be taken as the statements of the Company and the Warrant Agent assumes no responsibility for the correctness of the same. The Warrant Agent does not make any representation as to the validity or sufficiency of this Agreement or the Warrant Certificates, except for its due execution and delivery of this Agreement; provided, however, that the Warrant Agent shall not be relieved of -------- ------- its duty to authenticate the Warrant Certificates as authorized by this Agreement. The Warrant Agent shall not be accountable for the use or application by the Company of the proceeds of the exercise of any Warrant. (i) Before the Warrant Agent acts or refrains from acting with respect to any matter contemplated by this Warrant Agreement, it may require: (1) an Officers' Certificate (as defined in the Indenture) stating on behalf of the Company that, in the opinion of the signers, all conditions precedent, if any, provided for in this Warrant Agreement relating to the proposed action have been complied with; and (2) if reasonably necessary in the sole judgment of the Warrant Agent, an opinion of counsel for the Company stating that, in the opinion of such counsel, all such conditions precedent have been complied with provided that such matter is one customarily opined on by counsel. Each Officers' Certificate or, if requested, an opinion of counsel with respect to compliance with a condition or covenant provided for in this Warrant Agreement shall include: (1) a statement that the person making such certificate or opinion has read such covenant or condition; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of such person, he or she has made such examination or investigation as is necessary to enable him or her to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether or not, in the opinion of such person, such condition or covenant has been complied with. (j) The Warrant Agent shall be obligated to perform such duties as are herein and in the Warrant Certificates specifically set forth and no implied duties or obligations shall be read into this Agreement or the Warrant Certificates against the Warrant Agent. The Warrant Agent shall not be accountable or under any duty or responsibility for the use by the Company of any of the Warrant Certificates authenticated by the Warrant Agent and delivered by it to the Company pursuant to this Agreement. The Warrant Agent shall have no duty or responsibility in case of any default by the Company in the performance of its covenants or agreements -23- contained in the Warrant Certificates or in the case of the receipt of any written demand from a holder of a Warrant Certificate with respect to such default, including, without limiting the generality of the foregoing, any duty or responsibility to initiate or attempt to initiate any proceedings at law or otherwise or, except as provided in Section 7.02 hereof, to make any demand upon the Company. (k) Unless otherwise specifically provided herein, any order, certificate, notice, request, direction or other communication from the Company made or given under any provision of this Agreement shall be sufficient if signed by its chairman of the Board of Directors, its president, its treasurer, its controller or any vice president or its secretary or any assistant secretary. (l) The Warrant Agent shall have no responsibility in respect of any adjustment pursuant to Article V hereof. (m) The Company agrees that it will perform, execute, acknowledge and deliver, or cause to be performed, executed, acknowledged and delivered, all such further and other acts, instruments and assurances as may reasonably be required by the Warrant Agent for the carrying out or performing by the Warrant Agent of the provisions of this Agreement. (n) The Warrant Agent is hereby authorized and directed to accept written instructions with respect to the performance of its duties hereunder from any one of the chairman of the Board of Directors, the president, the treasurer, the controller, any vice president or the secretary of the Company or any other officer or official of the Company reasonably believed to be authorized to give such instructions and to apply to such officers or officials for advice or instructions in connection with its duties, and it shall not be liable for any action taken or suffered to be taken by it in good faith in accordance with instructions with respect to any matter arising in connection with the Warrant Agent's duties and obligations arising under this Agreement. Such application by the Warrant Agent for written instructions from the Company may, at the option of the Warrant Agent, set forth in writing any action proposed to be taken or omitted by the Warrant Agent with respect to its duties or obligations under this Agreement and the date on or after which such action shall be taken and the Warrant Agent shall not be liable for any action taken or omitted in accordance with a proposal included in any such application on or after the date specified therein (which date shall be not less than 10 Business Days after the Company receives such application unless the Company consents to a shorter period), provided that (i) such application includes a statement to the effect that it is being made pursuant to this paragraph (m) and that unless objected to prior to such date specified in the application, the Warrant Agent will not be liable for any such action or omission to the extent set forth in such paragraph (m) and (ii) prior to taking or omitting any such action, the Warrant Agent has not received written instructions objecting to such proposed action or omission. (o) Whenever in the performance of its duties under this Agreement the Warrant Agent shall deem it necessary or desirable that any fact or matter be proved or established by the Company prior to taking or suffering any action hereunder, such fact or matter (unless other evidence in respect thereof be herein specifically prescribed) may be deemed to be conclusively proved and established by a certificate signed on behalf of the Company by any one of the chairman of the Board of Directors, the president, the treasurer, the controller, any vice president or the secretary of the Company or any other officer or official of the Company reasonably believed to be authorized to give such instructions and delivered to the Warrant Agent; and such certificate shall be full authorization to the Warrant Agent for any action taken or suffered in good faith by it under the provisions of this Agreement in reliance upon such certificate. -24- (p) The Warrant Agent shall not be required to risk or expend its own funds in the performance of its obligations and duties hereunder. SECTION 6.03 RESIGNATION AND APPOINTMENT OF SUCCESSOR. (a) The Company agrees, for the benefit of the holders from time to time of the Warrant Certificates, that there shall at all times be a Warrant Agent hereunder. (b) The Warrant Agent may at any time resign as Warrant Agent by giving written notice to the Company of such intention on its part, specifying the date on which its desired resignation shall become effective; provided, -------- however, that such date shall be at least 60 days after the date on which such - ------- notice is given unless the Company agrees to accept less notice. Upon receiving such notice of resignation, the Company shall promptly appoint a successor Warrant Agent, qualified as provided in Section 6.03(d) hereof, by written instrument in duplicate signed on behalf of the Company, one copy of which shall be delivered to the resigning Warrant Agent and one copy to the successor Warrant Agent. As provided in Section 6.03(d) hereof, such resignation shall become effective upon the earlier of (x) the acceptance of the appointment by the successor Warrant Agent or (y) 60 days after receipt by the Company of notice of such resignation. The Company may, at any time and for any reason, and shall, upon any event set forth in the next succeeding sentence, remove the Warrant Agent and appoint a successor Warrant Agent by written instrument in duplicate, specifying such removal and the date on which it is intended to become effective, signed on behalf of the Company, one copy of which shall be delivered to the Warrant Agent being removed and one copy to the successor Warrant Agent. The Warrant Agent shall be removed as aforesaid if it shall become incapable of acting, or shall be adjudged a bankrupt or insolvent, or a receiver of the Warrant Agent or of its property shall be appointed, or any public officer shall take charge or control of it or of its property or affairs for the purpose of rehabilitation, conservation or liquidation. Any removal of the Warrant Agent and any appointment of a successor Warrant Agent shall become effective upon acceptance of appointment by the successor Warrant Agent as provided in Section 6.03(d). As soon as practicable after appointment of the successor Warrant Agent, the Company shall cause written notice of the change in the Warrant Agent to be given to each of the registered holders of the Warrants in the manner provided for in Section 7.04 hereof. (c) Upon resignation or removal of the Warrant Agent, if the Company shall fail to appoint a successor Warrant Agent within a period of 60 days after receipt of such notice of resignation or removal, then the holder of any Warrant Certificate or the retiring Warrant Agent may apply to a court of competent jurisdiction for the appointment of a successor to the Warrant Agent. Pending appointment of a successor to the Warrant Agent, either by the Company or by such a court, the duties of the Warrant Agent shall be carried out by the Company. (d) Any successor Warrant Agent, whether appointed by the Company or by a court, shall be a bank or trust company in good standing, incorporated under the laws of the United States of America or any State thereof and having, at the time of its appointment, a combined capital surplus of at least $50 million. Such successor Warrant Agent shall execute and deliver to its predecessor and to the Company an instrument accepting such appointment hereunder and all the provisions of this Agreement, and thereupon such successor Warrant Agent, without any further act, deed or conveyance, shall become vested with all the rights, powers, duties and obligations of its predecessor hereunder, with like effect as if originally named as Warrant Agent hereunder, and such predecessor shall thereupon become obligated to (i) transfer and deliver, and such successor Warrant Agent shall be entitled to receive, all securities, records or other property on deposit with or held by such predecessor as Warrant Agent hereunder and (ii) upon payment of the amounts then due it pursuant to Section 6.02(a) hereof, -25- pay over, and such successor Warrant Agent shall be entitled to receive, all monies deposited with or held by any predecessor Warrant Agent hereunder. (e) Any corporation or bank into which the Warrant Agent hereunder may be merged or converted, or any corporation or bank with which the Warrant Agent may be consolidated, or any corporation or bank resulting from any merger, conversion or consolidation to which the Warrant Agent shall be a party, or any corporation or bank to which the Warrant Agent shall sell or otherwise transfer all or substantially all of its corporate trust business, shall be the successor to the Warrant Agent under this Agreement (provided that such corporation or bank shall be qualified as aforesaid) without the execution or filing of any document or any further act on the part of any of the parties hereto. (f) No Warrant Agent under this Warrant Agreement shall be personally liable for any action or omission of any successor Warrant Agent. ARTICLE VII MISCELLANEOUS SECTION 7.01. AMENDMENT. This Agreement and the terms of the Warrants may be amended by the Company and the Warrant Agent, without the consent of the holder of any Warrant Certificate, for the purpose of curing any ambiguity, or of curing, correcting or supplementing any defective or inconsistent provision contained herein or therein, or to effect any assumptions of the Company's obligations hereunder and thereunder by a successor corporation under the circumstances described in Section 5.01(d) hereof or in any other manner which the Company may deem necessary or desirable and which shall not adversely affect the interests of the holders of the Warrant Certificates. The Company and the Warrant Agent may modify this Agreement and the terms of the Warrants with the consent of not less than a majority in number of the then outstanding Warrants for the purpose of adding any provision to or changing in any manner or eliminating any of the provisions of this Agreement or modifying in any manner the rights of the holders of the outstanding Warrants; provided, however, that no such modification that decreases the Exercise Rate, - -------- ------- reduces the period of time during which the Warrants are exercisable hereunder, otherwise materially and adversely affects the exercise rights of the holders of the Warrants, reduces the percentage required for modification, or effects any change to this Section 7.01 may be made with respect to an outstanding Warrant without the consent of the holder of such Warrant. Notwithstanding any other provision of this Agreement, the Warrant Agent's consent must be obtained regarding any supplement or amendment which alters the Warrant Agent's rights or duties (it being expressly understood that the foregoing shall not be in derogation of the right of the Company to remove the Warrant Agent in accordance with Section 6.03 hereof). Any modification or amendment made in accordance with this Agreement will be conclusive and binding on all present and future holders of Warrant Certificates whether or not they have consented to such modification or amendment or waiver and whether or not notation of such modification or amendment is made upon such Warrant Certificates. Any instrument given by or on behalf of any holder of a Warrant Certificate in connection with any consent to any modification or amendment will be conclusive and binding on all subsequent holders of such Warrant Certificate. SECTION 7.02. NOTICES AND DEMANDS TO THE COMPANY AND WARRANT AGENT. If the Warrant Agent shall receive any notice or demand addressed to the Company by the holder of a Warrant Certificate pursuant -26- to the provisions hereof or of the Warrant Certificates, the Warrant Agent shall promptly forward such notice or demand to the Company. SECTION 7.03. ADDRESSES FOR NOTICES TO PARTIES AND FOR TRANSMISSION OF DOCUMENTS. All notices hereunder to the parties hereto shall be deemed to have been given when sent by certified or registered mail, postage prepaid, or by facsimile transmission, confirmed by first class mail, postage prepaid, addressed to any party hereto as follows: To the Company: DIVA Systems Corporation Building 203 333 Ravenswood Avenue Menlo Park, California 94025 Facsimile No.: (415) 859-6959 Attention: President with copies to: Wilson Sonsini Goodrich & Rosati 650 Page Mill Road Palo Alto, California 94304-1050 Facsimile No.: (415) 493-6811 Attention: Barry E. Taylor, Esq. To the Warrant Agent: The Bank of New York 101 Barclay Street Floor 21 West New York, New York 10286 Attention: Corporate Trust Trustee Administration or at any other address of which either of the foregoing shall have notified the other in writing. SECTION 7.04. NOTICES TO HOLDERS. Notices to holders of Warrants shall be mailed to such holders at the addresses of such holders as they appear in the Warrant Register. Any such notice shall be sufficiently given if sent by first- class mail, postage prepaid. SECTION 7.05. APPLICABLE LAW. THE VALIDITY, INTERPRETATION AND PERFORMANCE OF THIS AGREEMENT AND EACH WARRANT CERTIFICATE ISSUED HEREUNDER AND OF THE RESPECTIVE TERMS AND PROVISIONS THEREOF SHALL BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO THE CONFLICT OF LAWS PROVISIONS THEREOF. SECTION 7.06. PERSONS HAVING RIGHTS UNDER AGREEMENT. Nothing in this Agreement expressed or implied and nothing that may be inferred from any of the provisions hereof is intended, or shall be construed, to confer upon, or give to, any person or corporation other than the Company, the Warrant Agent and the holders -27- of the Warrant Certificates any right, remedy or claim under or by reason of this Agreement or of any covenant, condition, stipulation, promise or agreement hereof; and all covenants, conditions, stipulations, promises and agreements in this Agreement contained shall be for the sole and exclusive benefit of the Company and the Warrant Agent and their successors and of the holders of the Warrant Certificates. SECTION 7.07. HEADINGS. The descriptive headings of the several Articles and Sections of this Agreement are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof. SECTION 7.08. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which so executed shall be deemed to be an original; but such counterparts shall together constitute but one and the same instrument. SECTION 7.09. INSPECTION OF AGREEMENT. A copy of this Agreement shall be available during regular business hours at the principal corporate trust office of the Warrant Agent, for inspection by the holder of any Warrant Certificate. The Warrant Agent may require such holder to submit his Warrant Certificate for inspection by it. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] -28- IN WITNESS WHEREOF, this Agreement has been duly executed by the parties hereto as of the day and year first above written. DIVA SYSTEMS CORPORATION By: /s/ Alan H. Bushell -------------------- Name: Alan H. Bushell Title: President and Chief Operating Officer THE BANK OF NEW YORK, as Warrant Agent By: /s/ Vivian Georges ------------------- Name: Vivian Georges Title: Assistant Vice President -29- EXHIBIT A [FORM OF WARRANT CERTIFICATE] [FACE] [Unless and until it is exchanged in whole or in part for Warrants in certificated form, this Warrant may not be transferred except as a whole by the Depositary to a nominee of the Depositary or by a nominee of the Depositary to the Depositary or another nominee of the Depositary or by the Depositary or any such nominee to a successor Depositary or a nominee of such successor Depositary. Unless this certificate is presented by an authorized representative of The Depository Trust Company, a New York corporation ("DTC"), to the issuer or its agent for registration of transfer, exchange or payment, and any certificate issued is registered in the name of Cede & Co. or such other name as requested by an authorized representative of DTC (and any payment is made to Cede & Co. or such other entity as is requested by an authorized representative of DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the registered owner hereof, Cede & Co., has an interest herein.]/1/ "THE SECURITY (OR ITS PREDECESSOR) EVIDENCED HEREBY WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER SECTION 5 OF THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND THE SECURITY EVIDENCED HEREBY MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF THE SECURITY EVIDENCED HEREBY IS HEREBY NOTIFIED THAT THE SELLER MAY BE RELYING ON THE EXEMPTION PROVIDED BY RULE 144A UNDER THE SECURITIES ACT. THE HOLDER OF THE SECURITY EVIDENCED HEREBY AGREES FOR THE BENEFIT OF THE COMPANY THAT (A) SUCH SECURITY MAY BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED, ONLY (1) (a) TO A PERSON WHO THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (b) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER THE SECURITIES ACT, (c) OUTSIDE THE UNITED STATES TO A FOREIGN PERSON IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 904 UNDER THE SECURITIES ACT OR (d) IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (AND BASED UPON AN OPINION OF COUNSEL IF THE COMPANY SO REQUEST), (2) TO THE COMPANY OR (3) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AND, IN EACH CASE, IN ACCORDANCE WITH THE APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER OF THE SECURITY EVIDENCED HEREBY OF THE RESALE RESTRICTIONS SET FORTH IN (1) ABOVE." ___________ /1/ This paragraph is to be included only if the Warrant is in global form. A-1 CUSIP #[ ] A-2 No. [ ] [ ] Warrants WARRANT CERTIFICATE DIVA SYSTEMS CORPORATION This Warrant Certificate certifies that [ ], or registered assigns, is the registered holder of [ ] Warrants (the "Warrants") to purchase shares of Common Stock, par value $.001 per share (the "Common Stock"), of DIVA SYSTEMS CORPORATION, a Delaware corporation (the "Company"). Each Warrant entitles the holder to purchase from the Company at any time from 9:00 a.m. New York City time on or after the occurrence of an Exercise Event until 5:00 p.m., New York City time, on the earlier to occur of (a) 90 days after an Exercise Event and (b) May 15, 2006 (unless otherwise extended as provided for herein) (the "Expiration Date"), 20.2 fully paid and nonassessable shares of Common Stock (the "Shares," which may also include any other securities or property purchasable upon exercise of a Warrant, such adjustment and inclusion each as provided in the Warrant Agreement) at the exercise price (the "Exercise Price") of $.01 per share upon surrender of this Warrant Certificate and payment of the Exercise Price at any office or agency maintained for that purpose by the Company (the "Warrant Agent Office"), subject to the conditions set forth herein and in the Warrant Agreement. Notwithstanding the foregoing, a Warrant may also be exercised solely by the surrender of the Warrant, and without the payment of the Exercise Price in cash, for such number of Shares equal to the product of (1) the number of Shares for which such Warrant is exercisable with payment of the Exercise Price as of the date of exercise and (2) the Cashless Exercise Ratio. For purposes of this Warrant, the "Cashless Exercise Ratio" shall equal a fraction, the numerator of which is the excess of the Current Market Value of the Common Stock on the date of exercise (calculated as set forth in Section 5.01(n) of the Warrant Agreement) over the Exercise Price Per Share as of the date of exercise and the denominator of which is the Current Market Value of the Common Stock on the date of exercise (calculated as set forth in Section 5.01(n) of the Warrant Agreement). An exercise of a Warrant in accordance with the immediately preceding sentences is herein called a "Cashless Exercise." Upon surrender of a Warrant Certificate representing more than one Warrant in connection with the Holder's option to elect a Cashless Exercise, the number of Shares deliverable upon a Cashless Exercise shall be equal to the number of Warrants that the Holder specifies is to be exercised pursuant to a Cashless Exercise multiplied by the Cashless Exercise Ratio. All provisions of this Agreement shall be applicable with respect to an exercise of a Warrant Certificate pursuant to a Cashless Exercise for less than the full number of Warrants represented thereby. "Exercise Event" means, with respect to each Warrant, the date of the earliest of: (1) the seventh day prior to the occurrence of a Change of Control, (2) the consummation of a Public Equity Offering, (3) the 90th day prior to May 15, 2006 (unless extended pursuant to Section 2.05 of the Warrant Agreement) and (4) the seventh day prior to a Tag-Along Event as defined in the Warrant Agreement. "Initial Public Offering" means a public equity offering, underwritten by a nationally recognized underwriter pursuant to an effective registration statement under the Securities Act (i) the aggregate gross proceeds of which equal or exceed the greater of (A) $30,000,000 and (B) the fair market value of shares of the Common Stock of the Company representing in the aggregate five percent (5%) of the Common Stock of the Company on a fully-diluted basis, after giving effect to such Public Equity Offering and (ii) the Common Stock offered thereby is registered on a national exchange. A-3 To the extent an exercise of a Warrant is not effected through the Cashless Exercise, the Exercise Price shall be payable by certified check or official bank check or by such other means as is acceptable to the Company in the lawful currency of the United States of America which as of the time of payment is legal tender for payment of public or private debts. The Company has initially designated the principal corporate trust office of the Warrant Agent in the Borough of Manhattan, The City of New York, as the initial Warrant Agent Office. The number of Shares issuable upon exercise of the Warrants ("Exercise Rate") is subject to adjustment upon the occurrence of certain events set forth in the Warrant Agreement. Any Warrants not exercised on or prior to 5:00 p.m., New York City time, on May 15, 2006 (unless otherwise extended as provided for herein) shall thereafter be void. In the event the Company has not consummated an Initial Public Offering prior to May 15, 2006, each holder of a Warrant shall have the right, at its election, (i) to require the Company to purchase the Warrants (the "Put") at the fair market value of the underlying Common Stock as determined by a nationally recognized investment banking firm selected by the Company (the "Put Price") or (ii) to extend the Expiration Date to May 15, 2011. On the extended Expiration Date, if applicable, each holder of a Warrant shall have the right to exercise the Put at the Put Price as determined on such date. Any holder of a Warrant may require the Company to purchase such Warrant pursuant to the terms of Section 2.05(a) of the Warrant Agreement upon not less than 30 days' prior written notice by surrendering the Warrant Certificate evidencing such Warrant at any office or agency maintained for that purpose by the Company pursuant to Section 1.10 of the Warrant Agreement. Payment in full of the Put Price to each surrendering holder of a Warrant shall be made by the Company in immediately available funds, in cash or by certified or official bank check to be delivered to the office or agency where the Warrant Certificate is being surrendered no later than close of business on June 15, 2006 or, if the Expiration Date has been extended pursuant to Section 2.05(a)(ii) of the Warrant Agreement, June 15, 2011. Warrants (i) outstanding on May 15, 2006, which are to be subject to a Put prior to or on June 15, 2006, shall automatically be deemed to be extended through June 15, 2006, and (ii) outstanding on May 15, 2011 shall automatically be deemed to be extended through June 15, 2011, in each such case, for the purpose of enabling the holders thereof to exercise the Put. The Warrant Holder may require the Company to purchase the Warrant by (i) surrendering at any office or agency maintained for that purpose by the Company pursuant to Section 1.10 the Warrant Certificate evidencing such Warrants. Payment in full of the Put Price to each surrendering Warrant Holder shall be made by the Company in immediately available funds in cash or by certified or official bank check to be delivered to the office or agency where the Warrant Certificate is being surrendered. Reference is hereby made to the further provisions on the reverse hereof which provisions shall for all purposes have the same effect as though fully set forth at this place. This Warrant Certificate shall not be valid unless authenticated by the Warrant Agent, as such term is used in the Warrant Agreement. A-4 THIS WARRANT CERTIFICATE SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO THE CONFLICT OF LAWS PROVISIONS THEREOF. WITNESS the facsimile seal of the Company and facsimile signatures of its duly authorized officers. DIVA SYSTEMS CORPORATION By: ----------------------------------------------- Name: Title: Attest: By: ------------------------------- Name: Title: Dated: May __, 1996 Certificate of Authentication: This is one of the Warrants referred to in the within mentioned Warrant Agreement: THE BANK OF NEW YORK, as Warrant Agent By: ------------------------------- Authorized Signatory Name: Title: A-5 [FORM OF WARRANT CERTIFICATE] [REVERSE] DIVA SYSTEMS CORPORATION The Warrants evidenced by this Warrant Certificate are part of a duly authorized issue of Warrants expiring at 5:00 p.m., New York City time, on the earlier to occur of (a) 90 days after an Exercise Event which causes such Warrants to become exercisable and (b) May 15, 2006 (unless otherwise extended as provided for herein), each of which represents the right to purchase at any time on or after the Exercisability Date (as defined in the Warrant Agreement) and on or prior to such date 20.2 shares of Common Stock of the Company, subject to adjustment as set forth in the Warrant Agreement. The Warrants are issued pursuant to a Warrant Agreement dated as of May 15, 1996 (the "Warrant Agreement"), duly executed and delivered by the Company to The Bank of New York as Warrant Agent (the "Warrant Agent"), which Warrant Agreement is hereby incorporated by reference in and made a part of this instrument and is hereby referred to for a description of the rights, limitation of rights, obligations, duties and immunities thereunder of the Warrant Agent, the Company and the holders (the words "holders" or holder" meaning the registered holders or registered holder) of the Warrants. Warrants may be exercised by (i) surrendering at any Warrant Agent Office this Warrant Certificate with the form of Election to Exercise set forth hereon duly completed and executed and (ii) to the extent such exercise is not being effected through a Cashless Exercise, paying in full the Warrant Exercise Price for each such Warrant exercised and any other amounts required to be paid pursuant to the Warrant Agreement. If all of the items referred to in the last sentence of the preceding paragraph are received by the Warrant Agent at or prior to 11:00 a.m., New York City time, on a Business Day, the exercise of the Warrant to which such items relate will be effective on such Business Day. If any items referred to in the last sentence of the preceding paragraph are received after 11:00 a.m., New York City time, on a Business Day, the exercise of the Warrants to which such item relates will be deemed to be effective on the next succeeding Business Day. Notwithstanding the foregoing, in the case of an exercise of Warrants on May 15, 2006, if all of the items referred to in the last sentence of the preceding paragraph are received by the Warrant Agent at or prior to 5:00 p.m., New York City time, on such Expiration Date, the exercise of the Warrants to which such items relate will be effective on the Expiration Date. As soon as practicable after the exercise of any Warrant or Warrants, the Company shall issue or cause to be issued to or upon the written order of the registered holder of this Warrant Certificate, a certificate or certificates evidencing the Share or Shares to which such holder is entitled, in fully registered form, registered in such name or names as may be directed by such holder pursuant to the Election to Exercise, as set forth on the reverse of this Warrant Certificate. Such certificate or certificates evidencing the Share or Shares shall be deemed to have been issued and any persons who are designated to be named therein shall be deemed to have become the holder of record of such Share or Shares as of the close of business on the date upon which the exercise of this Warrant was deemed to be effective as provided in the preceding paragraph. The Company will not be required to issue fractional shares of Common Stock upon exercise of the Warrants or distribute Share certificates that evidence fractional shares of Common Stock. In lieu of fractional shares of Common Stock, there shall be paid to the registered Holder of this Warrant Certificate at the time such Warrant Certificate is exercised an amount in cash equal to the same fraction of the Current Market Value (as defined in the Warrant Agreement) per share on the Business Day preceding the date this Warrant Certificate is surrendered for exercise. A-6 Warrant Certificates, when surrendered at any office or agency maintained by the Company for that purpose by the registered holder thereof in person or by legal representative or attorney duly authorized in writing, may be exchanged for a new Warrant Certificate or new Warrant Certificates evidencing in the aggregate a like number of Warrants, in the manner and subject to the limitations provided in the Warrant Agreement, without charge except for any tax or other governmental charge imposed in connection therewith. Upon due presentment for registration of transfer of this Warrant Certificate at any office or agency maintained by the Company for that purpose, a new Warrant Certificate evidencing in the aggregate a like number of Warrants shall be issued to the transferee in exchange for this Warrant Certificate, subject to the limitations provided in the Warrant Agreement, without charge except for any tax or other governmental charge imposed in connection therewith. The Company and the Warrant Agent may deem and treat the registered holder hereof as the absolute owner of this Warrant Certificate (notwithstanding any notation of ownership or other writing hereon made by anyone) for the purpose of any exercise hereof and for all other purposes, and neither the Company nor the Warrant Agent shall be affected by any notice to the contrary. The term "Business Day" shall mean any day on which (i) banks in New York City, (ii) the principal national securities exchange or market on which the Common Stock is listed or admitted to trading and (iii) the principal national securities exchange or market on which the Warrants are listed or admitted to trading are open for business. A-7 (FORM OF ELECTION TO EXERCISE) (To be executed upon exercise of Warrants on the Exercise Date) The undersigned hereby irrevocably elects to exercise [ ] of the Warrants represented by this Warrant Certificate and purchase the whole number of Shares issuable upon the exercise of such Warrants and herewith tenders payment for such Shares in the amount of $[ ] in cash or by certified or official bank check, in accordance with the terms hereof. In lieu of payment of the cash exercise price, the holder hereof is electing to exercise [ ] Warrants pursuant to a Cashless Exercise (as defined in the Warrant Agreement) for [ ] shares of Common Stock at the current Cashless Exercise Ratio. The undersigned requests that a certificate representing such Shares be registered in the name of ___________________ whose address is _________________________ and that such certificate be delivered to ___________________________ whose address is __________________________. Any cash payments to be paid in lieu of a fractional Share should be made to __________________ whose address is ________________________ and the check representing payment thereof should be delivered to ______________________ whose address is ______________________. Dated __________________, 19__ Name of holder of Warrant Certificate: _______________________________ (Please Print) Tax Identification or Social Security Number: ____________________________ Address: ___________________________________________ ___________________________________________ Signature: _________________________________________ Note: The above signature must correspond with the name as written upon the face of this Warrant Certificate in every particular, without alteration or enlargement or any change whatever and if the certificate representing the Shares or any Warrant Certificate representing Warrants not exercised is to be registered in a name other than that in which this Warrant Certificate is registered, or if any cash payment to be paid in lieu of a fractional share is to be made to a person other than the registered holder of this Warrant Certificate, the signature of the holder hereof must be guaranteed as provided in the Warrant Agreement. Dated ____________________, 19__ Signature: ___________________________________________________________ Note: The above signature must correspond with the name as written upon the face of this Warrant Certificate in every particular, without alteration or enlargement or any change whatever. Signature Guaranteed: ______________________________________________ A-8 FORM OF ASSIGNMENT For value received _______________________ hereby sells, assigns and transfers unto _____________________ the within Warrant Certificate, together with all right, title and interest therein, and does hereby irrevocably constitute and appoint __________________________ attorney, to transfer said Warrant Certificate on the books of the within-named Company, with full power of substitution in the premises. Dated ____________________, 199__ Signature: __________________________________________________________ Note: The above signature must correspond with the name as written upon the face of this Warrant Certificate in every particular, without alteration or enlargement or any change whatever. Signature Guaranteed: _______________________________________________ A-9 SCHEDULE OF EXCHANGES OF CERTIFICATED WARRANTS/2/ ---------------------------------------------- The following exchanges of a part of this Global Warrant for certificated Warrants have been made:
Number of Warrants of Amount of Amount of this Global decrease in increase in Warrant Signature of Number of Number of following authorized Date of Warrants of this Warrants of this such decrease signatory of Exchange Global Warrant Global Warrant (or increase) Warrant Agent - ---------- ---------------- ---------------- ------------- -------------
__________ /2/ This is to be included only if the Warrant is in global form. A-10 EXHIBIT B CERTIFICATE TO BE DELIVERED UPON EXCHANGE OR REGISTRATION OF TRANSFER OF WARRANTS Re: Warrants to Purchase Common Stock (the "Warrants") of DIVA SYSTEMS CORPORATION This Certificate relates to ____ Warrants held in* ___ book-entry or* _______ certificated form by ______ (the "Transferor"). The Transferor:* [_] has requested the Warrant Agent by written order to deliver in exchange for its beneficial interest in the Global Warrant held by the Depositary a Warrant or Warrants in definitive, registered form of authorized denominations and an aggregate number equal to its beneficial interest in such Global Warrant (or the portion thereof indicated above); or [_] has requested the Warrant Agent by written order to exchange or register the transfer of a Warrant or Warrants. In connection with such request and in respect of each such Warrant, the Transferor does hereby certify that Transferor is familiar with the Warrant Agreement relating to the above captioned Warrants and the restrictions on transfers thereof as provided in Section 1.08 of such Warrant Agreement, and that the transfer of this Warrant does not require registration under the Securities Act of 1933, as amended (the "Act") because[*]: [_] Such Warrant is being acquired for the Transferor's own account, without transfer (in satisfaction of Section 1.08(a)(y)(A) or Section 1.08(d)(i)(A) of the Warrant Agreement). [_] Such Warrant is being transferred to a qualified institutional buyer (as defined in Rule 144A under the Act), in reliance on Rule 144A. [_] Such Warrant is being transferred in accordance with Rule 144 under the Act. B-1 [_] Such Warrant is being transferred in reliance on and in compliance with an exemption from the registration requirements of the Act, other than Rule 144A or Rule 144 under the Act. An opinion of counsel to the effect that such transfer does not require registration under the Act accompanies this Certificate. ______________________________ [INSERT NAME OF TRANSFEROR] By: _________________________ Date: _____________ *Check applicable box. B-2 EXHIBIT C Transferee Letter of Representation DIVA SYSTEMS CORPORATION Building 203 333 Ravenswood Avenue Menlo Park, California 94025 Ladies and Gentlemen: In connection with [our] [my] proposed purchase of warrants to purchase Common Stock, par value $.001 per share, (the "Securities") of DIVA Systems Corporation (the "Company") we confirm that: 1. [We] [I] understand that the Securities have not been registered under the Securities Act of 1933, as amended (the "Securities Act") and, unless so registered, may not be sold except as permitted in the following sentence. [We] [I] agree on [our] [my] own behalf and on behalf of any investor account for which [we are] [I am] purchasing Securities to offer, sell or otherwise transfer such Securities prior to the date which is three years after the later of the date of original issue and the last date on which the Company or any affiliate of the Company was the owner of such Securities, or any predecessor thereto (the "Resale Restriction Termination Date") only (a) to the Company, (b) pursuant to a registration statement which has been declared effective under the Securities Act, (c) so long as the Securities are eligible for resale pursuant to Rule 144A, under the Securities Act, to a person [we] [I] reasonably believe is a qualified institutional buyer under Rule 144A (a "QIB") that purchases for its own account or for the account of a QIB and to whom notice is given that the transfer is being made in reliance on Rule 144A, (d) pursuant to offers and sales that occur outside the United States within the meaning of Regulation S under the Securities Act, (e) to an "accredited investor" within the meaning of Rule 501(a) under the Securities Act that is purchasing for his own account or for the account of such another "accredited investor," or (f) pursuant to any other available exemption from the registration requirements of the Securities Act, subject in each of the foregoing cases to any requirement of law that the disposition of our property or the property of such investor account or accounts be at all times within our or their control and to compliance with any applicable state securities laws. The foregoing restrictions on resale will not apply subsequent to the Resale Restriction Termination Date. If any resale or other transfer of the Securities is proposed to be made pursuant to clause (e) above prior to the Resale Restriction Termination Date, the transferor shall deliver a letter from the transferee substantially in the form of this letter to the warrant agent under the Warrant Agreement pursuant to which the Securities were issued (the "Warrant Agent") which shall provide, among other things, that the transferee is an institutional "accredited investor" within the meaning of Rule 501(a) under the Securities Act and that it is acquiring such Securities for investment purposes and not for distribution in violation of the Securities Act. The Warrant Agent and the Company reserve the right prior to any offer, sale or other transfer prior to the Resale Restriction Termination Date of the Securities pursuant to clauses (c), (d), (e) or (f) above to require the delivery of a written opinion of counsel, certifications, and or other information satisfactory to the Company and the Warrant Agent. C-1 2. [We are] [I am] an "accredited investor" (as defined in Rule 501(a) of Regulation D under the Securities Act) purchasing for [our] [my] own account or for the account of another "accredited investor," and [we are] [I am] acquiring the Securities for investment purposes and not with a view to, or for offer or sale in connection with, any distribution in violation of the Securities Act and [we] [I] have such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of [our] [my] investment in the Securities, and [we] [I] and any accounts for which [we are] [I am] acting are each able to bear the economic risk of our or its investment for an indefinite period. 3. [We are] [I am] acquiring the Securities purchased by [us] [me] for [our] [my] own account or for one or more accounts as to each of which [we] [I] exercise sole investment discretion. 4. You and your counsel are entitled to rely upon this letter and you are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceeding or official inquiry with respect to the matters covered hereby. Very truly yours, -------------------------------------------------- (Name of Purchaser) By: ----------------------------------------------- Date: --------------------------------------------- Upon transfer the Securities would be registered in the name of the new beneficial owner as follows: Name: --------------------------- Address: ------------------------ Taxpayer ID Number: ------------- C-2 EX-10.9 14 AMENDED AND RESTATED STOCKHOLDERS RIGHTS EXHIBIT 10.9 DIVA SYSTEMS CORPORATION STOCKHOLDER RIGHTS AGREEMENT AMENDED AND RESTATED AS OF MARCH 26, 1998 TABLE OF CONTENTS PAGE ---- 1. RIGHTS OF STOCKHOLDERS AND SUBORDINATED WARRANT HOLDERS................. 2. INFORMATION RIGHTS...................................................... 2 2.1 Financial Information.............................................. 2 2.2 Inspection......................................................... 2 2.3 Termination of Certain Rights...................................... 2 3. REGISTRATION RIGHTS..................................................... 3 3.1 Definitions........................................................ 3 3.2 Requested Registration............................................. 5 3.3 Piggyback Registrations............................................ 7 3.4 Expenses of Registration........................................... 9 3.5 Form S-3 Registration.............................................. 9 3.6 Obligations of the Company......................................... 10 3.7 Furnish Information................................................ 11 3.8 Delay of Registration.............................................. 11 3.9 Indemnification.................................................... 11 3.10 "Market Stand-Off" Agreement....................................... 14 3.11 Rule 144 Reporting................................................. 14 3.12 Limitations on Subsequent Registration Rights...................... 15 3.13 Assignment of Registration Rights.................................. 15 3.14 Termination of Registration Rights................................. 15 4. RIGHT OF PARTICIPATION TO SUBSCRIBE TO NEW ISSUANCES.................... 15 4.1 General............................................................ 15 4.2 Certain Definitions................................................ 16 4.3 Mechanics of Right................................................. 17 4.4 Termination........................................................ 18 4.5 Assignment......................................................... 18 5. RIGHTS OF FIRST REFUSAL AMONG COMPANY AND STOCKHOLDERS.................. 18 5.1 General............................................................ 18 5.2 Notice of Proposed Transfer........................................ 18 5.3 Exercise of Right of First Refusal................................. 18
-i- 5.4 Purchase Price..................................................... 19 5.5 Payment............................................................ 19 5.6 Selling Stockholder's Right to Transfer............................ 19 5.7 Exception for Certain Transfers.................................... 20 5.8 Termination of Rights of First Refusal............................. 20 6. CO-SALE RIGHT AMONG STOCKHOLDERS AND SUBORDINATED WARRANT HOLDERS....... 20 6.1 General............................................................ 20 6.2 Closing............................................................ 21 6.3 Transfers.......................................................... 21 6.4 Termination........................................................ 21 7. CONFIDENTIALITY......................................................... 22 8. CERTAIN RIGHTS OF SUBORDINATED WARRANT HOLDERS.......................... 22 8.1 Right to Approve Certain Transactions.............................. 22 8.2 General............................................................ 23 8.3 Certain Definitions................................................ 23 8.4 Mechanics of Right................................................. 24 8.5 Termination........................................................ 25 8.6 Assignment......................................................... 25 9. MISCELLANEOUS........................................................... 25 9.1 All Shares Held by Stockholders or Subordinated Warrant Holders.... 25 9.2 Additional Parties................................................. 25 9.3 Successors and Assigns............................................. 25 9.4 Governing Law...................................................... 25 9.5 Counterparts....................................................... 26 9.6 Headings........................................................... 26 9.7 Notices............................................................ 26 9.8 Attorneys' Fees.................................................... 26 9.9 Amendments and Waivers............................................. 26 9.10 Severability....................................................... 26 9.11 Entire Agreement................................................... 27 9.12 Further Assurances................................................. 27
-ii- AMENDED AND RESTATED STOCKHOLDER RIGHTS AGREEMENT This Amended and Restated Stockholder Rights Agreement (this "AGREEMENT") is amended and restated as of March 26, 1998 by and among DIVA Systems Corporation, a Delaware corporation (the "COMPANY"), certain stockholders of the Company listed on EXHIBIT A hereto (each individually a "STOCKHOLDER" and collectively the "STOCKHOLDERS"), certain warrant holders of the Company listed on EXHIBIT B hereto (the "SUBORDINATED WARRANT HOLDERS"), and certain holders of Class C Common Stock listed on EXHIBIT C hereto (the "CLASS C COMMON HOLDERS"). RECITALS WHEREAS, certain Stockholders, Subordinated Warrant Holders and Class C Common Holders possess information rights, registration rights, rights of first refusal and co-sale rights granted under that certain Stockholder Rights Agreement dated August 29, 1995, as amended and restated as of October 23, 1995, December 26, 1995, May 15, 1996, July 10, 1996, July 17, 1996, August 22, 1996, August 7, 1997, February 11, 1998 and February 19, 1998 (the "PRIOR AGREEMENT") between the Company and those persons (the "PRIOR HOLDERS") listed on Exhibits A, B and C attached thereto; and WHEREAS, the Prior Holders desire to amend and restate the Prior Agreement and to accept the rights created herein in lieu of rights provided by the Prior Agreement. NOW, THEREFORE, in consideration of the mutual promises and covenants hereinafter set forth, the Company and the Prior Holders agree that the Prior Agreement is terminated and superseded in its entirety by this Agreement, and all parties agree as follows: 1. RIGHTS OF STOCKHOLDERS AND SUBORDINATED WARRANT HOLDERS. The Company hereby grants to the Stockholders the information rights, registration rights, rights of first offer, and co-sale rights (collectively the "RIGHTS") contained herein. The Stockholders accept the Rights and agree to be bound by the obligations contained herein. The Company hereby grants to the Subordinated Warrant Holders the co-sale rights contained in Section 6 herein (the "CO-SALE RIGHTS"). The Subordinated Warrant Holders accept the Co-Sale Rights and agree to be bound by the obligations contained herein. The Company and the Stockholders agree that the Rights provided herein set forth the sole and entire agreement with respect to, and supersede any and all rights granted under, the Prior Agreement and further agree that the Prior Agreement shall hereafter be of no further force and effect. Upon execution of this Agreement by Prior Holders holding more than 50% of the outstanding Registerable Securities (as defined in the Prior Agreement), the Stockholders and the Company, this Agreement shall be binding upon all Stockholders who heretofore had rights under the Prior Agreement and each such Stockholder shall have the Rights and be subject to the duties hereunder as if it were a signatory hereof. The Class C Common Holders agree to be bound by the obligations contained herein in consideration of the shares of Class C Common Stock received pursuant to the Purchase Agreement. 2. INFORMATION RIGHTS. 2.1 FINANCIAL INFORMATION. The Company will furnish each Stockholder holding more than (i) 17,000 shares (as adjusted for any stock splits, reverse splits, combinations, reclassifications, stock dividends or similar events) of Preferred Stock (as defined herein) or (ii) 0.25% of the outstanding shares of Common Stock of the Company (assuming conversion into Common Stock of all outstanding shares of Class C Common Stock and Preferred Stock) (a "MAJOR STOCKHOLDER"): (a) Annual Reports. As soon as practicable and in any event within ninety (90) days after the end of each fiscal year, a consolidated Balance Sheet as of the end of such fiscal year and a consolidated Statement of Income and a consolidated Statement of Cash Flows of the Company and its subsidiaries for such year, setting forth in each case in comparative form the figures from the Company's previous fiscal year (if any), all prepared in accordance with generally accepted accounting principles and practices and audited and certified by nationally recognized independent certified public accountants. (b) Quarterly Reports. As soon as practicable and in any event within forty-five (45) days after the end of each fiscal quarter of the Company (except the last quarter of the Company's fiscal year), quarterly unaudited consolidated financial statements, including an unaudited consolidated Balance Sheet, an unaudited consolidated Statement of Income and an unaudited Statement of Cash Flows. (c) Narrative Report. With such annual and quarterly reports a brief report from the Chief Financial Officer of the Company describing significant recent developments since the date of the preceding report and certifying that such reports have been prepared in conformity with generally accepted accounting principles consistently applied throughout the periods indicated, subject in the case of the Quarterly Reports to normal year end adjustments and the absence of footnotes. 2.2 INSPECTION. The Company shall permit each Major Stockholder at such Major Stockholder's expense to visit and inspect the Company's properties, to examine its books of account and records and to discuss the Company's affairs, finances and accounts with its officers, all at such reasonable times as may be requested by the Major Stockholder; provided, however, that the Company shall not be obligated pursuant to this Section 2.2 to provide access to any information which it reasonably considers to be a trade secret or similar confidential information. Any Major Stockholder that is a corporation or partnership may act through one or more designated representatives. 2.3 TERMINATION OF CERTAIN RIGHTS. The Company's obligations under Section 2.1 and 2.2 herein will terminate upon the earliest of (i) the closing of the Company's initial public offering of Common Stock pursuant to a registration statement filed with and declared effective by the Securities and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended (the "SECURITIES ACT") (the "COMPANY'S INITIAL PUBLIC REGISTRATION"), or (ii) acquisition (by merger, consolidation or otherwise) of the Company where the surviving entity is subject to the reporting requirement of the Securities Exchange Act of 1934, as amended. 3. REGISTRATION RIGHTS. 3.1 DEFINITIONS. (a) Registration. The terms "REGISTER," "REGISTERED," and "REGISTRATION" refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act, and the declaration or ordering of effectiveness of such registration statement. (b) Registerable Securities. The term "REGISTERABLE SECURITIES" means: (1) all shares of Common Stock issued or issuable pursuant to the conversion of Series AA Preferred Stock, Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock and any shares of the Common Stock of the Company or other securities issued in connection with any stock split, stock dividend, recapitalization or similar event relating to the foregoing; (2) all shares of Common Stock held by any Stockholder and (3) any shares of Common Stock of the Company issued as (or issuable upon the conversion or exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of, all such shares of Common Stock described in clauses (1) and (2) of this subsection 3.1(b); excluding in all cases, however, any Registerable Securities sold by a person in a transaction in which rights under this Section 3 are not assigned in accordance with this Agreement or any Registerable Securities sold to the public or sold pursuant to Rule 144 promulgated under the Securities Act. (c) Holder. For purposes of this Section 3, the term "HOLDER" means any person owning of record or holding an option for Registerable Securities that have not been sold to the public or pursuant to Rule 144 promulgated under the Securities Act or any assignee of record of such Registerable Securities to whom rights under this Section 3 have been duly assigned in accordance with this Agreement. (d) Initiating Holder. The term "INITIATING HOLDER" shall mean any Holder or Holders who in the aggregate are Holders of more than 40% of the then outstanding Registerable Securities which have not been sold to the public. (e) Preferred Stock. The term "PREFERRED STOCK" shall mean the Series AA Preferred Stock, Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock of the Company. (f) Form S-3. The term "FORM S-3" means such form under the Securities Act as is in effect on the date hereof or any successor registration form under the Securities Act subsequently adopted by the SEC which permits inclusion or incorporation of substantial information by reference to other documents filed by the Company with the SEC. -3- (g) SEC. The term "SEC" or "COMMISSION" means the U.S. Securities and Exchange Commission. (h) Exchange Act. The term "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. (i) Registration Expenses. "REGISTRATION EXPENSES" shall mean all expenses incurred by the Company in complying with Sections 3.2 and 3.3 hereof, including, without limitation, all registration and filing fees, printing expenses, fees and disbursements of counsel and accountants for the Company, fees and expenses of one counsel for all the Holders in an amount not to exceed $25,000, blue sky fees and expenses and the expense of any special audits incident to or required by any such registration (but excluding the compensation of regular employees of the Company, which shall be paid in any event by the Company). (j) Selling Expenses. "SELLING EXPENSES" shall mean all underwriting discounts and selling commissions applicable to the sale of Registerable Securities and all fees and disbursements of counsel for each of the Holders other than fees and expenses of one counsel for all the Holders in an amount not to exceed $25,000. (k) Senior Warrant Agreement. "SENIOR WARRANT AGREEMENT" shall mean the Warrant Agreement dated as of February 19, 1998 between the Company and The Bank of New York, a New York banking corporation, as warrant agent. (l) Senior Warrant Holders. "SENIOR WARRANT HOLDERS" shall mean the holders of Senior Warrants. (m) Senior Warrant Registration Rights Agreement. "SENIOR WARRANT REGISTRATION RIGHTS AGREEMENT" shall mean the Warrant Registration Rights Agreement dated as of February 19, 1998 entered into among the Company, Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Chase Securities Inc. and Morgan Stanley & Co. Incorporated. (n) Senior Warrant Shares. "SENIOR WARRANT SHARES" shall mean the shares of Common Stock issued or issuable upon exercise of the Senior Warrants. (o) Senior Warrants. "SENIOR WARRANTS" shall mean the warrants of the Company issued pursuant to the Senior Warrant Agreement. (p) Subordinated Notes. "SUBORDINATED NOTES" shall mean the 13% Subordinated Discount Notes due May 15, 2006 issued on May 29, 1996 as governed by the Indenture dated as of May 15, 1996 between the Company and The Bank of New York as Trustee. (q) Subordinated Warrants. "SUBORDINATED WARRANTS" shall mean the warrants issued in connection with the issuance of the Subordinated Notes on May 29, 1996 pursuant -4- to the Subordinated Warrant Agreement and any additional warrants issued pursuant to the terms of the Subordinated Warrant Agreement. (r) Subordinated Warrant Agreement. "SUBORDINATED WARRANT AGREEMENT" shall mean the Warrant Agreement dated as of May 15, 1996 by and between the Company and The Bank of New York as the Warrant Agent. (s) Subordinated Warrant Registration Rights Agreement. "SUBORDINATED WARRANT REGISTRATION RIGHTS AGREEMENT" shall mean the Warrant Registration Rights Agreement dated as of May 15, 1996 entered into between the Company, Smith Barney Inc. and Toronto Dominion Securities (USA) Inc. (t) Subordinated Warrant Shares. "SUBORDINATED WARRANT SHARES" shall mean the shares of Common Stock issued or issuable upon exercise of the Subordinated Warrants. 3.2 REQUESTED REGISTRATION. (a) Request for Registration by Initiating Holders. If the Company shall receive from an Initiating Holder, at any time, a written request that the Company effect any registration with respect to all or a part of the Registerable Securities, the Company will: (i) promptly give written notice of the proposed registration, qualification or compliance to all other Holders of Registerable Securities; and (ii) as soon as practicable, use its diligent best efforts to effect such registration (including, without limitation, the execution of an undertaking to file post-effective amendments, appropriate qualification under applicable blue sky or other state securities laws and appropriate compliance with applicable regulations issued under the Securities Act) as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Registerable Securities as are specified in such request, together with all or such portion of the Registerable Securities of any Holder or Holders joining in such request as are specified in a written request received by the Company within fifteen (15) days after written notice from the Company is given under subsection 3.2(a)(i) above; provided, however, that the Company shall not be obligated to effect, or take any action to effect, any such registration pursuant to this subsection 3.2(a): (A) In any particular jurisdiction in which the Company would be required to execute a general consent to service of process in effecting such registration, qualification or compliance, unless the Company is already subject to service in such jurisdiction and except as may be required by the Securities Act or applicable rules or regulations thereunder; (B) After the Company has effected two (2) such registrations pursuant to Section 3.2 and such registrations have been declared or ordered effective and the sales of such Registerable Securities shall have closed; -5- (C) If the Registerable Securities requested by all Holders to be registered pursuant to such request have an anticipated net aggregate public offering price (after any underwriting discounts and commissions) of less than $5,000,000; or (D) Prior to six (6) months after the date the Company's Initial Public Registration has been completed or after the date the Company has otherwise become subject to the reporting requirements of the Exchange Act. The registration statement filed pursuant to the request of the Initiating Holders may, subject to the provisions of subsection 3.2(b)(i) below, include other securities of the Company which are held by officers or directors of the Company, or which are held by persons who, by virtue of agreements with the Company, are entitled to include their securities in any such registration, but the Company shall have no absolute right to include any of its securities in any such registration. (b) Underwriting. (i) Request by Initiating Holders. If the Initiating Holders intend to distribute the Registerable Securities covered by their request by means of an underwriting, they shall so advise the Company as a part of their request made pursuant to subsection 3.2(a) and the Company shall include such information in the written notice referred to in subsection 3.2(a). In such event, the right of any Holder to include such Holder's Registerable Securities in such registration shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registerable Securities in the underwriting (unless otherwise mutually agreed by a majority in interest of the Initiating Holders and such Holder) to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with the Company as provided in subsection 3.6(e)) enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting by a majority in interest of the Initiating Holders and reasonably acceptable to the Company. Notwithstanding any other provision of Section 3.2, if the underwriter advises the Company and the Initiating Holders in writing that marketing factors require a limitation of the number of shares to be underwritten, then the Company shall so advise all Holders of Registerable Securities whose shares would otherwise be underwritten pursuant hereto, Subordinated Warrant Holders whose Subordinated Warrant Shares are otherwise entitled to be registered pursuant to the Subordinated Warrant Registration Rights Agreement and Senior Warrant Holders whose Senior Warrant Shares are otherwise entitled to be registered pursuant to the Senior Warrant Registration Rights Agreement and the number of shares of Registerable Securities that may be included in the underwriting shall be allocated among all Holders, including the Initiating Holders, Subordinated Warrant Holders and Senior Warrant Holders thereof, in proportion, as nearly as practicable, to the respective amounts of securities sought to be registered (on an as-converted basis) by such Holders, Subordinated Warrant Holders or Senior Warrant Holders, as the case may be, participating in such registration at the time of filing of the registration statement. -6- (c) Notwithstanding the foregoing, if the Company shall furnish to Holders requesting the filing of a registration statement pursuant to subsection 3.2(a), a certificate signed by the President or Chief Executive Officer of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its stockholders for such registration statement to be filed and it is therefore essential to defer the filing of such registration statement, then the Company shall have the right to defer such filing for a period of not more than ninety (90) days after receipt of the request of the Initiating Holders; provided, however, that the Company may not utilize this right more than once in any twelve (12) month period. 3.3 PIGGYBACK REGISTRATIONS. The Company shall notify all Holders of Registerable Securities in writing at least fifteen (15) days prior to filing any registration statement under the Securities Act for purposes of effecting a public offering of securities of the Company for the account of the Company or for the account of any other security holder (including, but not limited to, registration statements relating to secondary offerings of securities of the Company, but excluding any registration statement relating to any employee benefit plan or a corporate reorganization or a registration of securities convertible into Common Stock) and will afford each such Holder an opportunity to include in such registration statement all or any part of the Registerable Securities then held by such Holder. Each Holder desiring to include in any such registration statement all or any part of the Registerable Securities held by such Holder shall, within fifteen (15) days after receipt of the above-described notice from the Company, so notify the Company in writing, and in such notice shall inform the Company of the number of Registerable Securities such Holder wishes to include in such registration statement. If a Holder decides not to include all of its Registerable Securities in any registration statement thereafter filed by the Company, such Holder shall nevertheless continue to have the right to include any Registerable Securities in any subsequent registration statement or registration statements as may be filed by the Company with respect to offerings of its securities, all upon the terms and conditions set forth herein. (a) Underwriting. If a registration statement under which the Company gives notice under Section 3.3 is for an underwritten offering, and if the managing underwriter or underwriters of such underwritten offering have informed the Company and the Holders of Registerable Securities requesting inclusion in such offering, in writing, that in such underwriter's or underwriters' opinion the total number of securities which the Company, such Holders and any other persons desiring to participate in such registration intend to include in such offering is such as to adversely affect the success of such offering, including the price at which such securities can be sold, then the Company will be required to include in such registration only the number of securities which it is so advised should be included in such registration. In such event: (x) in cases only involving the registration for sale of securities for the Company's own account (other than pursuant to the exercise of "piggy- back" rights herein and in other contractual commitments of the Company), securities shall be registered in such offering in the following order of priority: (i) first, the securities which the Company proposes to register, (ii) second, provided that no securities sought to be included by the Company have been excluded from such registration, the securities which have been requested to be included in such registration by the Subordinated Warrant Holders, by the Senior Warrant Holders and by the Stockholders to be allocated among these persons on a pro rata basis based on the amount of securities -7- sought to be registered by such persons and (iii) third, provided that no securities sought to be included by the Company or the Subordinated Warrant Holders or the Senior Warrant Holders or the Stockholders have been excluded from such registration, the securities of other persons entitled to exercise "piggy-back" registration rights pursuant to contractual commitments of the Company (pro rata based on the amount of securities sought to be registered by such persons); (y) in cases not involving the registration for sale of securities for the Company's own account only or not pursuant to the exercise of demand registration rights by any Holder of Registerable Securities, securities shall be registered in such offering in the following order of priority: (i) first, the securities of any person whose exercise of a "demand" registration right pursuant to a contractual commitment of the Company is the basis for the registration (provided that if such person is a Holder of Registerable Securities, as among Holders of Registerable Securities there shall be no priority and Registerable Securities sought to be included by Holders of Registerable Securities shall be included pro rata based on the respective numbers of securities sought to be registered by such persons), (ii) second, provided that no securities sought to be included by any person referred to in the immediately preceding clause (i) have been excluded from such registration, the securities which have been requested to be included in such registration by the Subordinated Warrant Holders, by the Senior Warrant Holders and by the Stockholders to be allocated among these persons on a pro rata basis based on the amount of securities sought to be registered by such persons; (iii) third, provided that no securities sought to be included by such person referred to in the immediately preceding clause (i) or of the Subordinated Warrant Holders or of the Senior Warrant Holders or of the Stockholders have been excluded from such registration, securities of any other persons entitled to exercise "piggy- back" registration rights pursuant to contractual commitments (pro rata based on the amount of securities sought to be registered by such persons) and (iv) fourth, provided that no securities sought to be included by any person described in the immediately preceding clauses (i) through (iii) have been excluded from such registration, the securities which the Company proposes to register; and; and (z) in cases involving the registration for sale of securities pursuant to the exercise of demand registration rights by any Holder of Registerable Securities, securities shall be registered in such offering in the following order of priority: (i) first, the securities which have been requested to be included in such registration by the Subordinated Warrant Holders pursuant to this Agreement or otherwise, by the Senior Warrant Holders and by the Stockholders to be allocated among these persons on a pro rata basis based on the amount of securities sought to be registered by such persons; (ii) second, provided that no securities sought to be included by the Subordinated Warrant Holders or the Senior Warrant Holders or the Stockholders have been excluded from such registration, securities of other persons entitled to exercise "piggy-back" registration rights pursuant to contractual commitments (pro rata based on the amount of securities sought to be registered by such persons) and (iii) third, provided that no securities of any other person has been excluded from such registration, the securities which the Company proposes to register. If, as a result of the provisions of this Section 3.3(a), any Holder of Registerable Securities shall not be entitled to include all Registerable Securities in a "piggy-back" registration that such Holder of Registerable Securities has requested to be included, such Holder of Registerable Securities may elect to withdraw his request to include Registerable Securities in such registration. -8- (b) Persons Deemed Holders. For any Holder of Registerable Securities which is a partnership or corporation, the partners, retired partners and stockholders of such Holder, or the estates and family members of any such partners and retired partners and any trusts for the benefit of any of the foregoing persons shall be deemed to be a single "HOLDER," and any pro rata reduction with respect to such "HOLDER" shall be based upon the aggregate amount of shares carrying registration rights owned by all entities and individuals included in such "HOLDER," as defined in this sentence. 3.4 EXPENSES OF REGISTRATION. All Registration Expenses incurred in connection with any registration, qualification or compliance pursuant to Section 3.2, 3.3 or 3.5 shall be borne by the Company, and all Selling Expenses shall be borne by the Holders of the securities so registered pro rata on the basis of the number of their shares so registered; provided, however, that the Company shall not be required to pay any Registration Expenses if, as a result of the withdrawal of a request for registration by any of the Holders, as applicable, the registration statement does not become effective, in which case each of the Holders withdrawing from the requested registration shall bear such Registration Expenses pro rata, and provided, further, that such registration (if requested pursuant to subsection 3.2(a)) shall not be counted as a registration pursuant to subsection 3.2(a)(ii)(B). Notwithstanding the foregoing, if at the time of such withdrawal, the Holders have learned of a material adverse change in the condition, business, or prospects of the Company from that known to the Holders at the time of their request (if requested pursuant to subsection 3.2(a)), then the Holders shall not be required to pay any of such expenses and such registration shall not be counted as a registration pursuant to subsection 3.2(a)(ii)(B). 3.5 FORM S-3 REGISTRATION. In case the Company shall receive from one or more Holders a written request or requests that the Company effect a registration on Form S-3 and any related qualification or compliance with respect to all or a part of the Registerable Securities owned by such Holders, provided the number of shares requested to be sold would have an aggregate price to the public of at least $1,000,000, then the Company will: (a) Notice. Promptly give written notice of the proposed registration and the Holder's request therefor, and any related qualification or compliance, to all other Holders of Registerable Securities; and (b) Registration. As soon as practicable, effect such registration and all such qualifications and compliances as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of the Holder's Registerable Securities as are specified in such request together with all or such portion of the Registerable Securities of any Holder or Holders joining in such request as are specified in a written request received by the Company within fifteen (15) days after written notice from the Company is given under subsection 3.5(a) above; provided, however, that the Company shall not be obligated to effect any such registration, qualification or compliance pursuant to this Section 3.5: (i) if Form S-3 is not available for such offering by the Holders; (ii) if the Holders propose to sell Registerable Securities at an aggregate price to the public of less than $1,000,000; -9- (iii) if the Company shall furnish to the Holders a certificate signed by the President or Chief Executive Officer of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its Stockholders for such Form S-3 Registration to be effected at such time, in which event the Company shall have the right to defer the filing of the Form S-3 registration statement no more than once during any twelve (12) month period for a period of not more than ninety (90) days after receipt of the request of the Holders under this Section 3.5; (iv) in any particular jurisdiction in which the Company would be required to qualify to do business or to execute a general consent to service of process in effecting such registration, qualification or compliance; or (v) if the Company has filed a registration statement on Form S-3 relating to Registerable Securities in the six (6) months preceding the request of the Holders. Subject to the foregoing, the Company shall file a Form S-3 registration statement covering the Registerable Securities and other securities so requested to be registered pursuant to this Section 3.5 as soon as practicable after receipt of the request from the Holders for such registration. (c) The Holders' right to register shares under this Section 3.5 shall be shared pro rata with the Subordinated Warrant Holders and all other security holders who have a right to request inclusion therein based on the number of shares (on an as-converted basis) held by such holders requesting inclusion in such registration. 3.6 OBLIGATIONS OF THE COMPANY. Whenever required to effect the registration of any Registerable Securities under this Agreement, the Company shall, as expeditiously as reasonably possible: (a) Prepare and file with the SEC a registration statement with respect to such Registerable Securities and use its best efforts to cause such registration statement to become effective, and keep such registration statement effective until the distribution is completed, but not more than one hundred and eighty (180) days for a Form S-1 or Form SB-2 Registration Statement or more than one hundred and twenty (120) days for a Form S-3 Registration Statement. (b) Prepare and file with the SEC 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 Securities Act with respect to the disposition of all securities covered by such registration statement. -10- (c) Furnish to the Holders such number of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as they may reasonably request in order to facilitate the disposition of the Registerable Securities owned by them that are included in such registration. (d) Use its best 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 Holders, provided, however, 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(s) of such offering. Each Holder participating in such underwriting shall also enter into and perform its obligations under such an agreement. (f) Notify each Holder of Registerable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Securities 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) Furnish, at the request of any Holder registering Registerable Securities, on the date that such Registerable Securities are delivered to the underwriters for sale, if such securities are being sold through underwriters, or, if such securities are not being sold through underwriters, on the date that the registration statement with respect to such securities becomes effective, (i) an opinion, dated as of such date, of the counsel representing the Company for the purposes of such registration, in form and substance as is customarily given to underwriters in an underwritten public offering addressed to the underwriters, if any, and if there are no underwriters, to the Holders requesting registration of Registerable Securities and (ii) a "comfort" letter dated as of such date, from the independent certified public accountants of the Company, in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering addressed to the underwriters, if any, and if there are no underwriters, to the Holders registering Registerable Securities. 3.7 FURNISH INFORMATION. It shall be a condition precedent to the obligations of the Company to take any action pursuant to Sections 3.2, 3.3 or 3.5 that the selling Holders shall furnish to the Company such information regarding themselves, the Registerable Securities held by them, and the intended method of disposition of such securities as shall be required to timely effect the registration of Registerable Securities. 3.8 DELAY OF REGISTRATION. No Holder 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 Section 3. -11- 3.9 INDEMNIFICATION. In the event any Registerable Securities are included in a registration statement under Sections 3.2, 3.3 or 3.5: (a) By the Company. To the extent permitted by law, the Company will indemnify and hold harmless each Holder, the partners, officers and directors of each Holder, any underwriter (as defined in the Securities Act) for such Holder and each person, if any, who controls such Holder or underwriter within the meaning of the Securities Act or the Exchange Act against any losses, claims, damages, or liabilities (joint or several) to which they may become subject under the Securities Act, the Exchange 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 Securities Act, the Exchange Act, any federal or state securities law or any rule or regulation promulgated under the Securities Act, the Exchange Act or any federal or state securities law in connection with the offering covered by such registration statement; and the Company will reimburse each such Holder, partner, officer or director, underwriter or controlling person for any legal or other expenses reasonably incurred by them, as incurred, in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the indemnity agreement contained in this subsection 3.9(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 such Holder, partner, officer, director, underwriter or controlling person of such Holder. (b) By Selling Holders. To the extent permitted by law, each selling Holder 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 Securities Act, any underwriter (as defined in the Securities Act) and any other Holder selling securities under such registration statement or any of such other Holder's partners, directors or officers or any person who controls such underwriter or other Holder within the meaning of the Securities Act or the Exchange Act, against any losses, claims, damages or liabilities (joint or several) to which the -12- Company or any such director, officer, controlling person, underwriter or other such Holder, partner or director, officer or controlling person of such underwriter or other Holder may become subject under the Securities Act, the Exchange 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 Holder expressly for use in connection with such registration; and each such Holder will reimburse any legal or other expenses reasonably incurred by the Company or any such director, officer, controlling person, underwriter or other Holder, partner, officer, director or controlling person of such other Holder or underwriter in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the indemnity agreement contained in this subsection 3.9(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 written consent of the Holder, which consent shall not be unreasonably withheld; and provided further, that the total amounts payable in indemnity by a Holder under this subsection 3.9(b) in respect of any Violation shall not exceed the net proceeds received by such Holder in the registered offering out of which such Violation arises. (c) Notice. Promptly after receipt by an indemnified party under Section 3.9 of notice of the commencement of any action (including, without limitation, any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under Section 3.9, 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 conflict of interests between such indemnified party and any other party represented by such counsel in such proceeding, and provided further, that the indemnifying party shall not be required to pay for more than one separate counsel for all indemnified parties. 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 Section 3.9, 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 Section 3.9. (d) Contribution. In order to provide for just and equitable contribution to joint liability under the Securities Act in any case in which either (i) any Holder exercising rights under this Agreement, or any controlling person of any such Holder, makes a claim for indemnification pursuant to Section 3.9 but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that Section 3.9 provides for indemnification in such case, or (ii) contribution under the Securities Act may be required on the part of any such selling Holder or any such controlling person in circumstances for which indemnification is provided under Section 3.9; then, and in each such case, the Company and such -13- Holder will contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (after contribution from others) in such proportion so that such Holder is responsible for the portion represented by the percentage that the public offering price of its Registerable Securities offered by and sold under the registration statement bears to the public offering price of all securities offered by and sold under such registration statement, and the Company and other selling Holders are responsible for the remaining portion; provided, however, that, in any such case, (A) no such Holder will be required to contribute any amount in excess of the net proceeds received by such holder from all such Registerable Securities offered and sold by such Holder pursuant to such registration statement; and (B) no person or entity guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) will be entitled to contribution from any person or entity who was not guilty of such fraudulent misrepresentation. (e) Survival. The obligations of the Company and Holders under Section 3.9 shall survive the completion of any offering of Registerable Securities in a registration statement, and otherwise. 3.10 "MARKET STAND-OFF" AGREEMENT. Each Holder and each Class C Common Holder hereby agrees that it shall not, to the extent requested by the Company or an underwriter of securities of the Company, sell or otherwise transfer or dispose of any Registerable Securities, Class C Common Stock or other shares of stock of the Company then owned by such Holder (other than to donees, affiliates or partners of the Holder who agree to be similarly bound) or Class C Common Holder for up to one hundred and eighty (180) days following the date of the final prospectus in connection with the registration statement of the Company filed under the Securities Act; provided, however, that such agreement shall be applicable only to the first such registration statement of the Company that covers securities to be sold on its behalf to the public in an underwritten offering but not to Registerable Securities sold pursuant to such registration statement and that such agreement shall only be applicable if the underwriters request such agreement from each Holder or Class C Common Holder, as the case may be. In order to enforce the foregoing covenant, the Company shall have the right to place restrictive legends on the certificates representing the shares subject to this Section 3.10 and to impose stop transfer instructions with respect to the Registerable Securities and such other shares of stock of each Holder and Class C Common Holder (and the shares or securities of every other person subject to the foregoing restriction) until the end of such period. The provisions of this Section 3.10 shall be binding upon any transferee of any Registerable Securities or Class C Common Stock. 3.11 RULE 144 REPORTING. With a view to making available the benefits of certain rules and regulations of the Commission which may at any time permit the sale of the Registerable Securities to the public without registration, after such time as a public market exists for the Common Stock of the Company, the Company agrees to: (a) Make and keep public information available, as those terms are understood and defined in Rule 144 under the Securities Act, at all times after the effective date of the -14- first registration under the Securities Act filed by the Company for an offering of its securities to the general public; (b) Use its best efforts to file with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements); and (c) So long as a Holder owns any Registerable Securities, to furnish to the Holder forthwith upon request a written statement by the Company as to its compliance with the reporting requirements of Rule 144 (at any time after ninety (90) days after the effective date of the first registration statement filed by the Company for an offering of its securities to the general public), and of the Securities Act and the Exchange Act (at any time after it has become subject to the reporting requirements of the Exchange Act), a copy of the most recent annual or quarterly report of the Company, and such other reports and documents of the Company as a Holder may reasonably request in availing itself of any rule or regulation of the Commission allowing a Holder to sell any such securities without registration (at any time after the Company has become subject to the reporting requirements of the Exchange Act). 3.12 LIMITATIONS ON SUBSEQUENT REGISTRATION RIGHTS. From and after the date of this Agreement, the Company shall not, without the prior written consent of the Holders of at least 33% of the Registerable Securities, enter into any agreement with any holder or prospective holder of any securities of the Company which would allow such holder or prospective holder (a) to include such securities in any registration filed under this Section 3 hereof, unless under the terms of such agreement, such holder or prospective holder may include such securities in any such registration only to the extent that the inclusion of his securities will not reduce the amount of the Registerable Securities of the Holders which is included, or (b) to make a demand registration to the Company. 3.13 ASSIGNMENT OF REGISTRATION RIGHTS. The rights of a Holder under this Section 3 may be assigned (i) by any Holder that is a partnership to any of its partners, (ii) by any Holder that is a corporation to any of its stockholders or any such corporation's subsidiaries, affiliates, officers, directors, employees or consultants who acquire Registerable Securities from such corporation and (iii) by any Holder to any party that acquires a minimum of 20,000 shares of Registerable Securities or shares of Preferred Stock convertible into a minimum of 20,000 shares of Registerable Securities (as adjusted for any stock splits, reverse stock splits, combinations, reclassifications, stock dividends or similar events) in a transfer not involving a distribution or offering of such shares to the public and not made pursuant to Rule 144 promulgated under the Securities Act; provided, however, in each case that such partner, stockholder or other party agrees in writing with the Company to be bound by all of the provisions of this Section 3. 3.14 TERMINATION OF REGISTRATION RIGHTS. The registration rights granted pursuant to Section 3 will terminate as to any Holder upon the later to occur of (a) such time as the Company and the Holder are satisfied that Rule 144(k) is available for the resale by the then-current Holder of the Common Stock underlying all of the Preferred Stock, (b) the one-year anniversary following the -15- effective date of the Company's Initial Public Registration or (c) such time as a Holder has less than 300,000 shares of the outstanding Common Stock of the Company (assuming conversion of all Preferred Stock and any other securities convertible into Common Stock, but not including options or warrants to acquire Common Stock, and as adjusted for any stock splits, reverse stock splits, combinations, reclassifications, stock dividends or similar events), but in no event later than five years after the Company's Initial Public Registration. 4. RIGHT OF PARTICIPATION TO SUBSCRIBE TO NEW ISSUANCES. 4.1 GENERAL. The Company hereby grants to each Major Stockholder who is an "accredited investor" within the meaning of Rule 501(a) of the Securities Act, and who can otherwise satisfy the necessary securities law requirements for an exemption for a particular transaction, the right of participation to purchase such Major Stockholder's pro rata share ("PRO RATA SHARE") of New Securities (as defined in subsection 4.2(a)) that the Company may, from time to time, propose to sell and issue. Such Major Stockholder's Pro Rata Share, for purposes of this right of participation, is the ratio that the number of shares of Common Stock (assuming conversion of all Preferred Stock and any other securities convertible into Common Stock but not including options or warrants to acquire Common Stock) held by such Major Stockholder bears to the total number of shares of Common Stock outstanding immediately prior to the time of issuance of such New Securities (assuming conversion into Common Stock of all outstanding Preferred Stock and any other securities convertible into Common Stock but not including options or warrants to acquire Common Stock). This right of participation shall be subject to the following provisions: 4.2 CERTAIN DEFINITIONS. For the purposes of Section 4: (a) "NEW SECURITIES" shall mean any Common Stock or any Preferred Stock of the Company, whether or not now authorized, and any rights, options, or warrants to purchase said Common Stock or Preferred Stock, and securities of any type whatsoever that are, or may become, convertible into or exchangeable for Common Stock or Preferred Stock; provided, however, that "NEW SECURITIES" does not include (i) securities issuable upon conversion of or with respect to the Series AA Preferred Stock, Series A Preferred Stock, Series B Preferred Stock, Series C or Series D Preferred Stock or upon conversion of or with respect to any other Preferred Stock subsequently issued; (ii) securities offered to the public pursuant to a registration statement filed under the Securities Act; (iii) securities issued pursuant to the acquisition of another unaffiliated corporation by the Company by merger, purchase of substantially all of the assets, or other reorganization whereby the Company or its Stockholders own not less than 50% of the voting power of the surviving corporation; (iv) shares of the Company's Common Stock (or related options or warrants) issued to employees, officers, directors, consultants, or other persons performing services for the Company (including, but not by way of limitation, distributors and sales representatives) pursuant to any stock offering, plan, or arrangement approved by a majority of the non-employee members of the Board of Directors of the Company; (v) securities issued pursuant to or in connection with any corporate partnership, joint venture or licensing arrangement with a non-affiliate or in connection with an unaffiliated equipment lease financing or bank debt into which the Company may enter; (vi) the Subordinated Warrants issued in -16- connection with the issuance of the Subordinated Notes; (vii) shares of the Company's Common Stock or Preferred Stock issued in connection with any stock split, stock dividend, or recapitalization by the Company; (viii) securities issued upon the exercise of outstanding warrants of the Company as of the date of the initial issuance of the Subordinated Warrants after giving effect to the issuance of the Subordinated Warrants; (ix) securities issuable upon conversion of or with respect to the Class C Common Stock; (x) securities issued upon the exercise of a Subordinated Warrant Holder's right of participation pursuant to Section 8, (xi) securities issued pursuant to the acquisition of Sarnoff Real Time Corporation by the Company or (xii) warrants to purchase Common Stock, and the securities issuable upon the exercise thereof, issued in connection with the offering of 12.625% Senior Discount Notes due March 1, 2008 issued on February 19, 1998, as governed by the Indenture between the Corporation and the Bank of New York as Trustee dated as February 19, 1998. 4.3 MECHANICS OF RIGHT. (a) Notices; Pro Rata Rights. In the event that the Company proposes to issue New Securities, it shall give each such Major Stockholder holding the number of shares set forth in Section 4.1, written notice (the "FIRST NOTICE") of its intention, describing the type of New Securities, the price, and the general terms upon which the Company proposes to issue the same. Within fifteen (15) days after receipt of the First Notice, the Major Stockholder shall give the Company written notice (the "STOCKHOLDER NOTICE") of its intention to purchase or obtain, at the price and on the terms specified in the Notice, its Pro Rata Share of the New Securities. In addition, the Stockholder Notice shall state whether a Major Stockholder wishes to purchase more than its Pro Rata Share of the New Securities. The Company shall promptly give written notice to each Major Stockholder that purchases its Pro Rata Share of the New Securities (a "FULLY-EXERCISING INVESTOR") of the amount of New Securities, if any, that other Major Stockholders or Subordinated Warrant Holders entitled to participate therein pursuant to Section 8 hereof do not elect to purchase in response to the First Notice (the "SECOND NOTICE"). Each Fully-Exercising Investor shall notify the Company within five (5) days of receipt of the Second Notice if it would like to purchase any of the unsubscribed shares and indicate the maximum number of unsubscribed shares it would like to purchase. The Company shall inform the Fully-Exercising Investors of the total number of unsubscribed shares available and provide the Fully- Exercising Investors with an allocation of the unsubscribed shares based on the number of shares of Common Stock (assuming conversion of all Preferred Stock into Common Stock) held by each Fully-Exercising Investor. (b) Company Right. To the extent that Major Stockholders fail to exercise in full the right of first offer as provided in subsection 4.3(a) hereof, the Company shall have ninety (90) days thereafter to sell (or enter into an agreement pursuant to which the sale of New Securities covered thereby shall be closed, if at all, within said ninety (90) day period) the New Securities respecting which the Major Stockholders' rights were not exercised, at a price and upon general terms no more favorable to the purchasers thereof than specified in the Company's notice. In the event the Company has not sold the New Securities within said ninety (90) day period (or sold and issued New Securities in accordance with the foregoing within ninety (90) days from the date of said agreement), the Company shall not thereafter issue or sell any New Securities, without first offering such securities to the Major Stockholders in the manner provided above. -17- (c) No Impairment. A Major Stockholder's failure to exercise this right of first refusal on any issuance of New Securities shall not adversely affect the Major Stockholder's right of first refusal to purchase subsequent issuances of New Securities. (d) Closing. The participating Investors shall be included in the same closing as the closing with other investors, provided, however, that the participating Investors shall not be required to close sooner than thirty (30) days after the date of the First Notice. The participating Investors shall be parties to the same agreement as the other investors purchasing New Securities, which shall include reasonably acceptable representations, warranties and covenants by the Company. 4.4 TERMINATION. The rights of participation under this Section 4 shall not apply to and shall terminate immediately before the closing of the Company's Initial Public Registration and shall be reinstated if such closing does not occur. 4.5 ASSIGNMENT. The rights of participation granted under this Section 4 may be assigned to any party that meets the requirements of a Major Stockholder; provided, however, in each case that such assignee agrees in writing with the Company to be bound by all of the provisions of this Section 4. 5. RIGHTS OF FIRST REFUSAL AMONG COMPANY AND STOCKHOLDERS. 5.1 GENERAL. Before any Common Stock or Common Stock equivalents of the Company held by a Stockholder or Class C Common Holder or any transferee (either being sometimes referred to herein as the "SELLING STOCKHOLDER") may be sold or otherwise transferred (including transfer by gift or operation of law), the Company or its assignee(s) and the other Stockholders who (i) are Major Stockholders and (ii) are "accredited investors" within the meaning of Rule 501(a) of the Securities Act, and who can otherwise satisfy the necessary securities law requirements for an exemption for a particular transaction (the "REMAINING STOCKHOLDERS") shall have rights of first refusal to purchase the shares on the terms and conditions set forth in this Section 5 (the "RIGHTS OF FIRST REFUSAL"). 5.2 NOTICE OF PROPOSED TRANSFER. The Selling Stockholder of the shares shall deliver to the Company and the Remaining Stockholders a written notice (the "NOTICE") stating: (i) the Selling Stockholder's bona fide intention to sell or otherwise transfer such shares (the "OFFERED SHARES"); (ii) the name of each proposed purchaser or other transferee ("PROPOSED TRANSFEREE"); (iii) the number of Offered Shares to be transferred to each Proposed Transferee; and (iv) the bona fide cash price or other consideration for which the Selling Stockholder proposes to transfer the Offered Shares (the "OFFERED PRICE"), and the Selling Stockholder shall offer the Offered Shares at the Offered Price to the Company or its assignee(s) and the Remaining Stockholders. 5.3 EXERCISE OF RIGHT OF FIRST REFUSAL. -18- (a) Exercise by Company. At any time within fifteen (15) days after receipt of the Notice, the Company or its assignee(s) may, by giving written notice to the Selling Stockholder, elect to purchase some or all of the Offered Shares, at the purchase price determined in accordance with Section 5.4 below. (b) Exercise by Remaining Stockholders. If the Company or its assignee(s) does not choose to purchase all the Offered Shares within fifteen (15) days after receipt of the Notice, the Remaining Stockholders may elect by giving written notice to the Selling Stockholder within thirty (30) days after receipt of the Notice to purchase up to such Stockholder's Pro Rata Share of the Offered Shares not purchased by the Company and its assignee(s), at the purchase price determined in accordance with Section 5.4 below. For purposes of these Rights of First Refusal, a Remaining Stockholder's "PRO RATA SHARE" is the ratio that the number of shares of Common Stock (assuming conversion of all Preferred Stock and any other securities convertible into Common Stock, but not including options or warrants to acquire Common Stock) held by such Stockholder bears to the total number of shares of Common Stock (assuming conversion of all Preferred Stock and any other securities convertible into Common Stock, but not including options or warrants to acquire Common Stock) held by all Remaining Stockholders. In addition, the notice shall state whether a Remaining Stockholder wishes to purchase more than its Pro Rata Share of Offered Shares. The Company shall promptly give written notice (the "SECOND NOTICE") to each Remaining Stockholder that purchases its Pro Rata Share of Offered Shares (a "FULLY-EXERCISING HOLDER") of the amount of Offered Shares, if any, that other Remaining Stockholders do not elect to purchase in response to the Notice. Each Fully- Exercising Holder shall notify the Company within five (5) days of receipt of the Second Notice if it would like to purchase any of the unsubscribed shares and indicate the maximum number of unsubscribed shares it would like to purchase. The Company shall inform the Fully-Exercising Holders of the total number of unsubscribed shares available and provide the Fully-Exercising Holders with an allocation of the unsubscribed shares based on the number of shares of Common Stock (assuming conversion of all Preferred Stock into Common Stock) held by each Fully Exercising Holder. 5.4 PURCHASE PRICE. The purchase price ("PURCHASE PRICE") for the Offered Shares purchased by the Company or its assignee(s) or the Remaining Stockholders under this Section 5.4 shall be the Offered Price. If the Offered Price includes consideration other than cash, the cash equivalent value of the non-cash consideration shall be determined by the Board of Directors of the Company in good faith. 5.5 PAYMENT. Payment of the Purchase Price shall be made, at the option of the Company or its assignee(s) or the purchasing Remaining Stockholders, in cash (by check), by cancellation of all or a portion of any outstanding indebtedness of the Selling Stockholder to the Company (or, in the case of repurchase by an assignee, to the assignee), or by any combination thereof within forty (40) days after receipt of the Notice or in the manner and at the times set forth in the Notice. The sale shall constitute a representation and warranty by the Selling Stockholder that the shares being sold are free and clear of all liens, claims and encumbrances. -19- 5.6 SELLING STOCKHOLDER'S RIGHT TO TRANSFER. If all of the Offered Shares proposed in the Notice to be transferred to a given Proposed Transferee are not purchased by the Company, its assignee(s) and the Remaining Stockholders as provided in this Section 5, then none of the Offered Shares shall be purchased under this Section 5 and the Selling Stockholder may sell or otherwise transfer the Offered Shares (subject to certain restrictions on transfer governing the Class C Common Stock as provided in the Purchase Agreement) to that Proposed Transferee at the Offered Price or at a higher price, provided that such sale or other transfer (i) complies with the provisions of Section 6 of this Agreement with respect to Co-sale Rights, (ii) is consummated within one hundred and eighty (180) days after the date of the Notice, (iii) is in accordance with all the terms of this Agreement and (iv) is effected in accordance with any applicable securities laws and the Proposed Transferee agrees in writing that the provisions of this Agreement shall continue to apply to the Offered Shares in the hands of such Proposed Transferee. If the Offered Shares described in the Notice are not transferred to the Proposed Transferee within such period, a new Notice shall be given to the Company and the Remaining Stockholders, and the Company or its assignees and the Remaining Stockholders shall again be offered the Rights of First Refusal before any Offered Shares held by the Selling Stockholder may be sold or otherwise transferred. 5.7 EXCEPTION FOR CERTAIN TRANSFERS. Anything to the contrary contained in this Section 5 notwithstanding (provided that the exceptions contained in this Section 5.7 shall not apply to the transfer of any or all of the Class C Common Stock), the provisions of this Section 5 shall not apply to the transfer of any or all of the Offered Shares (i) during the Selling Stockholder's lifetime or on the Selling Stockholder's death by will or intestacy to the Selling Stockholder's immediate family, a trust for the benefit of the Selling Stockholder or the Selling Stockholder's immediate family or an affiliate of the Selling Stockholder, (ii) by a Selling Stockholder that is a partnership to the Selling Stockholder's partners through a distribution, (iii) by a Selling Stockholder that is a corporation to the Selling Stockholder's stockholders, subsidiaries or affiliates (iv) upon exercise of an option by an optionee who is an employee, officer, director or consultant of a Selling Stockholder that is a corporation or upon any repurchase by Sarnoff Real Time Corporation pursuant to repurchase rights, (v) subject to the prior written approval of the Company, which may be withheld in its sole discretion, by a Selling Stockholder as a charitable contribution, (vi) to a new stockholder based on the best interests of the Company as determined by a majority of disinterested members of the Company's Board of Directors or (vii) by a stockholder who holds at least 500,000 shares of the Company's Common Stock (assuming conversion of all Preferred Stock and any other securities convertible into Common Stock, but not including options or warrants to acquire Common Stock, and as adjusted for any stock splits, reverse stock splits, combinations, reclassifications, stock dividends or similar events) of up to 2% of his holdings in any calendar year and up to 5% of his holdings overall on a cumulative basis. "IMMEDIATE FAMILY" as used herein shall mean spouse, lineal descendant or antecedent, father, mother, brother or sister. In such case, the transferee or other recipient shall receive and hold the Offered Shares so transferred subject to the provisions of this Section 5, and there shall be no further transfer of such Offered Shares except in accordance with the terms of this Section 5. 5.8 TERMINATION OF RIGHTS OF FIRST REFUSAL. The Rights of First Refusal under Section 5 shall not apply to and shall terminate immediately before the closing of the Company's Initial Public Registration and shall be reinstated if there is no closing. -20- 6. CO-SALE RIGHT AMONG STOCKHOLDERS AND SUBORDINATED WARRANT HOLDERS. 6.1 GENERAL. To the extent the Company or its assignee(s) and the Remaining Stockholders fail to exercise their Rights of First Refusal under Section 5.3, a Selling Stockholder proposing to sell at least 1% of the Company's outstanding voting securities (assuming conversion of all Preferred Stock and any other securities convertible into Common Stock, but not including options or warrants to acquire Common Stock) shall send a written notice (the "SECOND NOTICE") to all Stockholders and Subordinated Warrant Holders containing the terms and conditions of the proposed transfer and the number of Offered Shares, within sixty (60) days of sending the original Notice pursuant to Section 5.2, but no later than twenty-one (21) days prior to the contemplated closing date of such proposed sale. (a) The mailing of the Second Notice by a Selling Stockholder pursuant to this Section 6.1 shall trigger the right of all Subordinated Warrant Holders to exercise their Subordinated Warrants on the seventh (7th) day prior to the closing of such proposed sale by a Selling Stockholder as provided in the Subordinated Warrant Agreement. If, however, the sale of at least 1% of the Company's voting securities is not consummated by a Selling Stockholder (together with the co-sales by other parties hereto pursuant to this Section 6), the Subordinated Warrants shall be deemed not exercisable and any payment of the exercise price of any Subordinated Warrant which has been exercised shall be immediately returned to the exercising holder of such Subordinated Warrant. After the closing of any such sale of greater than 1% of the Company's voting securities (an "EXERCISE EVENT"), all Subordinated Warrants shall be exercisable under the terms of the Subordinated Warrant Agreement. (b) Within fourteen (14) days after the date of a Second Notice, each of the Stockholders and Subordinated Warrant Holders shall notify the Selling Stockholder, if such holder elects to participate in such transfer. Each participating Stockholder and Subordinated Warrant Holder (upon exercise of its Subordinated Warrant) shall then have the right to sell, at the same price and on the same terms as the Selling Stockholder, an amount of shares equal to the number of shares to be sold or transferred multiplied by a fraction, the numerator of which shall be the number of shares of Common Stock (assuming conversion of all Preferred Stock and any other securities convertible into Common Stock, but not including options or warrants to acquire Common Stock) held by the participating Stockholder or Subordinated Warrant Holder and the denominator of which shall be the sum of the number of shares of Common Stock (assuming conversion of all Preferred Stock and any other securities convertible into Common Stock, but not including options or warrants to acquire Common Stock) held by the Selling Stockholder and all participating Stockholders and Subordinated Warrant Holders; provided, however, that any shares of Common Stock acquired prior to the proposed closing date upon exercise of any options or warrants held by a Stockholder or Subordinated Warrant Holder and Subordinated Warrant Shares held by a Subordinated Warrant Holder will be counted for purposes of such determinations. -21- (c) Any sales (except to affiliates) of voting securities of the Company by a Stockholder in any six (6) month period shall be aggregated for purposes of determining whether the obligations of this Section 6.1 apply. If the number of voting securities sold by and proposed to be sold by a Stockholder exceed 1% of the Company's voting securities (as calculated above) during any six (6) month period, the obligations under this Section 6.1 shall apply to such Stockholder. 6.2 CLOSING. The participating Stockholders and Subordinated Warrant Holders agree to enter into an agreement with the purchaser on terms and conditions identical, to the extent feasible, with the agreement entered into by the Selling Stockholder providing representations and warranties and other terms and conditions agreed to by the Selling Stockholder. 6.3 TRANSFERS. In the event that the Selling Stockholder sells or transfers any shares of the Company's Common Stock or Common Stock equivalents to any party as permitted by Section 5.7 above, any subsequent sales or transfers by such party shall be subject to all the terms and conditions of this Section 6. 6.4 TERMINATION. The Co-Sale Right described in this Section 6 shall not apply to and shall terminate upon the closing of the Company's Initial Public Registration and shall be reinstated if there is no closing. 7. CONFIDENTIALITY. Each Stockholder, Subordinated Warrant Holder and Class C Common Holder hereby agrees to safeguard against disclosure to third parties and not to use except as specifically authorized herein (or by agreements executed pursuant hereto) all confidential information concerning the business of the Company that may be disclosed to such Stockholder or Subordinated Warrant Holder or Class C Common Holder by reason of such Stockholder's or Subordinated Warrant Holder's or Class C Common Holder's access to the books, records, properties or personnel of the Company before or after the date hereof in its capacity as Stockholder or Subordinated Warrant Holder or Class C Common Holder (collectively, "COMPANY CONFIDENTIAL INFORMATION") by using reasonable secrecy measures and in no event less than the same degree of care as such Stockholder or Subordinated Warrant Holder or Class C Common Holder uses for such Stockholder's or Subordinated Warrant Holder's or Class C Common Holder's own similar proprietary information. However, a Stockholder or Subordinated Warrant Holder or Class C Common Holder shall not be obligated to maintain any such Company Confidential Information in confidence to the extent that: (i) the Company Confidential Information is or becomes public knowledge other than through the fault of such Stockholder or Subordinated Warrant Holder or Class C Common Holder; (ii) the Company Confidential Information is or becomes available on an unrestricted basis to such Stockholder or Subordinated Warrant Holder or Class C Common Holder from a source other than the Company; or (iii) the Company Confidential Information is required to be disclosed by such Stockholder or Subordinated Warrant Holder or Class C Common Holder, under a court order or governmental action, provided, however, that such Stockholder or Subordinated Warrant Holder or Class C Common Holder provides not less than thirty (30) days' prior written notification to the Company of such obligation and seeks, or allows the Company to seek, an appropriate protective order, and provided further, that disclosure solely pursuant to this clause (iii) shall not release a -22- Stockholder or Subordinated Warrant Holder or Class C Common Holder from such Stockholder's or Subordinated Warrant Holder's or Class C Common Holder's obligation to maintain confidentiality. Notwithstanding the foregoing, a Stockholder, Subordinated Warrant Holder or Class C Common Holder that is a registered investment company or similar entity under the Investment Company Act of 1940, as amended, shall be permitted to disclose Company Confidential Information (a) to such of its respective officers, directors, employees, agents, affiliates and representatives as need to know such Company Confidential Information (who will be informed of the confidential nature of such information and who agrees to treat such Confidential Information in accordance with this paragraph), and (b) to the extent otherwise required by applicable laws and regulation or by any subpoena or similar legal process, or requested by any regulatory authority, without prior notification to the Company. The provisions of this Section 7 shall not restrain a Subordinated Warrant Holder from disclosing Company Confidential Information to any potential purchaser of Subordinated Warrants; provided that such potential purchaser agrees in writing to be bound by provisions substantially similar to the provisions of this Section 7. 8. CERTAIN RIGHTS OF SUBORDINATED WARRANT HOLDERS. 8.1 RIGHT TO APPROVE CERTAIN TRANSACTIONS. The Stockholders and Class C Common Holders acknowledge that, with respect to any proposed Change of Control (as defined in the Subordinated Warrant Agreement) the consummation of which would be subject to approval by the Stockholders, the Company shall consider the consents of the Subordinated Warrant Holders as though the Subordinated Warrants had been exercised and were entitled to vote. 8.2 GENERAL. The Company hereby grants to each Subordinated Warrant Holder the right of participation to purchase such Subordinated Warrant Holder's Participating Share (as defined below) of New Securities (as defined in subsection 8.3(b) and subject to the terms of Section 8.2(b)) that the Company may, from time to time, propose to sell and issue. A "PARTICIPATING SHARE", for purposes of this right of participation with respect to any Subordinated Warrant Holder, shall be calculated as (a) with respect to any offering of New Securities, after giving effect to which the aggregate gross proceeds yielded by issuances of New Securities by the Company after the date of the original issuance of the Subordinated Warrants would be less than $10,000,000, the ratio that twice the number of shares of Common Stock (assuming conversion of all Subordinated Warrants) held by such Subordinated Warrant Holder bears to the total number of shares of Common Stock outstanding immediately prior to the time of issuance of such New Securities (assuming conversion into Common Stock of all outstanding Preferred Stock and any other securities convertible into Common Stock and all options and warrants to acquire Common Stock), and (b) with respect to any subsequent offering of New Securities, the ratio that the number of shares of Common Stock (assuming conversion of all Subordinated Warrants) held by such Subordinated Warrant Holder bears to the total number of shares of Common Stock outstanding immediately prior to the time of issuance of such New Securities (assuming conversion into Common Stock of all outstanding Preferred Stock and any other securities convertible into Common Stock and all options and warrants to acquire Common Stock); provided, however, that in such event each Subordinated Warrant Holder shall have the right of participation to purchase such Subordinated Warrant Holder's Participating Share of only those New Securities to be issued to Insiders in connection with such offering. This right of participation shall be subject to the following provisions: -23- 8.3 CERTAIN DEFINITIONS. For the purposes of this Section 8: (a) "INSIDERS" shall mean all Major Stockholders and all directors and executive officers of the Company. (b) "NEW SECURITIES" shall mean any Common Stock or Preferred Stock of the Company, whether or not now authorized, and any rights, options, or warrants to purchase said Common Stock or Preferred Stock, and securities of any type whatsoever that are, or may become, convertible into or exchangeable for Common Stock or Preferred Stock; provided, however, that "NEW SECURITIES" shall not include (i) securities issuable upon conversion of or with respect to the Series AA Preferred Stock, Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, or Series D Preferred Stock or upon conversion of or with respect to any other Preferred Stock subsequently issued; (ii) securities offered to the public pursuant to a registration statement filed under the Securities Act; (iii) securities issued pursuant to the acquisition of another unaffiliated corporation by the Company by merger, purchase of substantially all of the assets, or other reorganization whereby the Company owns not less than 50% of the voting power of the surviving corporation; (iv) shares of the Company's Common Stock (or related options or warrants) issued to employees, officers, directors, consultants, or other persons performing services for the Company (including, but not by way of limitation, distributors and sales representatives) pursuant to any stock offering, plan, or arrangement approved by a majority of the non-employee members of the Board of Directors of the Company; (v) securities issued pursuant to or in connection with any corporate partnership, joint venture or licensing arrangement with a non-affiliate or in connection with an unaffiliated equipment lease financing or bank debt into which the Company may enter; (vi) the Subordinated Warrants issued in connection with the issuance of the Subordinated Notes; (vii) shares of the Company's Common Stock or Preferred Stock issued in connection with any stock split, stock dividend, or recapitalization by the Company; (viii) securities issued upon the exercise of outstanding warrants of the Company as of the date of the initial issuance of the Subordinated Warrants after giving effect to the issuance of the Warrants; (ix) securities issuable upon conversion of or with respect to the Class C Common Stock; (x) securities issued pursuant to the acquisition of Sarnoff Real Time Corporation by the Company or (xi) warrants to purchase Common Stock, and the securities issuable upon the exercise thereof, issued in connection with the offering of 12.625% Senior Discount Notes due March 1, 2008 issued on February 19, 1998, as governed by the Indenture between the Corporation and the Bank of New York as Trustee dated as February 19, 1998. -24- 8.4 MECHANICS OF RIGHT. (a) Notices; Participating Rights. In the event that the Company proposes to issue New Securities, it shall give each such Subordinated Warrant Holder written notice (the "FIRST NOTICE") of its intention, describing the type of New Securities, the price, and the general terms upon which the Company proposes to issue the same. Within fifteen (15) days after receipt of the First Notice, the Subordinated Warrant Holder shall give the Company written notice (the "SUBORDINATED WARRANT HOLDER NOTICE") of its intention to purchase or obtain, at the price and on the terms specified in the Notice, its Participating Share of the New Securities. In addition, the Subordinated Warrant Holder Notice shall state whether a Subordinated Warrant Holder wishes to purchase more than its Participating Share of the New Securities. The Company shall promptly give written notice to each Subordinated Warrant Holder that purchases its Participating Share of the New Securities (a "FULLY-EXERCISING INVESTOR") of the amount of New Securities, if any, that other Major Stockholders or Subordinated Warrant Holders do not elect to purchase in response to the First Notice (the "SECOND NOTICE"). Each Fully-Exercising Investor shall notify the Company within five (5) days of receipt of the Second Notice if it would like to purchase any of the unsubscribed shares and indicate the maximum number of unsubscribed shares it would like to purchase. The Company shall inform the Fully-Exercising Investors of the total number of unsubscribed shares available and provide the Fully-Exercising Investors with an allocation of the unsubscribed shares based on the number of shares of Common Stock (assuming conversion of all Subordinated Warrants) held by each Fully-Exercising Investor. (b) Company Right. To the extent that the Subordinated Warrant Holders fail to exercise in full the right of first offer as provided in subsection 8.4(a) hereof, the Company shall have ninety (90) days thereafter to sell (or enter into an agreement pursuant to which the sale of New Securities covered thereby shall be closed, if at all, within said ninety (90) day period) the New Securities respecting which the Subordinated Warrant Holders' rights were not exercised, at a price and upon general terms no more favorable to the purchasers thereof than specified in the Company's notice. In the event the Company has not sold the New Securities within said ninety (90) day period (or sold and issued New Securities in accordance with the foregoing within ninety (90) days from the date of said agreement), the Company shall not thereafter issue or sell any New Securities, without first offering such securities to the Subordinated Warrant Holders in the manner provided above. (c) No Impairment. A Subordinated Warrant Holder's failure to exercise this right of first refusal on any issuance of New Securities shall not adversely affect the Subordinated Warrant Holder's right of first refusal to purchase subsequent issuances of New Securities. (d) Closing. The participating Investors shall be included in the same closing as the closing with other investors, provided, however, that the participating Investors shall not be required to close sooner than thirty (30) days after the date of the First Notice. The participating Investors shall be parties to the same agreement as the other investors purchasing New Securities, which shall include reasonably acceptable representations, warranties and covenants by the Company. -25- 8.5 TERMINATION. The rights of participation under this Section 8 shall not apply to and shall terminate immediately before the closing of the Company's Initial Public Registration and shall be reinstated if such closing does not occur. 8.6 ASSIGNMENT. The rights of participation granted under this Section 8 may be assigned to any party that meets the requirements of a Subordinated Warrant Holder; provided, however, in each case that such assignee agrees in writing with the Company to be bound by all of the provisions of this Section 8. 9. MISCELLANEOUS. 9.1 ALL SHARES HELD BY STOCKHOLDERS OR SUBORDINATED WARRANT HOLDERS. The terms and conditions of this Agreement govern all shares of Common Stock or Preferred Stock held or acquired by any party to this Agreement subsequent to the date of this Agreement and before the Company's Initial Public Registration. In the event of a conflict between the terms of this Agreement and similar terms in an option agreement or other agreement governing shares of stock held by a Stockholder or Subordinated Warrant Holder, the terms of this Agreement shall govern. 9.2 ADDITIONAL PARTIES. From time to time, the Company may add Stockholders to this Agreement without the consent of the existing Stockholders or Subordinated Warrant Holders; provided, however, that the rights of the new Stockholders are not superior to or different from the rights of the existing Stockholders; and provided, further, that such Stockholders (and the shares held by such Stockholders) shall be excluded from the determination of the Holders whose consent is required under Section 3.12, unless the addition of such Stockholder is approved pursuant to Section 9.9. 9.3 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 transferees and permitted assigns of the parties. 9.4 GOVERNING LAW. This Agreement shall be governed by and construed under the internal laws of the State of Delaware as applied to agreements among Delaware residents entered into and to be performed entirely within Delaware, without reference to principles of conflict of laws or choice of laws. 9.5 COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 9.6 HEADINGS. The headings and captions used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. All references in this Agreement to sections, paragraphs, exhibits and schedules shall, unless otherwise provided, refer to sections and paragraphs hereof and exhibits and schedules attached hereto, all of which are incorporated herein by this reference. -26- 9.7 NOTICES. Unless otherwise provided, any notice required or permitted under this Agreement shall be given in writing and shall be deemed effectively given the earlier of (i) when received, (ii) upon personal delivery to the party to be notified, (iii) one business day after delivery via facsimile, (iv) one day after being deposited with an overnight courier service or (v) three days after deposit with the United States Post Office, by registered or certified mail, postage prepaid and addressed to the party to be notified at the address set forth on the signature page of this Agreement, or at such other address as such party may designate by ten days advance written notice to all other parties. 9.8 ATTORNEYS' FEES. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorneys' fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled. 9.9 AMENDMENTS AND WAIVERS. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the holders of more than 50% of the Registerable Securities; provided, however, that amendment or waiver of the provisions of Section 4, 5 and 6 shall require the written consent of the holders of at least 75% of the Registerable Securities; provided further, the Company shall not effect any amendment to Section 6 which eliminates or substantially impairs the Co-Sale Right of the Subordinated Warrant Holders or the rights of the Subordinated Warrant Holders under Section 8 without the prior written consent of holders of at least a majority of the Subordinated Warrant Shares. Any such amendments or waivers will be binding on all parties hereto except where the amendment or waiver affects a right or creates an obligation that is specific to a party named herein (whether an individual, trust, partnership or corporation), in which event the amendment or waiver of such right or creation of such obligation requires the consent of such party. 9.10 SEVERABILITY. If one or more provisions of this Agreement are held to be unenforceable under applicable law, such provision(s) shall be excluded from this Agreement and the balance of the Agreement shall be interpreted as if such provision(s) were so excluded and shall be enforceable in accordance with its terms to the maximum extent possible. 9.11 ENTIRE AGREEMENT. This Agreement, together with all exhibits and schedules hereto, constitutes the entire understanding and agreement of the parties with respect to the subject matter hereof and supersedes all prior negotiations, correspondence, agreements, understandings, duties or obligations among the parties with respect to the subject matter hereof. 9.12 FURTHER ASSURANCES. From and after the date of this Agreement, upon the request of a party, the other parties shall execute and deliver such instruments, documents or other writings as may be reasonably necessary or desirable to confirm and carry out and to effectuate fully the intent and purposes of this Agreement. -27- STOCKHOLDER RIGHTS AGREEMENT ________________________________________________________________________________ IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. DIVA SYSTEMS CORPORATION Signature of Authorized Signatory Name of Signatory Title of Signatory STOCKHOLDERS Name of Stockholder Signature of Authorized Signatory Name of Signatory Title of Signatory STOCKHOLDER RIGHTS AGREEMENT ________________________________________________________________________________ SUBORDINATED WARRANT HOLDERS Name of Warrant Holder Signature of Authorized Signatory Name of Signatory Title of Signatory -29- STOCKHOLDER RIGHTS AGREEMENT ________________________________________________________________________________ CLASS C COMMON STOCK HOLDERS Name of Class C Common Stock Holder Signature of Authorized Signatory Name of Signatory Title of Signatory -30- EXHIBIT A STOCKHOLDERS PARTICIPATING IN STOCKHOLDER RIGHTS AGREEMENT STOCKHOLDER ----------- Acorn Ventures, Inc. Algier, Gary A. Allen & Company Anderson, Bruce J. Armacost, Samuel H. and MaryJane Armacost as Trustees for the Armacost Trust dated 11/23/93 Armstrong, James B. Baldwin, Karen BEA Income Fund, Inc. BEA High Yield Portfolio Birks, David A. Blazerhold & Co., as nominee for Ameritech Corporation Bleidt, Robert L. Boccanfuso, Vincent J. Jr. Booth & co. as nominee for Abbott Labs Bost & Co. as nominee for Agway Inc. Employee High Yield Bost & Co. as nominee for Central States Bost & Co. as nominee for Mobil Oil Corp. Bost & Co. as nominee for Putnam High Yield Fixed Income DBT Bost & Co. as nominee for Putnam High Yield Fixed Income Trust Bost & Co. as nominee for Putnam High Yield Managed Trust Brescia, Rocco J. Bressler, Cynthia L. Burke, William J. Bushell, Alan H., Trustee of the Alan H. Bushell Revocable Intervivos Trust UTD 5/13/91 Campbell, Bruce D. Campodonico Children's Irrevocable Trust Caputo, Phyllis H. Carlson, Curtis R. Carnes, James E. Catanese, Carmen A. Chazin, Morris Chin, Danny Chinatti, Stephen A. Clingham, James H. Connolly, Barbara A. Cook, Gavin B. Cook, Paul M. and Marcia L. Cook as Trustees of the Paul and Marcia Cook Living Trust dated April 21, 1992 Cook, Paul M., Trustee of the Richard B. Souter Irrevocable Trust dtd 11/28/95 Cook, Paul M. and Marcia L. Cook, Trustees of the Susan Groton 1996 Irrevocable Trust dtd 3/18/96 Dandrea, Robert G. Davis, Wright, Tremaine 401k P.S.P & Trust DTD 1/1/72 FBO C. James Judson Drasner, Sharyn L. Dukes, Susan C. Edinger, Howard C. Jr. Ettenberg, Michael Evans, Robert M. Fjeldstad, Lucie Fontheim, Calude Fox, Edward C. Fredrickson, James M. Freeman, Smith Friel, Thomas J. Frim, Erick J. General Retirement Systems of the City of Detroit Gibbons, James F. Gokhale, Maya B. Goodall, Ronald W. Graham, Bill Greenberg, Arthur Grossman Investments Groton, Susan, Trustee of the Steven Joseph Anthony Groton 1994 Trust dtd 12/23/94 Groton, Susan, Trustee of the Allison Marie Groton 1994 Trust dtd 12/23/94 Groton, Susan, Trustee of the Andrew Michael Souter 1994 Trust dtd 12/23/94 Guyer, Anthony W Haimowitz, Jules Hambrecht & Quist California Hancs, Gavril Hare & Co. as nominee for Southern Farm Bureau Harris, Robert E. Hart, William Henry, Raymond E. Herrick, Edward D. Herzig, Alan Herzog, Robert M. Hurst, R. Norman Jr. Huss, Elmer G. and Joan L. Isnardi, Michael A. Janssen, Gerald A. Jessup, Ansley W. Jr. Kaba, James T. Kalar, Duane E., Trustee of the Duane E. Kalar, D.D.S. Kelen, Erwin A. Family Limited Partnership Kern, Harry M. Knamm, Willard E. Knight, Stanley P. Knight, Stanley P. & Sharon K. Knight, JTWROS Korsun, Victor Kratzer, Lawrence A. Krishnamoorthy, Badri Lamont, Nadine Larson, Christopher Lenfest, H.F. Lerman, Jesse S. Levin, Ludmila B. Levy, James and Marcia Community Property Trust Lieberman, Arthur M. Trust Lieberman, Mark S. Lister, Mark Lovell, Gayle Lumry, Rufus W. Lyddon, John K. and Claire A. Griffin, Joint Tenants, WROS Lyddon, Dorothy S., Trustee of the Dorothy S. Lyddon Revocable Trust dated 2/15/90 Manca, Paul G. Markel, Scott A. Matey, James R. McCormack, Richard J. McKean, Elvira Merrill Lynch Global Allocation Fund, Inc. Meyer, Thomas J. Minnich, Ronald G. Molbak, Jens H. and Catherine Blair Carleton Moller, Jeffrey B. Monier, Michael H. Montopoli, Duane C. Muico & Co. as nominee for PCM Diversified Income Fund Muico & Co. as nominee for PCM Diversified Income Trust Muico & Co. as nominee for PCM High Yield Fund Muico & Co. as nominee for Putnam Convertible Opps & Income Muico & Co. as nominee for Putnam Diversified Income Fund Muico & Co. as nominee for Putnam Diversified Income II Muico & Co. as nominee for Putnam Diversified Income Trust II Muico & Co. as nominee for Putnam High Yield Muico & Co. as nominee for Putnam High Yield Advantage Muico & Co. as nominee for Putnam High Yield Advantage Fund Muico & Co. as nominee for Putnam High Yield Fund Muico & Co. as nominee for Putnam Managed High Yield Trust Muico & Co. as nominee for Putnam Master Income Trust Muico & Co. as nominee for Putnam Master Intermediate Income Muico & Co. as nominee for Putnam Premier Income Trust Nguyen, Tieng D. Noel, Joseph A. Northwestern University Norwest Bank Minnesota, N.A. Trustee of the John A. Rollwagen Self-Directed IRA Nowak, Keith OKGBD & Co. Olender, Donald M. Omaha Public School Employee Retirement System Osborne, Georgia O'Harrah, James E. Palmer, Elizabeth C. Pappas, Dorothy Pappas, Nicholas Parmer, Jonathan & Roberta Passe, Joseph P. III Patterson & Co FBO SEI Institutional Managed Trust Pearson, John C. Perkin-Elmer Corp. EM Perkins, Christopher T. Perlman, Stuart S. Perlroth, Mark G. Perlroth, Victor Perry, David L., Trustee of the David L. Perry 1993 Trust U/A 04/14/93 Peters, Joseph E. Jr. Pfund, Nancy, Trustee of The Pfund Polakoff Family Trust dated 2/18/93 Piccillo, Nicole L. Picone, Joseph A. Pierantozzi, Donald C. Pollack, Jeremy D. Pollack, Jeremy D. and Marcia E., JTWROS Pruss, Steven T. Quartner, Andrew A. Raman, Raji V. Ramaswamy, Srinath Reitmeier, Glenn A. Rhein, Arthur RJR Nabisco Domestic High Yield Rollwagen, John A. Samuels-Kalow, Janet Sarnoff Corporation Sarnoff Real Time Corporation Schmidlin, Walter A. Jr. Schmidt, Mary M. Seidl, John M. Shindler, Steven M. Smith, Terrence R. Smith, Chester S. Sommers, Dr. William Sommerschuh, Rosemary Souter, Richard, Trustee of the Elizabeth Anne Souter 1994 Trust dtd 12/23/94 Spatz, Sterling Springut, Marsha St. Paul Venture Capital IV LLC St. Paul Venture Capital Affiliates Fund I, LLC Stein, Isaac and Madeline Johnson Stein, Trustees of The Stein 1995 Revocable Trust Stork, Carl Suburban Cable Sydnes, William L. Tashman, Emily Huss Taylor, Herbert H. Jr. Taylor, Clement G. Texaco, Inc. Towell, Timothy C. Trosby, Doris Trower, Tandy W. and Susan Trower JTWROS Trustee, WSGR Retirement Plan, FBO Barry E. Taylor Vail Vanozzi, Frederick J. Wainczak, Lauren Walsh, Carol G. Warnock, David J. Western Investments Capital, LLC Whitney, Mark Winarsky, Norman D. WS Investment Company 95B Yeh, Paul P. Zack, Steven Zalud, Peter F. EXHIBIT B SUBORDINATED WARRANT HOLDERS PARTICIPATING IN STOCKHOLDER RIGHTS AGREEMENT WARRANT HOLDER -------------- .Putnam High Yield Managed Trust Putnam High Yield Fixed Income Trust (DBT) Putnam High Yield Advantage Fund Putnam Capital Manger Trust - High Yield Fund Putnam Asset Allocation Fund - Balanced Portfolio Putnam Asset Allocation Fund - Conservative Portfolio Putnam Asset Allocation Fund - Growth Portfolio Putnam High Income Convertible and Bond Fund Putnam Master Income Trust Putnam Premier Income Trust Putnam Master Intermediate Income Trust Putnam Diversified Income Trust Putnam Diversified Income Trust II Putnam Capital Manger Trust - Diversified Income Fund Putnam Convertible Opportunities & Income Trust Putnam High Yield Trust Ameritech Pension Trust Central States SE and SW Areas Pension Fund Dana-Farber Cancer Institute .Prospect Street Investors .BEA Associates .Smith Barney Inc. for the account of Acorn Ventures, Inc. Paul M. Cook and Marcia L. Cook as Trustees of the Paul and Marcia Cook Living Trust dated April 21, 1992 EXHIBIT C CLASS C COMMON HOLDERS PARTICIPATING IN STOCKHOLDER RIGHTS AGREEMENT N.S. Telcom (Quebec) Inc. Jack Van Der Star Don Iannucci DLR Capital Corporation David Geoffrey Hawkins Max Anthony Pierrotti F.H.M. Properties Ltd. EX-10.10 15 LEASE ENTERED INTO JULY 13, 1995 EXHIBIT 10.10 OFFICE LEASE PREAMBLE This lease is entered into on July 13, 1995, by and between SRI International, a nonprofit corporation, referred to in this lease as "Landlord," and DIVA Systems Corporation, a Delaware corporation, referred to in this lease as "Tenant." Subject to the terms and conditions set forth in this lease, Landlord hereby leases to Tenant certain space on the second floor of the building located at 333 Ravenswood Avenue, Menlo Park, California, which is currently known as "I" Building ("the Building"). Effective July 10, 1995, the space referred to in this lease as the "Leased Space," shall consist of Suites IR217, IR219, IR220, IR221. Effective August 1, 1995, the Leased Space shall consist of Suites IR250, IR252, and IR254. Landlord reserves the right to renumber and redesignate at any time during this lease the number of any space in the Building, including the Lease Space. TERM 1. The term of this lease shall be a period not to exceed one (1) year commencing at 12:01 A.M. on July 10, 1995, and ending at 12:01 A.M. on June 30, 1996, unless terminated earlier as provided in this lease. Either Landlord or Tenant may terminate this lease upon thirty (30) days written notice to the other as required by the notice requirements of this lease. BASIC RENT 2. Tenant agrees to pay to Landlord as basic rent, for the use and occupancy of the Leased Space, the sum of $2.00 per square foot. The total square footage of the Leased Space shall be 603 square feet for the period July 10, 1995 through July 31, 1995. The total monthly rent for this period shall be $844.20, representing the prorated amount due based upon a monthly rental amount of $1,206.00. Effective August 1, 1995, the total square footage of the Leased Space shall increase to 1,271 square feet. The total monthly rent shall increase to $2,542.00 per month payable on the first day of each and every month commencing August 1, 1995, and continuing throughout the term of this lease. All rent shall be paid by Tenant at the office of Landlord in Room AG 139 of Building "A" or any other place or places that Landlord may from time to time designate by written notice given to Tenant. USE OF PREMISES 3. The Leased space shall be used for general office purposes by Tenant and for no other use or uses without the prior express written consent of Landlord. PROHIBITED USES 4. Tenant shall not commit or permit the commission of any acts on the Leased Space nor use or permit the use of the Leased Space in any way that: (a) Increases the existing rates for or causes cancellation of any fire, casualty, liability, or other insurance policy insuring the Building or its contents; (b) Obstructs or interferes with the rights of other tenants or occupants of the Building or injures or annoys them; or (c) Constitutes the commission of waste on the Leased Space or the commission or maintenance of a nuisance as defined by the laws of California. ALTERATIONS BY TENANT 5. No alteration, addition, or improvement to the Lease Space shall be made by Tenant without the written consent of Landlord. Concurrently with requesting Landlord's consent to the proposed alteration, addition, or improvement, Tenant shall submit to Landlord preliminary plans for the alteration, addition, or improvement. Landlord shall, in its sole discretion, approve or disapprove the proposed alteration, addition, or improvement, within 30 days after its receipt of Tenant's written request for approval. If Landlord fails to affirmatively approve or disapprove the proposed alteration, addition, or improvement within the same 30 day period, the proposed alteration, addition or improvement shall be deemed disapproved. If Landlord gives such written consent to any alteration, addition, or improvement to the leased premises, Landlord and Tenant shall agree in writing at that time to the date when that undertaking shall be completed. Tenant shall obtain all necessary governmental permits required for any alteration, addition, or improvement approved by Landlord and shall comply with all applicable governmental law, regulations, ordinances, and codes. All approved alterations, additions, or improvements to the Leased Space shall be performed by Landlord's Facilities staff. Upon completion of the work, Landlord shall provide Tenant with an itemized statement identifying all charges associated with the alteration, addition, or improvement and Tenant shall pay the amount invoiced within ten (10) days of receipt of the invoice. Any alteration, addition, or improvement made by Tenant, and any fixtures installed as part of the construction, shall at Landlord's option become the property of Landlord on the expiration or other earlier termination of this lease; provided, however, that Landlord shall have the right to remove the fixtures and to repair and restore any damages to the leased premises caused by such removal at Tenant's cost upon termination of this lease. SERVICES BY LANDLORD 6. Landlord shall provide heat, HVAC, electricity, water and janitorial service, all of which shall be included in the monthly rental fee. SERVICES NOT PROVIDED BY LANDLORD 7. Space is provided on an "as is" basis. Tenant will be responsible for providing its own telephone and other communication equipment and lines. Any such installations must be approved in advance by SRI Telecommunication Services. -2- MAINTENANCE AND REPAIRS 8. (a) Subject to the duty of the Landlord under this lease to provide regular cleaning service for the Leased Space and to perform maintenance and repairs for the Leased Space as needed, Tenant shall during the term of this lease maintain the Leased Space, in a good, clean, and safe condition, and shall on expiration or earlier termination of this lease surrender the Leased Space to Landlord in as good condition and repair as existed on the date of this lease, reasonable wear and tear excepted. Tenant, at Tenant's own expense, shall repair all deteriorations or injuries to the Leased Space or to the Building occasioned by Tenant's lack of ordinary care. (b) Except as otherwise provided in this lease, Landlord shall perform, at Landlord's sole expense, all repairs and maintenance for the Leased Space and the Building. Any repairs by Landlord shall be made promptly with first-class materials, in a good and workmanlike manner, in compliance with all applicable laws of all governmental authorities, and in a style, character, and quality conforming to the existing construction. Except in the case of any emergency, Landlord shall not enter the Leased Space for the purpose of effecting the repairs, alterations, or improvements other than during normal business hours, and shall give tenant 24-hours' notice of the intention to enter for those purposes. (c) Except for cases of emergency, Landlord shall make all repairs required hereunder as soon as is practical. In the event Landlord has not made a repair referred to in a written notice from Tenant to Landlord within 30 days after the date of that notice, Tenant shall have the right to have the repair performed and be reimbursed by Landlord. If the full amount of reimbursement is not delivered by Landlord to Tenant within 10 days after Tenant's delivery to Landlord of a written statement or bill evidencing the cost of the repair, Tenant shall have the right to deduct the cost of the repair from the next monthly rent payable to Landlord. (d) Cleaning maintenance for the Leased Space shall be regularly performed by Landlord. INSPECTION BY LANDLORD 9. Tenant shall permit Landlord or Landlord's agents, representatives, or employees to enter the Leased Space at all reasonable times for the purpose of inspecting the Leased Space to determine whether Tenant is complying with the terms of this lease and for the purpose of doing other lawful acts that may be necessary to protect Landlord's interest in the Leased Space under this lease. COMMON AREAS OF BUILDING 10. (a) Landlord shall make available at all times during the term of this lease in any portion of the Building that Landlord from time to time designates or relocates, automobile parking and common areas (jointly referred to as "common areas," as that term is defined below) as Landlord shall from time to time deem appropriate. Tenant shall have the nonexclusive right during the term of this lease to use the common areas for itself, its employees, agents, customers, clients, invitees, and licensees. -3- (b) The term "common areas" means the portions of the Building that, at the time in question, have been designated and improved for common use by or for the benefit of more than one tenant of the Building, including the parking areas; access and perimeter roads; landscaped areas; exterior walks, roofs, stairways, elevators, escalators and/or ramps; interior corridors, elevators, stairs, and balconies; directory equipment; the main entry lobby; restrooms; and drinking fountains. Landlord reserves the right to redesignate a common area for a noncommon use or to designate as a common area a portion of the Building not previously designated a common area. (c) All common areas shall be subject to the exclusive control and management of Landlord or any other persons or nominees that Landlord may have delegated or assigned to exercise management or control, in whole or in part, in Landlord's place and stead. Landlord shall have the right to close, if necessary, all or any portion of the common areas as is deemed necessary by Landlord in order to effect necessary repairs, maintenance, or construction, or to maintain the safety of tenants or the general public. Landlord will maintain the common areas in a clean, orderly, and sanitary manner. Landlord is responsible for all repairs of the common areas, except those required by the negligence of Tenant. (d) Landlord and Landlord's nominees and assignees shall have the right to establish, modify, amend, and enforce reasonable rules and regulations with respect to the common areas and the Building. Tenant shall fully and faithfully comply with and observe the rules and regulations for the common areas and the Building ("the Building Rules and Regulations"), of which the Leased Space is a part, including any additions or amendments to the Building Rules and Regulations that may be hereafter enacted by Landlord in Landlord's sole discretion. Tenant acknowledges receipt of a copy of the Building Rules and Regulations, which are attached to and made a part of this lease as Exhibit A. Landlord shall not be liable in any way for failure of any other occupant of the Building of which the Leased Space is a part to comply with and observe these rules and regulations. PARKING RIGHTS AND OBLIGATIONS 11. Included in the rent payable by Tenant under this lease for the Leased Space, Tenant shall have the exclusive right to seven (7) parking spaces in the parking area, for use by it and its employees. Subject to availability, Tenant may lease additional spaces at an additional cost of $35 per space per month. Landlord may in its sole discretion reconfigure the parking area and renumber the parking spaces or reassign Tenant or other tenants different parking spaces, provided that Tenant at all times is entitled to seven parking spaces. UTILITIES FURNISHED BY LANDLORD 12. Landlord shall, at Landlord's own cost and expense, provide the following utilities to the Leased Space and the Building: (a) Water and electricity for the Leased Space and the Building; available Monday through Friday, during regular business hours; -4- (b) Heating and air conditioning for the Leased Space and Building; available Monday through Friday, during regular business hours. TENANT'S INSURANCE 13. For the mutual benefit of Landlord and Tenant, Tenant shall during the term of this lease cause to be issued and maintained public liability insurance in the sum of at least $500,000 for injury to or death of one person, and $1,000,000 for injury to or death of more than one person in any one accident, insuring the Tenant against liability for injury and/or death occurring in or on the Leased Space or the common areas. Landlord shall be named as an additional insured and the policy shall contain cross--liability endorsements. The Tenant shall maintain all such insurance in full force and effect during the entire term of this lease and shall pay all premiums for the insurance. Evidence of insurance and of the payment of premiums shall be delivered to Landlord upon request. 14. The Tenant shall provide and maintain at its own expense during the entire term of this lease workers compensation insurance in amounts required by applicable state laws. INSURANCE FOR TENANT'S PERSONAL PROPERTY 15. Tenant agrees at all times during the term of this Lease to keep, at Tenant's sole expense, all of Tenant's personal property, including trade fixtures and equipment that may be on or in the Leased Space from time to time, insured against loss or damage by fire and by any period included within fire and extended coverage insurance for an amount that will insure the ability of Tenant to fully replace the personal property, trade fixtures, and equipment. INDEMNIFICATION 16. Landlord shall not be liable to Tenant, and Tenant hereby waives any and all claims against Landlord, for any injury or damage to any person or property in or about the Leased Space or any part of the Leased Space by or from any cause whatsoever, except injury or damage to Tenant resulting from the acts or omissions of Landlord or Landlord's authorized agents. Tenant shall hold Landlord harmless from and indemnify Landlord against any and all claims or liability for any injury or damage to any person or property whatsoever (1) occurring in, on, or about the Leased Space or any part of it, and (2) occurring in, on, or about any common areas of the Building when that injury or damage was caused in part or in whole by the act, neglect, fault of, or omission of any duty by Tenant, its agents, servants, employees, or invitees. DESTRUCTION OF LEASED SPACE OR BUILDING 17. If the Leased Space or the Building of which it is a part is damaged or destroyed by any cause not the fault of Tenant, Landlord shall at Landlord's sole cost and expense promptly repair it, and the rent payable under this lease shall be abated for the time and to the extent Tenant is prevented from occupying the Leased Space in its entirety. Notwithstanding the foregoing, if the Leased Space or the Building is damaged or destroyed and repair of the damage or destruction cannot be completed within 30 days, Landlord may, in lieu of making the repairs required by this paragraph, terminate this lease by giving Tenant 10 days' written notice of termination. A notice of -5- termination must be given by Tenant not later than 30 days after the event causing the destruction or damage. CONDEMNATION 18. (a) If all or any part of the Leased Space is taken by any public or quasi-public agency or entity under the power of eminent domain during the term of this lease: (1) Either Landlord or Tenant may terminate this lease by giving the other 10 days' written notice of termination; provided, however, that Tenant cannot terminate this lease unless the portion of the Leased Space taken by eminent domain is so extensive as to render the remainder of the Leased Space useless for the uses permitted by this lease. (2) If only a portion of the Leased Space is taken by eminent domain and neither Landlord nor Tenant terminates this lease, the rent thereafter payable under this lease shall be reduced by the same percentage that the floor area of the portion taken by eminent domain bears to the floor area of the entire Leased Space. (3) If any portion of the Building other than the Leased Space is taken by eminent domain, Landlord may, at its option, terminate this lease by written notice to Tenant. (4) Any and all damages and compensation awarded to paid because of a taking of the Leased Space or the Building shall belong to Landlord, and Tenant shall have no claim against Landlord or the entity exercising eminent domain power for the value of the unexpired term of this lease or any other right arising from this lease. ASSIGNMENT AND SUBLETTING 19. Tenant shall not encumber, assign, or otherwise transfer this lease, any right or interest in this lease, or any right or interest in the Leased Space without first obtaining the express written consent of Landlord, Furthermore, Tenant shall not sublet the Leased Space or any part of it or allow any other persons, other than Tenant's employees and agents, to occupy or use the Leased Space or any part of it without the prior written consent of Landlord. A consent by Landlord to one assignment, subletting, or occupation and use by another person shall not be deemed to be a consent to any subsequent assignment, subletting, or occupation and use by another person. Any encumbrance, assignment, transfer, or subletting without the prior written consent of Landlord, whether voluntary or involuntary, by operation of law or other wise, is void and shall, at the option of Landlord, terminate this lease. The consent of Landlord to any assignment of Tenant's interest in this lease or the subletting by Tenant of the Leased Space shall not be unreasonably withheld. ACTS CONSTITUTING BREACH BY TENANT 20. The following shall constitute a default under and a breach of this lease by Tenant: (a) The nonpayment of rent when due, when the nonpayment continues for 10 days after written notice to pay rent or surrender possession of the Leased Space has been given by Landlord to Tenant; -6- (b) A failure to perform any provision, covenant, or condition of this lease other than one for the payment of rent, when that failure is not cured within 10 days after written notice of the specific failure is given by Landlord to Tenant; (c) The breach of this lease and abandonment of the Leased Space before expiration of the term of this lease; (d) A receiver is appointed to take possession of all or substantially all of Tenant's assets, when possession is not restored to Tenant within 10 days; (e) Tenant makes a general assignment for the benefit of creditors; (f) The execution, attachment, or other judicial seizure of substantially all of Tenant's assets, when the seizure is not discharged within 10 days; or (g) The filing by or against Tenant of a petition to have Tenant adjudged or a petition for reorganization or arrangement under the federal bankruptcy law (unless, in the case of a petition filed against Tenant, it is dismissed within 10 days. LANDLORD'S REMEDIES 21. If Tenant breaches or is in default under this Lease, Landlord in addition to any other remedies given Landlord by law or equity, may: (a) Continue this lease in effect by not terminating Tenant's right to possession of the Leased Space and thereby be entitled to enforce all Landlord's rights and remedies under this lease including the right to recover the rent specified in this lease as it becomes due under this lease; or (b) Terminate this lease and all rights of Tenant under the lease and recover from Tenant: (1) The unpaid rent that had been earned at the time of termination of the lease; (2) The amount by which the unpaid rent that would have been earned after termination of the lease until the time of award exceeds the amount of rental loss that Tenant proves could have been reasonably avoided. (3) The amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of rental loss that Tenant proves could be reasonably avoided; and (4) Any other amount necessary to compensate Landlord for all detriment proximately caused by Tenant's failure to perform Tenant's obligations under this lease; or -7- (c) In lieu of, or in addition to, bringing an action for any or all of the recoveries described in subparagraph (b) of this paragraph, bring an action to recover and regain possession of the Leased Space in the manner provided by the California law of unlawful detainer then in effect. TERMINATION NOTICE 22. No act of Landlord, including but not limited to Landlord's entry on the Leased Space or efforts to relet the Leased Space, or the giving by Landlord to Tenant of a notice of default, shall be construed as an election to terminate this lease unless a written notice of the Landlord's election to do so is given to Tenant. WAIVER OF BREACH 23. The waiver by Landlord of any breach by Tenant of any of the provisions of this lease shall not constitute a continuing waiver or a waiver of any subsequent default or breach by Tenant either of the same or a different provision of this lease. NOTICES 24. Except as otherwise expressly provided by law, any and all notices or other communications required or permitted by this lease or by law to be served on or given to either party to this lease by the other party shall be in writing, and shall be deemed duly served and given when personally delivered to the party to whom it is directed or any employee of that party or, in lieu of personal service, when deposited in the United States mail, certified mail, return receipt requested, postage prepaid, addressed to Landlord at 333 Ravenswood Avenue, Menlo Park, California, 94025 or to Tenant at 333 Ravenswood Avenue, Menlo Park, California 94025. Either party may change its address for purposes of this paragraph by giving written notice of the change to the other party in the manner provided in this paragraph. ATTORNEYS' FEES 25. If any litigation is commenced between the parties to this lease concerning the Leased Space, this lease, or the rights and duties of either in relation to the Leased Space or the lease, the party prevailing in that litigation shall be entitled, in addition to any other relief grated, to a reasonable sum as and for its attorneys' fees in litigation, which sum shall be determined by the court in that litigation. BINDING ON HEIRS AND SUCCESSORS 26. This lease shall be binding on and shall inure to the benefit of the heirs, executors, administrators, successors, and assigns of the parties, but nothing in this paragraph shall be construed as a consent by Landlord to any assignment of this lease or any interest therein by Tenant except as provided in Paragraph 19 of this lease. TIME OF ESSENCE 27. Time is expressly declared to be of the essence in this lease. -8- SOLE AND ONLY AGREEMENT 28. This instrument constitutes the sole and only agreement between Landlord and Tenant respecting the Leased Space or the leasing of the Leased Space to Tenant, and sets forth the obligations of Landlord and Tenant to each other as of its date. Any agreements or representations respecting the Leased Space or their leasing by Landlord to Tenant not expressly set forth in this instrument are null and void. EXECUTED on _______________ at Menlo Park, San Mateo County, California. /s/ John Jay Osborn ---------------------------------------- SRI INTERNATIONAL LANDLORD /s/ Alan H. Bushell ---------------------------------------- DIVA SYSTEMS CORPORATION TENANT -9- EXHIBIT A BUILDING RULES AND REGULATIONS HALLS AND STAIRWAYS 1. Tenants shall not loiter in the halls and entryways, nor permit their employees or patrons to loiter in the halls and entryways, and shall not obstruct in any way the entryways, passages, stairways, elevators, and halls of the building or use them for any other purpose than ingress and egress to and from their respective offices. SIGNS 2. No sign, placard, picture, name, advertisement, or notice visible from outside a Tenant's premises shall be displayed in or on the Building without the express written consent of Landlord, and Landlord may remove, at the expense of Tenant, any sign, placard, picture, name, advertisement, or notice so displayed. LOCKS AND KEYS 3. No additional lock or locks shall be placed on any door in the Leased Space by Tenant without the prior written consent of Landlord. Tenant shall receive, without cost, two keys to each door having a lock in the Tenant's Leased Space. If Tenant desires extra keys to any door, Tenant must obtain them from Landlord and Landlord may impose a reasonable charge for them. WIRING AND ELECTRICITY 4. Wiring of any kind shall be introduced in the Building and connected only as directed by Landlord, and no boring or cutting for wires will be allowed except with the prior consent of Landlord. The location of all telephones and call boxes affixed to the Building shall be prescribed by Landlord. CONNECTION OF MACHINERY 5. Tenant shall not connect any apparatus, machinery, or device to the electric wires, water, or air pipes of the Building without the consent of Landlord. MOVING FURNITURE AND EQUIPMENT 6. Landlord shall prescribe the permissible times for moving equipment and furniture into the Building and Tenant's Leased Space. Tenant shall give the Landlord at least 24-hours' advance notice of the time Tenant intends to move furniture or equipment into Tenant's Leased Space. Landlord shall not be liable for any damage or loss caused by the moving of the furniture or equipment, and any damage to Building or Leased Space caused by the moving furniture or equipment shall be repaired at Tenant's expense. OBSTRUCTING LIGHT 7. The glass doors, windows, lights, and skylights admitting light into the halls and other common areas of the Building shall not at any time be covered or obstructed by Landlord or Tenant. LANDLORD'S OFFICE AND EMPLOYEES 8. Any respect of Tenant for service or any other matter connected with the Building must be made to and at the SRI Facilities department in Building 303, (415) 859-2222, Monday through Friday during regular business hours. In the event of an emergency during off-hours, Tenant shall contact SRI Security, Building E, (415) 859-2900. LOCKING OF ENTRANCE DOORS 9. All entrance and exit doors of the Building shall be open and unlocked by Landlord during the following hours: Monday through Friday, from 6:30 A.M. to 6:00 P.M. At all other times, including all national holidays, all entrance and exit doors shall be locked. ENTRY AFTER BUILDING CLOSED 10. Landlord shall provide Tenant with passes for after hours access to the building. Any person entering or leaving the Building at any time when its entrance and exit doors are closed and locked may be questioned about his or her business in entering or leaving the Building, and may be required to sign the Building register by security personnel. Any person not satisfying the security personnel that he or she has a right to enter the Building may be excluded from the Building. REMOVAL OF PERSONS 11. Landlord reserves the right to exclude and expel from the Building any person who, in the judgment of Landlord, is intoxicated or under the influence of any intoxicating beverage or drug or who in any manner violates any of these rules and regulations or creates, in the judgment of Landlord, a disturbance in the Building. NO CANVASSING OR SOLICITING 12. Canvassing, soliciting, and peddling in the Building are prohibited and Tenant shall promptly report to Landlord any person found by him or her to be canvassing, soliciting, or peddling in the Building. FURTHER RULES AND REGULATIONS 13. Landlord reserves the right to amend these rules and regulations and to make any other and further rules and regulations for the Building that, from time to time in the judgment of Landlord, are required for the orderly and safe conduct of Building operations. -2- [FLOOR PLAN] -3- FIRST MODIFICATION TO OFFICE LEASE WHEREAS, SRI INTERNATIONAL (SRI), hereinafter referred to as "Landlord", and DIVA SYSTEMS CORPORATION, hereinafter referred to as "Tenant", have entered into a lease dated July 13, 1995, for the rental of space in Building I, 333 Ravenswood Avenue, Menlo Park, California, the "Leased Space" as defined by the lease, and WHEREAS the parties now desire to include additional suites in the "Leased Space" and to increase the total monthly rental; NOW THEREFORE THE LEASE IS AMENDED AS FOLLOWS: The "Lease Space" as defined by paragraph 2 of the Preamble is increased to include Suite IR213 and IR215. The paragraph entitled "Basic Rent" is modified to read as follows: Effective October 1, 1995 the total square footage of the Leased Space shall increase to 1,495 square feet. The total monthly rental shall increase to $2,990.00 per month payable on the first day of each and every month commencing October 1, 1995, and continuing throughout the term of this Lease. Except as amended hereby, all other terms and conditions of said lease remain unchanged and in full force and effect. SRI INTERNATIONAL DIVA SYSTEMS CORPORATION By /s/ Thomas T. Little By /s/ Alan H. Bushell ---------------------------- ---------------------------- Title: Corporate Director, Support Operations Title: President Date: September 25, 1995 Date: September 26, 1995 FIRST [SECOND] MODIFICATION TO OFFICE LEASE WHEREAS, SRI INTERNATIONAL (SRI), hereinafter referred to as "Landlord," and DIVA SYSTEMS CORPORATION, hereinafter referred to as "Tenant," have entered into a lease dated July 13, 1995, for the rental of space in Building I, 333 Ravenswood Avenue, Menlo Park, California, the "Leased Space" as defined by the lease, and WHEREAS the parties now desire to include additional suites in the "Leased Space" and to increase the total monthly rental; NOW THEREFORE THE LEASE IS AMENDED AS FOLLOWS: The "Lease Space" as defined by paragraph 2 of the Preamble is increased to include Suite IS238 and IS240. The paragraph entitled "Basic Rent" is modified to read as follows: Effective December 1, 1995 the total square footage of the Leased Space shall increase by 230 square feet from 1,495 square feet to 1,725 square feet. The total monthly rental shall increase by $460 per month from $2,990 per month to $3,450.00 per month payable on the first day of each and every month commencing December 1, 1995, and continuing throughout the term of this Lease. Except as amended hereby, all other terms and conditions of said lease remain unchanged and in full force and effect. SRI INTERNATIONAL DIVA SYSTEMS CORPORATION By /s/ Thomas T. Little By /s/ Alan H. Bushell ---------------------------- ---------------------------- Title: Corporate Director, Support Operations Title: President Date: December 13, 1995 Date: December 13, 1995 THIRD MODIFICATION TO OFFICE LEASE WHEREAS, SRI INTERNATIONAL (SRI), hereinafter referred to as "Landlord," and DIVA SYSTEMS CORPORATION, hereinafter referred to as "Tenant," have entered into a lease dated July 13, 1995, for the rental of space in Building I, 333 Ravenswood Avenue, Menlo Park, California, the "Leased Space" as defined by the lease, and WHEREAS the parties now desire to terminate the lease of all space in Building I; to substitute other space in Building 203B as the "Leased Space" and to increase the total monthly rental; NOW THEREFORE THE LEASE is amended as follows: All space in Building I is deleted from the definition of the "Lease Space" as defined by paragraph 2 of the Preamble. Upon execution this modification the "Lease Space" will be defined as 3360 square feet of Building 203B, which includes Suites ___ and Labs ___ (or as outlined on the attached Exhibit A). The paragraph entitled "Basic Rent" is amended to read as follows: Effective February 1, 1996, the total square footage of the Leased Space shall increase by 1,635 square feet from 1,725 square feet to 3,360 square feet. The total monthly rental shall increase by $246 per month from $3,450 per month to $3,696 per month payable on the first day of each and every month commencing February 1, 1996, and continuing throughout the term of this Lease. The monthly rental rate per square foot is $1.10, inclusive of electricity, HVAC and janitorial services. All other services required by DIVA will be quoted "as needed" and billed separately. The space is offered on a move in "as is" basis with the exception that SRI will cover the cost of having the existing carpeting re-stretched. The following paragraph shall be added after the section entitled "Sole and Only Agreement": BADGES 29. Tenant, its employees, invitees, etc., shall wear SRI issued badges at any time when they are in or about the Premises, the Building or common area, and shall comply with SRI's badge policy. Except as amended hereby, all other terms and conditions of said lease remain unchanged and in full force and effect. SRI INTERNATIONAL DIVA SYSTEMS CORPORATION By /s/ Thomas T. Little By /s/ Alan H. Bushell ---------------------------- ---------------------------- Title: Corporate Director, Support Operations Title: President Date: January 16, 1996 Date: January 17, 1996 January 2, 1996 Mr. Alan Bushell DIVA 333 Ravenswood Avenue Menlo Park, CA 94025 Dear Alan: As promised, this letter puts forth the terms and conditions under which SRI proposes to lease office and dry laboratory space to DIVA in our building designated as #203B. As I mentioned, the rate I am proposing has not yet been reviewed and approved by our CEO, which is a requirement. In the interest of time, however, you and I can reach agreement and then I will submit it to Dr. Sommers for final approval. It is my understanding that your current space requirements will not definitely be known until such time as you occupy the proposed space. Further, I understand that those space requirements are expected to increase over time, but are not expected to exceed the total square footage available in 203B of 4800 square feet. Accordingly, as you and I agreed, we would propose that the lease be formalized at an initial square footage equal to 70% of the total, or 3360 square feet. Subsequently, the total space will be modified quarterly as needed to reflect any increase in your requirements, thus providing DIVA with the flexibility to add space as it becomes necessary. The rate that would apply should you opt to accept this proposal will be $1.35 per square foot, inclusive of electricity, HVAC and janitorial services. This would equate to an initial monthly base rent of $4,536. All other services required by DIVA will be quoted and billed separately. The space is offered on a move in as is basis with the exception that SRI will cover the cost of having the existing carpeting re-stretched. The general terms of the office lease currently in place between our two companies will apply, with one addition. That is a formal requirement that DIVA employees and their invitees must comply with SRI's existing identification badging program, and agree to further identification challenge by our Security personnel if requested. I hope you find this proposal acceptable and look forward to working with you to insure a timely and efficient relocation. Sincerely, Thomas T. Little Corporate Director Support Operations FIFTH MODIFICATION TO OFFICE LEASE WHEREAS, SRI INTERNATIONAL, hereinafter referred to as "Landlord," and DIVA SYSTEMS CORPORATION, hereinafter referred to as "Tenant," have entered into a lease dated July 13, 1995, for the rental of space located at 333 Ravenswood Avenue, Menlo Park, California, the "Leased Space" as defined by the lease and modifications thereto; and WHEREAS, the parties now desire to expand the area included in the "Leased Space" and to increase the total monthly rental; and NOW, THEREFORE, THE LEASE is amended as follows: The second paragraph of the preamble is modified such that upon execution of this modification, and retroactive to May 1, 1997, the Leased Space will be defined as Building 203 consisting of 10,070 square feet, Building 201 consisting of 8,700 square feet and Building 205 consisting of 9,440 square feet. The first sentence of the section entitled "Term" is amended to read as follows: The term of this lease shall be a period commencing at 12:01 a.m. on July 10, 1995, and ending at 12:01 a.m. on April 30, 1999. Upon expiration of the Term, as defined above, this Lease shall automatically renew and extend until April 30, 2001 ("Renewal Term") unless terminated by either party as permitted under this Lease. Concurrent with the commencement of the Renewal Term, the Base Rent will increase to then current market value as determined by Landlord. The paragraph entitled "Basic Rent" is amended to read as follows: Effective May 1, 1997, the total square footage of the Leased Space shall increase by 17,140 square feet from 11,070 square feet to 28,210 square feet. The total monthly rental shall increase by $21,425 per month from $13,837.50 to $35,262.50 per month payable on the first day of each and every month. The monthly rental rate per square foot is $1.25 inclusive of electricity, HVAC and janitorial services. All other services required by DIVA will be quoted on an "as needed" basis and billed separately. A paragraph numbered 29 and entitled "Option" is hereby added to the Lease. 29. Option. Tenant shall have the option to increase the Leased Space to ------ include any or all of Buildings 202 and 204 provided, however, that Landlord may deny such option should Landlord desire to retain the space for its own use. Tenant shall provide Landlord with prompt written notice of its desire to increase the Leased Space. Recognizing that the Tenant, in order to accommodate Landlord's desires, has relinquished its previous options on Buildings 108 and 110 in exchange for the above options, Landlord agrees to the following. Should Tenant exercise its option on either Building 202 or 204, Landlord agrees to make, at its own expense and within a reasonable time, those modifications necessary to convert those areas of the subject building, not currently so configured, into general office space of similar configuration and standards as currently existing in Building 110. Should Landlord not require the space, the parties shall negotiate in good faith as to the terms under which Tenant may lease the space. This paragraph shall in no way prohibit Landlord from letting the space to another tenant or using the space for its own purposes. However, prior to letting the space to another tenant, Landlord shall inform Tenant of its intention to do so and allow Tenant ten (10) days in which to exercise this option and begin good faith negotiations on the space. If Tenant does not respond within the above time period, Landlord shall be free to offer to let the space to another tenant on terms no more favorable than offered to Tenant. Landlord shall have no obligation to provide Tenant with the above right of first refusal if it desires to use the space for its own purposes, but shall inform Tenant, in a timely manner, that the space is no longer available for let. A paragraph numbered 30 and entitled "Signage" is hereby added to the Lease. 30. Signage. In order to be consistent with established emergency ------- response protocols, Tenant agrees to have erected, corporate signage, design and location to be approved by Landlord, that clearly indicates those buildings occupied by Tenant. All costs associated with the erection of the signs will be borne by the Tenant. Landlord agrees, at its sole expense, to remove all present signage relating to SRI International. Both parties agree that the above described work will be completed by a date not later than August 1, 1997. Except as amended hereby, all other terms and conditions of said lease remain unchanged and in full force and effect. SRI INTERNATIONAL DIVA SYSTEMS CORPORATION By /s/ Thomas T. Little By /s/ Alan H. Bushell ---------------------------- ---------------------------- Title: Corporate Director, Support Operations Title: President Date: July 24, 1997 Date: July 24, 1997 -2- EX-10.11 16 LEASE ENTERED INTO NOVEMBER 11, 1996 EXHIBIT 10.11 THIS LEASE is made this 15th day of August, 1996, between COLLEGE ROAD ASSOCIATES, LIMITED PARTNERSHIP, having an office at 2 Research Way, Princeton NJ 08540, hereinafter called "Landlord", and Sarnoff Real Time Corporation with an office located at 301 College Road East, Princeton, New Jersey 08540, hereinafter called "Tenant". LEASE OF PREMISES Landlord hereby leases to Tenant and Tenant hereby hires from Landlord, subject to all of the terms and conditions hereinafter set forth, those certain premises (the "Premises") as set forth in Items 1 of the Basic Lease Provisions and as shown in the drawings attached hereto as Exhibit "A" being located on the floor indicated in that certain office building (the "Building") and on that certain lot (the "Parcel") together hereinafter referred to as (the "Project") being located at 301 College Road East, Township of Plainsboro, County of Middlesex, State of New Jersey. BASIC LEASE PROVISIONS 1. Location of Premises: 301 College Road East Princeton, NJ 08540 2. Rentable Area of Premises: 22,598 rentable square feet 3. Tenant's Percentage Share: 42.16% (22,598/53,605) 4. Base Project Operating Expenses: Those incurred in the year 1997 5. Base Project Property Taxes: Those incurred in the year 1997 6. Basic Annual Rent: $463,259.00 per annum 7. Basic Monthly Rental Installments: $38,604.92 per month 8. Term: Five (5) years 9. Target Commencement Date: November 1, 1996 10. Security Deposit: Letter of Credit in the amount of $500,000.00 (see Paragraph 4) 11. Parking Spaces: Ninety (90) - including ten (10) visitors' spaces 12. Broker(s): Commercial Property Network, Inc. 13. Permitted Use: General Office and R&D Laboratory - including electronic assembly 14. Addresses for Notices: LANDLORD TENANT College Road Associates, Sarnoff Real Time Corporation Limited Partnership 301 College Road East 2 Research Way Princeton, NJ 08540 Princeton, NJ 08540 A copy of all notices to Landlord and/or Tenant shall also be sent to the addresses above. 15. All payments under this Lease shall be payable and sent to: College Road Associates Lock Box P.O. 19503 Newark, NJ 07195-0503 or such other payee or address as Landlord may designate by written notice to Tenant. IN WITNESS WHEREOF, the parties hereto have executed this Lease, consisting of the foregoing and Paragraphs 1 through 48 which follow, together with Exhibits A through F, inclusive, incorporated herein by this reference as of the date first above written. College Road Associates, Limited Partnership By: Z Forrestal Center, L.P., Managing General Partner By: Z Forrestal Corp., General Partner By: /s/ John Zirinsky ----------------- Name: John Zirinsky Title: President Sarnoff Real Time Corporation By: /s/ Erick J. Frim ----------------- Name: Erick J. Frim Title: Vice President and CFO -2- STATE OF NEW YORK: :SS COUNTY OF NEW YORK: BE IT REMEMBERED, that on this 20th day, of August, 1996, before me, the subscriber, a Notary Public of the State of New York, personally appeared John Zirinsky, of Z Forrestal Corp., the General Partner of Z Forrestal Center, L.P., the General Partner of College Road Associates, Limited Partnership, who, I am satisfied, is the person who has signed the within instrument, and he did acknowledge that he signed, sealed and delivered the same as such officer aforesaid; and that the within instrument is the voluntary act and deed of said corporation made by virtue of authority from its Board of Directors. /s/ Marc L. De Cecchis ---------------------------- Notary Public, New York STATE OF :SS COUNTY OF: BE IT REMEMBERED, that on this 15 day of August 1996, before me, the subscriber, a Notary Public of the State of New Jersey, personally appeared Erick Frimm Vice, president of SRTC who, I am satisfied, is the person who has signed the within instrument, and he did acknowledge that he signed, sealed and delivered the same as such officer aforesaid; and that the within instrument is the voluntary act and deed of said corporation made by virtue of authority from its Board of Directors. /s/ Patricia Hoeler ----------------------- Notary Public, New Jersey -3- TABLE OF CONTENTS PAGE ---- 1. COMMENCEMENT DATE AND TERM............................................. 1 2. BASIC ANNUAL RENT...................................................... 1 3. ADDITIONAL RENT........................................................ 2 4. SECURITY DEPOSIT....................................................... 5 5. REPAIRS................................................................ 6 6. IMPROVEMENTS AND ALTERATIONS........................................... 6 7. LIENS.................................................................. 8 8. USE OF PREMISES........................................................ 8 9. UTILITIES AND SERVICES.................................................10 10. RULES AND REGULATIONS..................................................12 11. TAXES AND TENANT'S PROPERTY............................................12 12. SUBSTITUTED PREMISES...................................................13 13. FIRE OR CASUALTY.......................................................14 14. EMINENT DOMAIN.........................................................14 15. ASSIGNMENT AND SUBLETTING..............................................15 16. LANDLORD'S ACCESS TO PREMISES..........................................17 17. SUBORDINATION, ATTORNMENT, ESTOPPEL CERTIFICATES.......................17 18. SALE BY LANDLORD.......................................................18 19. INDEMNIFICATION OF LANDLORD AND INSURANCE..............................18 20. WAIVER OF SUBROGATION..................................................20 21. NO WAIVER..............................................................20 22. DEFAULT................................................................21 -i- TABLE OF CONTENTS (CONT'D) PAGE ---- 23. RIGHT OF LANDLORD TO CURE TENANT'S DEFAULT............................ 23 24. NOTICE................................................................ 23 25. INSOLVENCY OR BANKRUPTCY.............................................. 24 26. SURRENDER AND HOLDOVER................................................ 24 27. CONDITION OF PREMISES................................................. 24 28. QUIET POSSESSION...................................................... 25 29. LIMITATION OF LANDLORD'S LIABILITY.................................... 25 30. GOVERNING LAW......................................................... 25 31. COMMON FACILITIES..................................................... 26 32. SUCCESSORS AND ASSIGNS................................................ 26 33. BROKERS............................................................... 26 34. NAME.................................................................. 27 35. EXAMINATION OF LEASE.................................................. 27 36. ADDITIONAL CHARGES.................................................... 27 37. MARGINAL HEADINGS..................................................... 27 38. PRIOR AGREEMENTS; SEVERABILITY........................................ 28 39. PARKING............................................................... 28 40. AUTHORITY............................................................. 28 41. NO LIGHT, AIR OR VIEW EASEMENT........................................ 28 42. FORCE MAJEURE......................................................... 28 43. ATTORNMENT............................................................ 29 44. COMMON AREA MAINTENANCE COST.......................................... 29 -ii- TABLE OF CONTENTS (CONT'D) PAGE ---- 45. NOTICE REGARDING TENANT'S MOVING IN OR OUT.................... 29 46. FIRST OPTION TO RENEW......................................... 30 47. SECOND OPTION TO RENEW........................................ 30 48. RIGHT OF FIRST REFUSAL ADDITIONAL SPACE....................... 30 Exhibit "A" Floor Plan(s) Exhibit "B1" Landlord's Work Letter Exhibit "B2" Building Standard Work Letter Exhibit "C" Commencement Date Memorandum Exhibit "D" Rules and Regulations Exhibit "E" Janitorial Specifications Exhibit "F" Letter of Credit -iii- PARAGRAPH 1 COMMENCEMENT DATE AND TERM (A) The term of this Lease shall be as shown in Item 8 of the Basic Lease Provisions and shall commence on the Target Commencement Date as shown in Item 9 of the Basic Lease Provisions or such earlier date as Tenant takes possession or commences use of the Premises for any purpose, and/or the issuance of a Temporary Certificate of Occupancy (Landlord shall be responsible to obtain such Temporary Certificate of Occupancy). Such date of commencement, hereinafter the "Commencement Date", shall be confirmed by Landlord and Tenant by execution of a "Commencement Date Memorandum" in a form substantially similar to Exhibit "C". The Tenant may terminate this Lease and have no liability pursuant to this Lease if the Commencement Date has not occurred within six (6) months of the issuance of all applicable building permits associated with the construction of the Premises, except if the reason the Commencement Date has not occurred is Tenant's fault or has been caused by Force Majeure as defined in Paragraph 42. If the Lease is so terminated, Landlord will refund to Tenant any sums Tenant has paid to Landlord on account of this Lease. (B) Notwithstanding the Commencement Date, if for any reason Landlord cannot deliver possession of the Demised Premises to Tenant on said Commencement Date, then Landlord shall not be subject to any liability therefor; nor shall such failure affect the validity of this Lease or the obligations of Tenant hereunder, provided that Tenant shall not be obligated to pay Rent (except a sum equal to the first Basic Monthly Rental Installment) until possession of the Premises is rendered to Tenant. PARAGRAPH 2 BASIC ANNUAL RENT (A) Tenant agrees to pay as Basic Annual Rent for the Premises the initial sum shown in Item 6 of the Basic Lease Provisions. Except for months when this Lease is not in effect for the full calendar month (partial month), the Basic Annual Rent shall be payable in U.S. currency in equal monthly installments, hereinafter sometimes referred to as "Basic Monthly Rental Installments", in advance without notice, deduction, demand, offset, or abatement. Basic Monthly Rental Installments shall be in the initial sum shown in Item 7 of the Basic Lease Provisions. Payment of Basic Annual Rent shall commence on the Commencement Date (except that the first month's rent shall be due upon the signing of this Lease), and continue on the first day of each calendar month thereafter except that Basic Rent for any partial month during the term hereof shall be prorated in the proportion that the number of days this lease is in effect during such partial month bears to the number of days in that calendar month, and shall be paid at the commencement of such partial month, and except further that the Basic Monthly Rental Installment for the first full calendar month of this Lease for which an installment of Basic Annual Rent is due will be paid on execution hereof. -1- (B) In addition to the Basic Annual Rent stipulated herein, Tenant covenants and agrees to pay Landlord without offset or deduction as additional Rent, hereinafter "Additional Rent", all other sums and charges which are to be paid by Tenant pursuant to the terms of this Lease. Except as otherwise provided in this Lease, Additional Rent shall be due and payable on the first day of the month following the date on which Tenant is given notice that Additional Rent is due. Rent means Basic Annual Rent and Additional Rent. PARAGRAPH 3 ADDITIONAL RENT (A) For each calendar year during the term of this Lease, Tenant agrees to pay as items of Additional Rent for the Premises, Tenant's "Percentage Share" (being the percentage indicated in Item 3 of Basic Lease Provisions) of all increases in "Project Operating Expenses" and "Project Property Taxes" (as hereinafter defined) incurred by Landlord in the operation of the Building or Project over the Base Project Operating Expenses and Base Project Property Taxes as stipulated in Items 4 and 5 respectively in the Basic Lease Provisions. (B) The items of Additional Rent contemplated under subparagraph 3(A) shall be calculated in accordance with the following procedures: (i) Each December (beginning December, 1997) during the term hereof or as soon thereafter as practical, Landlord shall give Tenant written notice of Landlord's estimate of any amounts payable under subparagraph 3(A) above for the ensuing calendar year. On or before the first day of each month during the ensuing calendar year, Tenant shall pay Landlord without further notice 1/12 (One-twelfth) of such estimated amounts, provided that if such notice is not given in December, Tenant shall continue to pay on the basis of the then applicable rental until the month after such notice is given. If at any time or times it appears to Landlord that the adjusted amounts payable under subparagraph 3(A) for the current calendar year will exceed its estimate, Landlord may, by notice to Tenant, revise its estimate for such year. Subsequent payments by Tenant for such year shall be based upon such revised estimate. (ii) Within ninety (90) days after the close of each calendar year or as soon thereafter as is practical, Landlord shall deliver to Tenant a statement of the annual adjustment of those Additional Rent items made pursuant to subparagraph 3(A) for such calendar year. If on the basis of such statement Tenant owes an amount that is less than the estimated payments for such calendar year previously made by Tenant, Landlord shall refund or credit such excess to Tenant, within thirty (30) days from such determination. If on the basis of such statement Tenant owes an amount that is more than the estimated payment for such calendar year previously made by Tenant, Tenant shall pay the deficiency to Landlord within thirty (30) days after delivery of the statement. (iii) The Additional Rent due under the terms and conditions of this Paragraph 3 shall survive termination of this Lease, shall be payable by Tenant without any setoff or deduction, and shall be computed by Landlord on a prorated basis for any period less than a full calendar year. -2- (iv) Anything to the contrary contained in this Paragraph 3 notwithstanding, if the average occupancy of the Building is less than ninety- five (95%) percent during the Base Year hereinafter defined, then Landlord shall make a determination ("Landlord's Determination") of what the Project Operating Expenses for such year would have been if during the entire year the average tenant occupancy of the Building were ninety-five (95%) percent. Landlord's Determination shall be binding and conclusive upon Tenant and shall for all purposes of this Lease be deemed to be the Project Operating Expenses for the Base Year. Landlord shall notify Tenant of Landlord's Determination within ninety (90) days following the last day of the Base Year. Thereafter, if for any subsequent Lease Year the average tenant occupancy of the Building is below ninety-five (95%) percent, the Project Operating Expenses for any such year shall be adjusted by Landlord to the amount that such Project Operating Expenses would have been if the average tenant occupancy during that year had been ninety-five (95%) percent. The term Base Year means the twelve (12) month period during which Base Project Operating expenses are calculated. (C) Definitions: (i) The term "Project Operating Expenses" as used herein shall include all costs of operation and maintenance of the Project for each calendar year as determined by generally accepted accounting principles consistently applied. Project Operating Expenses shall, by way of illustration but not limitation, include water and sewer charges, insurance premiums, license, permit, and inspection fees, fuel, heat, light, power (except for electricity charged directly to the Premises and other rental space on the Project), steam, janitorial and security services, labor, salaries, air conditioning, landscaping maintenance and repair of the Building and driveways, parking structures and surface parking areas, ice and snow removal, supplies, materials, equipment, tools, property management fees, office costs, and the cost incurred in contesting the validity of Project Property Taxes. Project Operating Expenses shall also include but not be limited to the cost of any capital improvements made to the Building by Landlord that reduce Project Operating Expenses or that are required under any governmental law or regulation not previously applicable to the Building or not in effect at the time it was constructed. Such capital cost shall be amortized over such reasonable periods as Landlord shall determine with a return on capital at the then current prime interest rate of the largest national bank in New York City or at such higher rate as may have been paid by Landlord on the funds borrowed for the purpose of purchasing such capital improvements. In no event shall Project Operating Expenses ever be less than Base Project Operating Expenses stipulated in Item 4 of Basic Lease Provisions. (ii) The term "Project Property Taxes" as used herein shall include all real estate taxes or personal property taxes and other taxes, charges and assessments, unforeseen as well as foreseen, which are levied with respect to the Project and any improvements, fixtures and equipment and other property of Landlord, real or personal, located in the Building or on the Project and used in connection with the operation of the Project for each calendar year and shall include any tax, surcharge or assessment which shall be levied in addition to or in lieu of real estate or personal property taxes, other than taxes covered in Paragraph 11, and shall also include any rental, excise, sales, transaction, privilege, or other tax or levy, however, denominated, imposed upon or measured by the rental reserved hereunder or on Landlord's business of leasing the Premises and Project, -3- excepting only net income taxes. In no event shall Project Property Taxes ever be less than Base Project Property taxes stipulated in Item 5 of Basic Lease Provisions. (D) Unless Tenant takes written exception to any item in the statement referred to in subparagraph 3(B)(ii) within thirty (30) days after the furnishing of the statement, such statement shall be considered as final and accepted by Tenant. Any amount due Landlord as shown on any such statement shall be paid by Tenant within thirty (30) days after it is furnished to Tenant. If Tenant shall dispute in writing any specific item, or items in the statement of Project Operating Expenses and Project Property Taxes, and such dispute is not resolved between Landlord and Tenant within sixty (60) days after the date the statement was rendered, either party may, during the thirty (30) days next following the expiration of the sixty (60) days, refer such disputed item or items to any independent certified public accountant mutually selected by Landlord and Tenant, for a determination. Pending the determination of any dispute with respect to the statement submitted by Landlord, Tenant shall pay when due the sums shown as due on such statement. If it shall be determined that any portion of such sums were not properly chargeable to Tenant, then Landlord shall credit or refund the appropriate sum to Tenant. The costs for the accountant's review and determination will be borne by Landlord if it is determined that Landlord's original calculation of both Project Property Taxes and Project Operating Expenses was in error by more than five (5%) percent, otherwise such costs will be borne by Tenant. (E) As one of the items of Additional Rent, payable monthly, Tenant shall also pay to Landlord the full cost of Tenant's consumption of electricity, except for heating and air conditioning as provided in subparagraph 9(A)(ii), as determined in accordance with Paragraph 9. (F) The Basic Annual Rent plus Additional Rent are sometimes collectively referred to as "Rent". (G) Notwithstanding anything to the contrary in the definition of Project Operating Expenses, such expenses shall not include the following: a. Repairs or other work occasioned by the exercise of right of eminent domain; b. Leasing commissions, attorneys' fees, costs and disbursements and other expenses, all of which are incurred in connection with negotiations or disputes with, other tenants, other occupants or prospective tenants; c. Renovating or otherwise improving or decorating, painting or redecorating leased space for tenants or other occupants of vacant tenant space, other than ordinary maintenance provided to all tenants, except in all common areas; d. Landlord's costs of electricity and other services sold separately to tenants for which Landlord is entitled to be reimbursed by such tenants as an additional charge over and above the base rent and operating expense or other rental adjustments payable under the lease with such tenant and domestic water sub-metered and separately billed to tenants of any retail area; -4- e. Depreciation and amortization except depreciation for Capital Expenditures which reduce operating costs; f. Expenses in connection with services or other benefits of a type which Tenant is not entitled to receive under the Lease but which are provided to another tenant or occupant; g. Costs incurred due to violation by Landlord or any other tenant of the terms and conditions of any other lease: h. Overhead and profit paid to subsidiaries or affiliates of Landlord services on or within Project, to the extent only that the costs of such services exceed competitive costs of such service were they not so rendered by a subsidiary or affiliate: provided, however, that the property management fee charged by an affiliate of Landlord shall not be in excess of the rates then customarily charged for building management for buildings of like class and character; i. Interest on debt or amortization payments on any mortgage or mortgages and rendered under any ground or underlying leases or lease; j. Any compensation paid to clerks, attendants or other persons in commercial concessions operated by Landlord: k. Any particular items and services for which Tenant otherwise reimburses Landlord by direct payment over and above base rent and operating expense adjustments: l. Advertising and promotional expenditures: m. Any costs, fines or penalties incurred due to violation by Landlord of any governmental rule or authority. n. Any expense for which Landlord is compensated through proceeds or insurance: and o. Costs of a capital nature, including-, but not limited to, capital improvements, capital repairs, capital equipment and capital tools which, under general accepted accounting principles, are not regarded as operating or maintenance expenses. PARAGRAPH 4 SECURITY DEPOSIT As set forth in Item 10 of the Basic Lease Provisions, Tenant shall post an Irrevocable Letter of Credit in the form of Exhibit F in the amount of $500,000.00. This Irrevocable Letter of Credit must be renewed sixty (60) days prior to its expiration date for each year of this Lease. In no instance shall the amount of such Irrevocable Letter of Credit be considered a measure of liquidated damages. If Tenant defaults with respect to any provision of this Lease, including but not limited to, the provisions relating to the payment of Rent or the surrender of the Premises in accordance with -5- the terms hereof upon the termination of the Lease, Landlord may, but shall not be required to use, apply or retain all or any part of the proceeds of this Irrevocable Letter of Credit for the payment of any Rent or any other sum in default, or for the payment of any other amount which Landlord may spend or become obligated to spend by reason of Tenant's default or to compensate Landlord for any other loss or damage which Landlord may suffer by reason of Tenant's default including, without limitation, costs and attorneys' fees incurred by Landlord. If any portion of said Irrevocable Letter of Credit is so used or applied, Tenant shall, upon demand therefor, post an additional Irrevocable Letter of Credit with Landlord in an amount that $500,000.00 exceeds that portion of the Irrevocable Letter of Credit drawn on by Landlord that is used for the payment of any other amount which Landlord may spend or become obligated to spend by reason of Tenant's default or to compensate Landlord for any other loss or damage which Landlord may suffer by reason of Tenant's default including, without limitation, costs and attorneys' fees incurred by Landlord. In the event of bankruptcy or other debtor-creditor proceeding against Tenant, such Irrevocable Letter of Credit shall be deemed to have been applied first to the payment of Rent and other charges due Landlord for all periods prior to filing of such proceedings. PARAGRAPH 5 REPAIRS (A) Subject to Paragraph 5(B), Landlord shall cause all necessary repairs to be made TO the structure exterior doors, windows, corridors and other common areas of the Building and the Project and Landlord shall cause the Building and the Project to be kept in a safe, clean and neat condition and shall use reasonable efforts to keep all equipment used in common with other tenants (such as elevators, plumbing, heating, air conditioning and similar equipment) in good condition and repair. Except as provided in Paragraph 13 hereof, there shall be no abatement of Rent and no liability of Landlord by reason of any injury to or interference with Tenant's business arising from the making of any repairs, alterations or improvements in or to any portion of the Building or the Project or in or to fixtures, appurtenances and equipment therein or thereon. (B) Tenant agrees that all repairs to the Premises not required above to be made by Landlord and all decorating, remodeling, alteration and painting required by Tenant during the term of this Lease, if approved by Landlord, shall be made by Landlord at the sole cost and expense of Tenant. Tenant shall have the freedom to perform its own interior decorating of the Premises provided that no permits are required for same. Tenant will pay for any; repairs to the Premises, the Building or the Project made necessary by any negligence or willful acts or omissions of Tenant or its assignees, subtenants, employees or their respective agents or other persons permitted in the Building or on the Project by Tenant, or any of them, and Tenant will maintain the Premises, and, upon termination of this Lease, will leave the Premises in a safe, clean, neat and sanitary condition, normal wear and tear excepted. PARAGRAPH 6 IMPROVEMENTS AND ALTERATIONS -6- (A) Landlord's sole construction obligation under this Lease is as set forth in the Work Letter attached hereto as Exhibit "B-1" and incorporated herein by reference. (B) Landlord shall have the right at any time to change the arrangement and/or location of entrances or passageways, doors and doorways, and corridors, elevators, stairs, toilets, or other public parts of the Building or Project, and upon giving Tenant reasonable notice thereof, to change the name, number or designation by which the Building or the Project is commonly known, provided such change(s) shall not inhibit Tenant's use within the Premises. (C) The alterations, additions or improvements to or of the Premises or any part thereof referred to in this subparagraph-(6)(C) do not include the initial tenant -improvements. Tenant shall not make or cause to be made any alterations, additions or improvements to or of the Premises or any part thereof, or attach any fixtures or equipment thereto, without first obtaining Landlord's prior written consent. Any such alterations, additions or improvements to the Premises consented to by Landlord shall at Landlord's option be made by Landlord for Tenant's account and Tenant shall pay Landlord for the costs thereof (including reasonable charge for Landlord's overhead) within ten (10) days after receipt of Landlord's statement. All such alterations, additions and improvements shall (without compensation to Tenant) at Landlord's option become Landlord's property (except movable furniture and trade fixtures including computer, telephone, and-power conditioning equipment which have not been permanently fastened to the walls, floors or ceilings or made part of the existing Building's systems) and at the end of the term hereof, shall remain on the Premises unless Landlord elects by notice to Tenant to have Tenant remove same, in which event Tenant shall promptly restore the Premises to their condition prior to the installation of (i) such alterations, additions and improvements, and (ii) equipment of any nature. Further, Landlord may elect by notice to Tenant to have Tenant remove not only Tenant's alterations, additions and improvements, but also any items of Tenant's equipment including but not limited to movable furniture, trade fixtures, office equipment and any cafeteria equipment. Any such equipment not removed from the Premises at the end of the term hereof shall at the option of the Landlord become Landlord's property without payment of any consideration therefor. The removal of any such equipment and any alterations, additions and improvements which Landlord elects Tenant to remove will be accomplished by Tenant prior to the expiration of the term of this Lease and if not done, Tenant will be deemed a tenant at sufferance pursuant to Paragraph 26. If Tenant does not perform such removal, Landlord may remove, destroy, store or otherwise dispose of such alterations, additions, improvements and equipment, whether or not Landlord takes title thereto. In addition, Tenant will pay (i) all Landlord's costs of removing, disposing or destroying any such alterations, additions, improvements and equipment whether or not Landlord takes title thereto, that Tenant is supposed to remove, which Tenant does not remove, and (ii) 'Landlord's cost to restore the Premises to their condition prior to the installation of any alterations, additions, improvements and equipment of any nature referred to in subdivision (i) of this sentence. Such costs will include Landlord's fees and expenses in collecting such costs and interest on such costs at the rate of fourteen (14%) percent per annum. Tenant will pay to Landlord Landlord's costs of storage of any equipment which Tenant is supposed to remove pursuant to this paragraph that Tenant does not remove. Further, Landlord reserves and shall have right of access to the Premises at any time with prior notice within ninety (90) days prior to any projected termination of this Lease to inspect the Premises to determine alterations, additions, improvements and -7- equipment Landlord desires Tenant to remove. This right of access is in addition to Landlord's right of access set forth in Paragraph 16 hereof. PARAGRAPH 7 LIENS Tenant shall keep the Premises free from any liens arising out of any work performed, materials furnished, or obligations incurred by or for Tenant. In the event that Tenant shall not, within thirty (30) days following the imposition of any such lien, cause the same to be released of record by payment or posting of a proper bond, Landlord shall have, in addition to all other remedies provided herein or by law, the right but not the obligation, to cause the same to be released by such means as it shall deem proper, including payment of or defense against the claim giving rise to such lien. All sums paid by Landlord and all expenses incurred by it in connection therewith, shall create automatically an obligation of Tenant to pay an equivalent amount as Additional Rent, which Additional Rent shall be payable by Tenant on Landlord's demand with interest at the maximum rate per annum permitted by law until paid. For purposes of this Paragraph 7, "liens" shall include, but not be limited to, lien claims filed under the "Construction Lien Law". PARAGRAPH 8 USE OF PREMISES Tenant shall use the Premises only as set forth in Item 13 of the Basic Lease Provisions and shall not use or permit the Premises to be used for any other purpose without the prior written consent of Landlord. Landlord covenants that the uses of the Premises stated in Item 13 of the Basic Lease Provisions will be uses permitted by the zoning- ordinance of the Township of Plainsboro on the Commencement Date of the Lease. Tenant shall comply with all laws and covenants and restrictions of record affecting use of the Premises, and shall not use or occupy the Premises in violation of law or of the certificate of occupancy issued for the Building, and shall immediately discontinue any use of the Premises which is declared by any governmental authority having jurisdiction to be a violation of law or of said certificate of occupancy. Tenant shall comply with any direction of any governmental authority having jurisdiction which shall, by reason of the nature of Tenant's use or occupancy of the Premises impose any duty upon Tenant or Landlord with respect to the Premises or with respect to the use or occupancy thereof. Tenant shall not do or permit to be done anything which will invalidate or increase the cost of any fire, extended coverage or any other insurance policy covering the Building, the Project and/or property located therein and shall comply with all rules, orders, regulations and requirements of the appropriate fire rating bureau or any other organization performing a similar function. Tenant shall upon demand reimburse Landlord for the full amount of any additional premium charged for such policy by reason of Tenant's failure to comply with the provisions of this paragraph. Such reimbursement shall not be Landlord's exclusive remedy. Tenant shall not in any way obstruct or interfere with the rights of other tenants or occupants of the Building or the Project or injure or annoy them, or use or allow the Premises to be used for any improper, immoral, unlawful, or objectionable purpose, nor shall Tenant cause, -8- maintain, or permit any nuisance in, on, or about the Premises. Tenant shall not commit or suffer to be committed any waste in or upon the Premises. Upon the expiration, or early termination of the Term of this Lease or the permanent assignment of this Lease, or subletting of the Premises, or cessation or transferring of Tenant's operations at the Premises, or upon any action or non-action of Landlord including a sale of the Building in which the Premises are located, Tenant, if its operations are subject to the Environmental Clean-up Laws hereinafter defined, shall comply, at Tenant's own expense, except as hereinafter stated, and with diligence, with the Industrial Site Recovery Act, 1993 N.J. Law's Chapter 139, the regulations promulgated thereunder and any successor legislation and regulations(collectively "Environmental Clean-up Laws"). Tenant, if its operations are subject to the Environmental Clean-up Laws shall, at Tenant's own expense, except as hereinafter stated, make prompt submissions to, provide all information to and comply with all requirements of the Industrial Site Evaluation Element ("ISEE") or its successor of the New Jersey Department of Environmental Protection or its successor ("NJDEP") arising out of the expiration, termination, assignment, subletting or transferring of Tenant's operation at the Premises or arising out of any action or non-action of the Landlord including the sale of the Building in which the Premises are located. If Landlord's actions or non-actions including a sale of the Building in which the Premises are located necessitate compliance with Environmental Clean-up Laws, Landlord, at its expense, will make the submissions to NJDEP or any of its elements in order to obtain a statement of non-applicability or negative declaration, but Tenant whether or not it is subject to Environmental Clean-up Laws, will cooperate with Landlord to aid in the making of Landlord's submission by providing information and signing such documents as are necessary for Landlord to make its submission. Clean-up expenses or the making up of any clean-up plan or remedial action work plan, or sampling plan or the taking of any corrective action to comply with Environmental Clean-up Laws and expenses therefore, will be borne by the party whose actions or failure to act necessitated the clean-up. Each party shall, within a reasonable time and receipt of same, furnish to the other party true and complete copies of all documents, submissions, correspondence and oral or written reports, directives, correspondence and oral or written communications by ISEE to the recipient party. Each party shall also promptly furnish to the other party true and complete copies of all sampling and test results and reports obtained and prepared from samples and tests taken at and around the Premises that is obtained by the party first obtaining the results and reports. Tenant shall immediately and diligently cause any and all Hazardous Materials it, its agents, employees, invitees or licensees released in, onto or under or disposed from the Premises during the Term of the Lease to be removed in compliance with all applicable laws, rules, ordinances and regulations and all conditions resulting therefrom to be remediated in compliance with all applicable laws, rules, ordinances and regulations and the Premises restored to their condition without said Hazardous Materials as quickly as possible. Tenant shall indemnify, defend and save harmless Landlord from all fines, suits, procedures, claims and actions of any kind arising out of or in any way connected with any release or discharge of Hazardous Materials at the Premises which occur during the term of the Lease as a result of the acts of Tenant, its invitees or licensees; and from all fines, suits, procedures, claims and actions of -9- any kind arising out of Tenant's failure to provide all information to NJDEP or the Landlord as appropriate make all submissions other than those Landlord is required to make as provided herein, and take all actions required by the NJDEP or any of its divisions. Landlord hereby agrees to defend, indemnify and hold Tenant harmless from and against any and all claims, lawsuits, liabilities, losses, damages and expenses (including, but not limited to, reasonable attorneys' fees arising by reason of any of the aforesaid or any action against the Landlord under this indemnity) arising directly or indirectly from, out of or by reason of (i) any spills or discharges of toxic or hazardous waste or substances at the Premises or Project which occur prior to or during the term of this Lease caused by Landlord, its employees, agents or invitees; or (ii) any pre-existing conditions including underground tanks, which are the subject of federal, state or local environmental laws. Tenant's obligations and liabilities under this Paragraph shall continue so long as Landlord remains responsible for any releases or discharges of Hazardous Materials at the Premises which occur as a result of the acts of Tenant, its invitees or licensees. Tenant's failure to abide by the terms of this Paragraph shall be restrainable by injunction. PARAGRAPH 9 UTILITIES AND SERVICES (A) Provided that Tenant is not in default hereunder, Landlord agrees to furnish or cause to be furnished to the Premises the following utilities and services, subject to the conditions and standards set forth below: (i) Intentionally Deleted. (ii) From 8 A.M. to 6 P.M., Monday through Friday (legal holidays excepted), Landlord shall ventilate the Premises and furnish heat or air conditioning when in the judgement of the Landlord it is required for the comfortable occupancy of the Premises during such days and hours, subject to any governmental requirements or standards relating to, among other things, energy conservation. Upon request and reasonable notice, Landlord shall make available at Tenant's expense after-hours heat or air conditioning. The cost thereof shall be $40.00 per hour. (iii) Landlord shall furnish to the Premises at all times, subject to interruptions beyond Landlord's control and subject to subparagraph 3(E), electric current in accordance with the Building Standard office lighting and receptacle, or as otherwise shown on Exhibit "A". At no time shall Tenant's use of electric current exceed the capacity of the feeders to the Building or the risers or wiring installation existing in the Building at the Commencement Date of this Lease (which shall provide ample capacity for Tenant's required use as per Exhibit "A" of this Lease). (iv) Landlord shall furnish the Building with water for drinking and lavatory purposes only. -10- (v) Landlord shall provide janitorial services to the Premises, comparable to such services provided in other first class office buildings in the vicinity, provided that the said other office buildings are used exclusively as offices, and provided further that the Premises are kept in good order by Tenant. Tenant shall pay to Landlord the cost of removal of any of Tenant's refuse and rubbish to the extent that the same exceeds the refuse and rubbish usually attendant upon the use of the Premises as offices. Tenant is responsible for the cleaning of Tenant's laboratory area(s), except that Landlord shall remove Tenant's trash (including recyclables) to the extent that such trash in the laboratory area(s) does not exceed the amount usually attendant upon the use of the Premises as offices. (vi) Landlord shall replace, as necessary, the fluorescent tubes in the standard lighting fixtures installed by Landlord. Tenant agrees to reimburse Landlord upon demand for the cost of such fluorescent tubes and ballast and the labor and overhead for their installation. Initial installation of fixtures will be warranteed for one year for lamps and ballast. (B) Landlord may impose a reasonable charge for any utilities and services, including without limitation, air conditioning, electric current (except for electricity paid under subparagraph (E) Paragraph 3 and water), provided by Landlord by reason of any use of the Premises at any time other than the hours of 8 A.M. to 6 P.M. Monday through Friday (excluding legal holidays) or any use beyond that which Landlord agrees to furnish as described above. The following- clauses (i) through (iv) apply to electrical consumption, electric energy and the public utility rate schedule for the supply of electric current to the Building. (i) All electric consumption for the sole use of the Tenant shall be separately sub-metered. (ii) Landlord shall not be liable in any way to Tenant for any failure or defect in the supply or character of electric energy furnished to the Premises by reason of any requirement, act or omission of the public utility serving the Building with electricity or for any other reason not attributable to Landlord. (iii) Tenant's use of electric energy in the Premises shall not at any time exceed the capacity of any of the electrical conductors and equipment serving the Premises existing at the Commencement Date of this Lease (which shall provide ample capacity for Tenant's required use as per Exhibit "A" of this Lease). In order to insure that such capacity is not exceeded and to avert possible adverse effect upon the Building's electric service, Tenant shall not, without Landlord's prior written consent in each instance (which shall not be unreasonably withheld), connect any additional fixtures, appliances or equipment to the Building's electric distribution system or make any alteration or addition to the electric system of the Premises existing on the Commencement Date. Should Landlord grant such consent, all additional risers or other equipment required therefor shall be provided by Landlord and the cost thereof shall be paid by Tenant upon Landlord's demand. (iv) If the public utility rate schedule for the supply of electric current to the Building shall be increased during the term of this Lease, the Additional Rent payable pursuant to Paragraph 3 hereof shall be equitably adjusted to reflect the resulting increase in Landlord's cost of -11- furnishing electric service to the Premises. It is the intention -hereof that Landlord only recapture the charges payable by Tenant under Paragraph 3 and under no circumstances shall Landlord earn any profit thereof. (C) Tenant agrees to cooperate fully at all times with Landlord and to abide by all regulations and requirements which Landlord may prescribe for the use of the above utilities and services. Any failure to pay any costs as described above shall constitute a breach of the obligation to pay Rent under this Lease and shall entitle Landlord to rights herein granted for such breach. (D) Landlord shall not be liable for, and Tenant shall not be entitled to, any abatement or reduction of Rent by reason of Landlord's failure to furnish any of the foregoing services, nor shall any such failure, stoppage or interruption of any such service be construed either as an eviction of Tenant, or relieve Tenant from the obligation to perform any covenant or agreement. However, in the event of any failure, stoppage or interruption thereof, Landlord shall use reasonable diligence to have service resumed promptly. (E) Notwithstanding anything hereinafter to the contrary, Landlord reserves the right from time to time to make reasonable modifications to the above provisions for utilities and services. PARAGRAPH 10 RULES AND REGULATIONS Tenant agrees to abide by all rules and regulations of the Buildings and Project ("Rules and Regulations") imposed by the Landlord as set forth in Exhibit "D" attached hereto, as the same may be changed from time to time upon reasonable notice to Tenant. These Rules and Regulations which shall be uniformly enforced among- all tenants are imposed for the cleanliness, good appearance, proper maintenance, good order and reasonable use of the Premises and the Project, as may be necessary for the enjoyment of the Project by all tenants and their employees and invitees. Landlord shall not be liable for the failure of any tenant, its agents or employees to conform to the Rules and Regulations. PARAGRAPH 11 TAXES AND TENANT'S PROPERTY (A) Tenant shall be liable for and shall pay not later than ten (10) days before delinquency, all taxes, levies and assessments levied against any personal property or trade fixtures placed by Tenant in or about the Premises. If any such taxes, levies and assessments on Tenant's personal property or trade fixtures are levied against Landlord or Landlord's property or if the assessed value of the Building or the Project is increased by the inclusion therein of a value placed upon such personal property or trade fixtures of Tenant and if Landlord pays the taxes, levies and assessments, Tenant shall, upon demand, repay to Landlord the taxes, levies and assessments so levied against Landlord, or the proportion of such taxes, levies and assessments resulting from such increase in the assessment. -12- (B) If Tenant improvements in the Premises, whether installed and/or paid for by Landlord or Tenant and whether or not affixed to the real property so as to become as part thereof, are assessed for real property tax purposes at a valuation higher than the valuation at which Tenant improvements conforming to "Building Standard" (as referred to in Exhibit "B-2") are assessed, then the real property taxes and assessments levied against Landlord or the Project by reason of such excess, assessed valuation shall be deemed to be taxes levied against personal property of Tenant and shall be governed by the provisions of subparagraph 11(A). If the records of the Tax Assessor are available and sufficiently detailed to serve as a basis for determining whether said Tenant improvements are assessed at a higher valuation than Building Standard, such records shall be binding on both Landlord and Tenant; otherwise the actual cost of construction shall be the basis for such determination. PARAGRAPH 12 SUBSTITUTED PREMISES Landlord reserves the right without Tenant's consent on sixty (60) days' written notice to Tenant, to substitute other premises located within the Buildings controlled by Landlord in College Park at Forrestal Center for the Premises described above, provided, that the substituted premises: (i) contain at least the same contiguous square footage as the Premises; (ii) contain comparable tenant improvements including "Lab Area" with the same square footage including a separate contiguous portion that has raised computer flooring. This Lab Area must have separate climate control that has 24 hour operation and a minimum clearance of ten (10) feet. Two large conference rooms fit-up within a similar configuration in the current floor plan including the separate kitchen. These conference rooms must be fit-up in a similar lay-out and fashion with similar quality materials. The "Executive Area" must be fit-up in a similar configuration including window space. The New Premises must include two entrances (1) a main entrance of the new premises must have with equal visibility as the main entrance to the Premises; and (2) a separate, double door entrance with the same clearance as the Premises double door access. In the event that the space is not on the first floor, then the building will provide for a freight elevator under the Tenant's control. The remaining fit-up shall contain the same number of offices and open work space for cubicles. Security system will be comparable to the security system installed at the Premises (if one is installed) Tenant shall have 24 hour, 7 day per week access to the replacement facility; and (iii) are made available to Tenant at the then current rental rate for such space, in no event to exceed the rental rate specified herein. Landlord shall pay all moving expenses of Tenant incidental to such substitution of premises including, but not limited to, the cost of moving all of the Tenant's furniture, fixtures, and electronic equipment (method of moving electronic equipment to be determined by the Tenant), the cost of new stationery and relocation announcements, the cost of new signage, and the cost of redundant operations during the moving process, if necessary. -13- PARAGRAPH 13 FIRE OR CASUALTY In the event that the Project (regardless of whether the Premises or access thereto is affected) is so damaged or destroyed to the extent of more than one- third of its replacement cost, or to any substantial extent by a casualty not covered by Landlord's insurance, or during the last two (2) years of this Lease, Landlord, upon giving thirty (30) days' notice to Tenant, may elect to terminate this Lease. If the damage or destruction is other than as provided above, then Landlord shall commence within ninety (90) days after such damage or destruction to rebuild, repair or restore the Premises and access thereto to substantially the same condition as when the same were delivered to Tenant, excluding the improvements owned by Tenant, and the Lease shall continue in full force and effect. Landlord shall in no event be obligated to make any repairs or replacements of any items owned by Tenant. If the Lease is not terminated but the Premises are rendered totally untenantable, Rent shall abate during the period of such untenantability. Tenant acknowledges (i) that Landlord shall not obtain insurance of any kind on Tenant's improvements and betterment to the Premises owned by Tenant or on Tenant's furniture, fixtures, equipment and other personal property, (ii) that it is Tenant's obligation to obtain such insurance at Tenant's sole cost and expense, and (iii) that Landlord not be obligated to repair any damage thereto or replace the same. PARAGRAPH 14 EMINENT DOMAIN In case the whole of the Premises, or such part thereof as shall substantially interfere with Tenant's use and occupancy thereof, shall be taken by any lawful power or authority by exercise of the power of eminent domain, Tenant or Landlord may terminate this Lease effective as of the date possession is required to be surrendered to said authority. In the event of any taking (in whole or part) of the Project whether or not the Premises or access thereto are affected thereby, Landlord shall have the right to terminate this Lease. Except as provided herein, Tenant shall not, because of any taking, assert any claim against Landlord or the taking authority for any compensation because of such taking, and Landlord shall be entitled to receive the entire amount of any award without deduction for any estate or interest of Tenant. In the event the amount of property or the type of estate taken shall not substantially interfere with Tenant's use of the Premises, and Landlord does not terminate this Lease, Landlord shall proceed to restore the Premises (to the extent permitted by the taking) to substantially their condition prior to such partial taking, and a proportionate allowance shall be made to Tenant for Rent corresponding to the time during which, and to the part of the Premises of which, Tenant shall be so deprived on account of such taking and restoration. Provided same shall not diminish Landlord's award in any way, nothing contained in this Paragraph 14 shall prevent Tenant from seeking any award against the taking authority for the taking of personal property and fixtures owned by Tenant or for relocation expenses recoverable from the taking authority. In no event shall Landlord be required to expend more for restoration than received from the taking authority for such taking. For the purposes of this paragraph, "taking" shall also include any conveyance in lieu of condemnation. -14- PARAGRAPH 15 ASSIGNMENT AND SUBLETTING (A) Tenant shall not voluntarily or involuntarily assign, sublet, mortgage, or otherwise encumber all or any portion of its interest in this Lease or in the Premises without obtaining the prior written consent of Landlord, which consent shall not be unreasonably withheld. Such attempted subletting, mortgage or other encumbrance without such consent shall be null and void and of no effect. It is recognized that with respect to any proposed sublet or assignment that Landlord may withhold its consent in its absolute discretion, and Landlord will not be unreasonable in withholding its consent in the instances where (i) the Rent per month is less than ninety percent (90%) of the then prevailing fair market rent for comparable space within Princeton Forrestal Center, (ii) the credit- worthiness of the proposed sublessee or assignee is not to the Landlord's satisfaction (unless Tenant produces security satisfactory to Landlord), (iii) the proposed sublessee's or assignee's use is not in accordance with other tenants' uses within College Park at Princeton Forrestal Center. (B) No assignment, subletting, mortgage or other encumbrance of Tenant's interest in this Lease shall relieve Tenant of its obligation to pay the Rent and to perform all of the other obligations to be performed by Tenant hereunder. The acceptance of Rent by Landlord from any other person shall not be deemed to be a waiver by Landlord of any provision of this Lease or be a consent to any subletting, assignment, mortgage or other encumbrance. Consent to one sublease, assignment, mortgage or other encumbrance shall not be deemed to constitute consent to any subsequent attempted subletting, assignment, mortgage or other encumbrance. (C) If Tenant desires at any time to assign this Lease or to sublet the Premises or any portion thereof, Tenant shall first notify Landlord of Tenant's desire to do so and shall submit in writing to Landlord no less than thirty (30) days prior to such assignment or subletting (i) the name of the proposed subtenant or assignee; (ii) the premises; (iii) the term and provisions of the proposed sublease or assignment and a copy of the proposed sublease or assignment; and (iv) such financial information as Landlord may reasonably request concerning the Proposed subtenant or assignee. (D) At any time within thirty (30) days after Landlord's receipt of the information specified in subparagraph (C) above, Landlord may by written notice to Tenant, elect (i) to take from Tenant a sublease of the Premises or the portion thereof proposed to be subleased by Tenant, or to take an assignment of Tenant's leasehold estate hereunder, or such part thereof as shall be specified in said notice, upon the same terms as those offered to the proposed subtenant or assignee, as the case may be; (ii) to give Tenant written consent to the proposed assignment or sublease, provided that the Rent payable monthly by the Tenant to the Landlord under the terms of this Lease shall be increased by a sum equal to all rental and other considerations received by Tenant from its subtenant or assignee in excess of the Rent payable by Tenant under the terms of this Lease; or (iii) to terminate this Lease as to the portion (including all) of the Premises proposed to be subleased or assigned with a proportionate abatement in the Rent payable hereunder. If Landlord does not exercise any option set forth in this subparagraph (D) within said thirty (30) day period, Landlord shall be deemed to have refused to consent to the proposed assignment or sublease and this Lease shall remain in full force and effect. -15- (E) If Tenant is a corporation, an unincorporated association or partnership, the transfer, assignment or hypothecation of any stock or interest in such corporation, association or partnership, in the aggregate in excess of forty-nine (49%) percent, shall be deemed an assignment within the meaning and provisions of this Paragraph, provided that the foregoing shall not apply, if Tenant is not in default in the payment of Basic Annual Rent, Additional Rent or any other amount due hereunder or in the performance of any covenant or obligation to be performed by Tenant hereunder, with respect to (i) any pledge of stock to an institutional lender, (ii) sales of stock pursuant to a Public Offering, (iii) any sales of stock where (a) and (b) immediately following both apply (a) the Seller is the Tenant, and (b) the buyer is paying in cash or in property an amount which the Tenant reasonably certifies is fair market value for the stock, and Tenant gives to Landlord reasonable written proof of the facts in this clause (iii) at or before such date sales occur (iv) transfers of stock not in a merger or consolidation transaction for prices current in the market made while the Tenant's stock is publicly traded, (v) transfers of stock in a merger or consolidation transaction which the surviving entity has a net worth equal to the greater of $10,000,000.00 or the net worth of that entity which is the Tenant immediately prior to the consummation of the merger or consolidation transaction, and reasonable written proof of this net worth requirement is given to Landlord immediately prior to this merger or consolidation transaction and the surviving entity assumes all obligations imposed by the Lease of that party to it who is the Tenant, including all obligations with respect to giving a Letter of Credit to Landlord. "Affiliate" shall mean with respect to an entity or natural person any other natural person (who by himself or together with his spouse or children) or other entity that controls, is controlled by or is under common control with such, entity or natural person. (F) Tenant shall reimburse Landlord for Landlord's reasonable costs and attorneys' fees incurred in conjunction with the processing and documentation of any such requested assignment, subletting, transfer, change in ownership or hypothecation of this Lease or Tenant's interest in and to the Premises. (G) Notwithstanding the provisions of this Paragraph to the contrary Tenant may assign this Lease in connection with the sale of substantially all of Tenant's asset-s or substantially all of its stock in a non-merger or a consolidation transaction provided: (a) the net worth of the assignee corporation or the original Tenant, if the stock is purchased, is equal to the greater of $10,000,000.00 or that of Tenant on the date of such assignment and reasonable written proof of this net worth requirement is given to Landlord immediately prior to the sale of stock or asset transaction-, (b) the assignee(if there is one) continues to operate the permitted use in the Premises but may change its trade name to the trade name being used by the assignee: (C) the assignee (if there is one) assumes all of Tenant's obligations hereunder by executing, acknowledging and delivering to Landlord, prior to the effective date of the assignment, an agreement, in recordable form, satisfactory to Landlord: and by giving to Landlord such other documents as it reasonably requests including the Letter of Credit required of the Tenant hereunder: and (d) Tenant IS not IN default in the payment of Basic Annual Rent, Additional Rent or any other amount due hereunder or in the performance of any covenant or obligation to be performed by Tenant hereunder. -16- PARAGRAPH 16 LANDLORD'S ACCESS TO PREMISES After having given notice Landlord reserves and shall at any and all times have the right to enter the Premises to inspect the same, to supply janitorial service and any other service to be provided by Landlord to Tenant hereunder, to show said Premises to prospective purchasers or tenants, to alter or repair the Premises or any portion of the Building or Project, all without being deemed guilty of an eviction of Tenant and without abatement of Rent, and may for that purpose erect scaffolding and other necessary structures where reasonable required by the character of the work to be performed, provided that the business of Tenant shall be interfered with as little as is reasonably practicable. Tenant hereby waives any claim for damages or any injury or inconvenience to or interference with Tenant's business, any loss of occupancy or quiet enjoyment of the Premises, and any other loss occasioned thereby. For each of the aforesaid purposes, Landlord shall at all times have and retain a key with which to unlock all of the doors in, upon and about the Premises, excluding Tenant's vaults and safes, and Landlord shall have the right to use any and all means which Landlord may deem proper to open said doors in an emergency in order to obtain entry to the Premises, and any entry to the Premises obtained by Landlord by any of said means shall not under any circumstances be construed or deemed to be a forcible or unlawful entry into, or a detainer of the Premises, or any eviction of Tenant from the Premises or any portion thereof. No provision of this Lease shall be construed as obligating Landlord to perform any repairs, alterations or decoration except as otherwise expressly agreed to be performed by Landlord. PARAGRAPH 17 SUBORDINATION, ATTORNMENT, ESTOPPEL CERTIFICATES (A) This Lease is junior, subject, and subordinate to all ground leases, mortgages, deeds of trust, and other security instruments of any kind now covering the Project or any portion thereof. Landlord reserves the right to place lien's or encumbrances on the Project or any part thereof or interest therein superior in lien and effect to this Lease. This Lease, at the option of Landlord, shall be subject and subordinate to any and all such liens or encumbrances now or hereafter imposed by Landlord without the necessity of the execution and delivery of any further instruments on the part of Tenant to effectuate such subordination. Notwithstanding the foregoing, Tenant covenants and agrees to execute and deliver upon request such further instruments evidencing such subordination of this Lease as may be requested by Landlord. (B) Tenant shall at any time and from time to time upon not less than ten (10) days' prior notice by Landlord, execute, acknowledge and deliver to Landlord a statement in writing and in form and substance satisfactory to Landlord certifying that this Lease is unmodified and in full force and effect (or if there have been modifications, that the same is in full force and effect as modified and stating the modifications), and the dates to which the Basic Annual Rent, Additional Rent and other charges have been paid in advance, if any, and stating whether or not to the best knowledge of Tenant, Landlord is in default in the performance of any covenant, agreement or condition contained in this Lease and, if so, specifying each such default of which Tenant may have knowledge. Any -17- such statement delivered pursuant to this Paragraph may be relied upon by any prospective purchaser of the fee of the Building or the Project or any prospective purchaser of the fee of the Building or the Project or any mortgagee, ground lessor or other encumbrancer thereof or any assignee of any such person. (C) Should any mortgage on the Property of which the Premises are a part be foreclosed, the Purchaser upon foreclosure of the lien of the mortgage shall have the right following foreclosure to preserve this Lease and the rights of the Tenant or any other person or entity having an interest in the Premises, and the Tenant shall attorn to such Purchaser at foreclosure and pay and perform its obligations under this Lease for the benefit of such Purchaser. PARAGRAPH 18 SALE BY LANDLORD In the event of a sale or conveyance by Landlord of the Project or any part thereof, the same shall operate to release Landlord from any and all liability under this Lease after the date of such conveyance of title. If any security deposit has been made by Tenant, Landlord shall transfer such security deposit to the purchaser, and thereupon Landlord shall be discharged from any further liability in reference thereto. PARAGRAPH 19 INDEMNIFICATION OF LANDLORD AND INSURANCE (A) Except for Landlord's negligence or willful misconduct, Tenant shall indemnify, hold Landlord harmless from and defend Landlord against any and all claims, loss, costs, damage, expense or liability, including without limitation reasonable attorneys' fees, for any injury or damages to any person or property whatsoever when such injury has been caused in part or in whole by any act, neglect, fault, or omission of Tenant, its agents, servants, employees or invitees. This indemnity shall not require any payment by Landlord as condition precedent to recovery. In addition, if any person not a party to this Lease shall institute any other type of action against Tenant in which Landlord shall be made a party defendant, Tenant shall indemnify, hold Landlord harmless from and defend Landlord from all liabilities and costs by reason thereof. (B) Tenant hereby agrees to maintain in full force and effect at all times during the term of this Lease, at its own expense, for the protection of Tenant and Landlord as their interests may appear, policies of insurance issued by a responsible carrier or carriers acceptable to Landlord licensed in New Jersey and also having a policyholder's rating of not less than A-in the most current edition of Best's Insurance Reports, which afford the following coverage: (i) Worker's Compensation -- Statutory Employer's Liability -- Not less than $250,000 (ii) Comprehensive General -- Not less than $2,000,000 Liability Insurance including Combined Single Limit for both -18- Blanket Contractual Liability bodily injury and property damage Broad Form Property Damage, Personal Injury, Completed Operations, Products Liability, Fire Damage Landlord and its managing agent shall be named as an additional insured on all policies listed under (ii) above, and (iv) below. (iii) All Risk Property Coverage in an amount sufficient to cover the full cost of replacement of all improvements and betterment to the Premises owned by Tenant and all of Tenant's fixtures and other personal property. (iv) Rent Insurance and Business Interruption Insurance in an amount equal to the Basic Annual Rent and Additional Rent for a period of at least twelve (12) months commencing with the date of loss. (C) Tenant shall deliver to Landlord at least thirty (30) days prior to the time such insurance is first required to be carried by Tenant and thereafter at least thirty (30) days prior to expiration of each such policy, certificates of insurance evidencing the above coverage with limits not less than those specified above. Such certificate, with the exception of Worker's Compensation, shall expressly provide that the interest of Landlord therein shall not be affected by any breach by Tenant of any provision of any such policy. Further, all certificates shall expressly provide that no less than thirty (30) days prior written notice shall be given Landlord in the event of material alterations to or cancellation of the coverage evidenced by such certificates. (D) Upon demand, Tenant shall provide Landlord, at Tenant's expense, with such increased amount of existing insurance, and such other insurance in such limits as Landlord may require and such other hazard insurance as the nature and condition of the Premises may require in the sole judgement of Landlord, to afford Landlord adequate protection for said risks. Such increased insurance required by Landlord shall be comparable to that which is required by other landlords of comparable quality buildings within the Princeton Forrestal Center. (E) If on account of the failure of Tenant to comply with the provisions of this Paragraph 19, Landlord is adjudged a coinsurer by its insurance carrier, then any loss or damage Landlord shall sustain by reason thereof shall be borne by Tenant and shall be immediately paid by Tenant upon receipt of a bill therefore and evidence of such loss. (F) Landlord makes no representation that the limits of liability specified to be carried by Tenant under the terms of this Lease are adequate to protect Tenant against Tenant's undertaking under this Paragraph 19. In the event Tenant believes that any such insurance coverage called for under this Lease is insufficient, Tenant shall provide, at its own expense, such additional insurance as it deems adequate. -19- (G) Each policy evidencing the insurance to be carried by Tenant under this Lease shall contain a clause that such policy and the coverage endorsed thereby shall be primary with respect to any policies carried by Landlord, and that any coverage carried by Landlord shall be excess insurance. (H) Any insurance required of Tenant under this Lease may be furnished by Tenant under a blanket policy carried by it. Such blanket policy shall contain an endorsement that names Landlord as an additional insured, references the Premises, and guarantees a minimum limit available for the Premises equal to the insurance amounts required in this Lease. (I) In the event Tenant fails to procure, maintain, and/or pay for the insurance required by this Lease, at the times and for the durations specified in this Lease, Landlord shall have the right, but not the obligation, at any time and from time to time, and without notice, to procure such insurance and/or pay the premiums for such insurance, in which event Tenant shall repay Landlord, immediately upon demand by Landlord, as additional rent, all sums so paid by Landlord together with interest thereon and any costs or expenses incurred by Landlord in connection therewith, without prejudice to any other rights and remedies of the Landlord under this Lease. PARAGRAPH 20 WAIVER OF SUBROGATION Tenant and Landlord each agree that the respective insurance carried by it against loss or damage by fire or other casualty shall contain a clause whereby the insurer waives its right of subrogation against the other party. Pursuant to the foregoing, Landlord and Tenant hereby waive all claims for recovery from the other party for any loss or damage to any of its property insured under valid and collectible insurance policies to the extent of any recovery collectible under such insurance. The foregoing waiver shall be in force only if both Tenant's and Landlord's insurance policies contain a clause providing that such waiver shall not invalidate the insurance. PARAGRAPH 21 NO WAIVER No waiver by Landlord of any provision of this Lease or of any breach by Tenant hereunder shall be deemed to be a waiver of any other provision hereof, or for any subsequent breach by Tenant of the same or any other provisions. Landlord's consent to or approval of any act by Tenant requiring Landlord's consent or approval shall not be deemed to render unnecessary the obtaining of Landlord's consent to or approval of any subsequent act of Tenant. Failure of Landlord to insist upon strict performance of any provision of this Lease shall not be deemed to be a waiver of such provision. No act or omission by Landlord or Landlord's agents during the term of this Lease shall be deemed an acceptance of a surrender of the Premises, unless confirmed by Landlord in writing. The delivery of the keys to an employee or agent of Landlord shall not operate as a termination of -20- the Lease or a surrender of the Premises. The acceptance of any Rent by Landlord following a breach of this Lease by Tenant shall not constitute a waiver of any of Landlord's rights unless such waiver is expressly stated in writing and signed by Landlord. PARAGRAPH 22 DEFAULT (A) The occurrence of any of the following shall constitute a material default and breach of this Lease by Tenant: (i) Any failure by Tenant to pay the Rent or to make any other payment required to be made by Tenant hereunder within five (5) days of date due; (ii) The abandonment or vacation of the Premises by Tenant; (iii) Any failure by Tenant to observe and perform any of its obligations under this Lease, where such failure continues for fifteen (15) days (except where a different period of time is specified in this Lease) after Landlord has given Tenant written notice or such other notice as may be required by law; (iv) Tenant makes, or has made, or furnishes, or has furnished, any warranty, representation or statement to Landlord in connection with this Lease, or any other agreement to which Tenant and Landlord are parties, which is or was false or misleading in any material respect when made or furnished; (v) Any substantial portion of the assets of Tenant is transferred unless such transfer is incurred in the ordinary course of Tenant's business in good faith for fair equivalent consideration, and with Landlord's consent or unless the transfer is to an entity that pursuant to Article 15 is a permitted assignee of the Tenant's interest in this Lease; (vi) Tenant becomes insolvent as defined in the Federal Bankruptcy Code, admits in writing its insolvency or its present or prospective inability to pay its debts as they become due, is unable to or does not pay all or any material portion (in number or dollar amount) of its debts as they become due, permits or suffers a judgement to exist against it which affects Tenant's ability to conduct its business in the ordinary course (unless enforcement thereof is stayed pending appeal), makes or proposes an assignment for the benefit of creditors or any class thereof for purposes of effecting a moratorium upon or extension or composition, or commences or proposes to commence any bankruptcy, reorganization or insolvency proceeding, or other proceedings under any federal, state or other law for the relief of debtors; (vii) Tenant fails to obtain the dismissal, within sixty (60) days after the commencement thereof, of any bankruptcy, reorganization or insolvency proceeding, or other proceeding under any law for the relief of debtors, instituted against it by one or more third parties, or fails actively to oppose any such proceedings, or, in any such proceeding, defaults or files an -21- answer admitting the material allegations upon which the proceeding was based or alleges its willingness to have an order for relief entered or its desire to seek liquidation, reorganization or adjustment of any of its debts; (viii) Any receiver, trustee, or custodian is appointed to take possession of all or any substantial portion of the assets of Tenant, or any committee of Tenant, or any committee of Tenant's creditors, or any class thereof is formed for the purpose of monitoring or investigating the financial affairs of Tenant or enforcing such creditors' rights. (B) In the event of any such default by Tenant, then in addition to any other remedies available to Landlord at law or in equity, Landlord shall have the option to immediately terminate this Lease and all rights of Tenant hereunder by giving written notice of such intention to terminate. In the event that Landlord shall elect to so terminate the Lease, then Landlord may recover from Tenant: (i) any unpaid Rent which shall have accrued at the time of such termination; plus (ii) the entire amount of unpaid Rent for the balance of the term which amount shall, at Landlord's option, be immediately due and payable; plus (iii) any other amount necessary to compensate Landlord for Landlord's loss or damage caused directly or indirectly by Tenant's failure to perform its obligations under this Lease including, but not limited to, reasonable attorneys' fees and costs; plus (iv) at Landlord's election, such other amounts in addition to, or in lieu of the foregoing, as may be permitted from time to time by applicable law. (C) In the event of any such default by Tenant, Landlord shall also have the right, with or without terminating this Lease, to re-enter and to take possession of the Premises and to remove all persons and property from the Premises. Landlord is hereby granted a lien, in addition to any statutory lien or right to distrain that may exist, on all personal property of Tenant in or upon the Premises, to assure payment of the Rent and performance of the covenants and conditions of this Lease. Landlord shall have the right, as agent of Tenant, to take possession of all personal property of Tenant found in or about the Premises including without limitation furniture and fixtures of Tenant and, to sell the same at public or private sale and to apply the proceeds thereof to the payment of any monies due or becoming under this Lease, or to remove all such effects and store same in a public warehouse or elsewhere at the cost of and for the account of Tenant, or any other owner or occupant, Tenant hereby waiving the benefit of all laws exempting property from executing, levy and sale of distress or judgement. (D) In the event of the vacation or abandonment of the Premises by Tenant or in the event that Landlord shall elect to re-enter as provided above or shall take possession of the Premises pursuant to legal proceeding or pursuant to any notice provided by law, then if Landlord does not elect to terminate this Lease as provided in this Paragraph 22, Landlord may from time to time, -22- without terminating this Lease, either recover all Rent as it becomes due or relet the Premises or any part thereof for such term or terms and at such rental or rentals and upon such other terms and conditions as Landlord in his sole discretion may deem advisable with the right to make alterations and repairs to the Premises. (E) In the event that Landlord shall elect to so relet, then rentals received by Landlord from such reletting shall be applied: first, to the payment of any indebtedness other than Rent due hereunder from Tenant to Landlord; second, to the payment of any cost of such reletting, including but not limited to broker's commissions and reasonable attorneys' fees; third, to the payment of the cost of any alterations and repairs to the premises; fourth, to the payment of any Rent due and unpaid hereunder; and the residue, if any, shall be held by Landlord and applied in payment of future Rent as the same may become due and payable hereunder. Should any such reletting result in the payment of rentals less than the Rent payable by Tenant hereunder, then Tenant shall pay such deficiency to Landlord immediately upon demand therefor by Landlord. Tenant shall also pay Landlord as soon as ascertained, any costs and expenses incurred by Landlord in such reletting or in making such alterations and repairs not covered by the rentals received from such reletting. (F) No re-entry or taking possession of the Premises by Landlord pursuant to this Paragraph 22 shall be construed as an election to terminate this Lease unless a written notice of such intention be given to Tenant. Notwithstanding any reletting without termination by Landlord because of any default by Tenant, Landlord may at any time after such reletting, elect to terminate this Lease for any such default. PARAGRAPH 23 RIGHT OF LANDLORD TO CURE TENANT'S DEFAULT If Tenant defaults in the making of any payment or in the doing of any act herein required to be made or done by Tenant, then Landlord may but shall not be required to make such payment or do such act and charge to Tenant the amount of all costs in connection therewith including but not limited to reasonable legal fees and expenses incurred by Landlord, with interest thereon as provided in Paragraph 36 from the date paid by Landlord to the date of payment thereof by Tenant. Such payment and interest shall constitute Additional Rent hereunder due and payable upon demand but the making of such payment or the taking of such action by Landlord shall not operate to cure such default or to stop Landlord from the pursuit of any other remedy to which Landlord would otherwise be entitled. PARAGRAPH 24 NOTICE All notices which Landlord or Tenant may be required or may desire to serve on the other may be served, as an alternative to personal service, by mailing the same by registered or certified mail, return receipt requested, postage prepaid, addressed as set forth in Item 15 of the Basic Lease -23- Provisions, or addressed to such other address or addresses as either Landlord or Tenant may from time to time designate to the other by written notice. PARAGRAPH 25 INSOLVENCY OR BANKRUPTCY In no event shall this Lease be assigned or assignable by operation of law and in no event shall this Lease be an asset of Tenant in any receivership, bankruptcy, insolvency, or reorganization proceeding. PARAGRAPH 26 SURRENDER AND HOLDOVER (A) On the expiration or the sooner termination hereof, Tenant shall peaceably surrender the Premises broom clean, in good order, condition and repair, reasonable wear and tear excepted. On or before the last day of the term or the sooner termination hereof, Tenant shall at its expense remove its trade fixtures, signs and other personal property from the Premises. Any property not removed shall be deemed abandoned and may either retained by Landlord as its property, or disposed of, without accountability and at Tenant's expense, in such manner as Landlord may determine. If the Premises are not surrendered at the end of the term or the sooner termination, Tenant shall indemnify Landlord against loss or liability resulting from delay by Tenant in so surrendering the Premises, including, without limitation, claims made by any succeeding tenants found on such delay. Tenant shall promptly surrender all keys for the Premises and Building restrooms to Landlord at the place then fixed for payments of Rent. Tenant's covenants hereunder shall survive the expiration or termination of this Lease. (B) If Tenant holds over after the expiration or sooner termination hereof without the express written consent of Landlord, Tenant shall become a Tenant at sufferance only at two times the greater of (i) the Rent due hereunder or (ii) the then prevailing market rate rent, as determined by Landlord in its sole and absolute discretion, plus all items of Additional Rent provided herein, and either (i) or (ii) shall be prorated on a daily basis according to the number of days contained in the month that such expiration or earlier termination takes place, and otherwise upon the terms, covenants and conditions herein specified, so far as applicable. Acceptance by Landlord of Rent after such expiration or earlier termination shall not constitute a consent to a holdover hereunder or result in a renewal. The foregoing provisions of this paragraph are in addition to and do not affect Landlord's rights of re-entry or any other rights of Landlord hereunder or as otherwise provided by law. PARAGRAPH 27 CONDITION OF PREMISES -24- Landlord's sole responsibility for preparation of the Premises will be as set forth in the Work Letter attached hereto as Exhibit "B-1" and if there is no Work Letter, Landlord's sole responsibility will consist of building a demising wall and an entry door for Tenant. Landlord's responsibility for the preparation of the Premises as described above is hereinafter referred to as Landlord's Work. Except for Landlord's Work, Tenant acknowledges that neither Landlord nor any agent of Landlord has made any representation or warranty with respect to the Premises, the Building or the Project for the conduct of Tenant's business. The taking of possession of the Premises by Tenant shall conclusively establish that the Building and the Premises were at such time in good order and repair. PARAGRAPH 28 QUIET POSSESSION Upon Tenant's paying the rent reserved hereunder and observing and performing all of the covenants, conditions and provisions on Tenant's part to be performed hereunder, Tenant shall have quiet possession of the Premises for the entire term hereof, subject to all of the provisions of this Lease. This covenant shall be binding upon any Landlord hereunder only during its respective ownership of the Premises. PARAGRAPH 29 LIMITATION OF LANDLORD'S LIABILITY (A) Except for Landlord's negligence or willful misconduct, Landlord and its employees and agents shall not be liable for any damage to Tenant's property entrusted to employees of Landlord or its agents, nor for any loss or interruption of Tenant's possession, nor for loss of or damage to any property by theft or otherwise, nor for any injury or damage to persons or property resulting from fire, explosion, falling plaster, steam, gas, electricity, water or rain which may leak from any part of the Building or from the pipes, appliances or plumbing works therein or from the roof, street, or sub-surface or from any other place or resulting from dampness or any other cause whatsoever in the Building or the Project. Landlord and its employees and agents shall not be liable for any property loss resulting from any latent defect in the Premises or in the Building. (B) Tenant shall look solely to Landlord's estate and property in the Project (or the proceeds thereof) for the satisfaction of Tenant's remedies for the collection of a judgement (or other judicial process) requiring the payment of money by Landlord in the event of any default by Landlord hereunder, and not other property or assets of Landlord or Landlord's partners or members shall be subject to levy, execution or other enforcement procedure for the satisfaction of Tenant's remedies under or with respect to either this Lease, the relationship of Landlord and Tenant hereunder, or Tenant's use and occupancy of the Premises. PARAGRAPH 30 GOVERNING LAW -25- This Lease shall be governed by and construed pursuant to the laws of the State of New Jersey. PARAGRAPH 31 COMMON FACILITIES Tenant shall have the non-exclusive right in common with others, to the use of common entrances, lobbies, elevators, ramps, drives, stairs and similar access and serviceways and the other common facilities (except for parking spaces other than those provided for in Paragraph 39) in and adjacent to the Building or Project, as may be provided by Landlord from time to time for general use, subject to such rules and regulations as may be adopted by the Landlord including, but not limited to, the right to close from time to time all or a portion of said common facilities to such extent as may be legally sufficient, in Landlord's sole opinion, to prevent a dedication thereof or the accrual of rights to any person or to the public therein. PARAGRAPH 32 SUCCESSORS AND ASSIGNS Except as otherwise provided in this Lease, all of the covenants, conditions and provisions of this Lease shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, personal representatives, successors and assigns. However, the obligations of Landlord under this Lease shall not be binding upon Landlord herein named with respect to any period subsequent to the transfer of its interest in the Project as owner or lessee thereof, and in the event of such transfer said obligations shall thereafter be binding upon each transferee of the interest of Landlord herein named as such owner or lessee of the Project, but only with respect to the period commencing with its respective transfer in and ending with a subsequent transfer out, and such transferee, by accepting such interest, shall be deemed to have assumed such obligations except only as may be expressly otherwise provided in this Lease. A lease of Landlord's entire interest in the Project as owner or lessee thereof shall be deemed a transfer within the meaning of this Paragraph 32. PARAGRAPH 33 BROKERS Tenant represents and agrees that it has not directly or indirectly dealt with any real estate broker(s) other than the firm(s) specified in Item 12 of Basic Lease Provisions in connection with this transaction. Further, Tenant covenants and agrees that with respect to any renewal or extension or expansion of this Lease, or with respect to any transaction' by Tenant or its affiliates, successors or assigns with Landlord or 400 College Road Associates, Limited Partnership with respect to the leasing of space by Tenant either by original lease, renewal or expansion space within any buildings owned by Landlord or 400 College Road Associates, Limited Partnership within College Park at -26- Princeton Forrestal Center in Plainsboro, New Jersey, that Tenant will pay all brokerage commissions or finders fees, commissions, fees or other remuneration claimed by any real estate broker or finder other than the firm (s) specified in Item 12 of the Basic Lease Provisions. Tenant agrees to defend, indemnify and hold Landlord harmless from and against any claims for brokerage commissions or finder's fee arising out of or based upon any actions of Tenant with respect to any other broker or brokers other than the firm (s) specified in Item 12 of the Bas Lease Provisions with respect to the leasing of space by Tenant, either by original leas renewal, or expansion space for any space including, but not limited to the Premises, least by Tenant or its affiliates, successors or assigns from Landlord or 400 College Ro,, Associates, Limited Partnership within the buildings owned by either of them at College Park at Princeton Forrestal Center in Plainsboro, New Jersey. The terms of this Paragraph will survive termination of this Lease. PARAGRAPH 34 NAME Tenant shall not, without the written consent of Landlord, use the name of the Building or the Project for any purpose other than as the address of the business to l: conducted by Tenant in the Premises, and in no event shall Tenant acquire any rights in I to such names. PARAGRAPH 35 EXAMINATION OF LEASE Submission of this instrument for examination or signature by Tenant does n, constitute a reservation of or option for lease, and it is not effective as a Lease or otherwise until execution by and delivery to both Landlord and Tenant. PARAGRAPH 36 ADDITIONAL CHARGES Any amount due from Tenant to Landlord which is not paid when due, in addition to other remedies available to Landlord, shall at Landlord's option bear interest which shall be at the lesser of (i) eighteen (18%) percent per annum or (ii) the maximum lawful rate per annum, from the date such payment is due until paid, but the payment of such interest shall not excuse the cure of default. In addition to the foregoing, Landlord may also impose a late charge of four (4%) percent of the amount past due, and a charge for reasonable legal fees and costs. PARAGRAPH 37 MARGINAL HEADINGS The marginal headings and titles to the Paragraphs of this Lease are not a part I this Lease and shall have no effect upon the construction or interpretation of any pa -27- PARAGRAPH 38 PRIOR AGREEMENTS; SEVERABILITY This Lease contains all of the agreements of the parties hereto with respect to any matter covered or mentioned in this Lease, and no prior agreement, understanding or representation pertaining to any such matter shall be effective for any purpose. No provision of this Lease may be amended or added to except by an agreement in writing signed by the parties hereto or their respective successors in interest. If any term or provision of this Lease, the deletion of which would not adversely affect the receipt of any material benefit by either party hereunder, shall be held invalid or unenforceable to any extent, the remainder of this Lease shall not be affected thereby and each term and provision of this Lease shall be valid and enforceable to the fullest extent permitted by law. PARAGRAPH 39 PARKING Tenant shall have the right to the non-exclusive use of the number of parking spaces shown in Item 11 of Basic Lease Provisions. Tenant covenants and agrees to comply with all reasonable rules and regulation which Landlord may hereafter from time to time make to assure use of parking spaces by permitted users. Landlord's remedies under such rules and regulations may include, but shall not be limited to, the right to tow away at owner's expense any vehicles not parked in compliance with these rules and regulations. Landlord shall not be responsible to Tenant for the noncompliance or breach by any other tenant of said rules and regulations. PARAGRAPH 40 AUTHORITY Tenant represents that Tenant is authorized to do business in the State of New Jersey. Upon Landlord's request, Tenant's signatories hereto will furnish satisfactory evidence of Tenant's authorization and their authority to execute this Lease on behalf of Tenant. PARAGRAPH 41 NO LIGHT, AIR OR VIEW EASEMENT Any diminution or shutting off of light, air or view of any structure which may be erected on lands adjacent to the Building shall in no way effect this Lease or impose any liability on Landlord. PARAGRAPH 42 FORCE MAJEURE -28- Except as otherwise expressly provided herein, this Lease and the obligations of Tenant to pay Rent hereunder and perform all of the other covenants, agreements, terms, provisions and conditions hereunder on the part of Tenant to be performed shall in no way be affected, impaired or excused because Landlord is unable to fulfill any of its obligations under this Lease, if Landlord is prevented or delayed from so doing by reason of any cause beyond Landlord's reasonable control, including, but not limited to, Acts of God, strikes, labor troubles, shortage of material, governmental preemption in connection with a national emergency or by reason of any rule, order or regulations of any governmental agency or by reason of war, hostilities or similar emergency; provided that Landlord shall in each instance exercise reasonable diligence to effect performance as soon as possible. It is agreed that Landlord shall not be required to incur any overtime or additional expenses in Landlord's reasonable diligence to effect the performance of any of Landlord's obligations hereunder. PARAGRAPH 43 ATTORNMENT If for any reason the leasehold estate of Landlord as Tenant under any underlying lease is terminated by summary proceedings or otherwise, Tenant will attorn to the Landlord under such underlying Lease and will recognize such Landlord as Tenant's Landlord under this (sub)lease. Tenant agrees to execute and deliver, at any time, and from time, to time, upon the request of Landlord or of the Landlord under any such underlying lease, any instrument which may be necessary or appropriate to evidence such attornment and Tenant hereby appoints Landlord the Landlord under such underlying lease the attorney-in-fact, irrevocable, of Tenant to execute and deliver any such instrument for and on behalf of Tenant. Tenant further waives the provisions of any statute or rule of law now or election to terminate this (sub)lease or to surrender possession of the Premises in the event such underlying lease terminates or any such proceeding is brought by Landlord under such underlying lease, and agrees that his (sub)lease shall not be affected in any way whatsoever by any such proceeding or termination. PARAGRAPH 44 COMMON AREA MAINTENANCE COST Base Project Operating Expenses as defined in Paragraph 3 shall also include Landlord's costs and expenses incurred as Landlord's share of common area maintenance all as set forth in Article 29 of the underlying Land Lease between the Trustees of Princeton University as landlord and Landlord as tenant. PARAGRAPH 45 NOTICE REGARDING TENANT'S MOVING IN OR OUT Two days prior to any move into or out of the Premises, Tenant must notify National Business Parks, as Agent for College Road Associates, of the following: the name of the Moving -29- Company, Moving Company representative in charge of the move, and Moving Company's phone number. Except as otherwise pre-arranged with Landlord, all moves must be done during the work week (Monday through Friday, inclusive between the hours of 7:30 A.M. and 4:30 P.M.). If Landlord consents to Tenant moving in or out of the Premises on a Saturday or a Sunday, Tenant shall be required to pay an overtime charge for Landlord's representative to be present (currently such charge 6b $50.00 per hour. No elevators will be available Saturday, Sunday or holidays or after 4:30 P.M. on other days. The insurance evidence in the form required by Paragraph 19 hereof must be delivered to Landlord prior to commencement of the Tenant's move into or out of the Premises. PARAGRAPH 46 FIRST OPTION TO RENEW Upon condition that Tenant is not in default in the payment of any Rent or other charge payable to Tenant under this Lease and not in default in the performance of any covenant or obligation to be performed by Tenant under this Lease and upon Tenant's giving Landlord nine (9) months notice in writing in the manner prescribed in Article 24 hereof prior to the expiration of the term hereof, Tenant shall have the option to renew and extend this Lease for an additional period of five (5) years, pursuant and subject to all terms, covenants, provisions, and conditions of this Lease, including, without limitation, the payment of all items of Rent as provided for hereunder, except that the Basic Annual Rent shall be adjusted to the then prevailing fair market rent for comparable space within Princeton Forrestal Center. PARAGRAPH 47 SECOND OPTION TO RENEW Upon condition that Tenant is not in default in the payment of any Rent or other charge payable to Tenant under this Lease and not in default in the performance of any covenant or obligation to be performed by Tenant under this Lease and upon Tenant's giving Landlord nine (9) months notice in writing in the manner prescribed in Article 24 hereof prior to the expiration of the first renewal term, Tenant shall have the option to renew and extend this Lease for an additional period of five (5) years, pursuant and subject to all terms, covenants, provisions, and conditions of this Lease, including, without limitation, the payment of all items of Rent as provided for hereunder, except that the Basic Annual Rent shall be adjusted to the then prevailing fair market rent for comparable space within Princeton Forrestal Center. PARAGRAPH 48 RIGHT OF FIRST REFUSAL ADDITIONAL SPACE During the term hereof and provided that Tenant is not in default in the Payment of Basic Net Annual Rent, Additional Rent or any other amount due hereunder or in the performance of any covenant or obligation to be performed by Tenant hereunder, Landlord agrees that Landlord will not enter into any lease for any space which is contiguous to Tenant's Premises in the Building, to any -30- prospective tenant who expresses to Landlord his intention to lease such space, unless Landlord shall first receive an acceptable bona-fide offer in writing from such prospective tenant for the lease of such space and Landlord shall have notified Tenant in writing of the name of the prospective tenant making the offer, the rental amount to be paid therefore and all pertinent details of the proposed lease. Landlord agrees that Tenant shall thereupon have the one-time prior right to lease said space upon the same terms and conditions as are contained in said offer. Said rip-ht must be exercised within ten (10) business days after Tenant's receipt of said written notice of said offer by giving written notice to Landlord of the exercise of said right within said ten (10) business day period. If Tenant shall fail to exercise its right to lease that particular space, Tenant shall be conclusively deemed to have forever waived and relinquished all rights to lease the particular space specified in the notice and Landlord may lease such space to the third party without further notice to Tenant. -31- [FLOOR PLAN] -32- EXHIBIT B-1 LANDLORD'S WORK LETTER It is the intent of this Exhibit that Tenant shall be permitted reasonable freedom in the interior design and layout of its space, consistent with applicable building codes and sound architectural and construction practices in first class office buildings, provided that no interference is caused to the operation of the Building's mechanical, heating, cooling or electrical systems or other building operations or functions, and no increase in maintenance or utility charges will be incurred by Landlord. Any additional costs of design, construction, operation or maintenance which results from Tenant's deviations from Building Standard quantities or specifications shall be charged to Tenant. A. IMPROVEMENTS 1. Landlord's Work: Landlord (in accordance with applicable building codes and regulations), at its sole cost and expense, shall furnish and install in or for the benefit of the Premises pursuant to the plans and specifications referred to below, the following: (a) For divided-floor tenancies, all walls separating the Premises from areas or from other tenant space. (b) Interior core improvements, including men's and women's toilet rooms, telephone closets, electrical closet, janitorial closet and core walls. (c) Those Building Standard improvements as shown in the list of allowances as detailed in Exhibit B-2, and indicated as shown in Exhibit "A" not to exceed a total construction cost of $225,980.00. 2. Tenant's Work: All other improvements required by Tenant in the Premises shall be at the sole cost and expense of Tenant. 3. Landlord's Approval: Tenant's Plan, as hereinafter defined, shall be subject to Landlord's prior written approval. If Tenant's Plan requires any variance or any modifications of any existing site plan, Tenant will be responsible for obtaining all approvals required at Tenant's sole cost and expense. B. PLANS AND SPECIFICATIONS Tenant may use the services of the space planner retained by Landlord at no cost to Tenant, to prepare an initial space plan and one revision. Tenant may at its own expense employ other professional space planning assistance. If Tenant requests any additional work which is not provided in the Building Standard, Tenant shall be responsible for all costs resulting from such additional work, including but not limited to architectural and engineering charges, and any special permits or fees attributed thereto. In either event, both Landlord and Tenant shall conform with the applicable time schedule set forth below. -33- 1. Tenant Uses Landlord's Space Planner: Tenant shall devote such time in consultation with Landlord's space planner as shall be necessary to enable the latter to develop complete working drawings and specifications for Building Standard improvements for the Premises (which drawings and specifications are hereafter and in the foregoing Lease collectively called the "Tenant's Plan"), showing thereon partitions, hardware, electrical and telephone outlets and spacial requirements (if any), light fixture locations, wall finishes, floor coverings, for Tenant's review and approval. Upon such approval, Landlord will submit Tenant's Plan, including items of work above Building Standard Allowance, to Landlord's contractor for determination of the cost of such work. Such costs for items of work, if any, above Building Standard Allowance shall include the contractor's fee of 10% for overhead and profit and Landlord's fee of 10% to cover its costs in administering the work. After approval by Tenant of such costs and before Landlord shall order that any work be commenced, Tenant shall pay the first one third in accordance with the following: One third (1/3) at time of approval of costs. One third (1/3) when work is 50% completed. One third (1/3) upon completion. Tenant shall approve space plan and provide all information required for working drawings no later than 5 days upon receipt of same. The following maximum time periods shall be allowed for the following matters after the completion of the immediately preceding item:
Business Days Allowed to Complete ------------------- (a) Landlord to complete working drawings and specifications 20 days (b) Tenant gives Landlord its approval of working drawings and specifications with any required changes 3 days (c) Landlord quotes Tenant cost of work above Building Standard Allowance for non-standard items 5 days (d) Tenant reviews, approves excess cost and pays one third (1/3) thereof to Landlord 3 days (e) Landlord authorizes commencement of work 1 day
2. Base Building Changes: If Tenant Plan necessitates revisions in the design of the base building or necessitates changes in the construction of the base building for which Landlord has previously contracted, Tenant shall be responsible for all costs resulting from such design revisions or construction changes, including but not limited to architectural and engineering changes, and any special permits for fees attributed thereto. Before Landlord shall authorize such design and/or construction changes, Tenant shall pay Landlord the full cost attributable thereto which includes the -34- contractor's fee of 10% for overhead and profit and Landlord's fee of 10% to cover its costs in administering the work. C. CONSTRUCTION 1. By Landlord: All partitions, floors, ceilings, and doors shall be installed and all work involving or affecting the Building's mechanical, electrical systems shall be performed by Landlord's contractor. If any work is not performed by the Landlord during the course of this Lease, or is performed by Tenant's own contractors, a fee of 10% of the total cost will be paid to the Landlord to cover the cost of coordination of Tenant's work. 2. By Tenant: Finish work in the Premises other than work described in the preceding paragraph, may be done by Tenant, in compliance with the following: (a) No such work shall proceed without Landlord's prior written approval of (i) Tenant's contractor; (ii) detailed plans and specifications for the work; and (iii) a certificate of workman's compensation insurance in an amount and with a company and on a form acceptable to Landlord and a certificate of insurance in form and from an insurer acceptable to Landlord, showing Tenant or Tenant's contractor to have in effect public liability, comprehensive general liability and property damage insurance with limits of not less than $1,000,000/$2,000,000 and $1,000,000 respectively. All such certificates except worker's compensation shall be endorsed to show Landlord as an additional insured and such insurance shall be maintained by Tenant or Tenant's contractor at all times during the performance of Tenant's work. (b) All such work shall be done in conformity with applicable codes and regulations of governmental authorities having jurisdiction over the Building and premises and with valid building permits and other authorizations from appropriate governmental agencies when required shall be obtained by Landlord's representative at Tenant's sole expense. Any work not acceptable to the appropriate governmental agencies or not reasonably satisfactory to Landlord, shall be promptly replaced at Tenant's expense. Notwithstanding any failure by Landlord to object to any such work, Landlord shall have no responsibility therefor. Tenant agrees to save and hold Landlord harmless for said work as provided in the Lease. (c) Tenant and Tenant's contractors shall abide by all safety and construction laws, ordinances, rules and regulations. All work and deliveries shall be scheduled through Landlord. Entry by Tenant's contractors shall be deemed to be under all the terms, covenants, provisions and conditions of the Lease. All Tenant's materials, work, installations and decorations of any nature brought upon or installed in the Premises before the Lease Commencement Date shall be at Tenant's risk, and neither Landlord nor any party acting on Landlord's behalf shall be responsible for any damage thereto or loss or destruction thereof. Tenant shall not employ any contractor who in Landlords' opinion may prejudice Landlord's negotiations or relationships with Landlord's contractors or subcontractors or the negotiations or relationship of those contractors or subcontractors with their employees, or may disturb harmonious labor relations. -35- (d) Tenant shall reimburse Landlord for any extra expenses incurred by Landlord by reason of faulty work done by Tenant or its contractors, or by reason of delays caused by such work, or by reason of cleanup which fails to comply with Landlord's rules and regulations, or by reason of use of elevators outside normal working hours. (e) Tenant shall pay to Landlord a building service fee of ten percent (10%) of the total cost of Tenant's work not done by Landlord's contractor to cover Landlord's cost of coordination of Tenant's Work. Such building service fee shall be paid to Landlord at the time of Landlord's approval of Tenant's contractor(s) as provided in Paragraph 2(a) above. (f) Tenant's contractors shall not post any signs on any part of the Building or the premises. (g) Tenant shall, upon Landlord's request, provide Landlord with copies of bills and invoices for the cost of Tenant's Work hereunder. 3. Tenant's Option to Use Landlord's Contractor: Tenant may elect to have any of the work described in Paragraph 2 done by Landlord's contractor at Tenant's expense. 4. Changes: If there are any changes requested by Tenant, after approval of Tenant's Plan, Tenant shall be responsible for all costs including but not limited to permits and fees, architectural, engineering and related design expenses resulting from such changes. No such changes shall be made without prior written approval of Landlord. Landlord shall not be responsible for delay in occupancy by Tenant because of changes to plans after approval by Tenant as outlined above. Upon completion of such revised working drawings and specifications, Landlord shall notify Tenant in writing of the cost which will be chargeable to Tenant by reason of such change, addition or deletion. Tenant shall, within (5) business days, notify Landlord in writing whether it desires to proceed with such change, addition or deletion. In the absence of such written authorization and payment in full of the total costs of such change, addition or deletion, Landlord shall not be obligated to continue work on Tenant's premises and may suspend work and Tenant shall be responsible and chargeable for any and all delays in the completion of the Premises resulting therefrom. 5. Tenant's Inspection: Tenant is authorized by Landlord to make periodic inspections of the Premises during construction provided that such inspections are made during reasonable business hours and that Tenant is accompanied by a representative of the Landlord. Tenant shall advise Landlord immediately in writing of any objection to the performance of such work. D. ACCEPTANCE OF PREMISES When Landlord's Work and Tenant's Work is substantially completed in accordance with Tenant's Plan except for the punch list items the Premises and/or Additional Space shall be considered acceptable for occupancy. Within five (5) business days of Landlord's notice that Landlord's Work and Tenant's Work has been substantially completed, Tenant shall inspect the Premises and/or Additional Space, in the presence of Landlord and Landlord's contractor in order to establish a punch list of items to be completed or corrected. -36- E. RESPONSIBILITY FOR DELAYS If Tenant shall cause any delay in the construction of the Premises, whether by reason of any failure by Tenant to comply with the applicable time schedule set forth in Paragraph B1, or by Tenant's requirement of materials or installations different from the Building Standard, or by delays in performance of completion by a party employed by Tenant, or by reason of building code problems arising from Tenant's design, or by reason of changes in the work ordered by Tenant, then notwithstanding the provisions of the Lease or any other provision of this Exhibit, any such delay in completing the Premises shall not in any manner affect the Lease Commencement Date of the Tenant's liability for the payment of rent set forth in the Lease. F. INCORPORATED IN LEASE This Agreement is, and shall be incorporated by reference in the Lease and all of the terms and provisions of said Lease are and shall be incorporated herein by this reference. G. BUILDING STANDARD ALLOWANCES Landlord, at Landlord's expense, except as otherwise expressly specified in this Exhibit B-1 and in the foregoing Lease, shall furnish and install in and to the Premises the following, all of which shall be of material, manufacture, design, capacity, finish and color of the Building Standard adopted by Landlord for the Building in accordance with the Tenant's Plan. The Building Standard Allowances as attached represents a maximum to be provided at no cost to Tenant. Tenant shall receive no credit for unused items. H. ELECTRICAL CONSUMPTION CALCULATION If Tenant's electrical requirements exceed power designed to be provided to the Premises, in order to accurately calculate the power consumed by Tenant, Landlord at its option may require Tenant to install at Tenant's cost a check meter. When no meter is required a survey of Tenant's electrical consumption will be made at Tenant's expense. I. FINAL PAYMENT OF EXCESS COSTS If prior to Tenant's occupancy of the Premises and/or Additional Space there is a default by Tenant in payment of the above, Landlord shall, in addition to all other legally allowable remedies, have the same rights as in the case of default in rent under the Lease. Tenant shall pay to Landlord the balance of all excess costs to complete Tenant's Work and the entire amount of any extra expenses incurred by Landlord. -37- EXHIBIT B-2 BUILDING STANDARD 300 SERIES 1. PARTITIONS (a) Partitions within the Demised Premises shall have 5/8" gypsum board on each side of 2-1/2" metal studs, 24" on center, taped and spackled, to underside of finished ceiling. Partitions between the Demised Premises and corridor(s) and between the Demised Premises, any adjacent space shall have 5/8" fire code gypsum board, taped and spackled, on each side of 3-1/2" metal studs, 24" on center. Demising partitions and corridor partitions to have 1-1/2" (full thick) sound deadening insulation installed within from floor to underside of floor above. (b) There will be no jogs, curves or angles in any partition. (c) Vinyl base 4" high to be on all partitioning and existing walls and columns. 2. DOORS (a) All frames to be 16 gauge, pressed steel, painted. (b) Doors within Demised Premises to be 3'-0" x 7'0" nominal x 1-3/4" solid core oak, rift cut, matched finish. Doors to have fire rating as required by applicable codes. 3. HARDWARE (a) Cylindrical latch sets, standard weight, on individual office doors within the Demised Premises. (b) Cylindrical lock sets, heavy duty, and closers on doors from corridor(s) on Demised Premises. (c) Lock sets and latch sets to be Schlage, Sargent, Yale, Russwin or equal, as selected by Landlord. (d) All lock sets shall be keyed to the building master key system. 4. ACOUSTICAL CEILINGS (a) Lay-in acoustic tile ceilings, within Demised Premises, shall be 24" x 48" regressed white mineral fiber, textured panels with white recessed "T"-spline, as selected by Landlord. (b) Ceiling heights within Demised Premises to be nominal 9'-0". (c) Direction of ceiling-grid to be as determined by Landlord. -38- 5. FLOORING Building standard carpet to be in all tenant areas where vinyl composition tile is not installed. All carpets will be selected from Landlord's samples, or of equal quality. 6. PAINTING (a) Interior wall surfaces of gypsum board shall receive two (2) coats of flat latex paint, colors to be selected by Tenant from Landlord's samples. (b) All interior ferrous metal surfaces shall receive two (2) coats of alkyd semigloss enamel paint over shop-applied primer. (c) All wood doors to receive one (1) coat of sealer and two (2) coats of clear polyurethane satin varnish. (d) Paint manufacturers to be Pratt & Lambert, Devoe & Reynolds, Benjamin Moore, or approved equal, as selected by Landlord. 7. WINDOW COVERING All exterior windows to receive building standard, narrow, horizontal aluminum slat blinds, Levelor or equal, as selected by Landlord. 8. ELECTRICAL SPECIFICATIONS (a) Lighting - Provide 2' x 4' 3L - high efficiency open deep cell fixtures in regressed aluminum frame with air return feature. (b) Power - Wall mounted duplex receptacles must meet all applicable codes. (c) The average electric load of the Demised Premises shall not exceed five (5) watts per square foot for lighting and power in office areas. Landlord will provide available service of 200A 277/480V, 3 phase, for Tenant's exclusive use. All other switchgear required is a function of the work letter allowance. (d) Landlord shall initially provide and install lamps and ballasts. Replacement of same shall be by Landlord, at Tenant's expense. 9. FIRE AND LIFE SAFETY FEATURES (a) The Building is fully sprinklered in all areas. (b) Fire Alarm System consisting of manual pull boxes, annunciators, alarm bells, control panel, etc. shall be required per code. -39- (c) Smoke detectors, ionization-type, in corridors, Tenant's space, electrical equipment rooms, elevator machine rooms and ductwork where the air quality is over 15,000 CFM. Firestats in the ductwork where air quality is less than 15,000 CFM. (d) Battery back-up shall be required in the Building to operate all emergency and exit lighting fixtures in public areas and fire alarm system. 10. TELEPHONE WORK (a) The Landlord shall arrange with New Jersey Bell Telephone Company for telephone service within the equipment room in the Building's core. (b) All telephone work and wiring in partitions, floors and ceilings to be paid for by Tenant as arranged for by Tenant with any qualified installer selected by Tenant but approved by Landlord. Landlord will coordinate work with other trades as required. Completion or non- completion of the telephone work will not delay Tenant's acceptance of the Demised Premises or the payment of Rent. All electrical load centers, special wiring and plywood supplied by Landlord for telephone equipment shall be an extra cost to be paid by Tenant. Telephone company work is to meet all prevailing codes. 11. RVAC SPECIFICATIONS (a) Heating, ventilation and air-conditioning system shall be capable of maintaining the following interior conditions, subject to governmental regulations: Summer - 75 degrees F (+2 degrees F) dry bulb and 50% relative humidity when outside temperature is 90 degrees F dry bulb and 75 degrees wet bulb. Winter - 68 degrees F when outside temperature is 14 degrees F. (b) The VAV system with roof top A/C unit will have automatic thermostats mounted in the rooms or open spaces within the Demised Premises. (c) The VAV units are connected to roof top A/C units with filters, mixing dampers and fan motor. (d) Tenant override timers and running hour meter will be provided in electrical closet for after hours use. (e) The air supply distribution of the HVAC system for the Demised Premises shall be based on five (5) watts per square foot of total electrical load for all purposes. Occupancy rate is based on one (1) person per 200 square feet. (f) All heating will be provided from the perimeter base board heaters via solid state controllers, from Building central system. -40- (g) The control system for the heating will be by means of electric thermostats mounted in the rooms or open spaces within the Demised Premises as described in (11 b) interfaced with solar & ambient outdoor temperature sensors. (h) Zoning within Tenant's Demised Premises shall provide interior and perimeter zones. The number of zones, as determined by Landlord, shall be based on orientation and total area occupied with average zones as follows: Perimeter of areas - one (1) zone per 1,200 square feet Interior areas - one (1) zone per 2,000 square feet An average of 1 CFM per square foot will be delivered by the HVAC system within the Demised Premises. Diffusers supplying air will be spaced at 1 per 225 square feet. (i) If Tenant's equipment (i.e. computers, business machines, etc.) or special uses (i.e. conference rooms, mailrooms, lunch rooms, etc.) requires air-conditioning above and beyond Building Standard, as outlined, said additional air conditioning (including cost of operation as stipulated in the Lease) shall be paid for by Tenant. Any special exhaust requirements will also be paid for by Tenant. -41- EXHIBIT "C" COMMENCEMENT DATE MEMORANDUM THIS AGREEMENT made the 5th day of November, 1996, by and between COLLEGE ROAD ASSOCIATES, LIMITED PARTNERSHIP ("Landlord") and SRTC with an office at 301 College Road East, Princeton, New Jersey 08540 ("Tenant"). WITNESSETH: WHEREAS, Landlord and Tenant entered into a lease dated 8/15/96 ("Lease") setting forth the terms of occupancy by Tenant of a portion of a Building located at 301 College Road East, Princeton, New Jersey; and WHEREAS, the Lease is for a term of five (5) years, with the "Target Commencement Date" of the term being defined as November 1, 1996 in Basic Lease Provisions of the Lease; and WHEREAS, it has been determined that November 1, 1996 is the actual Commencement Date of the Lease. NOW, THEREFORE, in consideration of the premises and the covenants hereinafter set forth, it is agreed: 1. The actual Commencement Date of the term of the Lease is October 31, 2001 and the termination date thereof is November 1, 1996. 2. This agreement is executed by the parties for the purpose of providing a record of the commencement and termination dates of the term of the Lease. -42- IN WITNESS WHEREOF, the parties hereto have duly executed this instrument as of the day and year first above written. COLLEGE ROAD ASSOCIATES, LIMITED PARTNERSHIP BY: Z FORRESTAL CENTER, L.P. Its Managing General Partner ATTEST: BY: Z FORRESTAL CORP., Its General Partner BY: ____________________________ BY: ____________________________ Name: Name: John Zirinsky Title: Title: President ATTEST: BY: BY: ____________________________ BY: ____________________________ Name: Name: Title: Title: -43- RULES AND REGULATIONS --------------------- Exhibit D 1. The sidewalks, halls, passages, elevators and stairways shall not be obstructed by any of the tenants nor used by them for any other purpose than for ingress and egress to and from their respective offices, nor shall they be used as a waiting or lounging place for tenant's employees or those having business with tenants. The halls, passages, elevators, stairways and roofs are not for the use of the general public, and Landlord retains in all cases the right to control and prevent access to any part of said Building of all persons whose presence, in the judgement of Landlord or Landlord's employees, may be prejudicial to the safety, character, reputation or interests of the Building and its tenants. In case of invasion, mob, riot, public excitement or other commotion, Landlord reserves the right to prevent access to the Building during the continuance of same by closing the doors or otherwise, for the safety of tenants and the protection of property in said Building. During other than business hours, access to the Building may also be refused, unless the person seeking admission is known by Landlord's agent in charge to have the right to enter the Premises therein or is properly identified. In addition, the production of a key to such premises may be required. Landlord shall in no case be liable in damages for the admission or exclusion of any person from said Building. 2. The floors, walls, partitions, skylights, transoms that reflect or admit light into passageways or into any place in said Building shall not be covered or obstructed by any of the tenants. The toilet-rooms, sinks and other water apparatus shall not be used for any purposes other than those for which they were constructed, and no sweepings, rubbish, rags, ashes, chemicals or refuse shall be thrown or placed therein. Any damage resulting from such misuses or abuse shall be borne and immediately paid by Tenant by whom or by whose employees it shall have been caused. 3. Nothing shall be placed by tenants or their employees on the outside of the Building. 4. No sign, advertisement or notice shall be inscribed, painted or affixed on any part of the outside or inside of said Building, unless of such character, color, size and material and in such places as shall be first designated by Landlord in writing. A sign painter authorized by Landlord will do such work at Tenant's expense. 5. Tenant will see that the windows are closed and the doors securely locked each day before leaving the Building. Shades shall be of the material, style, form and color adopted by Landlord for the Building, and no tenant shall put up any that do not conform to such standards. Tenant shall have the right to remove such shades at the expiration of the lease. 6. Tenant, their employees or others shall not make or commit any improper noises or disturbances of any kind in the Building, nor smoke in the elevators, mark or defile the elevators, bathrooms or interfere in any way with other tenants or those having business in the Building. Tenants shall be liable for all damage to the Building done by their employees. Cigar & pipe smoking will not be permitted anywhere in the Building. 7 No carpet, rug or other article shall be hung or shaken out of any window, and nothing shall be thrown by tenants or tenants' employees nor be allowed by them to drop out of the windows or -44- doors or down the passages or skylights of the Building; and no tenant shall sweep or throw or permit to be swept or thrown from the Premises any dirt or other substance into any of the corridors or halls, elevators or stairways of the Building, or into any of the lightshafts or ventilators thereof. 8. No animals shall be kept in or about the Premises. 9. If the tenants desire to introduce signalling, telegraphic, telephonic or other wires and instruments, Landlord will direct the electricians as to where and how the same are to be placed; and, without such direction, no placing boring or cutting for wires will be permitted. Landlord retains in all cases the right to require the placing and using of such electrical protecting devices to prevent the transmission of excessive currents of electricity into or through the Building, to require the changing of wires and of their placing an arrangement underground or otherwise as Landlord may direct, and further to require compliance on the part of all using or seeking access to such wires with such rules as Landlord may establish thereto; and, in the event of noncompliance by tenants or by those furnishing service by or using such wires or by others with the directions, requirements or rules, Landlord shall have the right to immediately cut, displace and prevent the use of such wires. Notice requiring such changing of wires and their replacing and rearrangement given by Landlord to any company or individual furnishing service by means of such wires to any tenant shall be regarded as notice to such tenants and shall take effect immediately. All wires used by tenants must be clearly tagged at the distributing boards and junction boxes and elsewhere in the Building and with the number of the office to which said wires lead and the purpose for which said wires respectively are used, together with the names of the company operating same. 10. A directory in a conspicuous place on the first floor, with the names of tenants, will be provided by Landlord at Landlord's expense. 11. No varnish, stain, paint, linoleum, oil-cloth, rubber or other air-tight covering shall be laid or put upon the floors; nor shall articles be fastened to or holes drilled or nails or screws driven into walls, doors or partitions; nor shall the walls, doors or partitions be painted, papered or otherwise covered or in any way marked or broken; nor shall any tenant use any other method of heating than that provided by Landlord; without the written consent of Landlord, which consent shall not be unreasonably withheld. 12. The delivery of materials and other supplies to tenants in the Building will be permitted only under the direction, control and supervision of the Landlord. 13. The use of rooms as sleeping apartments is prohibited. 14. All entrance doors leading from the hallways are to be kept closed at all times. 15. For the protection of tenants, the Landlord reserves the right to refuse the admittance to the Building between the hours of 5:30 p.m. and 8:00 a.m., Monday through Friday, and from 1:00 p.m. Saturday to 8:00 a.m. Monday to any person not producing a key to such Tenant's office or suite and a pass issued by building management upon the direction of the tenant. Tenants will instruct the Building manager from time to time as to the number of persons to whom they desire passes issued -45- for this purpose. It will be the responsibility of the Tenant to pick up any pass and key whenever the employment of the passholder is discontinued. 16. Tenants must use designated parking lots only during hours of building operation. Tenant parking is restricted to main lots and is not permitted in any other area whatsoever including visitor, delivery or fire lane areas. It is expressly prohibited to allow overnight parking or storage of vehicles used by employees or in the course of business without prior written consent of Landlord. Violation of this parking regulation will result in removal of the vehicle at the sole cost of tenant. 17. Tenants must adhere to all recycling mandates (as they may be required by local and state laws), and Landlord's existing established procedure (s). 18. No smoking is permitted in the Premises or any other part of the Building. 19. All deliveries to and/or from the Building must be coordinated with the Building's Management. -46- EXHIBIT E COLLEGE PARK AT PRINCETON FORRESTAL CENTER JANITORIAL SPECIFICATIONS General Cleaning - ---------------- Cleaning Services provided five (5) days per week unless otherwise specified. Cleaning hours Monday through Friday, between 6:00 p.m. and before 8:00 a.m. of the following day. On the last day of the week work will be done after 6:00 p.m. Friday, but before 8:00 a.m. Monday. No cleaning on holidays. I. Office Area ----------- Furniture and fixtures within reach will be dusted and desk tops will be wiped clean. However, desks with loose papers on top will not be cleaned. Window sills and baseboards to be dusted and washed when necessary. Office wastepaper baskets will be emptied. Cartons or refuse in excess of that which can be placed in wastebaskets will not be removed. Tenants are required to place such unusual refuse in trash cans. Cleaner will not remove or clean tea or coffee cups or similar containers; also, if such liquids are spilled in wastebaskets, the wastebaskets will be emptied but not otherwise cleaned. All kitchen cleaning by Tenant. Carpets will be vacuumed nightly. All tile floors will be vacuumed nightly and wet mopped weekly. Wipe clean all glass, brass and other bright work weekly. Dust all pictures, charts, wall hangings monthly that are not reached in nightly cleaning. Dust all vertical surfaces to include doors, bucks and partitions monthly. Dust all ventilating louvers and other such installations monthly. -47- II. Lavatories ---------- All lavatory floors to be swept and washed with disinfectant nightly. Tile walls and dividing partitions to be washed and disinfected weekly. Basins, bowls, urinals to be washed and disinfected daily. Mirrors, shelves, plumbing work, bright work, and enamel surfaces cleaned nightly. Waste receptacles will be emptied and cleaned and wash dispensaries to be filled with appropriate tissues, towels, and soap nightly. III. Main Lobby Elevators, Building Exterior and Corridors ----------------------------------------------------- Wipe and wash all floors in Main Lobby nightly. Wipe and/or vacuum elevator floor nightly. Polish floors weekly in elevator. IV: All windows interior and exterior will be cleaned once a year. V: Tenant will comply fully with the New Jersey State Recycling Mandates. VI: Tenant is responsible for the cleaning of Tenant's laboratory area(s), except that Landlord shall remove Tenant's trash (including recyclables) to the extent that the same does not exceed the amount usually attendant upon the use of the Premises as offices. -48- EXHIBIT "F" Model Letter of Credit ---------------------- {Insert name and address of issuing bank - ---------------------------------------- Insert date - ----------- IRREVOCABLE LETTER OF CREDIT NO. {Insert number} -------------- {Insert name and address of owner} - --------------------------------- Dear Sir: At the request and for the account of {insert name of Tenant} located at {insert ----------------------- ------- address of Tenant} (hereinafter called "Applicant"), we hereby establish our - ------------------ Irrevocable Letter of Credit No. {insert number} in your favor and authorize you --------------- to draw on us up to the aggregate amount of US $ {insert amount of Letter of --------------------------- Credit} available by your draft(s) at sight drawn on us and accompanied by the - ------- following: A written statement by you that: (i) "Applicant is in default under that certain lease, dated as of {insert ------- date of lease} between you, as Landlord, and Applicant, as Tenant (the -------------- 'Lease');" or (ii) "Applicant has failed to deliver timely a renewal Letter of Credit as provided in the Lease." This Irrevocable Letter of Credit will be duly honored by us at sight upon delivery of the statement set forth above without inquiry as to the accuracy of such statement and regardless of whether Applicant disputes the content of such statement. We hereby engage with you that all drafts drawn under and in compliance with the terms of this Irrevocable Letter of Credit will be duly honored by us if presented at {insert address of issuing bank} no later than {insert expiration -------------------------------- ------------------ date of Letter of Credit}, it being a condition of this Irrevocable Letter of - ------------------------- Credit that it shall be automatically extended for periods of at least one year from the present and each future expiration date unless, at least sixty (60) days prior to the relevant expiration date, we notify you, by certified mail, return receipt requested, that we elect not to extend this Irrevocable Letter of Credit for any additional period. This Irrevocable Letter of Credit is transferable at no charge to any transferee of Landlord upon notice to the undersigned from you and such transferee. This Irrevocable Letter of Credit is subject to the Uniform Customs and Practices for Documentary Credits (1983-Rev) International Chamber of Commerce Publication #400. -49- Sincerely yours, {Insert authorized signature} - ----------------------------- -50- EX-21.1 17 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT The Company has one subsidiary but does not consider it a significant subsidiary as defined in Rule 601 of Regulation S-K, of the Securities Act of 1933, as amended. EX-23.1 18 CONSENT OF KPMG EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS The Board of Directors DIVA Systems Corporation: We consent to the use of our reports included herein and to the reference to our firm under the heading "Experts" in the prospectus. KPMG Peat Marwick LLP Mountain View, California September 28, 1998 EX-99.1 19 FORM OF LETTER OF TRANSMITTAL EXHIBIT 99.1 [FORM OF LETTER OF TRANSMITTAL] DIVA SYSTEMS CORPORATION OFFER FOR ALL OUTSTANDING 12 5/8% SENIOR DISCOUNT NOTES DUE 2008, SERIES A IN EXCHANGE FOR 12 5/8% SENIOR DISCOUNT NOTES DUE 2008, SERIES B PURSUANT TO THE PROSPECTUS, DATED ________, 199_. - -------------------------------------------------------------------------------- THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M. NEW YORK CITY TIME, ON ______________, 1999, UNLESS EXTENDED (THE "EXPIRATION DATE"). TENDERS MAY BE WITHDRAWN PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE. - -------------------------------------------------------------------------------- THE BANK OF NEW YORK By Registered or Certified Facsimile Transmission By Hand/Overnight Delivery: Mail: Number: Attn.: ____________ The Bank of New York The Bank of New York Reorganization Section 101 Barclay Street 101 Barclay Street, Floor 7E (212) 815-____ Corporate Trust Services New York, New York 10286 Window Attn.:_____________ (For Eligible Institutions Only) Ground Level Reorganization Section Confirm by Telephone: New York, New York 10286 (212) 815-____ Attn.: __________ Reorganization Section For Information Call: (212) 815-____
Delivery of this instrument to an address other than as set forth above, or transmission of instructions via facsimile other than as set forth above, will not constitute a valid delivery. The undersigned acknowledges that he or she has received the Prospectus, dated _________, 199_ (the "Prospectus") DIVA Systems Corporation, a Delaware corporation (the "Company"), and this Letter of Transmittal (this "Letter of Transmittal"), which together constitute the Company's offer (the "Exchange Offer") to exchange an aggregate principal amount at maturity of up to $463,000,000 12 5/8% Senior Discount Notes due 2008, Series B (the "New Notes") of the Company for a like principal amount at maturity of the issued and outstanding 12 5/8% Senior Discount Notes due 2008, Series A (the "Old Notes") of the Company from the holders thereof. Capitalized terms used herein and not otherwise defined shall have the meanings herein as ascribed thereto in the Prospectus. This Letter of Transmittal is to be used if certificates for the Old Notes are to be forwarded herewith. If delivery of the Old Notes is to be made through book-entry transfer into the Exchange Agent's account at The Depository Trust Company ("DTC"), this Letter of Transmittal need not be delivered; provided, however, that tenders of the Old Notes must be effected in accordance with DTC's Automated Tender Offer Program procedures and the procedures set forth in the Prospectus under the caption "The Exchange Offer--Procedures for Tender" and "--Book-Entry Transfer; Delivery and Form." For each Old Note accepted for exchange, the holder of such Old Note will receive a New Note having a principal amount at maturity equal to that of the surrendered Old Note. Principal on the New Notes will accrete from the date of issuance of the New Notes. If by February 19, 1999, the Company has not consummated the Exchange Offer or caused a shelf registration statement to be declared effective, interest (in addition to interest otherwise due on the Old Notes after March 1, 2003) will accrue at the rate of 0.5% per annum of the Accreted Value on the preceding Semi-Annual Date and be payable in cash semiannually on March 1 and September 1 of each year, commencing September 1, 1999, until the Exchange Offer is consummated or a shelf registration statement is declared effective. Holders of Old Notes accepted for exchange will be deemed to have waived the right to receive any other payments or accrued interest on the Old Notes. The Company reserves the right, at any time or from time to time, to extend the Exchange Offer at its discretion, in which event the term "Expiration Date" shall mean the latest time and date to which the Exchange Offer is extended. The Company shall notify the holders of the Old Notes of any extension by means of a press release or other public announcement prior to 9:00 A.M., New York City time, on the next business day after the previously scheduled Expiration Date. This Letter of Transmittal is to be completed by a holder of Old Notes if certificates are to be forwarded herewith. Holders of Old Notes whose certificates are not immediately available, or who are unable to deliver their certificates and all other documents required by this Letter of Transmittal or confirmation of the book-entry tender of their Old Notes into the Exchange Agent's account at DTC (a "Book-Entry Confirmation") to the Exchange Agent on or prior to the Expiration Date, must tender their Old Notes according to the guaranteed delivery procedures set forth in "The Exchange Offer--Guaranteed Delivery Procedures" section of the Prospectus. See Instruction 1. Delivery of documents to DTC does not constitute delivery to the Exchange Agent. -2- The undersigned has completed the appropriate boxes below and signed this Letter of Transmittal to indicate the action the undersigned desires to take with respect to the Exchange Offer. List below the Old Notes to which this Letter of Transmittal relates. If the space provided below is inadequate, the certificate numbers and principal amount at maturity of Old Notes should be listed on a separate signed schedule affixed hereto.
- -------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------- DESCRIPTION OF OLD NOTES 1 2 3 - -------------------------------------------------------------------------------------------------------------------------- Aggregate Principal Amount Principal Amount Name(s) and Address(es) of Registered Holder(s) Certificate at Maturity of at Maturity (Please fill in, if blank) Number(s) Old Note(s) Tendered* - -------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------- ----------------------------------------------------------------------- ----------------------------------------------------------------------- Total - -------------------------------------------------------------------------------------------------------------------------- * Unless otherwise indicated in this column, a holder will be deemed to have transferred ALL of the Old Notes represented by the Old Notes indicated in column 2. See Instruction 2. Old Notes tendered hereby must be in denominations of principal amount at maturity of $1,000 and any integral multiple thereof. See Instruction 1. - --------------------------------------------------------------------------------------------------------------------------
[_] CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND COMPLETE THE FOLLOWING: Name(s) of Registered Holder(s)_____________________________________________ Window Ticket Number (if any)_______________________________________________ Date of Execution of Notice of Guaranteed Delivery__________________________ Name of Institution which guaranteed delivery_______________________________ [_] CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS THERETO. Name:___________________________________________________________________________ Address: _____________________________________________________________________ _____________________________________________________________________ -3- PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL CAREFULLY AND FOLLOW THE INSTRUCTIONS BEGINNING ON PAGE 6 HEREOF. Ladies and Gentlemen: Upon the terms and subject to the conditions of the Exchange Offer, the undersigned hereby tenders to the Company the aggregate principal amount at maturity of Old Notes indicated above. Subject to, and effective upon, the acceptance for exchange of the Old Notes tendered hereby, the undersigned hereby sells, assigns and transfers to, or upon the order of, the Company all right, title and interest in and to such Old Notes as are being tendered hereby. The undersigned hereby represents and warrants that the undersigned has full power and authority to tender, sell, assign and transfer the Old Notes tendered hereby and that the Company will acquire good and unencumbered title thereto, free and clear of all liens, restrictions, charges and encumbrances and not subject to any adverse claim when the same are accepted by the Company. The undersigned hereby further represents that any New Notes acquired in exchange for Old Notes tendered hereby will have been acquired in the ordinary course of business of the person receiving each New Note, whether or not such person is the undersigned, that neither the holder of such Old Notes nor any such other person has an arrangement or understanding with any person to participate in the distribution of such New Notes and that neither the holder of such Old Notes nor any such other person is an "affiliate," as defined in Rule 405 under the Securities Act of 1933, as amended (the "Securities Act"), of the Company. The undersigned also acknowledges that the Exchange Offer is being made in reliance on an interpretation by the Staff of the Securities and Exchange Commission that the New Notes issued in exchange for the Old Notes pursuant to the Exchange Offer may be offered for resale, resold or otherwise transferred by holders thereof (other than any such holder that is an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act), without compliance with the registration and prospectus delivery provisions of the Securities Act; provided, that such New Notes are acquired in the ordinary course of such holder's business and such holder has no arrangements with any person to participate in the distribution of such New Notes. If the undersigned is not a broker-dealer, the undersigned represents that it is not engaged in, and does not intend to engage in, a distribution of New Notes. If the undersigned is a broker-dealer that will receive New Notes for its own account in exchange for Old Notes that were acquired as a result of market-making activities or other trading activities, it acknowledges that it will deliver a prospectus in connection with any resale of such New Notes; however, by so acknowledging and delivering a prospectus, the undersigned will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. The undersigned will, upon request, execute and deliver any additional documents deemed by the Company to be necessary or desirable to complete the sale, assignment and transfer of the Old Notes tendered hereby. All authority conferred or agreed to be conferred in this Letter of Transmittal and every obligation of the undersigned hereunder shall be binding upon the successors, assigns, heirs, executors, administrators, trustees in bankruptcy and legal representatives of the undersigned and shall not be affected by, and shall survive, the death or incapacity of the undersigned. This tender may be withdrawn -4- only in accordance with the procedures set forth in "The Exchange Offer--Withdrawal of Tenders" section of the Prospectus. Unless otherwise indicated herein in the box entitled "Special Issuance Instructions" below, please deliver the New Notes (and, if applicable, substitute certificates representing Old Notes for any Old Notes not exchanged) in the name of the undersigned or, in the case of a book-entry delivery of Old Notes, please credit the account indicated above maintained at DTC. Similarly, unless otherwise indicated under the box entitled "Special Delivery Instructions" below, please send the New Notes (and, if applicable, substitute certificates representing Old Notes for any Old Notes not exchanged) to the undersigned at the address shown above in the box entitled "Description of Old Notes." THE UNDERSIGNED, BY COMPLETING THE BOX ENTITLED "DESCRIPTION OF OLD NOTES" ABOVE AND SIGNING THIS LETTER OF TRANSMITTAL, WILL BE DEEMED TO HAVE TENDERED THE OLD NOTES AS SET FORTH IN SUCH BOX ABOVE. -5- INSTRUCTIONS TO LETTER OF TRANSMITTAL FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER 1. Delivery of this Letter of Transmittal and Old Notes; Guaranteed Delivery Procedures. This Letter of Transmittal is to be completed by holders of Old Notes if certificates are to be forwarded herewith. Certificates for all physically tendered Old Notes as well as a properly completed and duly executed Letter of Transmittal (or manually signed facsimile hereof) and any other documents required by this Letter of Transmittal must be received by the Exchange Agent at the address set forth herein on or prior to the Expiration Date, or the tendering holder must comply with the guaranteed delivery procedures set forth below. Old Notes tendered hereby must be in denominations of principal amount at maturity of $1,000 and any integral multiple thereof. Holders whose certificates for Old Notes are not immediately available or who cannot deliver their certificates and all other required documents to the Exchange Agent on or prior to the Expiration Date, or who cannot complete the procedure for book-entry transfer of the Old Notes into the Exchange Agent's account at DTC on a timely basis, may tender their Old Notes pursuant to the guaranteed delivery procedures set forth in "The Exchange Offer--Guaranteed Delivery Procedures" section of the Prospectus. Pursuant to such procedures, (i) such tender must be made through an Eligible Institution (as defined below), (ii) prior to the Expiration Date, the Exchange Agent must receive from such Eligible Institution a Notice of Guaranteed Delivery, substantially in the form provided by the Company (by facsimile transmission, mail or hand delivery), setting forth the name and address of the holder of Old Notes tendered, stating that the tender is being made thereby and guaranteeing that within three New York Stock Exchange ("NYSE") trading days after the Expiration Date, the certificates for all physically tendered Old Notes and any other documents required by this Letter of Transmittal, or a Book-Entry Confirmation, as the case may be, will be delivered by the Eligible Institution to the Exchange Agent, and (iii) the Exchange Agent must receive certificates for all physically tendered Old Notes, in proper form for transfer, and all other documents required by this Letter of Transmittal, or a Book-Entry Confirmation, as the case may be, within three NYSE trading days after the date of execution of the Notice of Guaranteed Delivery. The method of delivery of this Letter of Transmittal, the Old Notes and all other required documents is at the election and risk of the tendering holders, but the delivery will be deemed made only when actually received or confirmed by the Exchange Agent. If Old Notes are sent by mail, it is suggested that the mailing be made sufficiently in advance of the Expiration Date to permit the delivery to the Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration Date. See "The Exchange Offer" section in the Prospectus. 2. Partial Tenders (not applicable to holders who tender by book-entry transfer). If less than all of the Old Notes evidenced by a submitted certificate are to be tendered, the tendering holder(s) should fill in the aggregate principal amount at maturity of Old Notes to be tendered -6- in the box above entitled "Description of Old Notes--Principal Amount at Maturity Tendered." A reissued certificate representing the balance of untendered Old Notes will be sent to such tendering holder, unless otherwise provided in the appropriate box on this Letter of Transmittal, promptly after the Expiration Date. All of the Old Notes delivered to the Exchange Agent will be deemed to have been tendered unless otherwise indicated. 3. Signatures on this Letter of Transmittal; Bond Powers and Endorsements; Guarantee of Signatures. If this Letter of Transmittal is signed by the registered holder of the Old Notes tendered hereby, the signature must correspond exactly with the name as written on the face of the certificates without any change whatsoever. If any tendered Old Notes are owned of record by two or more joint owners, all such owners must sign this Letter of Transmittal. If any tendered Old Notes are registered in different names on several certificates, it will be necessary to complete, sign and submit as many separate copies of this Letter of Transmittal as there are different registrations of certificates. When this Letter of Transmittal is signed by the registered holder or holders of the Old Notes specified herein and tendered hereby, no endorsements of certificates or separate bond powers are required. If, however, the New Notes are to be issued, or any untendered Old Notes are to be reissued, to a person other than the registered holder, then endorsements of any certificates transmitted hereby or separate bond powers are required. Signatures on such certificate(s) must be guaranteed by an Eligible Institution. If this Letter of Transmittal is signed by a person other than the registered holder or holders of any certificate(s) specified herein, such certificate(s) must be endorsed or accompanied by appropriate bond powers, in either case signed exactly as the name or names of the registered holder or holders appear(s) on the certificate(s) and signatures on such certificate(s) must be guaranteed by an Eligible Institution. If this Letter of Transmittal or any certificates or bond powers are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, such persons should so indicate when signing, and, unless waived by the Company, proper evidence satisfactory to the Company of their authority to so act must be submitted. Endorsements on certificates for Old Notes or signatures on bond powers required by this Instruction 3 must be guaranteed by a firm which is a member of a registered national securities exchange or a member of the National Association of Securities Dealers, Inc. or by a commercial bank or trust company having an office or correspondent in the United States or by such other Eligible Institution within the meaning of Rule 17(A)(d)-15 under the Securities Exchange Act of 1934, as amended (each an "Eligible Institution"). -7- Signatures on this Letter of Transmittal need not be guaranteed by an Eligible Institution, provided the Old Notes are tendered: (i) by a registered holder (which term, for purposes of the Exchange Offer, includes any participant in the DTC system whose name appears on a security position listing as the holder of such Old Notes) of Old Notes tendered who has not completed the box entitled "Special Issuance Instructions" or "Special Delivery Instructions" on this Letter of Transmittal, or (ii) for the account of an Eligible Institution. 4. Special Issuance and Delivery Instructions. Tendering holders of Old Notes should indicate in the applicable box the name and address to which New Notes issued pursuant to the Exchange Offer and/or substitute certificates evidencing Old Notes not exchanged are to be issued or sent, if different from the name or address of the person signing this Letter of Transmittal. In the case of issuance in a different name, the employer identification or social security number of the person named must also be indicated. Holders tendering Old Notes by book-entry transfer may request that Old Notes not exchanged be credited to such account maintained at DTC as such holder may designate hereon. If no such instructions are given, such Old Notes not exchanged will be returned to the name and address of the person signing this Letter of Transmittal. 5. Tax Identification Number. Federal income tax law generally requires that a tendering holder whose Old Notes are accepted for exchange must provide the Company (as payor) with such holder's correct Taxpayer Identification Number ("TIN") on Substitute Form W-9 below, which in the case of a tendering holder who is an individual, is his or her social security number. If the Company is not provided with the current TIN or an adequate basis for an exemption, such tendering holder may be subject to a $50 penalty imposed by the Internal Revenue Service. In addition, delivery to such tendering holder of New Notes may be subject to backup withholding in an amount equal to 31% of all reportable payments made after the exchange. If withholding results in an overpayment of taxes, a refund may be obtained. Exempt holders of Old Notes (including, among others, all corporations and certain foreign individuals) are not subject to these backup withholding and reporting requirements. See the enclosed Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9 (the "W-9 Guidelines") for additional instructions. To prevent backup withholding, each tendering holder of Old Notes must provide its correct TIN by completing the "Substitute Form W-9" set forth below, certifying that the TIN provided is correct (or that such holder is awaiting a TIN) and that (i) the holder is exempt from backup withholding, or (ii) the holder has not been notified by the Internal Revenue Service that such holder is subject to a backup withholding as a result of a failure to report all interest or dividends, or (iii) the Internal Revenue Service has notified the holder that such holder is no longer subject to backup withholding. If the tendering holder of Old Notes is a nonresident alien or foreign entity not subject to backup withholding, such holder must give the Company a completed Form W-8, Certificate of Foreign Status included herewith. If the Old Notes are in more than one name or are not in the name of the actual owner, such holder should consult the W-9 Guidelines for information on which TIN to report. If such holder does not have -8- a TIN, such holder should consult the W-9 Guidelines for instructions on applying for a TIN, check the box in Part 2 of the Substitute Form W-9 and write "applied for" in lieu of its TIN. Note: Checking this box and writing "applied for" on the form means that such holder has already applied for a TIN or that such holder intends to apply for one in the near future. If such holder does not provide its TIN to the Company within 60 days, backup withholding will begin and continue until such holder furnishes its TIN to the Company. 6. Transfer Taxes. The Company will pay all transfer taxes, if any, applicable to the transfer of Old Notes to it or its order pursuant to the Exchange Offer. If, however, New Notes and/or substitute Old Notes not exchanged are to be delivered to, or are to be registered or issued in the name of, any person other than the registered holder of the Old Notes tendered hereby, or if tendered Old Notes are registered in the name of any person other than the person signing this Letter of Transmittal, or if a transfer tax is imposed for any reason other than the transfer of Old Notes to the Company or its order pursuant to the Exchange Offer, the amount of any such transfer taxes (whether imposed on the registered holder or any other persons) will be payable by the tendering holder. If satisfactory evidence of payment of such taxes or exemption therefrom is not submitted herewith, the amount of such transfer taxes will be billed directly to such tendering holder. Except as provided in this Instruction 6, it will not be necessary for transfer tax stamps to be affixed to the Old Notes specified in this Letter of Transmittal. 7. Waiver of Conditions. The Company reserves the absolute right to waive satisfaction of any or all conditions enumerated in the Prospectus. 8. No Conditional Tenders. No alternative, conditional, irregular or contingent tenders will be accepted . All tendering holders of Old Notes, by execution of this Letter of Transmittal, shall waive any right to reserve notice of the acceptance of their Old Notes for exchange. Neither the Company, the Exchange Agent nor any other person is obligated to give notice of any defect or irregularity with respect to any tender of Old Notes nor shall any of them incur any liability for failure to give any such notice. -9- 9. Mutilated, Lost, Stolen or Destroyed Old Notes. Any holder whose Old Notes have been mutilated, lost, stolen or destroyed should contact the Exchange Agent at the address indicated above for further instructions. 10. Requests for Assistance or Additional Copies. Questions relating to the procedure for tendering, as well as requests for additional copies of the Prospectus and this Letter of Transmittal, may be directed to the Exchange Agent, at the address and telephone number indicated above. -10- - -------------------------------------------------------------- ------------------------------------------------------------------ SPECIAL ISSUANCE INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS (See Instructions 3 and 4) (See Instructions 3 and 4) To be completed ONLY if certificates for Old Notes not To be completed ONLY if certificates for Old Notes not exchanged and/or New Notes are to be issued in the name of exchanged and/or New Notes are to be issued in the name of and sent to someone other than the person or persons whose and sent to someone other than the person or persons whose signature(s) appear(s) on this Letter of Transmittal above, signature(s) appear(s) on this Letter of Transmittal below. or if Old Notes delivered by book-entry transfer which are not accepted for exchange are to be returned by credit to Mail: New Notes and/or Old Notes to: an account maintained at DTC other than the account indicated below. Name(s).................................................... (Please Type or Print) Issue: New Notes and/or Old Notes to: ........................................................... (Please Type or Print) Name(s)................................................. Address.................................................... (Please Type or Print) ........................................................... ........................................................ (Zip Code) (Please Type or Print) Address................................................. ........................................................ (Zip Code) (Complete Substitute Form W-9) Credit unexchanged Old Notes for "Debentures" delivered by book-entry transfer to the DTC account set forth below. _______________________________________________________ (DTC Account Number, if applicable) - -------------------------------------------------------------- ------------------------------------------------------------------
IMPORTANT: THIS LETTER OF TRANSMITTAL OR A FACSIMILE HEREOF (TOGETHER WITH THE CERTIFICATES FOR OLD NOTES) AND ALL OTHER REQUIRED DOCUMENTS HEREBY, A BOOK- ENTRY CONFIRMATION OR THE NOTICE OF GUARANTEED DELIVERY MUST BE RECEIVED BY THE EXCHANGE AGENT PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE. PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL CAREFULLY BEFORE COMPLETING ANY BOX ABOVE. PLEASE SIGN HERE (TO BE COMPLETED BY ALL TENDERING HOLDERS) (Complete Accompanying Substitute Form W-9) Dated: .............................................. .............................................., 1998 x ............................................. .............................................., 1998 x ............................................ .............................................., 1998 Signature(s) of Owner(s) Date Area Code and Telephone Number.......................................................................... If a holder is tendering any Old Notes this Letter of Transmittal must be signed by the registered holder(s) as the name(s) appear(s) on the certificate(s) of the Old Notes by any person(s) authorized to become registered holder(s) by endorsements and documents transmitted herewith. If signature is by a trustee, executor, administrator, guardian, officer or other person acting in a fiduciary or representative capacity, please set forth full title. See Instruction 3. Name(s):.................................................................................................................... .................................................................................................................................... (Please Type or Print) Capacity:................................................................................................................... Address:.................................................................................................................... .................................................................................................................................... (Including Zip Code) SIGNATURE GUARANTEE (if requested by Instruction 3) Signature Guaranteed by an Eligible Institution .............................................................................. .................................................................................................................................... (Title) .................................................................................................................................... (Name and Firm) - ------------------------------------------------------------------------------------------------------------------------------------
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=================================================================================================================== SUBSTITUTE FORM W-9 =================================================================================================================== To Be Completed by All Tendering Noteholders (See Instruction 5) Sign this Substitute Form W-9 in Addition to the Signature(s) Required Above PAYOR'S NAME: THE BANK OF NEW YORK =================================================================================================================== SUBSTITUTE Part 1-Please provide your TIN (either your social security TIN_________ Form W-9 number or employer identification number) in the box to the right and certify by signing and dating below. Department of the Treasury Internal Revenue Service Part 2-Awaiting TIN [_] SIGN THIS FORM and THE CERTIFICATION OF Payor's Request for AWAITING TAXPAYER IDENTIFICATION NUMBER BELOW. Taxpayer Identification Number Part 3-Exempt [_] (TIN) See enclosed Guidelines for additional and Certification information and SIGN THIS FORM. =================================================================================================================== CERTIFICATION -- Under penalties of perjury, I certify that: (1) the number shown on this form is my correct taxpayer identification number (or I am waiting for a number to be issued to me); or (2) I am not subject to backup withholding because (i) I am exempt from backup withholding, or (ii) I have not been notified by the Internal Revenue Service (IRS) that I am subject to backup withholding as a result of a failure to report all interest or dividends, or (iii) the IRS has notified me that I am no longer subject to backup withholding; and (3) any other information provided on this form is true and correct. CERTIFICATION INSTRUCTIONS--You must cross out item (iii) in (2) above if you have been notified by the IRS that you are subject to backup withholding because of underreporting interest or dividends on your tax return and you have not been notified by the IRS that you are no longer subject to backup withholding. =================================================================================================================== SIGNATURE__________________________________________________________________________DATE________________________ ===================================================================================================================
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX IN PART 2 OF THE SUBSTITUTE FORM W-9 CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER I certify under penalties of perjury that a taxpayer identification number has not been issued to me, and either (1) I have mailed or delivered an application to receive a taxpayer identification number to the appropriate Internal Revenue Service Center or Social Security Administration Office or (2) I intend to mail or deliver an application in the near future. I understand that if I do not provide a taxpayer identification number by the time of payment, 31% of all payments made to me on account of the New Notes shall be retained until I provide a taxpayer identification number to the Exchange Agent and that, if I do not provide my taxpayer identification number within 60 days, such retained amounts shall be remitted to the Internal Revenue Service as backup withholding and 31% of all reportable payments made to me thereafter will be withheld and remitted to the Internal Revenue Service until I provide a taxpayer identification number. SIGNATURE:_________________________________________________________________________DATE:_______________________ ============================================================================================================================
NOTE: FAILURE TO COMPLETE AND RETURN THIS SUBSTITUTE FORM W-9 MAY RESULT IN BACKUP WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER FOR ADDITIONAL INFORMATION. -12- GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 A. TIN - The Taxpayer Identification Number for most individuals is your social security number. Refer to the following chart to determine the appropriate number:
- ----------------------------------------------------------------------------------------------------------------------------------- Give the Give the SOCIAL EMPLOYER For this type of SECURITY For this type of IDENTIFICATION account Number of account Number of - -------------------------- --------------------------- -------------------------- --------------------------- 1. Individual The individual 6. Sole proprietorship The owner(3) 2. Two or more The actual owner of the 7. A valid trust, Legal entity(4) individuals (joint account or, if combined estate or pension account) funds, the first individual trust on the account(1) 8. Corporate The corporation 3. Custodian account The minor(2) of a minor (Uniform 9. Association, club, The organization Gift to Minors Act) religious, charitable, 4. a. The usual The grantor-trustee(1) educational or revocable other tax-exempt savings trust organization (grantor is also trustee) 10. Partnership The partnership b. So-called trust The actual owner(1) 11. A broker or The broker or nominee account that is registered nominee not a legal or valid trust under 12. Account with the The public entity state law Department of Agriculture 5. Sole proprietorship The owner(3) - -----------------------------------------------------------------------------------------------------------------------------------
(1) List first and circle the name of the person whose number you furnish. (2) Circle the minor's name and furnish the minor's name and social security number. (3) Show the individual's name. You may also enter your business name or "doing business as" name. You may use either your Social Security number or your employer identification number. (4) List first and circle the name of the legal trust, estate, or pension trust. NOTE: If no name is circled when there is more than one name, the number will be considered to be that of the first name listed. B. Exempt Payees -- The following lists exempt payees. If you are exempt, you must nonetheless complete the form and provide your TIN in order to establish that you are exempt. Check the box in Part 3 of the form, sign and date the form. For this purpose, Exempt Payees include: (1) a corporation; (2) an organization exempt from tax under section 501(a), or an individual retirement plan (IRA) or a custodial account under section 403(b)(7); (3) the United States or any of its agencies or instrumentalities; (4) a state, the District of Columbia, a possession of the United States, or any of their political subdivisions or instrumentalities; (5) a foreign government or any of its political subdivisions, agencies or instrumentalities; (6) an international organization or any of its agencies or instrumentalities; (7) a foreign central bank of issue; (8) a dealer in securities or commodities required to register in the United States or a possession of the United States; (9) a real estate investment trust; (10) an entity registered at all times during the tax year under the Investment Company Act of 1940; (11) a common trust fund operated by a bank under section 584(a); and (12) a financial institution. C. Obtaining a Number If you do not have a taxpayer identification number or you do not know your number, obtain Form SS-5, application for a Social Security Number, or Form SS-4, Application for Employer Identification Number, at the local office of the Social Security Administration or the Internal Revenue Service and apply for a number. D. Privacy Act Notice Section 6109 requires most recipients of dividend, interest or other payments to give taxpayer identification numbers to payors who must report the payments to IRS. IRS uses the numbers for identification purposes. Payors must be given the numbers whether or not recipients are required to file tax returns. Payors must generally withhold 31% of taxable-interest, dividend, and certain other payments to a payee who does not furnish a taxpayer identification number. Certain penalties may also apply. E. Penalties (1) Penalty for Failure to Furnish Taxpayer Identification Number. If you fail to furnish your taxpayer identification number to a payor, you are subject to a penalty of $50 for each such failure unless your failure is due to reasonable cause and not to willful neglect. (2) Failure to Report Certain Dividend and Interest Payments. If you fail to include any portion of an includible payment for interest, dividends, or patronage dividends in gross income, such failure will be treated as being due to negligence and will be subject to a penalty of 5% on any portion of an under-payment attributable to that failure unless there is clear and convincing evidence to the contrary. (3) Civil Penalty for False Information with Respect to Withholding. If you make a false statement with no reasonable basis which results in no imposition of backup withholding, you are subject to a penalty of $500. (4) Criminal Penalty for Falsifying Information. Falsifying certifications or affirmations may subject you to criminal penalties including fines and/or imprisonment. FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT OR THE INTERNAL REVENUE SERVICE. -13- EX-99.2 20 FORM OF NOTICE OF GUARANTEED DELIVERY EXHIBIT 99.2 DIVA SYSTEMS CORPORATION [FORM OF NOTICE OF GUARANTEED DELIVERY] This form or one substantially equivalent hereto must be used to accept the offer for all outstanding 12 5/8% Senior Discount Notes due 2008, Series A (the "Old Notes") of DIVA Systems Corporation (the "Company") in exchange for the Company's 12 5/8% Senior Discount Notes due 2008, Series B made pursuant to the prospectus, dated ________, 199_ (the "Prospectus") and the related letter of transmittal (the "Letter of Transmittal"), if (i) certificates for Old Notes are not immediately available, (ii) the Old Notes, the Letter of Transmittal and all other required documents cannot be delivered or transmitted by facsimile transmission, mail or hand delivery to The Bank of New York (the "Exchange Agent") as set forth below on or prior to 5:00 P.M., New York City time, on the Expiration Date, or (iii) the procedures for delivery of the Old Notes through book-entry transfer into the Exchange Agent's account at The Depository Trust Company ("DTC") in accordance with DTC's Automated Tender Offer Program cannot be completed on a timely basis. See "The Exchange Offer--Procedures for Tendering" section in the Prospectus. Capitalized terms not defined herein are defined in the Prospectus. THE BANK OF NEW YORK By Registered or Certified Facsimile Transmission By Hand/Overnight Delivery: Mail: Number: Attn.: Ayikwei Aryeetey The Bank of New York The Bank of New York Reorganization Section 101 Barclay Street 101 Barclay Street, Floor 7E (212) 815-____ Corporate Trust Services New York, New York 10286 Window Attn.: ___________ (For Eligible Institutions Only) Ground Level Reorganization Section Confirm by Telephone: New York, New York 10286 (212) 815-____ Attn.: ________ Reorganization Section For Information Call: (212) 815-____
Delivery of this instrument to an address other than as set forth above, or transmission of instructions via facsimile other than as set forth above, will not constitute a valid delivery. Ladies and Gentlemen: Upon the terms and conditions set forth in the Prospectus and the Letter of Transmittal, the undersigned hereby tenders to the Company the principal amount at maturity of Old Notes set forth below, pursuant to the guaranteed delivery procedures described in "The Exchange Offer--Guaranteed Delivery Procedures" section of the Prospectus. Principal Amount At Maturity of If Old Notes will be delivered by Old Notes Tendered:/1/ book-entry transfer into Exchange Agent's account with The Depository Trust Company, provide account number: $______________________________ Account Number_____________________ Certificate Nos. (if available): _______________________________ Total Principal Amount at Maturity Represented by Old Notes Certificate(s): $______________________________
- -------------------------------------------------------------------------------- All authority herein conferred or agreed to be conferred shall survive the death or incapacity of the undersigned and every obligation of the undersigned hereunder shall be binding upon the heirs, personal representatives, successors and assigns of the undersigned. - -------------------------------------------------------------------------------- ______________________ /1/ Must be in denominations of principal amount at maturity of $1,000 and any integral multiple thereof. -2- PLEASE SIGN HERE X______________________________ ______________________________ X______________________________ ______________________________ Signature(s) of Owner(s) or Date Authorized Signatory Area Code and Telephone Number:______________________________ Must be signed by the holder(s) of the Old Notes as their name(s) appear(s) on certificates for Old Notes or on a security position listing, or by person(s) authorized to become registered holder(s) by endorsement and documents transmitted with this Notice of Guaranteed Delivery. If signature is by a trustee, executor, administrator, guardian, attorney-in-fact, officer or other person acting in a fiduciary or representative capacity, such person must set forth his or her full title below. Please print name(s) and address(es) Name(s): ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ Capacity: ___________________________________________________________________ Address(es): ___________________________________________________________________ ___________________________________________________________________ ___________________________________________________________________ -3- GUARANTEE The undersigned, an Eligible Institution within the meaning of Rule 17(A)(d)-15 under the Securities Exchange Act of 1934, as amended, hereby guarantees that (i) the certificates representing the principal amount at maturity of Old Notes tendered hereby, in proper form for transfer, together with a properly completed and duly executed Letter of Transmittal (or a manually signed facsimile thereof), any required signature guarantee and any other documents required by the Letter of Transmittal, or (ii) timely confirmation of the book-entry transfer of such Old Notes into the Exchange Agent's account at DTC pursuant to the procedures set forth in "The Exchange Offer--Book-Entry Transfer; Delivery and Form" section of the Prospectus, will be received by the Exchange Agent at the address set forth above, no later than three New York Stock Exchange trading days after the date of execution hereof. __________________________________ __________________________________ Name of Firm Authorized Signature __________________________________ __________________________________ Address Title __________________________________ Name:_____________________________ Zip Code (Please Type or Print) Area Code & Telephone No._________ Dated:____________________________ NOTE: DO NOT SEND CERTIFICATES FOR OLD NOTES WITH THIS FORM. CERTIFICATES FOR OLD NOTES SHOULD ONLY BE SENT WITH YOUR LETTER OF TRANSMITTAL. -4- EX-99.3 21 FORM OF EXCHANGE AGENT AGREEMENT EXHIBIT 99.3 [FORM OF EXCHANGE AGENT AGREEMENT] As of ______, 199_ The Bank of New York Corporate Trust Trustee Administration 101 Barclay Street, 21st Floor New York, New York 10286 Ladies and Gentlemen: DIVA Systems Corporation (the "Company") proposes to make an offer (the "Exchange Offer") to exchange its 12 5/8% Senior Discount Notes due 2008, Series A (the "Old Securities") for its 12 5/8% Senior Discount Notes due 2008, Series B (the "New Securities"). The terms and conditions of the Exchange Offer as currently contemplated are set forth in a prospectus, dated ________, 199_ (the "Prospectus"), proposed to be distributed to all record holders of the Old Securities. The Company hereby appoints The Bank of New York to act as exchange agent (the "Exchange Agent") in connection with the Exchange Offer. References hereinafter to "you" shall refer to The Bank of New York. The Exchange Offer is expected to be commenced by the Company on or promptly after ______, 199_. The Letter of Transmittal accompanying the Prospectus (the "Letter of Transmittal") or, in the case of book-entry transfer of the Old Securities into your account at The Depository Trust Company ("DTC"), DTC's Automated Tender Offer Program, is to be used by the holders of the Old Securities to accept the Exchange Offer. The Letter of Transmittal contains instructions with respect to the delivery of certificates for Old Securities tendered in connection with the Exchange Offer. The Exchange Offer shall expire at 5:00 P.M., New York City time, on the date specified in the Prospectus or on such later date or time to which the Company may extend the Exchange Offer (the "Expiration Date"). Subject to the terms and conditions set forth in the Prospectus, the Company expressly reserves the right to extend the Exchange Offer from time to time and may extend the Exchange Offer by giving oral (confirmed in writing) or written notice to you before 9:00 A.M., New York City time, on the business day following the previously scheduled Expiration Date. The Company expressly reserves the right to amend or terminate the Exchange Offer, and not to accept for exchange any Old Securities not theretofore accepted for exchange, upon the occurrence of any of the conditions of the Exchange Offer specified in the Prospectus under the caption "The Exchange Offer--Conditions." The Company will give oral (confirmed in writing) or written notice of any amendment, termination or nonacceptance to you as promptly as practicable. In carrying out your duties as Exchange Agent, you are to act in accordance with the following instructions: 1. You will perform such duties and only such duties as are specifically set forth in the section of the Prospectus captioned "The Exchange Offer", or as specifically set forth herein; provided, however, that in no way will your general duty to act in good faith be discharged by the foregoing. 2. You will establish an account with respect to the Old Securities at DTC for purposes of the Exchange Offer within two business days after the date of the Prospectus, and any financial institution that is a participant in DTC's systems may make book-entry delivery of the Old Securities by causing DTC to transfer such Old Securities into your account in accordance with DTC's Automated Tender Offer Program procedures for such transfer. 3. You are to examine each of the Letters of Transmittal and certificates for Old Securities and any other documents delivered or mailed to you by or for holders of the Old Securities to ascertain whether: (i) the Letters of Transmittal and any such other documents are duly executed and properly completed in accordance with instructions set forth therein and (ii) the Old Securities have otherwise been properly tendered. In each case where the Letter of Transmittal or any other document has been improperly completed or executed or any of the certificates for Old Securities are not in proper form for transfer or some other irregularity in connection with the acceptance of the Exchange Offer exists, you will endeavor to inform the presenters of the need for fulfillment of all requirements and to take any other action as may be necessary or advisable to cause such irregularity to be corrected. 4. With the approval of the President or any Vice President of the Company (such approval, if given orally, to be confirmed in writing) or any other party designated by such an officer in writing, you are authorized to waive any irregularities in connection with any tender of Old Securities pursuant to the Exchange Offer. 5. Tenders of Old Securities may be made only as set forth in the Letter of Transmittal and in the section of the Prospectus captioned "The Exchange Offer", and Old Securities shall be considered properly tendered to you only when tendered in accordance with the procedures set forth therein. Notwithstanding the provisions of this paragraph 5, Old Securities which the President or any Vice President of the Company shall approve as having been properly tendered shall be considered to be properly tendered (such approval, if given orally, shall be confirmed in writing). 6. You shall advise the Company with respect to any Old Securities received subsequent to the Expiration Date and accept its instructions with respect to disposition of such Old Securities. 7. You shall accept tenders: (a) in cases where the Old Securities are registered in two or more names only if signed by all named holders; (b) in cases where the signing person (as indicated on the Letter of Transmittal) is acting in a fiduciary or a representative capacity only when proper evidence of his or her authority so to act is submitted; and -2- (c) from persons other than the registered holder of Old Securities; provided, that customary transfer requirements, including any applicable transfer taxes, are fulfilled. You shall accept partial tenders of Old Securities where so indicated and as permitted in the Letter of Transmittal and deliver certificates for Old Securities to the transfer agent for split-up and return any untendered Old Securities to the holder (or such other person as may be designated in the Letter of Transmittal) as promptly as practicable after expiration or termination of the Exchange Offer. 8. Upon satisfaction or waiver of all of the conditions to the Exchange Offer, the Company will notify you (such notice if given orally, to be confirmed in writing) of its acceptance, promptly after the Expiration Date, of all Old Securities properly tendered and you, on behalf of the Company, will exchange such Old Securities for New Securities and cause such Old Securities to be canceled. Delivery of New Securities will be made on behalf of the Company by you at the rate of $1,000 principal amount at maturity of New Securities for each $1,000 principal amount at maturity of the corresponding series of Old Securities tendered promptly after notice (such notice if given orally, to be confirmed in writing) of acceptance of said Old Securities by the Company; provided, however, that in all cases, Old Securities tendered pursuant to the Exchange Offer will be exchanged only after timely receipt by you of certificates for such Old Securities and a properly completed and duly executed Letter of Transmittal (or facsimile thereof) with any required signature guarantees and any other required documents, or confirmations from DTC of book- entry transfers of such Old Securities into your account at DTC, as the case may be. You shall issue New Securities only in denominations of $1,000 or any integral multiple thereof. 9. Tenders pursuant to the Exchange Offer are irrevocable, except that, subject to the terms and upon the conditions set forth in the Prospectus and the Letter of Transmittal, Old Securities tendered pursuant to the Exchange Offer may be withdrawn at any time prior to the Expiration Date. 10. The Company shall not be required to exchange any Old Securities tendered if any of the conditions set forth in the Exchange Offer are not met. Notice of any decision by the Company not to exchange any Old Securities tendered shall be given (and confirmed in writing) by the Company to you. 11. If, pursuant to the Exchange Offer, the Company does not accept for exchange all or part of the Old Securities tendered because of an invalid tender, the occurrence of certain other events set forth in the Prospectus under the caption "The Exchange Offer--Conditions" or otherwise, you shall as soon as practicable after the expiration or termination of the Exchange Offer return those certificates for unaccepted Old Securities, together with any related required documents and the Letters of Transmittal relating thereto that are in your possession, to the persons who deposited them, or effect appropriate book- entry transfer, as the case may be. 12. All certificates for reissued or unaccepted Old Securities or for New Securities shall be forwarded by (a) first-class certified mail, return receipt requested under a blanket surety bond protecting you and the Company from loss or liability arising out of the non-receipt or non-delivery of such certificates or (b) by registered mail insured separately for the replacement value of each of such certificates. -3- 13. You are not authorized to pay or offer to pay any concessions, commissions or solicitation fees to any broker, dealer, bank or other person or to engage or utilize any person to solicit tenders. 14. As Exchange Agent hereunder you: (a) shall have no duties or obligations other than those specifically set forth herein or as may be subsequently agreed in writing by you and the Company; (b) will be regarded as making no representations and having no responsibilities as to the validity, sufficiency, value or genuineness of any of the certificates or the Old Securities represented thereby deposited with you pursuant to the Exchange Offer, and will not be required to and will make no representation as to the validity, value or genuineness of the Exchange Offer; (c) shall not be obligated to take any legal action hereunder which might in your reasonable judgment involve any expense or liability, unless you shall have been furnished with reasonable indemnity; (d) may reasonably rely on and shall be protected in acting in reliance upon any certificate, instrument, opinion, notice, letter, telegram or other document or security delivered to you and reasonably believed by you to be genuine and to have been signed by the proper party or parties; (e) may reasonably act upon any tender, statement, request, comment, agreement or other instrument whatsoever not only as to its due execution and validity and effectiveness of its provisions, but also as to the truth and accuracy of any information contained therein, which you shall in good faith believe to be genuine or to have been signed or represented by a proper person or persons; (f) may rely on and shall be protected in acting upon written or oral instructions from any officer of the Company; (g) may consult with your counsel with respect to any questions relating to your duties and responsibilities and the advice or opinion of such counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted to be taken by you hereunder in good faith and in accordance with the advice or opinion of such counsel; and (h) shall not advise any person tendering Old Securities pursuant to the Exchange Offer as to the wisdom of making such tender or as to the market value or decline or appreciation in market, value of any Old Securities. 15. You shall take such action as may from time to time be requested by the Company or its counsel (and such other action as you may reasonably deem appropriate) to furnish copies of the Prospectus, the Letter of Transmittal and the Notice of Guaranteed Delivery (as defined in the Prospectus) or such other forms as may be approved from time to time by the Company, to all persons requesting such documents and to accept and comply with telephone requests for information relating to the Exchange Offer; provided, that such information shall relate only to the procedures for accepting -4- (or withdrawing from) the Exchange Offer. The Company will furnish you with copies of such documents at your request. All other requests for information relating to the Exchange Offer shall be directed to the Company, Attention: Chief Financial Officer. 16. You shall advise by facsimile transmission or telephone, and promptly thereafter confirm in writing to the Chief Financial Officer of the Company and such other person or persons as it may request, daily (and more frequently during the week immediately preceding the Expiration Date and if otherwise requested) up to and including the Expiration Date, as to the number of Old Securities which have been tendered pursuant to the Exchange Offer and the items received by you pursuant to this Agreement, separately reporting and giving cumulative totals as to items properly received and items improperly received. In addition, you will also inform, and cooperate in making available to, the Company or any such other persons, upon oral request made from time to time prior to the Expiration Date, such other information as such other persons reasonably request. Such cooperation shall include, without limitation, the grant by you to the Company, and such persons as the Company may request, of access to those persons on your staff who are responsible for receiving tenders, in order to ensure that immediately prior to the Expiration Date the Company shall have received information in sufficient detail to enable it to decide whether to extend the Exchange Offer. You shall prepare a final list of all persons whose tenders were accepted, the aggregate principal amount at maturity of Old Securities tendered and the aggregate principal amount at maturity of Old Securities accepted and deliver said list to the Company. 17. Letters of Transmittal and Notices of Guaranteed Delivery shall be stamped by you as to the date and the time of receipt thereof and shall be preserved by you for a period of time at least equal to the period of time you preserve other records pertaining to the transfer of securities. You shall dispose of unused Letters of Transmittal and other surplus materials by returning them to the Company. 18. You hereby expressly waive any lien, encumbrance or right of set-off whatsoever that you may have with respect to funds deposited with you for the payment of transfer taxes by reason of amounts, if any, borrowed by the Company, or any of its subsidiaries or affiliates pursuant to any loan or credit agreement with you or for compensation owed to you hereunder. 19. For services rendered as Exchange Agent hereunder, you shall be entitled to such compensation as set forth on Schedule I attached hereto. 20. You hereby acknowledge receipt of the Prospectus and the Letter of Transmittal and further acknowledge that you have examined each of them. Any inconsistency between this Agreement, on the one hand, and the Prospectus and the Letter of Transmittal (as they may be amended from time to time), on the other hand, shall be resolved in favor of the latter two documents, except with respect to the duties, liabilities and indemnification of you as Exchange Agent, which shall be controlled by this Agreement. 21. The Company covenants and agrees to indemnify and hold you harmless in your capacity as Exchange Agent hereunder against any loss, liability, cost or expense, including reasonable attorneys' fees and expenses, arising out of or in connection with any act, omission, delay or refusal made by you -5- in reliance upon any signature, endorsement, assignment, certificate, order, request, notice, instruction or other instrument or document reasonably believed by you to be valid, genuine and sufficient and in accepting any tender or effecting any transfer of Old Securities reasonably believed by you in good faith to be authorized, and in delaying or refusing in good faith to accept any tenders or effect any transfer of Old Securities; provided, however, that the Company shall not be liable for indemnification or otherwise for any loss, liability, cost or expense to the extent arising out of your gross negligence or willful misconduct. In no case shall the Company be liable under this indemnity with respect to any claim against you unless the Company shall be notified by you, by letter or by facsimile confirmed by letter, of the written assertion of a claim against you or of any other action commenced against you, promptly after you shall have received any such written assertion or notice of commencement of action. The Company shall be entitled to participate at its own expense in the defense of any such claim or other action, and, if the Company so elects, the Company shall assume the defense of any suit brought to enforce any such claim. In the event that the Company shall assume the defense of any such suit, the Company shall not be liable for the fees and expenses of any additional counsel thereafter retained by you so long as the Company shall retain counsel satisfactory to you to defend such suit. 22. You shall arrange to comply with all requirements under the tax laws of the United States, including those relating to missing Tax Identification Numbers, and shall file any appropriate reports with the Internal Revenue Service. The Company understands that you are required to deduct 31% on payments to holders who have not supplied their correct Taxpayer Identification Number or required certification. Such funds will be turned over to the Internal Revenue Service in accordance with applicable regulations. 23. You shall deliver or cause to be delivered, in a timely manner to each governmental authority to which any transfer taxes are payable in respect of the exchange of Old Securities, your check in the amount of all transfer taxes so payable, and the Company shall reimburse you for the amount of any and all transfer taxes payable in respect of the exchange of Old Securities; provided, however, that you shall reimburse the Company for amounts refunded to you in respect of your payment of any such transfer taxes, at such time as such refund is received by you. 24. This Agreement and your appointment as Exchange Agent hereunder shall be construed and enforced in accordance with the laws of the State of New York applicable to agreements made and to be performed entirely within such state, and without regard to conflicts of law principles, and shall inure to the benefit of, and the obligations created hereby shall be binding upon, the successors and assigns of each of the parties hereto. 25. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. 26. In case any provision of this Agreement shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. -6- 27. This Agreement shall not be deemed or construed to be modified, amended, rescinded, canceled or waived, in whole or in part, except by a written instrument signed by a duly authorized representative of the party to be charged. This Agreement may not be modified orally. 28. Unless otherwise provided herein, all notices, requests and other communications to any party hereunder shall be in writing (including facsimile or similar writing) and shall be given to such party, addressed to it, at its address or telecopy number set forth below: If to the Company: DIVA Systems Corporation Building 205 333 Ravenswood Ave Menlo Park, California 94025 Facsimile: Attention: If to the Exchange Agent: The Bank of New York 101 Barclay Street Floor 21 West New York, New York 10286 Facsimile: (212) 815-____ Attention: Corporate Trust Trustee Administration 29. Unless terminated earlier by the parties hereto, this Agreement shall terminate 90 days following the Expiration Date. Notwithstanding the foregoing, paragraphs 19, 21 and 23 shall survive the termination of this Agreement. Upon any termination of this Agreement, you shall promptly deliver to the Company any certificates for Old Securities and New Securities, funds or property then held by you as Exchange Agent under this Agreement. 30. This Agreement shall be binding and effective as of the date hereof. [Remainder of page intentionally left blank.] -7- Please acknowledge receipt of this Agreement and confirm the arrangements herein provided by signing and returning the enclosed copy. DIVA SYSTEMS CORPORATION By:_______________________________ Name: Title: Accepted as of the date first above written: THE BANK OF NEW YORK, as Exchange Agent By:__________________________ Name: Title: -8- SCHEDULE I FEES -9- -----END PRIVACY-ENHANCED MESSAGE-----