-----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, SiOBXnndY9XerrEeyUBqQkR/+8Pdqj8lmLYhumjQfAVGSKz8ORDUe+Gituw3X+b+ h0AkvBRNsQvR+JDv1GGlfA== 0001047469-99-003877.txt : 19990210 0001047469-99-003877.hdr.sgml : 19990210 ACCESSION NUMBER: 0001047469-99-003877 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 11 FILED AS OF DATE: 19990209 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WORLDGATE COMMUNICATIONS INC CENTRAL INDEX KEY: 0001030058 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 232866697 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-71997 FILM NUMBER: 99524581 BUSINESS ADDRESS: STREET 1: 3220 TILLMAN DR STREET 2: SUITE 300 CITY: BENDALEM STATE: PA ZIP: 19020 BUSINESS PHONE: 2156335100 MAIL ADDRESS: STREET 1: 3220 TILLMAN DR STREET 2: SUITE 300 CITY: BENDALEM STATE: PA ZIP: 19020 S-1 1 FORM S-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 9, 1999 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ------------------------ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ WORLDGATE COMMUNICATIONS, INC. (Exact name of registrant as specified in its charter) DELAWARE 4841 23-2866697 (State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer of Classification Code No.) Identification incorporation or organization) No. 23-2866697)
3220 TILLMAN DRIVE, SUITE 300 BENSALEM, PENNSYLVANIA 19020 (215) 633-5100 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) RANDALL J. GORT, ESQ. VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY WORLDGATE COMMUNICATIONS, INC. 3220 TILLMAN DRIVE, SUITE 300 BENSALEM, PENNSYLVANIA 19020 (215) 633-5100 (Name, address, including zip code, and telephone number, including area code, of agent for service) ------------------------------ COPIES OF ALL COMMUNICATIONS TO: WALTER J. MOSTEK, JR., ESQ. JEFFREY A. STEIN, ESQ. DRINKER BIDDLE & REATH LLP HALE AND DORR LLP 1000 WESTLAKES DRIVE, SUITE 300 60 STATE STREET BERWYN, PENNSYLVANIA 19312-2409 BOSTON, MASSACHUSETTS 02109 (610) 993-2200 (617) 526-6000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. / / If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / ______________ If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / ______________ If 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 effective registration statement for the same offering. / / ______________ If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. / / ------------------------ CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM AMOUNT OF AGGREGATE OFFERING REGISTRATION TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED PRICE(1) FEE common stock, par value $.01 per share............................................ $64,400,000 $17,904
(1) Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(g) under the Securities Act of 1933. 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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SUBJECT TO COMPLETION, DATED FEBRUARY 9, 1999 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. PROSPECTUS SHARES [LOGO] WORLDGATE COMMUNICATIONS, INC. COMMON STOCK ------------------ This is an initial public offering of shares of common stock of WorldGate Communications, Inc. No public market currently exists for our common stock. We estimate that the initial public offering price will be between $ and $ per share. PROPOSED TRADING SYMBOL: NASDAQ NATIONAL MARKET SYMBOL--WGAT INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 8.
PER SHARE TOTAL ----------- --------- Public Offering Price.................................................... $ $ Underwriting Discounts and Commissions................................... $ $ Proceeds to WorldGate.................................................... $ $
We have granted to the underwriters an option, exercisable for 30 days from the date of this prospectus, to purchase up to additional shares to cover over-allotments of shares. If this option is exercised in full, the Total Public Offering Price, Underwriting Discounts and Commissions and Proceeds to WorldGate will be $ , $ and $ , respectively. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. --------------------- GERARD KLAUER MATTISON & CO., INC. JEFFERIES & COMPANY, INC. Prospectus dated , 1999 Unless the context otherwise indicates, as used in this prospectus "Company" and "WorldGate" mean WorldGate Communications, Inc. and its predecessor, WorldGate Communications, L.L.C. This prospectus includes statistical data regarding our company, the Internet and the industries in which we compete. This data is based on our records or is taken or derived from information published or prepared by various sources, including International Data Corporation ("IDC"), Paul Kagan Associates, Inc. ("Kagan"), Cahners Business Information--publishers of Cablevision Blue Book ("Cablevision Blue Book") and Jupiter Communications ("Jupiter Communications"), providers of market and strategic information for the information technology industry. Paul Kagan is a stockholder of WorldGate. YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT WHICH IS CONTAINED IN THIS PROSPECTUS. THIS PROSPECTUS MAY BE USED ONLY WHERE IT IS LEGAL TO SELL THESE SECURITIES. THE INFORMATION IN THIS PROSPECTUS MAY ONLY BE ACCURATE ON THE DATE OF THIS PROSPECTUS. DEALER PROSPECTUS DELIVERY OBLIGATION Until , 1999, all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. PROSPECTUS SUMMARY YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED INFORMATION REGARDING OUR COMPANY AND THE COMMON STOCK BEING SOLD IN THIS OFFERING AND OUR FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS ASSUMES (1) THE UNDERWRITERS DO NOT EXERCISE THEIR OVER-ALLOTMENT OPTION, (2) AN OFFERING PRICE OF $ PER SHARE, (3) THE CONVERSION OF ALL OUTSTANDING SHARES OF SERIES A, SERIES B AND SERIES C PREFERRED STOCK AND ALL OUTSTANDING SHARES OF CLASS B COMMON STOCK INTO COMMON STOCK, AND (4) A 2-FOR-3 STOCK SPLIT TO BE EFFECTED IMMEDIATELY BEFORE THE OFFERING. THE COMPANY We provide a new television-based Internet service, the WORLDGATE(SM) Service, that delivers the Internet through cable television systems. The WORLDGATE Service provides: - high speed, easy to use, low cost Internet access without a personal computer, modem or special purpose set-top appliance, - full-featured Internet functionality and content that can be accessed within seconds, and - a television-based portal enabling viewers to dynamically link from television programming and advertising to related Web sites. We believe this combination of television and the Internet will transform advertising, electronic commerce and information delivery for the consumer mass market. BENEFITS TO CABLE TELEVISION SUBSCRIBERS Cable television subscribers using the WORLDGATE Service can access the Internet by using only their television, a digital or advanced analog cable television set-top box that is WORLDGATE enabled and a remote control or wireless keyboard. No additional set-top appliance, personal computer or modem is required. With the press of a button, subscribers can: - connect within seconds to the Internet where they can, among other activities, browse the World Wide Web, send and receive e-mail, participate in chat sessions and shop on-line, and - dynamically link from television programming and advertising to related Internet content through our CHANNEL HYPERLINKING(SM) technology, without entering or even knowing the appropriate Internet address. BENEFITS TO CABLE OPERATORS The WORLDGATE platform is designed to operate with current and upgraded cable systems using current and future generation digital and advanced analog cable television set-top boxes. We believe that we are the only company providing a television-based Internet service for both advanced analog and digital cable boxes. We believe this is particularly important for cable operators who deploy both types of cable boxes. The WORLDGATE Service does not typically require use of the limited channel capacity associated with the advanced analog cable box. We believe our service enables cable operators to: - earn additional subscription, advertising and e-commerce revenues, - attract new customers not presently subscribing to cable programming, and - easily expand capacity to accommodate additional subscribers to the WORLDGATE Service and new WORLDGATE Service features. BENEFITS TO TELEVISION PROGRAMMERS AND ADVERTISERS Our CHANNEL HYPERLINKING technology integrates the dynamics of the Internet with television's proven advertiser-sponsored 3 entertainment model. This technology will enable a viewer watching a television program or advertisement to link within seconds to a related interactive Web site, with the push of a button. We believe this combination will be desirable to consumers and thus valuable to advertisers that support the providers of television programming and Internet content. A 1998 report by Jupiter Communications predicted that Web advertising in the United States alone will increase from approximately $1.7 billion in 1998 to over $7.7 billion in 2002. We are working with over 70 television programmers, advertisers, advertising agencies and e-commerce merchants to establish and maintain a centrally administered database that provides viewers with CHANNEL HYPERLINKING capability. We have also established a committee with representatives of these organizations to work with us to develop standards and policies for our CHANNEL HYPERLINKING technology as well as to assist in its promotion. These committee members include representatives of: - Showtime Networks - CNN - The Weather Channel - QVC Networks, Inc. - E! Entertainment - Citicorp - Excite, Inc. - Ogilvy & Mather Worldwide, Inc. - Modem Media . Poppe Tyson, Inc. - General Motors Corporation OUR BUSINESS MODEL We anticipate that in the near term substantially all of our revenues will be derived from cable operators. Cable operators purchase our systems and wireless keyboards for use with the WORLDGATE Service and pay a monthly license fee for each of their subscribers using the WORLDGATE Service. As the number of WORLDGATE Service subscribers grows, we anticipate that a significant portion of our revenues may also be derived from: - advertisers who: (1) purchase banner or sponsorship advertisements, (2) pay a fee based on the number of clicks on the advertisements, or (3) pay a fee based on viewers' use of our CHANNEL HYPERLINKING feature, and - merchants who share a portion of their revenues derived from customers who: (1) use our CHANNEL HYPERLINKING feature or (2) click through from the WORLDGATE Service. CABLE INDUSTRY We believe that the cable industry provides a large and pervasive market opportunity for the WORLDGATE Service. According to a 1997 report, Kagan projected that at the end of 1999 there would be more than 230 million cable subscribers worldwide. General Instrument Corporation and Scientific-Atlanta, Inc., the two largest manufacturers of cable boxes, have advised us that as of December 31, 1998, they had shipped approximately 4.3 million digital and advanced analog cable boxes that can be WORLDGATE enabled through a centrally administered software download and that another approximately 4 million of such boxes will be shipped during 1999. In addition, General Instrument and Scientific-Atlanta have advised us that as of December 31, 1998 they had received orders from cable operators for an aggregate of approximately 70,000 advanced analog cable boxes that will be WORLDGATE enabled at the factory. Both General Instrument and Scientific-Atlanta have licensed the WORLDGATE technology for inclusion in their advanced analog cable boxes and are also working with us on their digital platforms. GROWTH OF INTERNET AND E-COMMERCE We believe that Internet usage has experienced, and will continue to experience, rapid growth. IDC estimates that the number of Internet users worldwide exceeded 97 million in 1998 and will grow to over 319 million by the end of 2002. A 1998 report by Jupiter Communications predicted that online shopping in the United States alone will grow from approximately $5 billion in 1998 to over $29 billion by 2002. 4 TELEVISION-BASED INTERNET ACCESS In 1998, according to IDC, only 45% of U.S. households owned a personal computer, whereas, according to Cablevision Blue Book, 97% had a television. IDC forecasts that the cumulative shipments of television-based Internet access devices in the United States will grow from 1 million at the end of 1998 to almost 24 million by the end of 2002. IDC further forecasts that this market will achieve a penetration rate in excess of 22% of all U.S. homes by 2002. We believe that the opportunity for television-based Internet access outside the United States may eventually be even larger. AGREEMENTS WITH CABLE OPERATORS We have entered into multi-year agreements with U.S. and international cable operators that together with their affiliates have approximately 2.7 million subscribers. These cable operators include: - Charter Communications, Inc., which was recently acquired by Vulcan Ventures Incorporated, which also owns Marcus Cable Company, L.P., - Click!Network, a service of City of Tacoma, Washington, Tacoma Public Utilities, - Massillon CableTV, Inc., - Prestige Cable, Inc., and - TVCable S.A. (Quito, Ecuador). Generally, these agreements provide that the cable operators will offer the WORLDGATE Service in their major cities of operation. These cable operators are in various stages of planning for and commercially offering our service. Charter and Click!Network have begun to offer the WORLDGATE Service to their subscribers. We believe that the three other cable operators will commence deployment within the next several months. Our service is also in various stages of testing by cable operators whose cable systems serve approximately 29 million subscribers. BACKGROUND Hal M. Krisbergh and other former senior managers of General Instrument founded WorldGate in 1995. To date, we have raised approximately $49 million from equity investors including General Instrument, Scientific-Atlanta, Charter, Alan Gerry (former chairman of Cablevision Industries Corporation), Showtime Networks, Citicorp, AMP Incorporated, Motorola, Inc., Needham & Company, Advent International Corporation and XL Capital LLC. We were incorporated in Delaware in November 1996 to succeed to the business of our predecessor, WorldGate Communications, L.L.C., which commenced operations in March 1995. Our executive offices are located at 3220 Tillman Drive, Suite 300, Bensalem, Pennsylvania 19020. Our telephone number is (215) 633-5100. Our World Wide Web site is www.wgate.com. The information in our Web site is not incorporated by reference into this prospectus. 5 THE OFFERING Common stock offered......... shares Common stock to be outstanding immediately after this offering........ shares Use of proceeds.............. We will use the net proceeds of this offering for general corporate purposes, including working capital and research and development Proposed Nasdaq National Market symbol for our common stock............... WGAT
The number of shares of our common stock offered and common stock outstanding immediately after this offering listed above is based on shares of our common stock outstanding as of , 1999, excluding shares of our common stock subject to outstanding options and warrants and shares of our common stock available for future grants under our stock option plan. If the underwriters exercise in full the over-allotment option, there will be shares outstanding. 6 SUMMARY FINANCIAL INFORMATION (In thousands, except share and per share data) The following table summarizes our financial data. The data presented in this table is derived from the "Selected Financial Information" and the financial statements and notes which are included elsewhere in this prospectus. You should read those sections for a further explanation of the financial data summarized here. The pro forma balance sheet data gives effect to the sale of the Series C Preferred Stock in January and February 1999 for aggregate gross proceeds of approximately $7.6 million and the conversion of all preferred stock into common stock as if it occurred at December 31, 1998. The pro forma as adjusted balance sheet data also gives effect to this offering and the application of the estimated net proceeds of approximately $ million. The pro forma net loss per common share data gives effect to the conversion of all preferred stock outstanding as of December 31, 1998 into common stock.
YEAR ENDED DECEMBER 31, ------------------------------------ 1996 1997 1998 --------- ---------- ------------- STATEMENT OF OPERATIONS DATA: Revenues.................................................................... $ 141 $ 1,022 Costs and expenses: Product costs, engineering and development.............................. $ 1,408 8,511 19,603 Sales and marketing..................................................... 428 3,623 5,157 General and administrative.............................................. 1,093 2,432 3,486 Depreciation and amortization........................................... -- 22 119 --------- ---------- ------------- Total costs and expenses............................................ 2,929 14,588 28,365 Loss from operations........................................................ (2,929) (14,447) (27,343) Other income, net........................................................... 8 423 423 Interest expense............................................................ (2) (17) (101) --------- ---------- ------------- Net loss.................................................................... (2,923) (14,041) (27,021) Accretion on preferred stock................................................ (75) (2,436) (6,145) --------- ---------- ------------- Net loss available to common shareholders................................... $ (2,998) $ (16,477) $ (33,165) --------- ---------- ------------- --------- ---------- ------------- Historical net loss per common share........................................ $ (0.33) $ (1.81) $ (3.64) Historical weighted average common shares outstanding....................... 9,100,801 9,100,801 9,100,801 Pro forma net loss per common share......................................... $ (2.24) ------------- ------------- Pro forma weighted average common shares outstanding........................ 14,785,714 ------------- -------------
DECEMBER 31, 1998 --------------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED --------- ----------- --------------- BALANCE SHEET DATA: Cash and cash equivalents.................................................... $ 368 $ 7,968 Total assets................................................................. 5,621 13,221 Total indebtedness........................................................... 1,127 1,127 Total mandatory redeemable preferred stock................................... 49,276 -- Total stockholders' equity (deficit)......................................... (52,240) 5,516 OTHER DATA: Common shares outstanding.................................................... 9,100,801 15,658,690
7 CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements that are not historical facts, but rather are based on our current expectations, estimates and projections about WorldGate's industry and our beliefs and assumptions. Words such as "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates" and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to some risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward- looking statements. These risks and uncertainties are described in "Risk Factors" and elsewhere in this prospectus. We caution you not to place undue reliance on these forward-looking statements, which reflect our management's view only as of the date of this prospectus. We are not obligated to update these statements or publicly release the result of any revisions to them to reflect events or circumstances after the date of this prospectus or to reflect the occurrence of unanticipated events. RISK FACTORS AN INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS, AS WELL AS THE OTHER INFORMATION IN THIS PROSPECTUS, BEFORE INVESTING IN OUR COMMON STOCK. WE HAVE A SHORT OPERATING HISTORY We began operations in March 1995 and our service was first made commercially available in the third quarter of 1998. As a result, we have only a limited operating history upon which you can base an evaluation of our business and prospects. Our prospects are subject to the risks, uncertainties, expenses and difficulties frequently encountered by companies in their early stages of development, particularly companies in new and rapidly evolving markets, such as Internet access and e-commerce. If we are not successful in implementing our marketing and business plans on a timely basis, our operating results and financial condition will be materially and adversely affected. CONSUMERS MAY NOT EMBRACE THE WORLDGATE SERVICE Because the market for television-based Internet access is new and evolving, we cannot guarantee that a market for the WORLDGATE Service will develop or that demand for the WORLDGATE Service will be sustainable. If the market does not develop, develops more slowly than expected or becomes saturated with competitors, or if the WORLDGATE Service does not achieve or sustain market acceptance, our business, operating results, and financial condition will be materially and adversely affected. WE HAVE A HISTORY OF NET LOSSES SINCE INCEPTION AND ANTICIPATE CONTINUING LOSSES For us to make a profit, we need to increase our revenues and gross profit margins sufficiently to cover the costs necessary for the continued deployment, development and enhancement of the WORLDGATE Service. If we are not able to do so, our losses may extend beyond the foreseeable future and we may never achieve profitability. We have experienced losses and had negative cash flow in each quarter and year since inception. Our aggregate revenues from inception to December 31, 1998 were approximately $1.2 million, and our aggregate accumulated deficit at December 31, 1998 was approximately $51.9 million. In addition, we currently intend to increase our operating expenses and capital expenditures in order to continue the commercial deployment, development and enhancement of the WORLDGATE Service. As a result, we expect to experience substantial additional operating losses and a negative cash flow for the foreseeable future. WE DEPEND ON CABLE OPERATORS Our growth and future success depends substantially upon our ability to convince cable operators to offer the WORLDGATE Service to their subscribers. As of the date of this prospectus, we have only entered into a limited number of agreements with cable operators providing for 8 the commercial launch of the WORLDGATE Service. None of these cable operators who are deploying, or who have agreed to deploy, the WORLDGATE Service are obligated to exclusively provide the WORLDGATE Service to their subscribers. In addition, no cable operator currently testing the WORLDGATE Service is obligated to provide the WORLDGATE Service to its cable subscribers. If our service is not viable as a business proposition or if cable operators otherwise determine that the service does not meet their business or operational expectations or strategies, the WORLDGATE Service will not be offered to their subscribers. We cannot assure you that our current and planned trials or that our commercial deployment of the WORLDGATE Service will be successful. If we fail to successfully complete our trials and commercial deployment in any cable operator's systems, we will be unable to generate any cash flow from such systems and other prospective cable operators may be reluctant to enter into commitments with us due to concerns about the viability of the WORLDGATE Service. As a result of our dependence on cable operators to provide the WORLDGATE Service to their subscribers, we have no control over a number of important factors, including: - the cable operators' advertising or marketing strategy, if any, regarding their offering of the WORLDGATE Service to their subscribers, and - the monthly fees cable operators may charge to their subscribers for the WORLDGATE Service. WE ARE DEPENDENT UPON CONTINUED INVESTMENT BY CABLE OPERATORS TO UPGRADE THEIR INFRASTRUCTURE The adoption of the WORLDGATE Service is dependent upon continued investment by cable operators to upgrade their infrastructures to support two-way data transmissions. It is uncertain whether cable operators will upgrade to two-way cable plant in the near term, or at all. The failure of cable operators to complete these upgrades or implement new services in a timely and satisfactory manner, or at all, would adversely affect the market for the WORLDGATE Service. Cable plants, which are the network used to distribute cable programming to subscribers, encompass three general levels of performance: - "one-way plant" that is only capable of downstream transmission of programming to subscribers, - "standard two-way plant" that is capable of downstream transmission plus upstream transmission from the subscriber to the cable operator as provided by a standard pay-per-view radio frequency return path, but that has more than a nominal level of ambient noise, and - "cable modem ready two-way plant" that is capable of downstream and upstream transmissions with only a nominal level of ambient noise. Although the WORLDGATE Service can operate over one-way cable plant, it can do so only in conjunction with a telephone connection. As such, it is less convenient and efficient for a subscriber to use the WORLDGATE Service over one-way cable plant and to date, all of the cable operators who have agreed to deploy the WORLDGATE Service have done so only over two-way cable plant. According to Kagan, in 1998 at least 60% of homes were passed by one-way cable plant. Although we believe that many cable operators have begun upgrading their cable infrastructures to two-way cable plant primarily to offer digitally compressed information transmission with increased channel capacity and speed, many cable operators have in the past delayed their planned upgrades. Some cable operators may have limited experience with these upgrades, and these investments may place a significant strain on the financial, managerial, operational and other resources of the cable operators, most of which are already highly leveraged and face intense competition from wireline and wireless telecommunications and broadcast satellite service providers. Cable operators may not have the capital or resources required to upgrade their infrastructures or to offer new services. 9 WE DEPEND ON CABLE BOX MANUFACTURERS TO INCORPORATE OUR TECHNOLOGY INTO THEIR CABLE BOXES In order to access the WORLDGATE Service, a consumer needs a WORLDGATE enabled digital or advanced analog cable box. We have worked closely with General Instrument and Scientific-Atlanta in developing the technology that will enable the WORLDGATE Service to operate on their digital or advanced analog cable boxes. Although we believe that we have developed strong relationships with General Instrument and Scientific-Atlanta, neither company is required to install our WORLDGATE technology in its current or next generation cable boxes. Similarly, neither company is prohibited from establishing relationships with any of our competitors and incorporating our competitors' technologies in their current or next generation cable boxes. We have entered into agreements with General Instrument and Scientific-Atlanta providing for the testing and certification of WORLDGATE technology within their products as well as the joint marketing of the technology with their products. Although we have obtained certification for General Instrument's and some models of Scientific Atlanta's current generation advanced analog cable boxes, additional certifications will likely be required for other Scientific Atlanta advanced analog cable boxes and future generation cable boxes. The length of time required to complete such certifications cannot be accurately predicted and has in the past resulted in unexpected delays. Any failure or delay in the testing, certification or availability of these cable boxes could impact the timing and effectiveness of the deployment of the WORLDGATE Service which could, in turn, have a material adverse effect on our business, financial condition and results of operations. Our WORLDGATE technology is currently incorporated into an additional feature expansion module that must be installed within General Instrument's and some models of Scientific-Atlanta's current advanced analog cable boxes to enable the WORLDGATE Service. We currently bear the manufacturing responsibility for and pay the manufacturing expenses for, and the costs of, these modules. The incremental cost per cable box of this module is currently approximately $60, but we expect this cost to decrease with further cost reduction activities and volume production. Once the incremental cost to cable box manufacturers for incorporating our WORLDGATE technology into their cable boxes becomes nominal, however, we believe that General Instrument and Scientific-Atlanta may assume the manufacturing responsibility and cost. We cannot assure you that the cost reductions will be achieved in a timely manner, if at all, or that General Instrument or Scientific-Atlanta will assume the manufacturing responsibility and cost. Additionally, because General Instrument and Scientific-Atlanta are the two largest suppliers of cable boxes, their decision not to install our WORLDGATE technology in their cable boxes or to develop similar technology with our competitors could have a material adverse effect on our future success. Both General Instrument and Scientific-Atlanta have joined us in promoting the WORLDGATE Service in the press, at trade shows and conferences and through joint sales and marketing presentations worldwide, which we believe is particularly important in gaining market acceptance for the WORLDGATE Service outside the United States. If either cable box manufacturer severed this relationship with us, we would lose a valuable sales and marketing resource. WE DEPEND ON ADVERTISERS AND TELEVISION PROGRAMMERS Our future growth and long-term success depends substantially on our ability to convince advertisers and television programmers to use our CHANNEL HYPERLINKING technology with their advertisements and television programs. Although we have tested our CHANNEL HYPERLINKING technology with programmers such as The Weather Channel, no advertiser or programmer had, as of January 31, 1999, paid us to use our CHANNEL HYPERLINKING technology, or is obligated to use our CHANNEL HYPERLINKING technology in their advertisements or programs. If we cannot demonstrate the business viability of our CHANNEL HYPERLINKING technology or if advertisers and programmers otherwise determine that such service does not meet their business or operational expectations or 10 strategies, our CHANNEL HYPERLINKING technology will not be incorporated into their advertisements or programs. In addition, cable operators will need to achieve significant penetration rates of the WORLDGATE Service to provide an attractive target audience for advertisers and programmers. We cannot assure you that we will achieve a significant number of WORLDGATE Service subscribers or that advertisers and programmers will otherwise embrace our CHANNEL HYPERLINKING technology. If we fail to incorporate our CHANNEL HYPERLINKING technology in a substantial number of advertisements and programs, our business, operating results and financial condition could be materially adversely affected. INTELLECTUAL PROPERTY CLAIMS AGAINST US CAN BE COSTLY AND RESULT IN THE LOSS OF SIGNIFICANT RIGHTS We are subject to patent litigation which claims that we are infringing other parties' intellectual property rights. - On May 11, 1998, Interactive Channel Technologies, Inc. and SMI Holdings, Inc., subsidiaries of Source Media, filed a complaint against us in the U.S. District Court for the District of Delaware, alleging that we infringed some patents issued to Source. The complaint seeks injunctive relief, as well as monetary damages and attorneys' fees. If the plaintiffs win this lawsuit and they are able to obtain an injunction against us, we could be precluded from offering the WORLDGATE Service. - On October 6, 1998, Advanced Interactive, Inc. ("AII") filed a complaint in the U.S. District Court for the Northern District of Illinois, Eastern Division, against us and several other defendants, alleging that each of the defendants infringed a patent issued to AII. The complaint seeks monetary damages and attorneys' fees. Many parties are also actively developing or have developed technologies related to Internet access and the establishment of links between the Internet and television. We believe that such parties will continue to take measures to protect these technologies, including seeking patent protection. We are aware that a number of patents have been issued in this area and we anticipate that additional third-party patents will be issued in the future. We cannot assure you that additional infringement or invalidity claims, or claims for indemnification resulting from infringement claims, will not be asserted or prosecuted against us or that any assertion or prosecution will not materially adversely affect our business, financial condition and results of operations. This may be the case even if patents are issued to us. Irrespective of the validity or the successful assertion of such claims, they would result in significant costs and diversion of management time and resources. This would have a material adverse effect on our business, financial condition and results of operations. If any claim or action were to be asserted against us, we may seek to obtain licenses for other parties' intellectual property rights. We cannot assure you that under such circumstances licenses would be available to us on commercially reasonable terms, or at all. CABLE OPERATORS MAY BE CONTRACTUALLY LIMITED IN OFFERING THE WORLDGATE SERVICE We are aware that some cable operators, such as Cablevision, Comcast Corporation, Cox Enterprises, Inc. and Tele-Communications, Inc., whose cable systems serve more than 26 million U.S. homes, have entered into a distribution agreement with At Home Corporation. The distribution agreement with At Home contains exclusivity provisions prohibiting these cable operators from conducting or participating in any business in the United States that involves the provision of some residential Internet services over their cable plants at data transmission speeds greater than 128 Kbps. This distribution agreement could be interpreted to preclude or hinder these cable operators from offering the WORLDGATE Service to their subscribers at speeds in excess of 128 Kbps. If cable operators are unwilling or unable to offer the WORLDGATE Service to subscribers in these cable systems, our business, financial condition and results of operations would be materially adversely affected. 11 CABLE OPERATORS/CABLE BOX MANUFACTURERS MAY HAVE POTENTIAL CONFLICTS OF INTEREST IN PROVIDING THE WORLDGATE SERVICE Some cable operators and cable box manufacturers may be stockholders of other companies that provide Internet services. For example, TCI, Comcast, Cox and Cablevision are stockholders of At Home, and MediaOne Group, Inc. and Time Warner, the second largest cable company in the United States, have established their own cable-based Internet service, called Road Runner, with proprietary content featuring various Time Warner publications and services. Time Warner markets the Road Runner service to its subscribers as well as to other cable operators. Also, some companies that provide Internet services may be stockholders of cable operators or cable box manufacturers. For example, in 1997 Microsoft Corporation, which also owns WebTV Networks, Inc., invested $1 billion in Comcast. We cannot assure you that other companies will not invest in cable operators and/or cable box manufacturers. As a result, these cable operators may be reluctant to provide any service, including the WORLDGATE Service, that provides other Internet services. OUR MARKETS ARE HIGHLY COMPETITIVE We experience intense competition. There are many companies providing Internet access and we anticipate that many more companies will provide Internet products and services, including companies that provide access to the Internet: - on televisions through cable infrastructure without a personal computer, such as Source Media, Inc.'s Interactive Channel and ICTV, Inc., - on personal computers through telephone modems and telephone lines, such as America Online, Inc., Microsoft Network, Earthlink Network, Inc., MindSpring Enterprises, Inc., AT&T Corp., MCI WorldCom, Inc., Sprint Corporation and regional Bell operating companies, - on personal computers with cable modems through the cable television infrastructure, such as At Home and Road Runner, - on televisions through telephone lines, such as WebTV and a product offering recently announced by America Online, and - by broadcast satellite. There are also many companies providing Internet content and other Internet services, such as companies that provide, over the Internet and on proprietary on-line services, content and applications ranging from news, sports and community features to e-mail and consumer video conferencing, such as America Online, Infoseek Corporation, Microsoft Network LLC, Prodigy Communications Corporation, Netscape Communications Corporation and WebTV. In addition, companies such as Wink Communications, Inc. and Intel Corporation broadcast supplementary text and/or graphics information as an enhancement to television programming. This information may be displayed on the television screen in addition to the standard broadcast television programming. Many of the above companies have significantly greater financial, technical, marketing, distribution, customer support, other resources, name recognition, compelling content and access to consumers, and more established relationships with advertisers and content and application providers than we have. We cannot assure you that we will be able to achieve our objectives, that we will be able to compete successfully against current or future competitors or that competitive pressures faced by us will not have a material adverse effect on our business, financial condition and results of operations. WE ARE SUBJECT TO CAPACITY CONSTRAINTS AND SYSTEM FAILURES Due to the limited deployment of the WORLDGATE Service, the ability of our service to accommodate a substantial number of users concurrently performing tasks requiring intensive processing is not yet known. Although the 12 WORLDGATE Service has been designed to be easily expandable, we cannot assure you that we will be able to maintain quality of performance and high transaction speeds as the number of subscribers grows or their usage increases. In addition, as subscriber penetration grows it may be necessary for cable operators to purchase additional equipment, and we cannot assure you that they will do so. The performance of the WORLDGATE Service is also subject to degradation and interruption from human errors, telecommunication failures, computer viruses and similar events. Any of these problems in our systems or those of cable operators could result in reduced subscriber demand. We have experienced service degradations and interruptions in the past and we expect that these problems will continue. Our failure to provide uninterrupted service at a level of performance acceptable to subscribers would have a material adverse effect on our business, financial condition and results of operations. WE MAY NOT BE SUCCESSFUL IN PROTECTING OUR PROPRIETARY RIGHTS We regard our copyrights, trademarks, trade dress, trade secrets and similar intellectual property as critical to our success. To protect these rights, we rely on a combination of patent, trade secret, copyright and trademark laws and contractual restrictions to establish and protect our proprietary rights in our products, services, know-how and information. We have filed patent applications in the United States and internationally covering aspects of the WORLDGATE Service and our CHANNEL HYPERLINKING technology. We cannot assure you that any patent will issue from these applications or that, if issued, the claims covered by the patents will not be substantially reduced from the claims covered by our current patent applications. Moreover, any patent that may be issued might be held invalid or unenforceable by a court. Failure of any patent to provide protection to our technology may make it easier for our competitors to offer technology equivalent or superior to our technology. Even if the patents are upheld or are not challenged, third parties might be able to develop alternative technologies or products without infringing any such patent. We generally enter into confidentiality agreements with our employees and consultants, and, when possible, customers, partners and others to control and limit access to and disclosure of our proprietary information. We cannot assure you that these contractual arrangements or other steps taken by us to protect our intellectual property will prove sufficient to prevent misappropriation of our technology or deter independent third party development of similar technologies. Enforcement of our intellectual property rights may be costly. Additionally, the laws of foreign countries may not protect our products or intellectual property rights to the same extent as U.S. laws. WE DEPEND ON THIRD PARTY SUPPLIERS FOR TECHNOLOGY AND OTHER COMPONENTS NECESSARY TO PROVIDE THE WORLDGATE SERVICE We depend, and will continue to depend, on third parties to provide us with technology and other components necessary to provide the WORLDGATE Service. Further, we do not manufacture, nor do we have the capability to manufacture, any of the equipment used in providing the WORLDGATE Service. Any termination of the license for such technology or any reduction or interruption in the supply of equipment or other components or in product manufacturing by third party contractors could adversely affect our ability to deliver the WORLDGATE Service, thereby having a material adverse effect on our business, financial condition and results of operations. WE ARE SUBJECT TO RISKS ASSOCIATED WITH OUR FOREIGN OPERATIONS We cannot assure you that we will be successful in deploying the WORLDGATE Service in any foreign market. To date, we have only limited experience in developing, marketing and operating the WORLDGATE Service internationally. In particular, international markets may be slower in adopting cable or the Internet as an advertising and commerce medium and may not have a technologically advanced cable or Internet infrastructure. We may experience difficulty in managing international operations as a result of distance as well as language and 13 cultural differences. In international jurisdictions, some governmental entities own and operate the communication authorities which they regulate. The governmentally owned and operated authorities may be given preferences or otherwise be treated more favorably by such governments. A government may also own and operate an Internet service. As such, the government may prohibit any similar or other Internet service provider from offering their services in their territory. In addition to the above, other risks inherent in doing business internationally include: - loss of revenue, property and equipment from social, political and economic instability, - potentially adverse tax consequences, - changes in both foreign and U.S. laws and regulations, - U.S. export restrictions relating to encryption technology, - foreign laws and regulations relating to the Internet as a communications medium, as well as laws and regulations with respect to privacy, morality and/or other social or political standards which impact the information which may be made available on such medium, - difficulties in staffing and managing foreign operations, - problems in collecting accounts receivable, - difficulties in translating and localizing content, - fluctuations in currency exchange rates, and - local economic crises, such as the current Asian economic crisis. We cannot assure you that one or more such factors will not have a material adverse effect on our future international operations and consequently on our business, financial condition and results of operations. WE MAY NOT BE ABLE TO EFFECTIVELY MANAGE OUR ANTICIPATED GROWTH If we are unable to manage our growth effectively, our business, financial condition and results of operations could be materially adversely affected. Our current business plan forecasts a period of rapid growth following the commencement of commercial deployment of the WORLDGATE Service. This growth, if it occurs, will place a significant strain on our financial, managerial and other resources. Our ability to manage our growth effectively, should it occur, will require us to continue to improve our operating, financial and management information systems and to attract, train, motivate, manage and retain key employees, including additional technical, marketing and sales personnel. In addition, our plan to widely deploy the WORLDGATE Service in multiple locations imposes challenges in finding additional qualified personnel as well as managing the required logistics for operating in various locations and monitoring cable headend systems in multiple locations. WE RELY ON KEY EXECUTIVES AND PERSONNEL The loss of the services of our Chairman and Chief Executive Officer, Hal M. Krisbergh, or one or more of our other key employees or our failure to attract additional qualified personnel, could have a material adverse effect on our business, financial condition and results of operations. Our success depends in significant part upon the continued service of our key technical, sales and senior management personnel, particularly Mr. Krisbergh. Because no officer or employee of WorldGate is bound by an employment agreement, any officer or employee of WorldGate could terminate his or her relationship with us at any time. Our future success will also depend on our ability to attract, train, retain and motivate highly qualified senior management, technical, marketing and sales personnel. Because competition for these personnel is intense, we cannot assure you that we will be able to do so. 14 OUR REVENUES ARE DERIVED FROM A LIMITED NUMBER OF CUSTOMERS We have in the past derived, and will in the future derive, a significant portion of our revenues from a limited number of customers. In 1997, three cable operators accounted for approximately 100% of our revenues and in 1998, ten cable operators accounted for approximately 98% of our revenues. Moreover, in 1998, Charter and Click!Network accounted for 44% and 10%, respectively, of our revenues. We cannot assure you that any of these customers will continue to offer the WORLDGATE Service to their cable subscribers. The loss of any of these cable operators as customers would have a material adverse effect on us and our financial results. WE ARE SUBJECT TO BURDENSOME GOVERNMENT REGULATION We are subject to varying degrees of federal, state, local and foreign regulation as well as laws enacted by the U.S. Congress and other governments. The Federal Communications Commission has established regulations that, among other things, set installation and equipment standards for communications systems. In addition, due to the increasing popularity and use of the Internet, it is possible that laws and regulations may be adopted covering issues such as user privacy, defamation, network access, pricing, taxation, content regulation, quality of products and services, and intellectual property ownership and infringement. Such legislation could expose us to substantial liability, could materially increase our cost of providing the WORLDGATE Service and could decrease the growth and acceptance of the Internet. Due to the global nature of the Internet, it is possible that governments of other state and foreign countries might attempt to regulate our transmissions, confiscate our property or prosecute us for violations of their laws. We might unintentionally violate such laws. We cannot assure you that future regulations adopted by the Federal Communications Commission or other regulatory, legislative or judicial initiatives will not have a material adverse effect on us. WE MAY HAVE LIABILITY FOR DEFAMATORY OR INDECENT CONTENT The law relating to liability of Internet service providers for information carried on or disseminated through their networks is currently unsettled. A number of lawsuits have sought to impose such liability for defamatory speech and indecent materials. In addition, the Children's Online Protection Act and the Children's Online Privacy Act may restrict the distribution of some materials deemed harmful to children and may impose additional restrictions on the ability of on-line services to collect user information from minors. We cannot assure you that such legislation will not impose significant additional costs on our business or subject us to additional liabilities and to expenditures of substantial resources or the discontinuation of some of our product or service offerings. In addition, the imposition of liability for information carried by us would have a material adverse effect on our business, operating results and financial condition. WE MAY HAVE LIABILITY FOR INFORMATION RETRIEVED AND REPLICATED ON THE INTERNET Claims for negligence, copyright or trademark infringement or other legal theories could be made against us because information will be downloaded and redistributed by users of the WORLDGATE Service. Copyright and trademark laws are evolving both domestically and internationally and we are uncertain as to their applicability to the WORLDGATE Service. The imposition of liability for information carried by us would have a material adverse effect on our business, operating results and financial condition. WE MAY HAVE LIABILITY FOR E-COMMERCE TRANSACTIONS As part of our business, we are seeking to enter into agreements with content providers, advertisers and e-commerce merchants under which we will receive a share of revenue from the purchase of goods and services by users of 15 the WORLDGATE Service. Such arrangements may expose us to additional legal risks and uncertainties, including potential liabilities to consumers of such products and services. Our insurance may not cover potential claims of this type or may not be adequate to indemnify us for all liability that may be imposed. OUR CHAIRMAN AND CHIEF EXECUTIVE OFFICER CAN EXERCISE SIGNIFICANT INFLUENCE OVER WORLDGATE After the completion of this offering, Hal M. Krisbergh will beneficially own approximately % of the outstanding common stock. Mr. Krisbergh will have the voting power to exercise substantial control over the election of our entire Board of Directors and all votes on matters requiring stockholder approval. This concentration of ownership may also have the effect of delaying or preventing a change in control of WorldGate. WE MAY NEED ADDITIONAL CAPITAL IN THE FUTURE We have funded operations primarily through private sales of equity securities. Our capital requirements depend on numerous factors, including: - the rate of acceptance by cable operators, cable subscribers, advertisers, e-commerce companies and Internet content providers of the WORLDGATE Service, - our ability to maintain and expand the number of subscribers, and - the rate of commercialization of the WORLDGATE Service. We cannot accurately predict the timing and amount of our capital requirements. Any additional equity financing, if available, may be dilutive to our stockholders, and debt financing, if available, may involve restrictions on our financing and operating activities. If we are unable to obtain additional financing on terms acceptable to us as needed, our business, operating results and financial condition would be materially and adversely affected. YEAR 2000 RISKS MAY ADVERSELY AFFECT WORLDGATE Year 2000 problems experienced by us or any third parties could materially adversely affect our business. Additionally, the Internet could face serious disruptions arising from the Year 2000 problem. We are evaluating our internal information technology and non-information technology systems to determine our exposure to Year 2000 problems. In addition, we have begun to contact our information technology suppliers to ascertain their Year 2000 status. However, we cannot guarantee that our own systems will be Year 2000 compliant in a timely manner, that any of our participating sellers, such as cable operators, or other Web site vendors will be Year 2000 compliant in a timely manner, or that there will not be problems with technology systems working together. We also cannot guarantee that consumers will be able to use the WORLDGATE Service without serious disruptions arising from the Year 2000 problem. Given the pervasive nature of the Year 2000 problem, we cannot guarantee that disruptions in other industries and market segments will not adversely affect our business. Moreover, the costs related to Year 2000 compliance could be significant. WE ARE SUBJECT TO SECURITY RISKS The secure transmission of confidential information over the Internet is a significant aspect of maintaining consumer and supplier confidence in the WORLDGATE Service. We rely on encryption and authentication technology as well as other network technology to effect secure transmission of confidential information within our service. We are also dependent upon the infrastructure provided by the cable operators for the distribution of our service. It is possible that advances in computer capabilities, new discoveries or other developments could result in a compromise or breach of the technology used by us to protect customer data transmission. A party that is able to circumvent our security systems could steal proprietary information or cause interruptions in our operations. Security breaches also could damage our reputation and expose us to a risk of loss or litigation and possible liability. Our insurance policies carry coverage limits, which may not be adequate to reimburse us for losses caused by security breaches. We cannot guarantee that our security measures will prevent security breaches. 16 We also face risks associated with security breaches affecting third parties conducting business over the Internet. Consumers generally are concerned with security and privacy on the Internet and any publicized security problems could inhibit the growth of the Internet and, therefore, the WORLDGATE Service as a means of conducting commercial transactions. OUR STOCK PRICE MAY BE VOLATILE Prior to this offering, you could not buy or sell our common stock publicly. An active public market for our common stock may not develop or be sustained after this offering. The initial public offering price of our common stock was determined solely by negotiations between us and the underwriters and does not necessarily reflect the price at which shares of our common stock may be sold in the public market during or after this offering. The market price of our common stock is likely to be highly volatile and could be subject to wide fluctuations in response to various factors and events such as the following, some of which are beyond our control: - quarterly variations in our operating results, - operating results that vary from the expectations of securities analysts and investors, - changes in expectations as to our future financial performance, including financial estimates by securities analysts and investors, - changes in market valuations of other Internet or technology companies, - announcements of technological innovations or new services by us or our suppliers, customers or competitors, - announcements by us or our suppliers, customers or competitors of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments, - additions or departures of key personnel, and - regulatory action in the cable or Internet industry. Domestic and international stock markets often experience extreme price and volume fluctuations. Market fluctuations, as well as general political and economic conditions, such as a recession or interest rate or currency rate fluctuations, could adversely affect the market price of our common stock. The market prices for stocks of Internet-related and technology companies, particularly following an initial public offering, frequently reach levels that bear no relationship to the operating performance of such companies. Such market prices generally are not sustainable and are subject to wide variations. If our common stock trades to such levels following this offering, it likely will thereafter experience a material decline. In the past, securities class action litigation has often been brought against a company following periods of volatility in the market price of its securities. We may in the future be the target of similar litigation. Securities litigation could result in substantial costs and divert management's attention and resources. WE ARE SUBJECT TO ANTI-TAKEOVER PROVISIONS We are subject to Delaware laws that could have the effect of delaying, deterring or preventing a change in control of WorldGate. One of these laws prohibits us from engaging in a business combination with any interested stockholder for a period of three years from the date the person became an interested stockholder, unless some conditions are met. In addition, provisions of our Certificate of Incorporation and By-laws, and the significant amount of common stock held by our executive officers, directors and affiliates, could have the effect of discouraging potential takeover attempts or making it more difficult for stockholders to change management. One such provision is the ability of the Board of Directors to authorize the issuance of preferred stock without stockholder approval. The rights of the holders of our common stock will be subject to, and would be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. 17 SUBSTANTIAL SALES OF OUR COMMON STOCK MAY AFFECT OUR STOCK PRICE The market price for our common stock could drop as a result of sales of a large number of shares of our common stock in the market after this offering, or the perception that such sales could occur. These factors also could make it more difficult for us to raise funds through future offerings of our common stock. Following the expiration of or earlier release from the 180-day lockup agreements, approximately 14.1 million shares will become eligible for sale, subject to compliance with Rule 144 and to contractual restrictions in our Stock Option Plan. The approximately remaining million shares held by existing stockholders will become eligible for sale in accordance with Rule 144. In addition, we intend to register on Form S-8 a total of 291,990 shares of our common stock reserved for issuance and 641,343 shares subject to outstanding options granted under our Stock Option Plan. The holders of approximately 13.8 million shares of our common stock, assuming the exercise of all outstanding warrants, will also be entitled to some rights with respect to registration of such shares of our common stock for offer or sale to the public. Upon consummation of this offering, there will be outstanding shares of our common stock. The shares of our common stock sold in this offering will be freely tradable without restriction, except for any shares acquired by our "affiliates" which can be sold under Rule 144, subject to volume and other limitations. 18 USE OF PROCEEDS We estimate that we will receive net proceeds of approximately $ million, approximately $ million if the underwriters fully exercise their over-allotment option, from the sale of our common stock offered by us in this offering based on an assumed offering price of $ per share. This estimate is after deducting underwriting discounts and commissions and other fees and expenses payable by us. We intend to use the net proceeds from this offering for working capital, general corporate purposes and capital expenditures. We may use a portion of the net proceeds to acquire or invest in complementary businesses or products or to obtain the right to use complementary technologies. The amounts and the timing of any such use may vary significantly depending upon a number of factors, including our revenue growth, asset growth, cash flow and acquisition activities. Pending such uses, the net proceeds of this offering will be invested in short-term, investment-grade, interest-bearing securities. We currently anticipate that the net proceeds received by us from this offering, together with cash generated from operations and existing cash balances will be sufficient to satisfy our operating cash needs for at least 18 months from receipt of the proceeds. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." DIVIDEND POLICY We have never paid nor declared any cash dividends. We currently intend to retain future earnings, if any, for use in our business, and, therefore, we do not anticipate paying or declaring any cash dividends in the foreseeable future. The payment of future dividends, if any, will depend among other things, on our results of operations, cash flows and financial condition and on such other factors as the Board of Directors may, in its discretion, consider relevant. 19 CAPITALIZATION The following table sets forth our capitalization as of December 31, 1998, (1) on a historical basis, (2) on a pro forma basis to reflect the sale of 697,437 additional shares of Series C Preferred Stock in January and February 1999 for aggregate gross proceeds of approximately $7.6 million, and the conversion of Series A, B and C Preferred Stock and of Class B Common Stock into Class A Common Stock and (3) on a pro forma basis as adjusted to give effect to such sales and this offering and the application of the estimated net proceeds of approximately $ million therefrom, assuming a public offering price of $ per share. This table should be read in conjunction with the financial statements and related notes thereto and other financial information included elsewhere in this prospectus. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."
DECEMBER 31, 1998 ------------------------------------------- PRO FORMA AS ACTUAL PRO FORMA(1) ADJUSTED(1)(2) ---------- ------------- ---------------- (IN THOUSANDS) Notes payable........................................................ $ 1,111 $ 1,111 $ 1,111 Capital leases....................................................... 16 16 16 Series A Convertible Mandatory Redeemable Preferred Stock, 2,752,111 shares authorized, issued and outstanding; no shares outstanding pro forma and pro forma as adjusted................................ 16,578 Series B Convertible Mandatory Redeemable Preferred Stock, 3,270,760 shares authorized, 2,803,031 shares outstanding; no shares outstanding pro forma and pro forma as adjusted.................... 23,569 Series C Convertible Mandatory Redeemable Preferred Stock, 3,181,819 shares authorized, 832,277 shares outstanding; no shares outstanding pro forma and pro forma as adjusted.................... 9,129 Warrant for Series B Convertible Mandatory Redeemable Preferred Stock.............................................................. 881 Stockholders' equity (deficit): Class A Common Stock, $.01 par value, 50,000,000 shares authorized, no shares issued and outstanding; 15,658,690 shares outstanding pro forma; shares outstanding pro forma as adjusted(3)..... 157 Class B Common Stock, $.01 par value, 27,608,000 authorized, 9,100,801 shares outstanding; no shares outstanding pro forma and pro forma as adjusted(3)(4)...................................... 91 Additional paid in capital......................................... 56,809 Warrant for common stock........................................... 881 881 Accumulated deficit................................................ (51,876) (51,876) (51,876) Deferred compensation.............................................. (455) (455) (455) ---------- ------------- -------- Total stockholders' equity (deficit)............................. (52,240) 5,516 ---------- ------------- -------- Total capitalization................................................. $ (956) $ 6,643 $ ---------- ------------- -------- ---------- ------------- --------
- ------------------------ (1) See note 2 of the notes to financial statements for a description of pro forma presentation. (2) Adjusted to reflect the sale of million shares of our common stock offered hereby and the application of the estimated net proceeds therefrom. See "Use of Proceeds." (3) Adjusted to reflect the conversion of Class B Common Stock into Class A Common Stock upon the consummation of this offering. (4) Excludes (a) 641,343 shares of common stock issuable upon exercise of all outstanding stock options as of December 31, 1998, at exercise prices between $.75 per share and $4.50 per share and (b) 311,819 shares of common stock issuable upon exercise of all outstanding warrants. 20 DILUTION The pro forma net tangible book value of the Company's Class A Common Stock as of December 31, 1998 was approximately $( ), or $( ) per share. "Pro forma net tangible book value per share" represents the amount of pro forma total tangible assets of the Company less pro forma total liabilities divided by the number of shares of common stock outstanding after giving effect to the conversion of Series A, Series B and Series C Preferred Stock and the Class B Common Stock, the sales of the Series C Preferred Stock in January and February 1999 and the stock split. After giving effect to the sale by the Company of shares of common stock in this offering and after deducting the underwriting discount and estimated offering expenses payable by the Company, the pro forma net tangible book value of the Company as of December 31, 1998 would have been approximately $ or $ per share to new investors purchasing our common stock in this offering. "Dilution per share" represents the difference between the initial public offering price per share of our common stock and the pro forma net tangible book value per share of the Company as of December 31, 1998 after giving effect to this offering. The following table illustrates this per share dilution: Initial public offering price per share...................................... $ Pro forma net tangible book value per share as of December 31, 1998........ Increase per share attributable to new investors........................... --------- Pro forma (as adjusted) net tangible book value per share after this offering................................................................... --------- Dilution per share to new investors.......................................... $ --------- ---------
The following table summarizes, as of December 31, 1998, on the pro forma basis described above, the difference between the total consideration paid and the average price per share paid by our existing stockholders and the new investors purchasing shares of common stock in this offering (before deducting underwriting discounts and estimated offering expenses):
SHARES PURCHASED TOTAL CONSIDERATION --------------------------- ---------------------------- AVERAGE PRICE NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE ------------ ------------- ------------- ------------- --------------- Existing Stockholders........................ 15,658,690 $ 48,752,075 New Stockholders............................. ------------ --- ------------- --- Total.................................... 100% $ 100% ------------ --- ------------- --- ------------ --- ------------- ---
The foregoing tables exclude all outstanding options and warrants. As of December 31, 1998, there were outstanding warrants to purchase an aggregate of 311,819 shares of common stock and options to purchase an aggregate of 641,343 shares of Common Stock (108,750 of which were exercisable at December 31, 1998) at a weighted average exercise price of $3.00 per share, and the Company had an additional 291,990 shares of common stock available for future grants and other issuances under its Stock Option Plan. See "Management" and note 7 of the notes to financial statements appearing elsewhere in this prospectus. The exercise of outstanding options and warrants having an exercise price less than the offering price would increase the dilutive effect to new investors. 21 SELECTED FINANCIAL INFORMATION The following selected financial information as of December 31, 1997 and 1998 and for each of the three years in the period ended December 31, 1998 are derived from our financial statements included in this prospectus, which have been audited by PricewaterhouseCoopers LLP, independent accountants. You should read the following information in conjunction with the Company's financial statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus. The data as of December 31, 1995 and 1996 and for the period ended December 31, 1995 are derived from financial data not included in this prospectus.
MARCH 21, 1995 (INCEPTION) THROUGH YEAR ENDED DECEMBER 31, DECEMBER 31, ----------------------------------------- 1995 1996 1997 1998 ------------- ------------ ------------ ------------- (UNAUDITED) (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenues................................................ $ 141 $ 1,022 Costs and expenses: Product costs, engineering and development............ $ 149 $ 1,408 8,511 19,603 Sales and marketing................................... 428 3,623 5,157 General and administrative............................ 1,093 2,432 3,486 Depreciation and amortization......................... 22 119 ------ ------------ ------------ ------------- Total costs and expenses.......................... 149 2,929 14,588 28,365 Loss from operations.................................... (149) (2,929) (14,447) (27,343) Other income, net....................................... 8 423 423 Interest expense........................................ (2) (17) (101) ------ ------------ ------------ ------------- Net loss................................................ (149) (2,923) (14,041) (27,021) Accretion on preferred stock............................ (75) (2,436) (6,145) ------ ------------ ------------ ------------- Net loss available to common shareholders............... $ (149) $ (2,998) $ (16,477) $ (33,165) ------ ------------ ------------ ------------- ------ ------------ ------------ ------------- Historical net loss per common share.................... $ (0.33) $ (1.81) $ (3.64) Historical weighted average common shares outstanding... 9,100,801 9,100,801 9,100,801 Pro forma net loss per common share(1).................. $ (2.24) ------------- ------------- Pro forma weighted average common shares outstanding(1)........................................ 14,785,714 ------------- -------------
PRO FORMA DECEMBER 31, PRO FORMA DECEMBER --------------------------------------------------- DECEMBER 31, 1998, AS 1995 1996 1997 1998 31, 1998(1) ADJUSTED(1)(2) --------- ------------ ------------ ------------ ------------ --------------- (IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents and short term investments........................... $ 32 $ 7,574 $ 17,318 $ 368 $ 7,968 Total assets............................ 32 7,583 18,412 5,621 13,221 Total indebtedness...................... 591 1,127 1,127 Total mandatory redeemable preferred stock................................. 8,571 34,366 49,276 Total stockholders' equity (deficit).... 32 (1,451) (19,177) (52,240) 5,516 OTHER DATA: Common shares outstanding............... -- 9,100,801 9,100,801 9,100,801 15,658,690
- ------------------------ (1) See note 2 to notes to financial statements for a description of pro forma presentation. (2) Adjusted to reflect the sale of million shares of our common stock by us at an assumed price to the public of $ per share, less expenses. See "Use of Proceeds." 22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BACKGROUND We commenced operations on March 21, 1995. Since inception, all of our activities have involved developing the WORLDGATE Service and conducting tests and trials of our service with cable operators throughout the world. We are engaged in joint engineering and sales and marketing activities with General Instrument and Scientific-Atlanta. These relationships began in 1996 with product development for some hardware components of our WORLDGATE platform. We first announced the WORLDGATE Service at the National Cable Television Association Show in May 1996 and first demonstrated an operational system at the Western Cable Show in December 1996. Tests at corporate locations of major cable operators began in the third quarter of 1997 and consumer field trials began in September 1997. We have entered into multi-year agreements with cable operators that collectively have approximately 2.7 million system subscribers including: - Charter, - Click!Network, - Massillon Cable, - Prestige Cable, and - TVCable. Generally, these agreements provide that these cable operators will offer the WORLDGATE Service in their major cities of operation. These cable operators are in various stages of planning for and commercially offering our service. Only Charter and Click!Network have begun to offer the WORLDGATE Service to their subscribers. The WORLDGATE Service is also in various stages of testing by cable operators whose cable systems serve approximately 29 million subscribers. See "Business--WORLDGATE Trials," and "Risk Factors--We depend on cable box manufacturers to incorporate our technology into their cable boxes." We have minimal revenues to date and have incurred operating losses, net losses and negative operating cash flow each month since our inception. At December 31, 1998, we had an accumulated deficit of approximately $51.9 million. We have funded our operations since inception through private placements of preferred stock, capital contributions from stockholders and a line of credit. See "--Liquidity and Capital Resources." We currently intend to increase our operating expenses and capital expenditures in order to continue the development and enhancement of the WORLDGATE Service and to expand the commercial deployment of the WORLDGATE Service. REVENUES SYSTEM SALES. In the near term we anticipate that a majority of our revenues will be derived from cable operators who purchase our headend computers. We derive revenues from the sale to cable operators of cable headend equipment, including computer systems, proprietary vertical blanking interval encoders and demodulators and other equipment manufactured by third parties. The price of the cable headend systems, including installation and training, is expected to depend on the number of subscribers supported. We also sell to cable operators wireless keyboards, designed specifically for the WORLDGATE Service, for consumers who want the convenience of a keyboard for e-mail and other applications. When we provide cable headend and other equipment to cable operators that are testing the WORLDGATE Service, we do not recognize any revenue so long as payment for the equipment has not been made and there is a substantial risk of return of such equipment. SUBSCRIPTION AND OTHER SERVICES. We earn monthly fees from cable operators based upon the number of WORLDGATE Service subscribers. We offer the WORLDGATE Service to cable operators for monthly subscriber fees payable to us based upon a metered standard, which includes a flat monthly 23 fee and additional access charges for use after a threshold, E.G. two hours, of service time, or an unlimited standard, which provides for a fixed charge not dependent on usage time. We cannot accurately predict the level of the subscription fees that we will actually receive from cable operators that offer the WORLDGATE Service because contracts with only a limited number of cable operators are currently in place. OTHER REVENUES. In the future, as the number of WORLDGATE subscribers grows, we also expect to generate other revenues that we will share on a basis to be negotiated with cable operators. These include revenues from: - advertisers who: (1) purchase banner or sponsorship advertisements, (2) pay a fee based on the number of clicks on the advertisements or (3) pay a fee based on viewers' use of our CHANNEL HYPERLINKING feature, and - merchants who share a portion of their revenues derived from customers who: (1) use our CHANNEL HYPERLINKING feature or (2) click through from the WORLDGATE Service. COST OF REVENUES To date, we have included in our cost of revenues expenses associated with product costs, engineering and development. At such time as we generate significant revenues, we expect to separately identify cost of revenues on our financial statements. Cost of revenues includes the cost of (1) system hardware, wireless keyboards and the other components of the WORLDGATE Service which are manufactured by third parties, (2) assembly, installation and testing of the system, (3) training of cable operator personnel and (4) documentation, customer support and other production costs. We expect that cost of revenues will also include the costs of operating our CHANNEL HYPERLINKING technology. In 1997 and in 1998, we incurred product costs for systems being installed as trial systems. We expect to continue to incur costs for trial systems throughout the remainder of 1999. We do not recognize revenue from the sale of headend and other equipment used in trial systems so long as there is a substantial risk of return of such equipment. As a result, the cost of such equipment is held in inventory until revenue is realized from the sale thereof. We currently bear the manufacturing responsibility for, and the cost of, feature expansion modules installed within some of General Instrument's and Scientific-Atlanta's current advanced analog cable boxes. Once installed, these modules enable the WORLDGATE Service on such cable boxes. The incremental cost per cable box of this module is currently approximately $60, but we expect this cost to decrease with further cost reduction activities and volume production. We expect to bear the manufacturing responsibility for and the cost of incorporating our WORLDGATE technology into these cable boxes. Once the incremental cost to cable box manufacturers for incorporating our WORLDGATE technology into their cable boxes becomes nominal, however, we believe that General Instrument and Scientific-Atlanta may assume the manufacturing responsibility and cost. See "Risk Factors--We depend on cable box manufacturers to incorporate our technology into their cable boxes." The WORLDGATE Service can also operate on current models of General Instrument's and Scientific-Atlanta's digital cable boxes and some models of Scientific-Atlanta's advanced analog cable boxes that can be activated through a centrally-administered software download; therefore, we do not expect to incur any manufacturing cost for these boxes. ENGINEERING AND DEVELOPMENT EXPENSES Engineering and development expenses consist principally of personnel costs, including salaries, benefits and bonuses, travel and other personnel-related expenses of employees and consultants engaged in ongoing development projects, and, to a lesser extent, prototype expenses related to the design, development, testing and enhancement of the WORLDGATE Service. We believe that continued 24 investment in engineering and development is critical to attaining our strategic product initiatives and cost reduction objectives. As a result, we expect that these expenses will increase significantly in the future. SALES AND MARKETING EXPENSES Our sales and marketing expenses consist principally of the costs of marketing the WORLDGATE Service, including our CHANNEL HYPERLINKING technology, to cable operators, television programmers and advertisers. These will include salaries, travel expenses, trade show fees, consulting fees and costs to promote the WORLDGATE Service to them. These may include the costs of materials for direct mailings, brochures, targeted advertising and promotional campaigns. We expect that the actual costs of delivering these marketing materials and advertisements to consumers will be paid by the cable operators. We expect that sales and marketing expenses will continue to increase as commercial deployment of the WORLDGATE Service expands. GENERAL AND ADMINISTRATIVE EXPENSES Our general and administrative expenses consist primarily of personnel costs including salaries, benefits, bonuses and related costs for management, finance and accounting, legal and other professional services. We expect general and administrative expenses to increase as we add personnel and incur additional costs related to the growth of our business and operations and to reflect the costs of operating as a public company. RESULTS OF OPERATIONS Since inception, we have engaged principally in the development of the WORLDGATE Service. Accordingly, our historical results of operations are not indicative of and should not be relied upon as an indicator of our future performance. 1998 VERSUS 1997 Our revenues increased to $1.0 million in 1998, as compared to $141,000 in 1997. The increase in our revenues reflects an increase in the number of system sales and wireless keyboard sales in connection with the initial commercial deployment of the WORLDGATE Service. The WORLDGATE Service was first made available to cable subscribers in 1998. As of December 31, 1998, there were approximately 1,200 WORLDGATE Service subscribers as compared to 0 as of December 31, 1997. Our product costs, engineering and development expenses increased to $19.6 million in 1998, as compared to $8.5 million in 1997. The increase in these costs is primarily due to an increase in the number of trial and deployed systems installed. Because of the initial commercial deployment of the WORLDGATE Service, the increase in the number of trials and the on-going product development, testing and enhancement to the WORLDGATE Service, we increased the number of engineering and development personnel in 1998. Our sales and marketing expenses increased to $5.2 million in 1998, as compared to $3.6 million in 1997. These expenses represent the cost of introducing the WORLDGATE Service to the cable television industry, and for the marketing expenditures incurred as a result of the expansion of our initial commercial deployment and the increased number of initial trials with cable operators. These expenses include expenditures for advertising, trade shows, promotional materials, consultants and general sales and marketing overhead. Our general and administrative expenses increased to $3.5 million in 1998, as compared to $2.4 million in 1997. The increase is attributable primarily to additional personnel and related overhead 25 costs to support our growth, including the initial commercial deployment and the increased number of trials. We have not provided for or paid any federal or state income taxes. As of December 31, 1998, we had net operating loss carry forwards of approximately $38.3 million available to offset future income subject to income taxes. The Company believes that its ability to utilize its net operating loss carryforwards will be subject to annual limitations as a result of this public offering. 1997 VERSUS 1996 Our revenues for 1997 were $141,000 which consisted entirely of the sale of headend systems shipped during the year. We had no revenues in 1996. Our product costs, engineering and development expenses increased to $8.5 million in 1997, as compared to $1.4 million in 1996. The increase in these costs is primarily due to the hiring of additional engineering and development personnel in connection with our ongoing development and enhancement of the WORLDGATE Service. Our sales and marketing expenses increased to $3.6 million in 1997, as compared to $428,000 in 1996. The primary items contributing to the increase in sales and marketing expense were the hiring of additional personnel and promotional expenditures and trade show expenses related to the introduction of the WORLDGATE Service to the cable television industry. Our general and administrative expenses increased to $2.4 million in 1997, as compared to $1.1 million in 1996, primarily as a result of the hiring of additional personnel and increased facilities costs, legal expenses and other consulting costs necessary to support our engineering and development and sales and marketing efforts. LIQUIDITY AND CAPITAL RESOURCES Since inception, we have derived substantially all of our operating capital from private placements of preferred stock, a $1.1 million capital contribution from our Chief Executive Officer and a $2.0 million line of credit. At December 31, 1998, the amount of our accumulated deficit was $51.9 million and cash and cash equivalents were $368,000. At December 31, 1997 and 1996, we had an accumulated deficit of $19.2 million and $3.1 million respectively, and cash and cash equivalents of $17.3 million and $7.6 million, respectively. Our operating activities utilized cash in the amount of approximately $25.7 million, $12.6 million and $1.7 million for the years ended December 31, 1998, 1997 and 1996, respectively. The net cash used for operations during these periods was primarily for funding engineering and development. Capital expenditures for the acquisition of office equipment, computer systems and equipment for engineering and manufacturing operations were $533,000, $249,000 and $0, for the years ended December 31, 1998, 1997 and 1996, respectively. Net cash provided by financing activities was approximately $9.3 million, $22.6 million and $9.2 million for the years ended December 31, 1998, 1997 and 1996, respectively, which related primarily to the issuance of preferred stock of $9.3 million, $23.4 million and $8.5 million in 1998, 1997 and 1996, respectively. Additionally, there was established a $1.0 million line of credit in 1997, which was increased to $2.0 million in June 1998. As of December 31, 1998, approximately $1.6 million of this line had been utilized, $500,000 had been repaid and an additional $400,000 was available for borrowing. At December 31, 1998, the weighted average interest rate of the borrowings was 8.89% per annum. These borrowings mature on various dates through 2001. In January and February 1999, the Company raised approximately $7.6 million from the sale of 697,437 additional shares of Series C Preferred Stock. 26 We plan to continue to invest in sales and marketing and engineering and development for the WORLDGATE Service as well as to support our infrastructure. Additionally, we expect to use a portion of our cash for capital expenditures and other general corporate purposes. We believe the net proceeds from this offering, together with our existing capital resources and anticipated funds from operations, will satisfy our projected product development, working capital and capital expenditure requirements for at least the next 18 months. LIMITED NUMBER OF CUSTOMERS We have in the past derived, and will in the future derive, a significant portion of our revenues from a limited number of customers. In 1997, three cable operators accounted for approximately 100% of our revenues and in 1998, ten cable operators accounted for approximately 98% of our revenues. Moreover, in 1998, Charter and Click!Network accounted for 44% and 10%, respectively, of our revenues. We cannot assure you that any of these customers will continue to offer the WORLDGATE Service to their cable subscribers or that they will continue to be a significant source of revenues, if at all, for us. The loss of any of these cable operators as customers would have a material adverse effect on us and our financial results. YEAR 2000 RISK MAY ADVERSELY AFFECT US Many existing computer programs use only two digits to identify a year. These programs were designed and developed without addressing the impact of the upcoming change in the century. If not corrected, many computer software applications could fail or create erroneous results by, at or beyond the year 2000. We utilize software, computer technology and other services internally developed and provided by third-party vendors that may fail due to the year 2000 phenomenon. We are also dependent on cable operators to maintain network reliability. We are currently assessing the year 2000 readiness of our third-party supplied software, computer technology and other services. Based upon the results of this assessment, we will develop and implement, if necessary, a remediation plan with respect to any third-party software, computer technology and services which may fail to be year 2000 compliant. We have assessed our proprietary software and internal systems and believe them to be year 2000 compliant. We anticipate that our systems, including components thereof provided by third-party vendors, will be year 2000 compliant by the end of 1999. At this time, the expenses associated with this assessment and potential remediation plan cannot be determined. The failure of our software and computing systems and our third-party vendors to be year 2000 compliant could have a material adverse effect on us. RECENT ACCOUNTING PRONOUNCEMENTS Effective January 1, 1998, we have adopted the provisions of Statement of Financial Accounting Standards No. 130 ("SFAS No. 130"), "Reporting Comprehensive Income." SFAS No. 130 establishes standards for the reporting and display of comprehensive income, requiring its components to be reported in a financial statement that is displayed with the same prominence as other financial statements. The adoption of SFAS No. 130 had no impact on our results of operations, financial condition or cash flows. In March 1998, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" (SOP 98-1). SOP 98-1 provides, among other things, guidance for determining whether computer software is for internal use and when the cost related to such software should be expensed as incurred or capitalized and amortized. SOP 98-1 is required to be applied prospectively and adopted no later than January 1, 1999. The Company does not expect the adoption of SOP 98-1 to have a material effect on its results of operations and financial condition. 27 In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up Activities." SOP 98-5 generally requires costs of start-up activities to be expensed instead of being capitalized and amortized and is required to be adopted no later than January 1, 1999. The Company does not expect the adoption of SOP 98-5 to have a material effect on its results of operations and financial condition. 28 BUSINESS OVERVIEW WorldGate provides a new television-based Internet service, the WORLDGATE Service, that delivers the Internet through cable television systems. The WORLDGATE Service provides: - high speed, easy to use Internet access without the use of a personal computer, modem or special purpose set-top appliance, - low cost for the subscriber, currently being offered by cable operators to existing subscribers for $7 to $16 per month for unlimited service, - full featured Internet functionality and content that can be accessed within seconds, and - a television-based portal for enabling viewers to dynamically link from television programming and advertising to related Web sites. We believe this combination of television and the Internet will transform advertising, e-commerce and information delivery for the consumer mass market. WORLDGATE MARKET OPPORTUNITY The Internet is growing rapidly and is emerging as a significant interactive medium used by millions of people for entertainment, communications, research, education and e-commerce. IDC estimates that the number of Internet users worldwide exceeded 97 million in 1998 and will grow to over 319 million by the end of 2002. A 1998 report by Jupiter Communications predicted that online shopping in the United States alone will grow from approximately $5 billion in 1998 to over $29 billion by 2002. Although Internet access has historically required a personal computer, IDC surveys indicate that U.S. consumers, by a two-to-one margin, would prefer to receive emerging electronic information and entertainment services through their television sets, rather than their personal computers. When surveyed by IDC about their reasons for not purchasing a personal computer, many respondents indicated that they do not have a need for a personal computer, that they cannot afford a personal computer and that personal computers are too difficult or complicated to use. According to an IDC survey of consumers, personal computer users spend 30% of their usage time on maintenance and other problem fixing activities. The Company believes that a television-based approach to Internet services is a superior alternative for many consumers. In 1998, according to IDC, only 45% of U.S. households owned a personal computer, whereas, according to Cablevision Blue Book, 98% had televisions. The Company believes that a television-based approach offers the following advantages: - televisions are widely accepted and used by consumers, - televisions are well suited for sharing information and entertainment, - the advertiser-sponsored television entertainment model is well accepted, and - television programming provides a unique portal opportunity. IDC forecasts that the cumulative shipments in the United States of Internet television access devices, including dedicated Internet access set-top boxes and cable television set-top boxes, will grow from 1 million at the end of 1998 to almost 24 million by the end of 2002, representing 22% penetration. The IDC report indicates that based upon the expense, complexity and obsolescence issues associated with a personal computer, there is an opportunity for television-based devices to supplement and potentially replace personal computers as the preferred devices for accessing the Internet. 29 Set-top appliances, such as those provided by WebTV, have been introduced to provide Internet access through telephone lines to a television without requiring a personal computer. Although such access solutions do not require a personal computer or personal computer expertise, the Company believes that this mode of Internet access may be limited by: - the need to purchase a dedicated or "single-purpose" set-top appliance which typically costs approximately $100-$240 and exposes the consumer to risks of equipment obsolescence, - monthly subscription fees that may be up to $25 per month in addition to any telephone access charges, - the telephone bandwidth and usage constraints of using dial-up modems with peak data transmission speeds of 56 Kbps that may result in significant dial-up connection times, busy signals and delays, and - functional limitations such as the inability to support CD-quality audio and Java-based applications, including instant messaging and chat rooms. As a result of the shortcomings of telephone-based access, there is an opportunity to provide Internet television access through a set-top box connected to a cable television service. The Company believes that the cable infrastructure provides a superior medium for Internet access that eliminates the major obstacles of telephone access. The Company believes that the benefits of cable-based Internet access include: - lower cost than telephone-based methods, - high transmission speed, with a maximum downstream data transmission speed of 27 Mbps, which is almost 500 times faster than a standard 56.6 Kbps dial up modem, and - "always-on" availability providing access within seconds. A 1997 Kagan report predicted that there would be approximately 230 million worldwide cable subscribers in 1998 and approximately 285 million worldwide cable subscribers by the year 2001. In the United States, cable is widely available, with approximately 96% of homes passed by cable infrastructure in 1998 and approximately 69% of such homes being cable subscribers, according to Cablevision Blue Book. IDC forecasts that, of all the Internet television access devices considered by it, cable television set-top boxes are expected to achieve the highest growth rate through at least 2002. The Company believes that to successfully take advantage of the demand for cable television-based Internet services in the mass consumer market, the service should: - be a relatively low-cost solution for cable operators that can be offered to consumers over existing cable systems, I.E. one-way and two-way cable plants, and current and future generation digital and advanced analog cable boxes, with minimal or no use of dedicated video channel capacity, - provide low-cost, easy to use, high speed Internet access to consumers, - require no additional investment in equipment or hardware by the consumer, and - be flexible enough to efficiently accommodate ongoing advances in Internet capabilities, such as CD-quality audio and Java-based applications, including instant messaging and chat rooms. The Company believes that current Internet access offerings have not addressed the mass market opportunity due to a failure to satisfy one or more of these criteria. 30 WORLDGATE SOLUTION The Company believes that the WORLDGATE Service addresses this mass consumer market opportunity because it is a low cost, high speed, easy to use Internet service. This service is currently being offered by cable operators to existing subscribers at prices ranging from $7 to $16 per month for unlimited service. In the subscriber home, the WORLDGATE Service employs only a television, a remote control or WorldGate wireless keyboard, and a WORLDGATE capable digital or advanced analog cable box - both of which are currently being deployed by cable operators for business reasons largely unrelated to Internet access. The WORLDGATE Service enables users, among other activities, to browse the Web, send and receive e-mail, participate in chat sessions and shop online. With features such as the Company's CHANNEL HYPERLINKING technology, the WORLDGATE Service can integrate the interactivity of the Internet with the television viewing experience. By enabling low cost Internet access, integrated Internet/television advertising and e-commerce, the Company believes it is pioneering a new mass market. WORLDGATE BUSINESS MODEL WorldGate expects to derive revenues from cable operators, e-commerce merchants and advertisers. WorldGate expects to enhance these revenue opportunities by implementing the strategies described below. REVENUE DERIVED FROM CABLE OPERATORS. The Company intends to sell its headend server equipment and wireless keyboards to cable operators and to license the software for the WORLDGATE Service to cable operators for a monthly subscriber fee based upon either a metered standard, which includes a flat monthly rate plus additional access charges for use after a threshold (e.g. two hours) of service time, or an unlimited standard, which provides service for a fixed charge not dependent on usage time. The Company believes that cable operators will either offer the WORLDGATE Service to their subscribers as a premium service, requiring subscribers to pay a separate monthly fee for the service, or as a part of a package of services in which the subscriber pays a monthly fee for the entire package. In either case, the Company expects to receive monthly fees from the cable operators based on the total number of subscribers to the WORLDGATE Service. REVENUE DERIVED FROM E-COMMERCE MERCHANTS. Forecasts by Jupiter Communications predict that online shopping in the United States will grow from approximately $5 billion in 1998 to over $29 billion by 2002. The Company is in the process of negotiating with companies in the business of selling products and services online. The Company believes that it is common for these companies to pay for the opportunity to promote their businesses through portals by sharing a fraction of the revenues they are paid or by paying a fixed fee per transaction. We intend to make the process of online shopping both simple and convenient for our subscribers so that we can participate in the rapid growth forecasted for e-commerce. We expect to share the revenues derived from e-commerce merchants with cable operators. REVENUE DERIVED FROM ADVERTISERS. A 1998 report by Jupiter Communications predicted that Web advertising in the United States alone will increase from approximately $1.7 billion in 1998 to over $7.7 billion in 2002. The Company has space on its various menu pages that is available for banner advertising and other promotions. When subscribers click on these banners, they can be linked quickly to another Web page that gives more detailed information about the subject of the banner ad. Advertisers typically pay portals based on the number of times that their ad is displayed on a page viewed by a subscriber, so as the number of WorldGate subscribers grows, we expect our opportunities to derive advertising revenues will also grow. We intend to rely at least in part on third party firms such as DoubleClick, Inc. that are in the business of providing advertisements to portals. In some cases, we may ourselves directly contract with advertisers to display their ads, either on a per view basis or based on a fixed fee to cover the right to display their ad for a period of time. Information derived from the 31 cable system will permit us to know the general geographic area in which each of our subscribers lives, and in many cases we will know zip codes and perhaps more extensive demographic information regarding our subscribers if they wish to share that information with us. Having location and other data regarding our subscribers is expected to be valuable because advertisers typically are willing to pay higher advertising fees if they can target their ads based on such information. We expect to share the revenues derived from Web advertising with cable operators. Our CHANNEL HYPERLINKING technology will provide one button linking from television and advertising content to a related fully interactive Web site. This sort of advertising is "self-targeted" in the sense that subscribers themselves decide whether they want to get more information. This is in sharp contrast to traditional advertising that typically includes sending messages to large numbers of viewers on an unsolicited basis. In addition to the value achieved by self-targeting, the value of our CHANNEL HYPERLINKING technology is enhanced by both the availability of demographic information and interactivity. By delivering an interactive experience, we are able to give the subscribers the opportunity to follow a variety of paths to gain extensive information about the subject of interest. Perhaps most importantly, the interactivity also allows the subscribers in many cases to purchase a product or service online. With the average cable household being exposed to tens of thousands of television advertisements annually, we believe there is the potential to have many opportunities for use of our CHANNEL HYPERLINKING technology. Our CHANNEL HYPERLINKING technology business model is based on a revenue split with our cable operator partners. Revenues to WorldGate are expected to come from advertisers seeking to engage the WORLDGATE Service subscribers in some form of interactivity while using our CHANNEL HYPERLINKING technology. The business model assumes that interactions will be on a pay-for-performance basis such that advertisers and others will pay us based on the number of "clicks" that occur. Consumers in an early deployment of the WORLDGATE Service have averaged fifteen clicks per month related to television networks. This result was achieved without providing any special promotion of our CHANNEL HYPERLINKING capabilities. Clicks related to television advertisements are expected to begin in the second half of 1999 when CHANNEL HYPERLINKING technology for advertisements is deployed although no meaningful revenue is expected to be derived from this service in 1999. BUSINESS STRATEGY The Company's objective is to transform advertising, commerce and information delivery for the consumer mass market through its combination of television with the Internet. The principal elements of the Company's business strategy are the following: PROVIDE COMPELLING VALUE FOR END-USERS. While many companies are focused primarily on increasing the speed of Internet access, WORLDGATE is focused on significantly expanding the availability of the Internet to a broader set of consumers and providing these consumers with an enriched Internet experience, in addition to offering high speed access. The Company designed the WORLDGATE Service to operate on the widely available existing cable television systems, to be an inexpensive alternative to other forms of Internet television access and to be easy for the consumers to use. In contrast to other television-based services, such as those offered by WebTV, which currently requires the purchase of a dedicated set-top appliance, the WORLDGATE Service does not require consumers to purchase or install any in-home equipment. To use the WORLDGATE Service, a consumer needs only her existing television, a WORLDGATE enabled digital or advanced analog cable box and a wireless remote or keyboard, with all but the television typically being supplied by her cable operator. In addition, the Company's CHANNEL HYPERLINKING technology has been designed to offer consumers easy, fast and interactive access to content which is associated with a television program or advertisement they are viewing. PROVIDE COMPELLING VALUE FOR CABLE OPERATORS. The Company believes that cable operators assess the viability of an investment in a new service by considering the cost of initial investment in 32 equipment, service reliability, overall operating and maintenance expenses and the incremental revenue that can be generated by such service. The WORLDGATE Service can be offered to cable subscribers through the cable operators' existing one-way or two-way infrastructure. Furthermore, the WORLDGATE Service has been designed to be deployed with relatively low capital costs of $45,000 to $75,000 for a system covering up to 1,400 WorldGate subscribers. These systems are also designed to be efficiently upgraded as the operator's infrastructure is improved (whether through the deployment of new generation cable boxes or cable modem ready plant) and easily expanded as subscriber penetration grows. There is no need for any costly upgrades for cable modem ready two-way plant. Accordingly, the WORLDGATE Service can provide cable operators with the opportunity for immediate incremental revenue streams from subscriber fees and sharing of advertising and online transaction fees. Additionally, the WORLDGATE Service for the advanced analog cable box typically does not require the use of channel bandwidth. As a result of the advantages offered by its solution, the Company believes that it will be able to successfully market the WORLDGATE Service to cable operators. PROVIDE COMPELLING VALUE FOR PROGRAMMERS, ADVERTISERS, ADVERTISING AGENCIES AND E-COMMERCE MERCHANTS. Through our CHANNEL HYPERLINKING technology, programmers and advertisers may enhance their television content with related Internet materials by providing their viewers with the ability to interact in real-time with their television programming or advertising. With a push of a single button on their remote controls, television viewers can be connected to an Internet site that has been linked to the television program or advertisement. For example, a television viewer watching a commercial could link immediately to that advertiser's Web site to find more information about the product or to place an order. By giving viewers this ability, the Company believes that the value of the program or advertisement to the television programmers or advertisers is increased, and that as a result, programmers and advertisers will be able to increase their revenues. The Company has established relationships with many providers of content for the WORLDGATE Service including programmers such as CNN, C-SPAN, The Weather Channel, Showtime, E! Entertainment Network, Lifetime, Arts & Entertainment, HGTV and CourtTV. Similarly, the Company has established relationships with Internet and other information content or service providers such as Citicorp, Excite and Zip2. The WORLDGATE Service provides them with an opportunity to broaden their offerings by taking advantage of the dynamic capabilities of the Internet linked with cable television's broad subscriber base. The television-based nature of the WORLDGATE Service provides a natural portal for interaction between the consumer and programming and other content providers. The Company is also working with advertisers and advertising agencies such as General Motors, Poppe Tyson, Ogilvy & Mather, Grey Advertising Inc. and True North Communications Inc. The Company is working with these advertisers and advertising agencies to allow for interactive links by television consumers with the products and/or services being advertised on the television. The Company has also established a committee (the North American CHANNEL HYPERLINKING Organization or "NACHO") which includes representatives from many of these content providers, advertisers and advertising agencies as well as advertising service providers such as Nielsen Media Research Inc. and Match Logic, Inc., an operating unit of Excite. The NACHO advisory board is developing standards and policies for the Company's CHANNEL HYPERLINKING technology as well as assisting in its promotion. The Company believes that its CHANNEL HYPERLINKING technology, along with the participation of its CHANNEL HYPERLINKING providers and the NACHO advisory board, will facilitate an enriched interactive experience for users of the WORLDGATE Service, and will also provide a basis for potential additional advertising and online transaction revenue to the Company and cable operators offering the WORLDGATE Service. Initial field tests of the CHANNEL HYPERLINKING technology in advertisements is currently scheduled for the second half of 1999. The Company also intends to provide additional value added services to advertisers, programmers and cable operators by collecting consumer activity data. This activity data will be collected and tabulated to statistically reflect consumer responses to interactive advertisements and programming, television viewing habits and Internet "surfing" habits. The Company 33 intends to ensure a WORLDGATE Service subscriber's privacy by not providing personally identifiable data unless authorized by the subscriber. AGGRESSIVELY PENETRATE GLOBAL MARKETS. The Company believes that the market for the WORLDGATE Service is global and is seeking to deploy its systems with additional cable operators in the United States, Canada, China, Europe, Latin America and Southeast Asia. The WORLDGATE Service is currently being tested by cable operators on four continents. The Company is working with third parties to provide local content directories and user interfaces in multiple languages for the WORLDGATE Service as the demand arises. CREATE BRAND EQUITY. The Company intends to create an identity for its INTERNET TV OVER CABLE-SM- service under the "WORLDGATE" brand. In this regard WORLDGATE is already a registered service mark in the United States and applications have been filed in many other countries. The Company believes that the creation of a brand identity among cable subscribers is important to its strategy to become the preferred provider of cable Internet television services to the cable television industry, advertisers, programmers and e-commerce companies. By creating consumer awareness of the WORLDGATE Service, the Company believes it will drive penetration in its geographic markets worldwide and increase the pace at which cable operators, advertisers, programmers and e-commerce companies recognize the economic and service benefits of the WORLDGATE Service. MAINTAIN AND LEVERAGE TECHNOLOGY POSITION. The Company believes that it has established a competitive advantage through its technology position. Development of the WORLDGATE Service has required in excess of three years of intensive engineering and development efforts and the combination of significant expertise in two historically separate industries, cable and the Internet. The Company's engineering personnel, who came from established industry participants such as General Instrument and Hitachi, Ltd., have been able to solve challenges involved in delivering real-time Internet access over existing cable infrastructure. WORLDGATE believes that it is currently the only company to have developed, and commercially deployed, the capability to offer both real-time upstream communications from the cable box and downstream transmissions from the cable headend without requiring the use of cable channel capacity. The Company intends to maintain its technology leadership by continuing to enhance the performance and functionality of the WORLDGATE Service, and by aggressively seeking to protect its intellectual property. LEVERAGE EXISTING RELATIONSHIPS WITH GENERAL INSTRUMENT AND SCIENTIFIC-ATLANTA. The Company has strategic relationships with General Instrument and Scientific-Atlanta, the world's two largest suppliers of cable boxes. Both companies have participated in the joint development, including testing and implementation, of the Company's technology. The Company's technology has been incorporated into versions of their advanced analog cable boxes and is being tested on their digital cable boxes. In addition, both General Instrument and Scientific-Atlanta are stockholders of the Company and have joined the Company in promoting the WORLDGATE Service in the press, at trade shows and conferences and through joint sales and marketing presentations worldwide. THE WORLDGATE SERVICE OVERVIEW OF THE WORLDGATE SERVICE. WorldGate is the developer of the WORLDGATE Service, an Internet television service that enables: - cable operators to offer subscribers low cost, easy to use, high speed Internet access, and - television programmers and advertisers to link their programs and advertisements with a fully interactive Web site. Upon accessing the WORLDGATE Service, the user is provided with a main menu screen offering several options, including Web browsing and e-mail. The main menu screen also provides options for 34 viewing informative content such as an electronic television program guide, news, weather, sports and community activities. These options can be selected with a single keystroke on a standard cable remote control or optional keyboard provided by the cable operator. Depending on the option selected, the consumer is connected to the desired content or a secondary menu screen providing additional options. WORLDGATE has designed both its navigational menu screens and e-mail service to be simple and user-friendly. The WORLDGATE Service does not require an additional set-top appliance, personal computer or modem. Furthermore, the WORLDGATE Service can co-exist with alternative methods of Internet access, which may share the same cable operator network and application infrastructure it employs. The advanced e-mail service option provides additional features, such as e-mail address list management, multiple folders for archiving received and sent e-mail, support for multi-part mime attachments (of which ones that can e displayed are identified and presented in such a fashion that the user can view them), support for forwarding and carbon copying additional mail recipients, and allowing a subscriber to establish and manage multiple mail box addresses for each member of the subscriber's household. The "My Town" icon on the Company's main menu screen provides local directories and community guides. This feature offers users a directory of local school activities, restaurants, government resources and related community information. Zip2 currently provides this information on behalf of the Company. Also, from the WORLDGATE home page subscribers receive the current local weather that is updated every hour. The Weather Channel currently provides this weather information. With a few key strokes the subscriber can receive a five day forecast, or even check the weather for any other location in the United States. From the Web section, subscribers can access our "Web Directories" that provide subscribers with national references to advertisers and links that are organized by category such as travel, sports, finance and shopping. WorldGate can update this information to reflect the changing dynamics of the Web. "Networks on the Web" allows subscribers to view our CHANNEL HYPERLINKING technology partners and any currently available information that is provided by television programmers. "Bookmarks" allows subscribers to save their favorite sites for easier access. Subscribers can also review and edit their list of favorite sites. Subscribers can easily go to any site or search the Web by simply entering a phrase or Web address into the WORLDGATE Service. The WORLDGATE technology determines if the user has entered a valid Web address or a search phrase and then links to the appropriate Web site. The search engine is provided by Excite and the search results are presented in a television friendly fashion. The WORLDGATE Service allows subscribers to administer their household accounts online. The household administrator can add new accounts, change the parental control (content filtering), change passwords and change the first and last names of the individual users on the service. Up to six users are allowed for each household. The WORLDGATE Service provides the ability to filter the sites being viewed by the subscriber on a subscriber and household basis. WorldGate currently uses Spyglass, Inc.'s SurfWatch filtering technology to offer subscribers the ability to restrict viewing of Web content in categories ranging from sexually explicit, violent and gambling to drugs and alcohol. In addition we offer a filtering system that uses a special list in order to ensure more restrictive content filtering suitable for children using the service. CHANNEL HYPERLINKING TECHNOLOGY. WorldGate's innovative CHANNEL HYPERLINKING technology is designed to allow a user to dynamically link directly from a television program or advertisement being viewed to related Internet sites with the push of a button on a standard remote control or optional wireless keyboard. The WORLDGATE subscriber does not have to enter or even know the associated Internet address. For example, while watching The Weather Channel, a subscriber can directly access a Web page providing local weather forecasts. Advertising, promotion, transaction and information services are examples of the types of related programming links that may be enabled through the 35 CHANNEL HYPERLINKING technology. The real-time nature of our CHANNEL HYPERLINKING technology is designed to enable applications such as simulcast information on the sports program being viewed. There have been several instances where programmers have referred television viewers to related Internet sites. For example, Showtime, ESPN and NBC, among others, have encouraged viewers to use their personal computers to access Web sites related to the content of their sporting event programs, including the Olympics. The Company believes that easier and quicker access to the Internet through the capabilities provided by CHANNEL HYPERLINKING technology will promote a new category of cross-programming opportunities. The Company's CHANNEL HYPERLINKING technology can also be used to enhance the functionality of information sources such as electronic program guides. Although program guides currently offer limited television program and advertising information, such information and their utility can be significantly improved through the use of Web-based content and the ability to perform transactions online. Because such guides are considered by many to be essential when hundreds of channels are available, such as is the case with digital platforms, and because the guides will likely be accessed multiple times per day, the Company believes that CHANNEL HYPERLINKING enhancements to program guides may represent a significant source of revenue. To realize the economic benefits of CHANNEL HYPERLINKING, the Company, programmers, advertisers and advertising agencies have begun to coordinate implementation of the WORLDGATE Service. In addition, cable operators will need to achieve significant penetration rates of the WORLDGATE Service to provide an attractive target audience for programmers and advertisers to focus on developing the CHANNEL HYPERLINKING service. The Company believes that CHANNEL HYPERLINKING may enhance the value of television programming and advertising, increase related on-line transactions and potentially lead to related revenue generating opportunities associated with advertising and on-line transactions revenue generating opportunities. 36 WORLDGATE COMMERCIAL LAUNCHES The Company has entered into multi-year agreements with five operators of cable television systems, Charter, Click!Network, Massillon Cable, Prestige Cable and TVCable, which collectively with their affiliates have approximately 2.7 million subscribers. Charter and Marcus Cable, which are owned by Paul Allen's Vulcan Ventures, together constitute the seventh largest U.S. cable operator, with over 2.4 million subscribers in the United States. Set forth below is a table summarizing the current status of these commercial launches:
COMMERCIALLY TOTAL SYSTEM LAUNCHED CABLE OPERATOR SUBSCRIBERS(1) LOCATION PLANNED LAUNCH LOCATIONS - ------------------ ------------- ------------------ ---------------------------------------------------------- Charter 2,414,800 St. Louis, MO; Lanett, AL; Alhambra, CA; Burbank, CA; Glendale, CA; Long Newtown, CT Beach, CA; Riverside, CA; San Luis Obispo, CA; LaGrange, GA; Noonan, GA; Maryville, IL; Hickory, NC; Ft. Worth, TX; Logan, UT Click!Network 3,000 Tacoma, WA Massillon Cable 43,800 Massillon, OH Prestige Cable 152,500 Cartersville, GA; Westminster, MD; Mooresville, NC; Fredericksburg, VA TVCable 100,000 Quito, Ecuador
- ------------------------ (1) Represents the total number of subscribers served by the cable operator and its affiliates across all of their systems, as estimated by Cable Television Developments (Spring 1998 NCTA publication), except for TVCable, which is a Company estimate. WORLDGATE TRIALS The WORLDGATE Service is in various stages of trials on four continents with a number of cable operators including Comcast, Time Warner and MediaOne, which are three of the four largest U.S. cable operators. Trials typically start with cable boxes connected to a headend server system installed at a cable operator's corporate office location for technical evaluation. Trials are of varying duration and complexity. The total subscriber base of cable operators currently in trials with the Company is approximately 29 million. There can be no assurance that the current or planned trials will be successful or will lead 37 to commercial deployment of the WORLDGATE Service by these cable operators. Set forth below is a table summarizing the current trials and planned trials of the WORLDGATE Service as of December 31, 1998:
NUMBER OF TOTAL SYSTEM TRIAL WORLDGATE SYSTEM CABLE OPERATOR SUBSCRIBERS(1) LOCATION BOXES TYPE - --------------------------------------------------------- ------------- ---------------- ----------- --------- UNITED STATES TRIALS: Ameritech Corporation.................................. 210,000 Chicago, IL(2) 2 Analog Comcast................................................ 4,366,000 Lower 65 Analog Merion, PA Philadelphia, PA Torresdale, 4 Digital PA(2) MediaOne............................................... 4,910,000 Boulder, CO(2) 4 Analog SNET Personal Vision, Inc.............................. 22,000 Hartford, CT 37 Analog Time Warner............................................ 12,500,000 Orlando, FL 50 Analog INTERNATIONAL TRIALS: Image TV............................................... 24,000 Brazil Planned Analog Shaw................................................... 1,500,000 Calgary, 1 Digital Canada(2) Singapore CableVision.................................. 800,000 Singapore(2) 5 Analog Skycable............................................... 24,000 Philippines Planned Analog SuperCable............................................. 52,000 Caracas, 12 Analog Venezuela(2) United International Holdings.......................... 5,253,070 Vienna, 10 Analog Austria(2), Santiago, 20 Analog Chile(2)
- ------------------------ (1) Represents the total number of subscribers served by the cable operator across all of its systems, as estimated by Cable Television Developments (Spring 1998 NCTA publication), except for the international operators, which are Company estimates. (2) Corporate office trial. TECHNOLOGY The WORLDGATE platform is based on a "thin client architecture," which allows substantially all client-related processing to be performed at the cable headend. The WORLDGATE platform is comprised of three components: - Unix-based servers located at the cable headend, - a WORLDGATE enabled digital or advanced analog cable box, and - a remote control and/or optional wireless infrared keyboard. 38 CABLE HEADEND; CHANNEL HYPERLINKING. There are two Unix-based servers located at the cable headend. One server manages all information traveling to and from this server to the Internet. This server also manages individual Internet sessions, processes data for presentation on the television screen and manages the Web browsing client. The second server manages real-time communications from the cable headend to a subscriber's cable box. This server acts as a bi-directional router for data on a cable network. These servers: - are based on a multi-processor architecture, - can be accessed remotely by WorldGate for performance monitoring and software upgrades, and - are configured so that typical full screen refresh time on: (1) an analog platform is five seconds or less and (2) a digital platform is as low as 1/30(th) of a second. General Web surfing is provided by our browser technology using high performance server headend systems. The WORLDGATE Service browser currently supports HTML Version 3.2, HTTP Version 1.0 and 1.1, HTML Frames, Image formats such as GIF Animations, JPEG and XBM formats. To the Company's knowledge, WorldGate is the only company that supports a full Java implementation offering on a set-top platform. Java is used for such applications as chat and instant messaging. The WORLDGATE platform supports JavaScript that is compatible with Microsoft and Netscape browsers. We also support network protocols such as HTTP 1.0 & 1.1, security layers such as SSL 2.0 and authentication requests such as Basic Authentication and Digest Authentication. One feature of the WORLDGATE Service is our CHANNEL HYPERLINKING technology. When a cable television subscriber makes a CHANNEL HYPERLINKING request, the subscriber's cable box sends a signal to the cable headend indicating the channel and program information of the program the subscriber is viewing. This information is then matched with the corresponding Web address for the program which has been stored at a cable headend database. Afterwards, the subscriber is linked to the corresponding Web site for full Internet interactivity. This entire process occurs within seconds. [figure depicting five horizontal boxes. The first box is labeled Advertisers and Ad Agencies and contains two smaller boxes including the following text: "Advertising ID codes are added to master video tapes before distribution," and "the matching URL is associated with the Advertising ID in WorldGate's SALSA software and sent to the NACHO Center." The first box has a one-way arrow to the second box that is labeled "Broadcast and Cable TV Network Uplink Centers." The second box contains two smaller boxes including the following text: "Advertising ID codes travel in realtime with the broadcast advertisement" and "Television programming schedules are sent to the NACHO Center in advance of broadcast." The third box is labeled WorldGate's NACHO Center and has a smaller box with "Advertising ID cones are aggregated from all networks and sent to local Cable TV Headends" and a cylinder with "Master Database for all Channel HyperLinking" included. The fourth box is labeled "Cable TV Headend" and has a smaller box with "Local cable affiliates receive data from NACHO Center in realtime. Incoming realtime data supercedes scheduled data" and a cylinder with "Local Database for National and Local Channel HyperLinks" included. The fourth box is linked with a one-way arrow and text reading "broadband cable to the home" and "return path" to the fifth box. The fifth box is labeled "Analog or Digital Cable Subscriber's Home" and contains two smaller boxes with the following text: "An on-screen prompt will be displayed for any advertisements or programs that have interactive content" and "When the consumer clicks to go interactive, the headend computer system will retrieve the appropriate Web page to be displayed." The second box is connected to the third box and the third box is connected to the fourth box by pictures of satellite dishes and satellites.] CABLE BOX. We believe that we are the only company providing a television-based Internet service for both advanced analog and digital cable boxes. This is particularly important for cable operators deploying both types of cable boxes. The Company has developed technology that allows WORLDGATE enabled advanced analog cable boxes to display the graphics and to provide real-time communications 39 necessary for the WORLDGATE Service. The WORLDGATE technology is currently incorporated in an additional feature expansion module that must be installed within General Instrument's and some models of Scientific-Atlanta's existing advanced analog cable boxes. The WORLDGATE Service currently operates on modified versions of the General Instrument CFT 2200 and the Scientific-Atlanta 8600 advanced analog cable boxes. Existing models of General Instrument's and Scientific-Atlanta's digital cable boxes, as well as Scientific-Atlanta's 8600X advanced analog cable box, can be used to provide the WORLDGATE Service with a software download. The software download can be done remotely. The advanced analog WORLDGATE platform makes use of the vertical blanking interval to transmit its data in conjunction with regular television signals. The vertical blanking interval is part of a television signal that is not used for the television program. By using the vertical blanking interval, WorldGate does not interfere with the television signal and does not require additional bandwidth to provide the WORLDGATE Service. To provide the WORLDGATE Service, the Company typically uses less than five of the typically 80 to 100 lines of vertical blanking intervals available. More capacity for the WORLDGATE Service can be provided by use of the vertical blanking interval in these additional lines. With the advanced analog platform, WorldGate supports data transmission rates of up to 128 Kbps downstream and 14 Kbps or 20 Kbps upstream. Because only keystrokes are being sent upstream, the Company believes that the upstream data transmission rate is adequate to transmit such data. The WORLDGATE advanced analog platform supports: (1) up to 65,000 colors on modified versions of General Instrument's CFT 2200 and Scientific-Atlanta's 8610 advanced analog boxes and (2) 16 colors on the Scientific-Atlanta 8600X advanced analog cable boxes. The Company believes that there are currently over 2.3 million of advanced analog cable boxes already shipped which can be WorldGate enabled with a software download and an additional 1 million of such boxes which can also be WorldGate enabled with a software download and installation of additional memory in the boxes. The WORLDGATE digital platform uses MPEG2 technology to provide transmission speeds of up to 27 Mbps downstream and 256 Kbps upstream. As with the advanced analog cable box, the Company believes that the relatively slower upstream speed does not decrease performance of the WORLDGATE Service. Unlike high bandwidth requirements for the downstream path for large data transfers such as Web pages, the upstream path generally is used for small data transfers, such as keystrokes, and does not require large bandwidth capacity. The Company's digital platform provides up to 16 million colors and will operate on the following models of digital boxes: GI DCT1000, 1200 and 2000 and the Company expects to operate on the GI DCT5000 and Scientific-Atlanta's Explorer 2000. The WORLDGATE Service over the digital platform is currently being tested by the Company and certain cable operators. According to Cablevision Blue Book, over two million current generation digital boxes have been shipped through December 31, 1998. All of these boxes can potentially be upgraded to support the WORLDGATE Service through a centrally-administered software download. Due to its thin client/server architecture, the Company believes that the WORLDGATE Service can be deployed on future generation digital boxes with minimal development by WorldGate and minimal transition cost to cable operators offering the WORLDGATE Service on the current-generation digital platform. In addition to operating on two-way cable systems, the WORLDGATE platform is capable of operating over one-way cable systems via a telephone return. It is estimated that at least 60% of cable homes are currently connected to one-way cable systems. On a one-way cable system, it is possible to transmit data from the cable headend to the subscriber using the one-way cable system but there is no available return path. WorldGate uses the telephone system for the return path. The response time of the WORLDGATE Service over two-way and one-way cable plant is similar for most functions except for slower responses during login and use of our CHANNEL HYPERLINKING technology. The Company also believes that as with two-way cable plant, the slower speed for the telephone system return path is sufficient because of the generally low bandwidth requirements for the return path. 40 WIRELESS CABLE REMOTE CONTROL AND OPTIONAL KEYBOARD. To access and input data on the WORLDGATE Service, cable television subscribers can use either a standard remote control provided with their advanced analog or digital cable boxes or a infrared wireless keyboard. The Company has designed a custom wireless keyboard which provides a full size keypad, pointing device and function keys customized for our WORLDGATE Service, such as a CHANNEL HYPERLINKING key. The Company expects cable operators to buy keyboards from the Company directly and then to resell or lease them to subscribers. [figure depicting four boxes labeled "billing," "subscriber data base," "cache engine" and "SNMP" each connecting to a larger box labeled "Application Servers" with the following smaller boxes included: "E-mail," "Community Intranet," "EPG," "Billing Inquiries" and "Channel HyperLinking." That larger box is connected to a second large box labeled "Multi-User Client" with the following smaller boxes included: "Communications Library," "Browser" and "Display Manager." The second larger box is connected to a third large box labeled "Converter Communications Manager" with the following smaller boxes included: "Controller" and "Command Interpreter." The third large box has smaller boxes connected to it that are labeled "Data Demodulator" and "VBI Inserter."] SECURITY The WORLDGATE Service uses the Secured Sockets Layer protocol, a standard encryption protocol, to encrypt data transmitted between the cable box and the cable headend. When a WorldGate session is initiated, the WORLDGATE enabled cable box sends a log-in request to the WorldGate headend server. The server then creates a unique master key. The master key is comprised of two keys: one key is known as the public key, which is used only for encryption, and the second key is known as the private key, which is used only for decryption. Only the public key is transmitted back to the cable box. The cable box then chooses two random 128 bit numbers, the session keys, and encrypts them with the public portion of the master key before sending the encrypted session keys back to the server. The server receives the encrypted session keys and decrypts them with the private portion of its master key. As a result, both the server and the cable box have available a pair of unique session keys which may be used to encrypt and decrypt messages and thereby communicate securely for that particular session. ENGINEERING AND DEVELOPMENT To date, engineering and development have been a significant focus of the Company. Development of the WORLDGATE Service has required combining technical experience and knowledge from two historically separate industries, the Internet and cable, as well as three years of intensive efforts. The principal elements of the Company's engineering and development activities are as follows: CHANNEL HYPERLINKING. The Company has been developing and will continue to develop the systems and hardware necessary to establish a centralized CHANNEL HYPERLINKING control facility to enable advertisers to provide data necessary to implement CHANNEL HYPERLINKING on a large scale. The CHANNEL HYPERLINKING technology is currently available to enable television programmers to link programs with related Web sites. FEATURE ENHANCEMENTS. The Company intends to continue to expand features of the system to integrate newly developed Web features, accessories and tools. The Company also intends to support picture-in-picture capability to allow Web pages and television programs to be viewed at the same time. The Company is working to develop system enhancements that will enable consumers to listen to CD-quality audio while browsing the Web. The Company is also currently working to allow attachment of a printer to the WORLDGATE Service. To implement its engineering and development strategy, the Company has assembled an engineering team from established industry players, such as General Instrument and Hitachi, with strong backgrounds in real-time data communications hardware and software, digital video, client-server software, Unix operating systems, computer networking, circuit design and cable headend design. 41 SALES AND MARKETING SALES. The Company utilizes its direct sales force and senior management, including its Chief Executive Officer, to market the WORLDGATE Service. These individuals work closely with the General Instrument and Scientific-Atlanta sales forces to promote the WORLDGATE Service in the press, at trade shows and conferences and through joint sales and marketing presentations worldwide. Because the roll-out of the Company's service will in many cases be tied to the introduction of new cable box deployments, it will remain important and advantageous to the Company to have an integrated sales effort with the major cable box manufacturers. The Company believes that its relationship with these large industry sales forces will continue to provide efficient leads for high volume sales. Currently, nine employees are dedicated to the sales efforts, including its Vice President and General Manager, and the Vice President, Affiliate Sales and Marketing. MARKETING. The Company's marketing strategy is directed at four primary constituencies: consumers, cable operators, programming content providers and advertisers. To reach consumers, the Company intends to provide cable operators with promotional content for the WORLDGATE Service including local cable television commercial spots and insertions for monthly cable billings, in addition to utilizing the cable operators' extensive sales networks. Because the Company will market itself as a family service, the Company intends to develop a series of television commercials aimed at various demographic market segments, which will be customized for specific cable companies. In addition, the Company plans to develop a training tape for customer service representatives to teach them how to sell the WORLDGATE Service and how to answer commonly asked questions. The Company also plans to create longer form commercials to sell the WORLDGATE Service over cable television and ten-minute tutorial tapes to teach consumers how to use the WORLDGATE Service. Standard print media for consumers may include user guides, point-of-purchase displays, low-cost bill stuffers and a monthly WorldGate news magazine tailored to the subscriber base. To enhance the potential penetration of the WORLDGATE Service, the Company plans to establish WorldGate as a known trade and consumer brand. To reach cable operators, the Company has focused its marketing efforts mainly on trade advertising and promotions, which includes demonstrations at industry conferences and print advertising in major weekly industry news publications such as MultiChannel News and Cable World. The Company has made substantial investments in trade show booths for cable shows such as the NCTA Cable Show, and also plans to continue to share booths with General Instrument and Scientific-Atlanta at various upcoming trade shows. To reach programming content providers the Company has developed an aggressive program to establish distribution arrangements with various content providers to develop content particularly suited to the WORLDGATE Service. Through WorldGate's distribution of such content packages as part of the WORLDGATE Service, these providers are offered access to a pervasive medium in which television programming can be enriched by Internet materials, and in which consumers can experience real-time, interaction with the programming. The television-based nature of the WORLDGATE Service provides a natural portal for interaction between the consumer and the programming offered by these content providers. WorldGate has established a team to market the WORLDGATE Service, including the opportunities created by a television-based portal to the Internet, to television programmers, advertisers and other content providers. WorldGate's marketing efforts to television networks have focused primarily on cable television networks and secondarily on the broadcast networks. We believe that national cable television networks may have some complexities over broadcast networks in providing CHANNEL HYPERLINKING for their programming because they do not have to contend with programming provided by numerous affiliated local stations. Rather, just a few network feeds cover the entire nation. We believe that our CHANNEL HYPERLINKING technology can turn the cable television network of national programming into targeted, personalized interactive content with very little effort on the part of television networks. 42 WorldGate sees value in partnering with television networks because the Company believes that consumers will see value in interacting with their favorite television programming. The Company has developed a strategy to establish partnerships with television programming content partners through distribution agreements. These distribution agreements generally provide that our partner will provide link information and Internet-based content particularly suited to the WORLDGATE Service and our CHANNEL HYPERLINKING technology. The Company believes that Internet and other information or service content providers such as Citicorp, Excite and Zip2 can broaden their customer base by taking advantage of our television-based WORLDGATE Service. The television-based nature of the WORLDGATE Service provides a natural portal for interaction between the consumer and the programming and other content offered by these content providers. WorldGate's marketing team also works with advertisers and advertising agencies. We believe that interactive television advertising will grow significantly in the future. WorldGate promotes the WORLDGATE Service for television advertising directly to blue-chip advertisers and top national and global advertising agencies. In addition, WorldGate promotes the WORLDGATE Service through the American Association of Advertising Agencies, whose members are composed of the leading advertising agencies in the United States, and the Association of National Advertisers, whose members are composed of blue-chip advertisers. WorldGate expects to provide value to advertisers and advertising agencies by providing interactivity between broadcast television advertising and related Internet content. Our CHANNEL HYPERLINKING technology provides a combination of broad viewership of broadcast advertising with the accuracy of direct, target marketing. During 1999, WorldGate expects to work with Nielsen Media, MatchLogic, cable operators, television networks, advertisers and their advertising agencies to complete a marketing study which will measure the effectiveness and value of our CHANNEL HYPERLINKING technology for both interactive programming and interactive advertising. CUSTOMER SERVICE AND SUPPORT The Company has developed and maintains a sales support and customer service network infrastructure to enable it to respond to cable operator and consumer issues. The Company believes that most sales support and customer service requests can be handled by Company personnel via the telephone or the Internet. Accordingly, the Company has set up a 24-hour, toll free telephone help-line and Web site to assist cable operators having technical problems with the Company's software or hardware. The Company also plans to monitor each cable headend system utilizing the WORLDGATE Service in an effort to detect system problems before they become apparent to consumers, and to remotely download software updates as needed from its principal offices in Bensalem, Pennsylvania. To assist domestic consumers subscribing to the WORLDGATE Service, electronic on-line help is available 24 hours a day from any of the WORLDGATE Service screens. Additionally, the Company intends to provide consumers with access to a telephonic help-line offering pre-recorded answers to frequently asked questions for a nominal charge. SYSTEM INTEGRATION The Company utilizes contract manufacturing for substantially all of the major hardware components and licenses technology necessary to provide the WORLDGATE Service, thereby allowing the Company to focus resources on sales and marketing and engineering and development related to the WORLDGATE Service. The Company does not manufacture, nor does it have the capability to manufacture, any of the components of the equipment used in providing the WORLDGATE Service. Rather, the Company's internal manufacturing operations consist primarily of assembly of prototypes, test engineering, materials purchasing, integration of equipment components and inspection and quality control, all of which are performed at its facilities in Bensalem, Pennsylvania. Although the Company 43 has not experienced any material difficulties in obtaining supplies or manufactured products, any termination of the license of such technology or any reduction or interruption in supply or manufacturing from these third-party contractors would adversely affect its ability to deliver its products. INTELLECTUAL PROPERTY We regard our technology as proprietary, and we rely on a combination of patents, copyrights, trademarks, trade secret laws, contractual restrictions, restrictions on disclosure and other methods to establish and protect our technology and proprietary rights and information. We have filed patent applications in the United States and internationally covering aspects of our real-time, asymmetric, hybrid, two-way interactive systems, including our CHANNEL HYPERLINKING technology. We cannot assure you that any patent will issue from these applications or that, if issued, any claims allowed will be sufficiently broad to protect our technology. In addition, we cannot assure you that any patents that may be issued will not be challenged, invalidated or circumvented, or that any rights granted thereunder would provide us with proprietary protection. The failure of any patents to protect our technology may make it easier for our competitors to offer technology equivalent or superior to our technology. We also generally enter into confidentiality agreements with our employees and consultants, and when possible, customers, partners and others to control access to and distribution of our documentation and other proprietary information. Despite these precautions, a third party may copy or otherwise obtain and use the our products, services or technology without authorization, or to develop similar technology independently. In addition, effective patent, copyright, trademark and trade secret protection depends on the various forms of liability for infringement. Legislators both domestically and internationally are grappling with these issues, and the case law in this area is not fully developed. Moreover, protection may be unavailable or limited particularly in some foreign countries, and the global nature of the Internet makes it virtually impossible to control the ultimate destination of the our content offerings. Policing unauthorized use of our content offerings is difficult. There can be no assurance that the steps taken by us will prevent misappropriation or infringement of our technology. In addition, litigation may be necessary in the future to enforce our intellectual property rights, to protect the our trade secrets or to determine the validity and scope of the proprietary rights of others. Such litigation could result in substantial costs and diversion of resources and could have a material adverse effect on our business, financial condition and results of operations. See "--Legal Proceedings." We are subject to litigation brought by others claiming that we infringe their intellectual property. See "--Litigation." COMPETITION The market for consumer Internet services is extremely competitive, and the Company expects that competition will intensify in the future. Access to the Internet is currently available through several methods including: - - telephone access through a personal computer, - - telephone access through a television, - - cable access through a personal computer, and - - cable access through a television. While these various methods of Internet access and types of services offered may be construed as competitive, they may also be complementary. Household members may prefer to use different methods of Internet service/access based on availability and their intended business or leisure use. The Company is working with some of the companies described below to find ways to combine their product and service offerings with those of the Company. 44 TELEPHONE ACCESS THROUGH A PERSONAL COMPUTER. Currently, the majority of Internet users utilize a personal computer and a modem to access the Internet over a telephone line through a connection to an Internet service provider ("ISP") such as America Online, Earthlink or MindSpring. The Company believes that this mode of Internet access may be limited by: - the complexity, maintenance and obsolescence issues usually associated with a personal computer, - bandwidth constraints of using dial-up modems with peak data transmission speeds of 56 Kbps that may result in significant dial-up connection times and delays, - expenses including: (1) investment that may be required for a personal computer and a modem, (2) ISP's monthly fees, which the Company believes range from $10-22 per month, and (3) possible telephone access charges, and - the total number of users that may be simultaneously connected to an ISP. Recent advancements within telephone systems may mitigate some of the above factors. Integrated Services Digital Network ("ISDN") technology enables a peak data transmission speed of 128 Kbps between the user and the ISP over specially conditioned telephone lines. Although ISDN technology has been available for several years, the Company believes that it has not been widely deployed due primarily to its relatively high costs. Asymmetric Digital Subscriber Line ("ADSL") technology is currently the most common implementation of Digital Subscriber Line ("xDSL") technology. ADSL enables peak data transmission speeds of 8.4 Mbps downstream from the ISP to the user and 640 Kbps upstream from the user to the ISP. The Company believes that these new technologies are expected to have associated monthly fees in the range of $90-170. In addition to telephone based access, satellite based access may be an alternative. Satellite-delivered approaches such as direct broadcast satellite ("DBS") currently provide a peak data transmission speed of approximately 400 Kbps downstream and rely on dial-up modems and the telephone network for upstream transmission ("telephone return"). In addition to the telephone limitations discussed above, these approaches have limitations on the ability to expand their services due to the necessity of dividing a finite amount of satellite bandwidth among subscribers in a broad geographic area. Other wireless offerings rely on ground-based radios instead of satellites. Such offerings include multichannel multipoint distribution service ("MMDS") and local multipoint distribution service ("LMDS"), which are one-way and two-way high-bandwidth wireless digital broadcasting systems, respectively. MMDS and LMDS are not yet widely available, require unobstructed "line-of-sight" transmission paths and may require additional radio frequency spectrum allocations, an entirely new distribution infrastructure and new equipment, including specialized radio modems. TELEPHONE ACCESS THROUGH A TELEVISION. Set-top appliances, such as those provided by WebTV, have been introduced to provide Internet access through telephone lines to a television without requiring a personal computer. Additional offerings for this type of service have recently been announced by Net Channel, the assets of which have been acquired by America Online, as well as other set-top appliance manufacturers such as American Interactive Media, The Thomson Corporation, Teknema and Mitsubishi Electronics America, Inc. Although such access solutions do not require a personal computer or personal computer expertise, the Company believes that this mode of Internet access may be limited by: - - the need to purchase a dedicated or "single-purpose" set-top appliance which typically costs approximately $100-$240 and exposes the consumer to risks of equipment obsolescence, - - the telephone bandwidth constraints discussed above, - - monthly subscription fees that may be up to $25 per month in addition to any telephone access charges, and 45 - - functional limitations such as the inability to support CD-quality audio and Java-based applications, including instant messaging and chat rooms. In addition, satellite television providers have recently initiated Internet access products that broadcast Internet information from the satellite to the in-home satellite converter but which still use the telephone infrastructure for the upstream path. Although the satellite converter is not a dedicated set-top appliance, like the other products in this category, its use of the telephone infrastructure imposes the bandwidth constraints inherent with the telephone infrastructure. CABLE ACCESS THROUGH A PERSONAL COMPUTER. In order to leverage the broadband infrastructure of cable television systems, several services have recently been launched to provide high-speed Internet access and content to cable subscribers with personal computers. Companies in this segment include At Home and Road Runner. The Company believes that subscribers to these services require a separate high-speed cable modem with an installation cost of approximately $40-$100 and that additional costs are also incurred for monthly subscription fees and cable access charges in the range of $30-$40. Such high-speed cable modems, while generally providing higher speed Internet access than dial-up access, typically require extensive and costly cable network upgrades. CABLE ACCESS THROUGH A TELEVISION. Various companies are attempting to provide Internet access to cable television consumers through a set-top appliance connected to a television. In some instances this appliance may be a dedicated unit, such as is currently utilized by ICTV and the Interactive Channel, or an advanced analog or digital cable box, such as that utilized by the WORLDGATE Service. Generally, these solutions are cable-based and do not use the telephone infrastructure. Accordingly, these solutions generally overcome the bandwidth constraints typically associated with the telephone infrastructure. The use, however, of a dedicated unit adds incremental costs which are not present when the service is offered directly over a cable box. Furthermore, analog-based services such as that currently offered by ICTV require the use of one dedicated full video channel for the downstream path for each user, which is less attractive to cable operators since such channel(s) can no longer be used for television programming or other revenue generating services. The WORLDGATE Service's analog platform, however, does not require a dedicated video channel as a result of the use of the vertical blanking interval for the downstream path. See "--Technology." Cable operators offering the WORLDGATE Service on a digital platform will need to provide a dedicated video channel, but it will alone support the expected usage of hundreds of WORLDGATE Service subscribers. Companies such as Wink and Intel broadcast supplementary text and/or graphics information which is displayed on televisions to enhance the television viewing experience. Typically, these systems are one-way unless a telephone and modem is available for the return path. It is also possible for these systems to use the pay per view polling mechanism to retrieve limited data from the subscriber. The Company believes that there are many factors which can affect success within this market. Key factors include: - - transmission speed, - - ease-of-use, - - price, - - reliability of service, - - ease of access, - - obsolescence, - - content quality, - - quality of presentation, - - timeliness of content, - - customer support, - - brand recognition, - - operating experience, - - revenue sharing, and - - with respect to advertisers, the number of users, duration and frequency of visits and user demographics. 46 LEGAL PROCEEDINGS On May 11, 1998, Interactive Channel Technologies, Inc. and SMI Holdings, Inc., subsidiaries of Source Media, Inc. ("Source"), filed a complaint against the Company in the United States District Court for the District of Delaware, alleging that the WORLDGATE Service infringes patents issued to Source. The complaint seeks injunctive relief, as well as monetary damages and attorney fees. In our answer filed on June 22, 1998, we have denied these allegations and further asserted that the patents in suit were invalid. In addition we have filed multiple counterclaims against Source asserting that Source misappropriated our confidential information and trade secrets, and intentionally and tortiously interfered with our existing and prospective business relationships, which counterclaims Source has subsequently moved to dismiss. Discovery and further action with respect to the alleged infringement has been stayed pending oral argument on the merits of our counterclaims, which has not yet been scheduled. If the plaintiffs win the lawsuit and they are able to obtain an injunction against us, we could be precluded from offering the WORLDGATE Service. On October 6, 1998, Advanced Interactive, Inc. ("AII") filed a complaint in the United States District Court for the Northern District of Illinois, Eastern Division, against Matsushita Electric Corporation, Matsushita Electric Industrial Co. Ltd., Sharp Electronics, Corp., Sharp Corp., Interactive Channel Technologies, Thomson Consumer Electronics, Toshiba Consumer Products, Inc, Toshiba America, Inc., Toshiba Corporation, General Instrument Corporation, Scientific-Atlanta, Inc., ATI Technologies, Inc., ADS Technologies Inc., Gateway 2000, Inc., STB Systems, Inc., Hauppauge Computer Works, Inc., WebTV Networks, Inc. and us, alleging that each of the above companies infringed a patent issued to AII. The complaint seeks monetary damages and attorney fees. In our answer filed on December 2, 1998, we have denied these allegations and further asserted that the patent in suit was invalid. We intend to vigorously defend these matters, but, as with any patent litigation, there can be no assurance that the plaintiffs will not prevail and obtain damages and, in the event that the plaintiffs would not accept an ongoing royalty, an injunction. From time to time, others may assert infringement claims against us in the future. Except as stated above, we are not currently involved in any material legal proceedings. EMPLOYEES As of December 31, 1998, we employed 131 full-time employees and had 15 independent contractors. All of our employees and independent contractors are located in Bensalem, Pennsylvania, except for an aggregate of four sales people located in Colorado, Florida and Georgia. None of our employees is represented by a labor union, and we have no collective bargaining agreement. We believe that our relations with our employees are good. FACILITIES Our corporate headquarters is currently located in Bensalem, Pennsylvania with facilities consisting of approximately 30,000 square feet. In the third quarter of 1999, we intend to relocate our headquarters to Trevose, Pennsylvania in a leased facility with approximately 72,000 square feet. The lease for this space will expire in June 2009, with an option to extend for an additional 10 years. 47 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS Our executive officers and directors are as follows:
NAME AGE POSITION(S) - ----------------------------------------------------- --- ----------------------------------------------------- Hal M. Krisbergh(1).................................. 51 Chairman and Chief Executive Officer Joseph E. Augenbraun................................. 34 Vice President, Engineering Scott B. Campbell.................................... 52 Vice President, Business Development David A. Dill........................................ 47 Chief Financial Officer Randall J. Gort...................................... 49 Vice President, General Counsel and Secretary Gerard K. Kunkel..................................... 40 Vice President, Strategic Programs Jae Hea Edward Lee................................... 35 Vice President, Operations Peter C. Mondics..................................... 45 Vice President, Affiliate Sales and Marketing David E. Wachob...................................... 44 Director, Vice President and General Manager Thomas G. Baxter..................................... 52 Director Alan Gerry(1)........................................ 70 Director Marcia J. Hooper(1).................................. 44 Director Graham Pattison...................................... 48 Director Ronald A. Walter..................................... 56 Director
- ------------------------ (1) Member of Compensation Committee HAL M. KRISBERGH has been with the Company since its inception in March 1995. From September 1981 to September 1994, Mr. Krisbergh was an executive officer of General Instrument. Mr. Krisbergh served as President of General Instrument's Communications Division and, for the past 15 years, has been a well-known figure in the cable industry. He is a recognized leader in the development of addressable cable boxes, impulse pay-per-view, optoelectronics and digital audio technologies. Mr. Krisbergh is also a director of AM Communications, Inc., a provider of network monitoring systems, and Ortel Corporation, a provider of linear fiberoptic technology. In 1991, Mr. Krisbergh received cable television's prestigious Vanguard award. Prior to joining General Instrument, Mr. Krisbergh was employed by W. R. Grace & Co., Deloitte & Touche and Raytheon Company. JOSEPH E. AUGENBRAUN joined the Company in August 1995. Mr. Augenbraun is responsible for the management of the hardware and software teams developing the WORLDGATE platform. From August 1992 to August 1995, Mr. Augenbraun was a researcher for Hitachi's HDTV Advanced Television and Systems Laboratory. From November 1987 to August 1992, Mr. Augenbraun was on the engineering staff at Commodore-Amiga Inc, where he served in various capacities including Project Manager on the Amiga 1500 Computer System and lead designer in ASIC development. SCOTT B. CAMPBELL joined the Company in February 1997. Mr. Campbell was President of Genesis International Group, a consulting firm to the cable industry, from November 1993 to February 1997. At Home Shopping Network, Mr. Campbell served in various management and sales positions, including: from March 1992 to February 1993 as Executive Vice President/Diversified Marketing and Media Services, from July 1989 to March 1992 as Senior Vice President/Affiliate Relations, and from July 1986 to July 1989 as Senior Vice President/Marketing and Sales. DAVID A. DILL joined the Company in April 1996. From July 1994 to October 1995, Mr. Dill was the Vice President, Finance of General Instrument's Communications Division. From August 1991 through March 1994, Mr. Dill held executive positions with International Business Machines Corporation, including Financial Analysis Director (IBM U.S. Company), Controller (Personal Systems Business), and Assistant General Manager, Finance and Planning (RISC System/6000 Division). Prior to joining 48 IBM, Mr. Dill was Vice President and Controller for the Rolm Company. From February 1975 to August 1989, Mr. Dill held several other executive positions with IBM, culminating in his role as Director of Finance, Communications Systems Group. RANDALL J. GORT joined the Company in August 1997. From July 1995 to August 1997, Mr. Gort was General Counsel, Secretary, and Director of Legal and Corporate Affairs for Integrated Circuit Systems, Inc. Mr. Gort was in private practice from August 1994 through June 1995. Prior to that time, he acted as Associate General Counsel for Commodore International Ltd. from May 1987 through July 1994. Mr. Gort was with Schlumberger Ltd. from October 1982 through early 1987, originally as Senior Attorney and then as General Counsel, FACTRON Division. From April 1979 through October 1982, Mr. Gort was Counsel for various divisions of the 3M Company, including Medical and Surgical Products Divisions, Orthopedic Products Division, Electro-Mechanical Resources Division and 3M's four Tape divisions. GERARD K. KUNKEL joined the Company in February 1997. Mr. Kunkel is responsible for the development and deployment of the Company's CHANNEL HYPERLINKING business and technology. From May 1995 to February 1997, Mr. Kunkel was President of Broadband Applications Development Company. From March 1993 to April 1995, he served as Vice President, Product Development of StarNet, Inc. From June 1991 to March 1993, Mr. Kunkel was President of The Kunkel Group. From May 1984 to June 1991, Mr. Kunkel was Director of Design and Electronic Publishing for PC MAGAZINE. For the period 1977 through 1984, Mr. Kunkel was an award winning art director for various New York City based magazines. JAE HEA EDWARD LEE has been with the Company since its inception in March 1995. Mr. Lee is responsible for all manufacturing, quality assurance and field service activities. From October 1991 through January 1995, Mr. Lee was General Manager and then President of RGB Industries, Inc., a manufacturing and import/export business. From September 1987 to October 1991, Mr. Lee was a Design Engineer for General Instrument's Jerrold Division, where he was System Manager for the engineering group's development workstation local area network. PETER C. MONDICS has been with the Company since March 1996. From January 1994 through February 1996, Mr. Mondics was a principal with New Ventures Business Planning, a corporation formed to conceptualize, model, create and distribute new business models for clients seeking entry into the cable operator, phone and wireless distributed service businesses. From February 1991 to December 1993, Mr. Mondics was President of NuStar, Inc. and Executive Vice-President of StarNet, NuStar's parent entity. From February 1987 to January 1991, Mr. Mondics was Vice-President of NuStar's Network Sales. Mr. Mondics was Eastern Regional Vice-President of Financial News Network from June 1984 to January 1987 and Marketing Manager for Home Box Office from May 1981 to May 1984. DAVID E. WACHOB has been with the Company since its inception in March 1995. Between 1991 and 1995, Mr. Wachob was President of Network Resources Incorporated, an independent consulting company for the cable, cellular, telecommunications and consumer electronics industries. From June 1988 to September 1991, Mr. Wachob was Director of Advanced Technologies for General Instrument where he managed strategic planning, market research, technical assessment and business development of advanced technologies for the cable television industry. Mr. Wachob's other positions with General Instrument included, from July 1986 to June 1988, Manager of Product Support Engineering, and from November 1984 to July 1986, Radio Frequency Systems Engineer. ALAN GERRY has been a member of the Company's Board of Directors since April 1997. Mr. Gerry founded Granite Associates, L.P., a private investment company, and presently serves as its Chairman and Chief Executive Officer. Mr. Gerry was the founder, and for at least the last 3 years prior to 1996, he was the Chairman and Chief Executive Officer of Cablevision Industries Corporation, the eighth largest multiple system operator in the United States, with over 1.3 million subscribers at the time of its 49 merger with Time Warner Inc. in 1996. Mr. Gerry has been the recipient of numerous awards and citations including the cable television industry's prestigious Vanguard Award for Distinguished Leadership, which he received in 1995. Mr. Gerry is a veteran of the U.S. Marine Corps. MARCIA J. HOOPER has been a member of the Company's Board of Directors since April 1997. Ms. Hooper has been a partner with the Information Technology Group of Advent International Corporation since May 1986. Ms. Hooper is also a director of Interleaf, Inc., Signal Internet Technologies, Inc., LionBridge Technology, Inc., PolyMedica Industries, Inc. and Wang Laboratories, Inc.. In July 1994 Ms. Hooper co-founded Viking Capital Group, Inc., a venture firm focused on early stage investments. From May 1979 to July 1994, Ms. Hooper was employed as a general partner with Paine Webber/Ampersand Ventures. RONALD A. WALTER has been a member of the Company's Board of Directors since April 1998. Mr. Walter has been a Vice President of Citicorp and Citibank, N.A. since May 1979. He serves as Director of Investments for Citicorp's proprietary long-term equity investment program and manages the investment program for the assets supporting Citigroup's employee benefit programs. He is also a partner with Citicorp's internal Mergers and Acquisition team and its Corporate Technology Office. His previous experience with Citicorp includes serving as Secretary of Citicorp's Finance Committee, Head of Strategic Analysis and Chief Financial Officer for the company's equipment finance and leasing business. Mr. Walter was a member of the Urban Planning faculty at MIT and was part of the management team responsible for ending the financial crisis in the City of New York. THOMAS G. BAXTER has been a member of the Company's Board of Directors since July 1998. Mr. Baxter has been an operating partner in the investment banking firm of Evercore Partners since June 1998. Mr. Baxter is also a director of C-Span and Dycom Industries, Inc. Prior to his current position Mr. Baxter served as President of Comcast's cable subsidiary, Comcast Cable Communications, Inc., the nation's fifth largest cable television operation, from January 1990 to January 1998. Mr. Baxter was also responsible for the operations of Comcast's telephone and cable systems in the United Kingdom. Prior to joining Comcast Mr. Baxter held executive positions with Cablevision Systems Corporation and Time Warner Entertainment Company, Inc. GRAHAM PATTISON has been a member of the Company's Board of Directors since August 1998. Mr. Pattison has held executive positions with Motorola for over ten years and is currently the Vice President and General Manager of the Network Systems Division of Motorola, which position he has held since April 1995. In his current capacity Mr. Pattison has worldwide responsibility for the design, manufacture and marketing of networking data communication devices. Mr. Pattison has also served as General Manager for the Europe, Middle East and Africa region of Motorola's Information Systems Group. BOARD OF DIRECTORS AND COMMITTEES Each director is elected to hold office until the next annual meeting of stockholders and until his or her respective successor is elected and qualified. Mr. Baxter and Ms. Hooper are reimbursed for travel and other expenses related to their service on the Board of Directors. In addition, the Company pays to Mr. Baxter a stipend of $1,000 for each Board meeting he attends in person and the Company has granted to him an option to purchase 6,666 shares of the common stock at an option price of $4.50 per share. This option became effective on Mr. Baxter's appointment to the Board and will vest in four equal annual installments on the anniversary of such date. The Board of Directors has a Compensation and Stock Option Committee (the "Compensation Committee") which makes recommendations to the Board concerning the compensation and benefits programs for its directors, officers and employees, including all stock options granted under the Company's 1996 Stock Option Plan. Currently, the Compensation Committee is composed of 50 Messrs. Krisbergh and Gerry and Ms. Hooper. The Board intends to create an Audit Committee upon completion of this offering. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION With the exception of Mr. Krisbergh, no member of the Compensation Committee is an officer or employee of the Company. Mr. Krisbergh does not, however, participate in the determination of his own compensation. 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 on the Compensation Committee. EMPLOYMENT AGREEMENTS No employee of the Company has entered into an employment agreement with the Company. BONUS PLAN The Company has established a bonus plan which provides for the payment of bonuses to executive officers and other employees based upon the performance of the Company, the performance of the business division of which such officer or employee is a member and the performance of such officer or employee. Under this plan, the Company generally assesses the prior year's performance and makes bonus payments during the first calendar quarter of each year. EXECUTIVE COMPENSATION The following table sets forth information concerning compensation paid in fiscal year 1998 with respect to the Company's Chief Executive Officer and its four other most highly compensated executive officers (collectively, the "Named Officers"): SUMMARY COMPENSATION TABLE FISCAL YEAR 1998
LONG TERM COMPENSATION AWARDS ----------------- ANNUAL COMPENSATION SECURITIES ---------------------- UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION SALARY BONUS(1) OPTIONS COMPENSATION - ----------------------------------------------------------- ---------- ---------- ----------------- ------------- Hal M. Krisbergh........................................... $ 320,250 $ 144,113 -- $ -- Chairman and Chief Executive Officer David A. Dill.............................................. 193,218 67,626 -- -- Chief Financial Officer Scott B. Campbell.......................................... 160,000 48,000 -- -- Vice President, Business Development Peter C. Mondics........................................... 159,375 47,813 -- -- Vice President, Affiliate Sales and Marketing David E. Wachob............................................ 149,450 44,835 -- -- Director, Vice President and General Manager
No options were granted to any Named Officer in 1998. - ------------------------ (1) While the cost of the above bonuses has been accrued and reflected in the 1998 results, none of the bonuses have been paid as of February 8, 1999. 51 The following table sets forth information concerning options exercised during 1998 and the number and the hypothetical value of unexercised options of the Company held by the Named Officers as of December 31, 1998. This table is presented solely for purposes of complying with the Commission rules and does not necessarily reflect the amounts the optionees will actually receive upon any sale of the shares acquired upon exercise of the options. AGGREGATE OPTION EXERCISES AND LAST FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE- OPTIONS AT DECEMBER 31, MONEY OPTIONS AT SHARES 1998 DECEMBER 31, 1998(1) ACQUIRED VALUE -------------------------- -------------------------- NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ---------------------------------- --------------- ----------- ----------- ------------- ----------- ------------- Scott B. Campbell................. 15,000 45,000 Peter C. Mondics.................. 16,666 50,000
- ------------------------ (1) Assuming, for presentation purposes only, a per share fair market value of $ . KEY MAN INSURANCE The Company maintains key man insurance policies in the amounts of $3.0 million on Hal Krisbergh and $1.0 million on David Wachob. STOCK OPTION PLAN The Company has one stock option plan, the 1996 Stock Option Plan, as amended (the "Stock Option Plan"), under which, as of January 31, 1999, options for 680,410 shares of common stock were outstanding and options for an additional 252,923 shares were available for further grant. Outstanding options are exercisable at prices ranging from $.75 to $4.50 per share. The maximum number of shares of Common Stock reserved for the grant or settlement of awards under the Stock Option Plan is 933,333 subject to adjustment as provided therein. The total number of shares authorized, as well as shares subject to outstanding options, will be adjusted in the event of changes to the Company's capital structure, such as stock dividends, stock splits or other recapitalizations. Generally, outstanding options vest in equal installments over a four-year period, but in no event may an option be exercised more than 10 years following the date of its grant, subject to acceleration in the event of some changes of control of the Company. The Stock Option Plan is intended to promote the long term financial interests and growth of the Company by providing employees, officers, directors and consultants of the Company with appropriate incentives and rewards to enter into and continue in the employ of, or their relationship with, the Company. The Stock Option Plan gives recipients the opportunity to acquire a proprietary interest in the long-term success of the Company and rewards the performance of individual officers, other employees, consultants and directors in fulfilling their responsibilities for long-range achievements. The Stock Option Plan provides for the granting of awards to such officers, other employees, consultants and directors of the Company and its affiliates as the Compensation Committee, which is the committee of the Board appointed to administer the Stock Option Plan, may select from time to time. If any shares subject to an award are forfeited, canceled, exchanged or surrendered or if an award otherwise terminates or expires without a distribution of shares to the holder of such award, the shares of Common Stock with respect to such award will, to the extent of any such forfeiture, cancellation, exchange, surrender, termination or expiration, again be available for awards under the Stock Option Plan. 52 The Compensation Committee has the authority to administer the Stock Option Plan and to exercise all the powers and authorities either specifically granted to it under, or necessary or advisable in the administration of, the Stock Option Plan, including, without limitation, the authority to grant awards; to determine the persons to whom and the time or times at which awards shall be granted; to determine the type and number of awards to be granted, the number of shares of Common Stock to which an award may relate and the terms, conditions, restrictions and performance goals relating to any award; to determine whether, to what extent, and under what circumstances an award may be settled, canceled, forfeited, exchanged, or surrendered; to make adjustments in the performance goals in recognition of unusual or non-recurring events affecting the Company or the financial statements of the Company (to the extent not inconsistent with Section 162(m) of the Code, if applicable), or in response to changes in applicable laws, regulations, or accounting principles; to construe and interpret the Stock Option Plan and any award; to prescribe, amend and rescind rules and regulations relating to the Stock Option Plan; to determine the terms and provisions of agreements evidencing awards; and to make all other determinations deemed necessary or advisable for the administration of the Stock Option Plan. The purchase price per share payable upon the exercise of an option (the "option exercise price") will be established by the Compensation Committee, provided, however, that Incentive Stock Options may not have an option exercise price less than the fair market value of a share of common stock on the date of grant. The option exercise price is payable by any one of the following methods or a combination thereof, to the extent permitted by the Compensation Committee: (1) in cash or by personal check, certified check, bank cashier's check or wire transfer, (2) subject to the approval of the Committee, in common stock owned by the participant for at least six months prior to the date of exercise and valued at their fair market value on the effective date of such exercise, or (3) subject to the approval of the Compensation Committee, by such other provision as the Compensation Committee may from time to time authorize. The Board of Directors or the Compensation Committee may suspend, revise, terminate or amend the Stock Option Plan at any time, provided, however, that (1) stockholder approval will be obtained if and to the extent required under Rule 16b-3 promulgated under the Exchange Act or if and to the extent the Board determines that such approval is required for purposes of satisfying Section 162(m) or Section 422 of the Code and (2) no such suspension, revision, termination or amendment may, without the consent of a participant, reduce the participant's rights under any outstanding award. CERTAIN TRANSACTIONS RESTRUCTURING. We were organized in March 1995 as a Pennsylvania limited liability company (the "LLC"). In December 1996, the LLC was merged with and into the Company as a result of which all assets and liabilities of the LLC were transferred to us. Pursuant to the merger, Hal M. Krisbergh and David E. Wachob, as the founding members of the LLC, and some other executive officers, key employees and consultants (collectively, the "Management Stockholders") who had been granted profit interests in the LLC, received an aggregate of 9,100,801 shares of our common stock in exchange for the cancellation of their membership interests in the LLC. Of the total shares allocated to the Management Stockholders, 808,733 shares of our common stock were issued subject to vesting over a defined period as described further in the "Management Shareholders' Agreement" discussed below. MANAGEMENT SHAREHOLDERS AGREEMENT. Each of the Management Stockholders who received shares of our common stock in the merger entered into a Management Shareholders' Agreement with us (the "Management Agreement") providing for some voting agreements, restrictions on transfer of our common stock, rights of first refusal and vesting arrangements. Pursuant to the Management Agreement, each Management Stockholder and his transferees are obligated to vote for Mr. Krisbergh's designees to the Board. No Management Stockholder may transfer his shares, except for (1) transfers to family members and (2) transfers of up to five percent of 53 his total shares, PROVIDED that such transferees agree to be bound by the Management Agreement. Any Management Stockholder who wishes to sell in excess of five percent of his shares must first offer to sell such shares to the other Management Stockholders on a pro rata basis. The Management Agreement also sets forth the vesting arrangements for some of the Management Stockholder's shares, and provides that any shares that remain unvested at the time of termination of a Management Stockholder's employment (other than by reason of death) shall be distributed pro rata to the remaining Management Stockholders and will fully vest upon such distribution. Unvested shares will be transferred to a Management Stockholder's estate or heirs in the event of his death. The Management Agreement automatically terminates upon the consummation of this offering. PREFERRED STOCK FINANCINGS. We have financed our operations to date largely through contributions from stockholders and a series of private placements of our Series A, Series B and Series C Preferred Stock. Each share of our Series A Preferred Stock was initially convertible into two shares of our common stock, each share of our Series B Preferred Stock was initially convertible into one share of our common stock and each share of our Series C Preferred Stock was initially convertible to one share of our common stock, subject to some anti-dilution protections. As a result of the stock split, each share of our Series A Preferred Stock will convert into one and one-third shares of our common stock, each share of our Series B Preferred Stock will convert into two-thirds of a share of our common stock and each share of our Series C Preferred Stock will convert into two-thirds of a share of our common stock From March 1996 through July 1997, we sold an aggregate of 2,752,111 shares of our Series A Preferred Stock at a purchase price of $4.395 per share to the various investors, including Citicorp, AMP Incorporated, Alan Gerry, Motorola, funds affiliated with Advent International Corporation, Needham & Company, Paul Kagan, Scientific-Atlanta and General Instrument (collectively, the "Series A Investors"). From November 1997 through January 1998, we sold an aggregate of 2,803,031 shares of our Series B Preferred Stock at a purchase price of $7.10 per share to various investors, including Citicorp, Needham & Company, H.F. Lenfest, Charter and Paul Kagan (collectively, the "Series B Investors"). From September 1998 through February 1999, we sold an aggregate of 1,529,714 shares of our Series C Preferred Stock at a purchase price of $11.00 per share to various investors, including Citicorp, Needham & Company, General Instrument, Scientific-Atlanta, Charter, Showtime and XL Capital L.L.C. (collectively, the "Series C Investors"). STOCKHOLDERS' AGREEMENT. The Series A Investors, the Series B Investors, Series C Investors, Messrs. Krisbergh and Wachob, some other management personnel of the Company, the Company and other stockholders are parties to a Stockholders' Agreement (the "Stockholders' Agreement"). Pursuant to the Stockholders' Agreement, (1) Hal M. Krisbergh designated David E. Wachob, Alan Gerry and Thomas G. Baxter, (2) Motorola designated Graham Pattison, (3) the Series A Investors, other than Motorola, designated Marcia J. Hooper, and (4) the Series B Investors designated Ronald A. Walter to our Board of Directors. The material provisions of the Stockholders' Agreement will terminate upon the consummation of this offering, except for the registration rights provided for therein. See "Shares Eligible for Future Sale-Registration Rights." OFFICER LOANS. During the fall of 1996, we borrowed approximately $350,000 from Hal M. Krisbergh in exchange for a seven percent demand note which was repaid in full out of the proceeds of the initial Series A Preferred Stock financing. 54 PRINCIPAL STOCKHOLDERS The following table sets forth information as of February 8, 1999 regarding beneficial ownership of the common stock and as adjusted to reflect the sale of the shares offered hereby (1) by each person who is known to us to own beneficially more than 5% of the outstanding shares of common stock, (2) by each director of the Company, (3) by each Named Officer and (4) by all directors and executive officers of the Company as a group. Unless otherwise indicated below, to our knowledge, all persons listed below have sole voting and investment power with respect to their shares of common stock, except to the extent authority is shared by spouses under applicable law.
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP PRIOR TO THE OFFERING(1) AFTER THE OFFERING(1) ------------------------- ------------------------- NUMBER OF NUMBER OF NAME AND ADDRESS(2) SHARES PERCENTAGE SHARES PERCENTAGE - -------------------------------------------- ---------- ------------- ---------- ------------- Citicorp.................................... 1,124,442 7.2 153 East 53(rd) Street New York, NY 10043 Hal M. Krisbergh(3)......................... 6,515,686 41.6 Scott B. Campbell........................... 15,000 * David A. Dill(4)............................ 369,988 2.4 Peter C. Mondics(5)......................... 35,859 * David E. Wachob............................. 557,897 3.6 Alan Gerry.................................. 606,666 3.9 Marcia J. Hooper(6)......................... -- * Ronald A. Walter(7)......................... -- * Thomas G. Baxter............................ -- * Graham Pattison(8).......................... -- * All current directors and executive officers as a group (14 persons)(9)................ 9,003,972 57.3
- ------------------------ * Less than 1% of the outstanding Common Stock. (1) Beneficial ownership is determined in accordance with the rules of the SEC, based on factors including voting and investment power with respect to shares, subject to applicable community property laws. Shares of common stock subject to options or warrants exercisable within 60 days of February 8, 1999 are deemed outstanding for the purpose of computing the percentage ownership of the person holding such options or warrants, but are not deemed outstanding for computing the percentage ownership of any other person. The amounts indicated assumes that the outstanding shares of Series A, Series B and Series C Preferred Stock have been converted into shares of common stock without adjustment for anti-dilution protections to which they may be entitled. See "Certain Transactions--Preferred Stock Financings." (2) Unless otherwise indicated, the mailing address of such beneficial owners is 3220 Tillman Drive, Suite 300, Bensalem, Pennsylvania 19020. (3) Includes (a) 15,237 shares of common stock held by Mr. Krisbergh as custodian for his minor child and (b) 15,237 shares of common stock held by Mr. Krisbergh's wife as custodian for their minor child. (4) Includes 26,666 shares of common stock held by Mr. Dill as custodian for his two minor children. (5) Includes 2,666 shares of common stock held by Mr. Mondics' minor child, 6,666 shares of common stock held jointly with his wife and options to purchase 16,666 shares of common stock. 55 (6) Does not include 379,218 shares of common stock held by funds that are affiliated with Advent International Corporation as follows: Adtec Limited Partnership (60,674 shares), Advent Crown Fund, C.V. (60,068 shares), Digital Media & Communications, L.P. (240,880 shares), and Advent Partners Limited Partnership (17,596 shares). Ms. Hooper is a partner and an officer of Advent International Corporation and an officer of several of the Advent funds, and was originally elected to the Company's Board of Directors as a representative of the holders of the Series A Preferred Stock. Ms. Hooper disclaims beneficial ownership of the shares held of record by the Advent funds. (7) Does not include 1,124,442 shares of common stock held by Citicorp. Mr. Walter is a vice president of Citicorp and Citibank, NA. (8) Does not include 454,666 shares of common stock held by Motorola, Inc. Mr. Pattison is a vice president of Motorola, Inc. (9) Includes (a) options to purchase 56,666 shares of common stock and (b) 87,034 shares of common stock owned by family members or affiliates of some members of the group. 56 DESCRIPTION OF CAPITAL STOCK The Company's authorized capital stock consists of 50,000,000 shares of common stock, par value $.01 per share, and 13,500,000 shares of preferred stock, par value $.01 per share. The following summary is qualified in its entirety by reference to our Amended and Restated Certificate of Incorporation, as amended (the "Certificate of Incorporation"), a form of which is filed as an exhibit to this registration statement of which this prospectus is a part. COMMON STOCK As of February 8, 1999, there were 15,658,690 shares of common stock outstanding. After giving effect to the issuance of shares of common stock offered by the Company hereby, there will be shares of common stock outstanding. The outstanding shares of common stock are, and the shares offered by the Company in this offering will be, when issued and paid for, fully paid and nonassessable. The rights, preferences and privileges of holders of common stock are subject to, and may be adversely affected by, the rights of holders of shares of any series of preferred stock which the Company may designate and issue in the future. See "--Preferred Stock." Holders of common stock are entitled to one vote per share on all matters submitted to a vote of holders of common stock. The holders of common stock do not have cumulative voting rights. The election of directors is determined by a plurality of votes cast, and, except as otherwise required by law, the Company's Certificate of Incorporation or By-Laws, all other matters are determined by a majority of the votes cast. See "Risk Factors--Our Chairman and Chief Executive Officer Can Exercise Significant Influence Over WorldGate." The common stock has no preemptive rights and is not convertible, redeemable or assessable. The holders of common stock are entitled to receive ratably such dividends, if any, as may be declared by the Board out of legally available funds, subject to any preferential dividend rights of outstanding preferred stock. Upon any liquidation, dissolution or winding up of the Company, after payment of all debts and liabilities of the Company and after payment of any liquidation preferences of then outstanding preferred stock, the holders of common stock will be entitled to receive a portion of all remaining assets that are legally available for distribution. PREFERRED STOCK The Company, by resolution of the Board of Directors and without any further vote or action by the stockholders, has the authority, subject to certain limitations prescribed by law, to issue from time to time up to an aggregate of 13,500,000 shares of preferred stock in one or more classes or series and to determine the designation and the number of shares of any class or series as well as the voting rights, preferences, limitations and special rights, if any, of the shares of any such class or series, including dividend rights, dividend rates, conversion rights and terms, redemption rights and terms, and liquidation preferences. The issuance of preferred stock may have the effect of delaying, deferring or preventing a change of control of the Company. Upon the closing of this offering, there will be no shares of preferred stock outstanding, and the Company has no plans to issue any shares of preferred stock. LIMITATION ON LIABILITY The Company's Certificate of Incorporation limits or eliminates the liability of the Company's directors or officers to the Company or its stockholders for monetary damages to the fullest extent permitted by the Delaware General Corporation Law, as amended (the "DGCL"). The DGCL provides that a director of the Company shall not be personally liable to the Company or its stockholders for monetary damages for a breach of fiduciary duty as a director, except for liability: (1) for any breach of such person's duty of loyalty, (2) for acts or omissions not in good faith or involving intentional misconduct or a knowing violation of law, (3) for the payment of unlawful dividends and some other 57 actions prohibited by Delaware corporate law, and (4) for any transaction resulting in receipt by such person of an improper personal benefit. The Certificate of Incorporation also provides that the directors shall be entitled to the benefits of all limitations on the liability of directors generally that now or hereafter become available under the DGCL. The Certificate of Incorporation also contains provisions indemnifying the Company's directors, officers and employees to the fullest extent permitted by the DGCL. The Company maintains directors' and officers' liability insurance to provide its directors and officers with insurance coverage for losses arising from claims based on breaches of duty, negligence, error and other wrongful acts. See "Business--Legal Proceedings" for a discussion of pending litigation. CERTAIN ANTI-TAKEOVER PROVISIONS The ability of the Company's Board under the Company's Certificate of Incorporation to establish the rights of, and to cause the Company to issue, substantial amounts of preferred stock without the need for stockholder approval, upon such terms and conditions, and having such rights, privileges and preferences, as the Company's Board may determine from time to time in the exercise of its business judgment, may, among other things, be used to create voting impediments with respect to changes in control of the Company or to dilute the stock ownership of holders of common stock seeking to obtain control of the Company. The rights of the holders of common stock will be subject to, and may be adversely affected by, any preferred stock that may be issued in the future. The issuance of preferred stock, while providing desirable flexibility in connection with possible acquisitions, financings and other corporate transactions, may have the effect of discouraging, delaying or preventing a change in control of the Company. The Company has no present plans to issue any shares of preferred stock. SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW Section 203 of the DGCL prohibits some "business combinations" between a Delaware corporation and an "interested stockholder," which is defined as a person who, together with any affiliates or associates of such person, beneficially owns, directly or indirectly, 15% or more of the outstanding voting shares of a Delaware corporation. For purposes of Section 203, business combinations are defined broadly to include mergers, consolidations, sales or other dispositions of assets having an aggregate value in excess of 10% of the consolidated assets of the corporation and some transactions that would increase the interested stockholder's proportionate share ownership in the corporation. Section 203 prohibits any such business combination for a period of three years commencing on the date the interested stockholder becomes an interested stockholder, unless (1) the business combination is approved by the corporation's board of directors prior to the date the interested stockholder becomes an interested stockholder, (2) the interested stockholder acquired at least 85% of the voting stock of the corporation (other than stock held by directors who are also officers or by some employee stock plans) in the transaction in which it becomes an interested stockholder or (3) the business combination is approved by a majority of the board of directors and by the affirmative vote of two-thirds of the outstanding voting stock that is not owned by the interested stockholder. See "Risk Factors--Certain Anti-takeover Provisions." The DGCL contains provisions enabling a corporation to avoid Section 203's restrictions if stockholders holding a majority of the corporation's voting stock approve an amendment to the corporation's Certificate of Incorporation or By-Laws to avoid the restrictions. The Company has not and does not currently intend to "elect out" of the application of Section 203 of the DGCL. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Company's common stock is . 58 SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there has been no market for our common stock, and we cannot assure you that a significant public market for our common stock will develop or be sustained after this offering. Future sales of substantial amounts of our common stock (including shares issued upon exercise of outstanding options and warrants) in the public market after this offering could adversely affect market prices prevailing from time to time and could impair our ability to raise capital through the sale of our equity securities. Upon completion of this offering, shares of our common stock will be outstanding (based on shares outstanding on February 8, 1999, and assuming no exercise of options or warrants). Of these shares, shares will be freely tradable without restriction, including shares registered and sold in this offering, except that shares purchased by our "affiliates," as that term is defined in Rule 144 under the Securities Act, may generally be sold only in compliance with the limitations of Rule 144. The remaining approximately 15.7 million shares of our common stock (the "Restricted Shares") were issued and sold by us in private transactions in reliance upon exemptions from the registration requirements of the Securities Act and are therefore deemed "restricted securities" as defined in Rule 144 and may not be sold in the absence of registration under the Securities Act unless an exemption is available, including an exemption afforded by Rule 144 or Rule 701. See "Risk Factors--Substantial Sales of Our Common Stock May Affect Our Stock Price." In general, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated) who has beneficially owned "restricted shares" (as defined in Rule 144) for at least one year (including the holding period of any prior owner, except an affiliate) is entitled to sell, within any three month period, a number of shares that does not exceed the greater of (1) one percent of the number of shares of common stock then outstanding or (2) the average weekly trading volume of the common stock on the Nasdaq National Market during the four calendar weeks preceding the required filing of a Form 144 with respect to such sale. Sales under Rule 144 are also subject to some manner of sale provisions and notice requirements and to the availability of current public information about us. Under Rule 144(k), a person who is not deemed to have been an affiliate at any time during the 90 days preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years (including the holding period of any prior owner except an affiliate), is entitled to sell such shares without complying with the manner of sale, public information, volume and other limitation or notice provisions of Rule 144. Rule 144A under the Securities Act provides a non-exclusive safe harbor exemption from the registration requirements of the Securities Act for specified resales of restricted securities to some institutional investors. In general, Rule 144A allows unregistered resales of restricted securities to a "qualified institutional buyer," which generally includes an entity, acting for its own account or for the account of other qualified institutional buyers, that in the aggregate owns or invests on a discretionary basis at least $100 million in securities of issuers that are not affiliated with the entity, as long as these securities when issued were not of the same class as securities listed on a national securities exchange or quoted on Nasdaq. The shares of our common stock outstanding as of the date of this prospectus would be eligible for resale under Rule 144A because such shares, when issued, were not of the same class as any listed or quoted securities. STOCK OPTIONS AND WARRANTS As of December 31, 1998, there were outstanding options to purchase an aggregate of 641,343 shares of our common stock (108,750 of which were exercisable at December 31, 1998) at a weighted average exercise price of $3.00 per share, and we had an additional 291,990 shares of our common stock available for future grant under the Stock Option Plan. The holders of options which are presently exercisable to purchase a total of 108,750 shares are subject to lock-up agreements, which 59 restrict the holders' ability to sell or otherwise dispose of our common stock acquired upon the exercise of such options. See "Management--Stock Option Plan." Following closing of this offering, we intend to file a registration statement on Form S-8 under the Securities Act covering shares of our common stock subject to outstanding options under the Stock Option Plan and 291,990 shares of our common stock reserved for issuance under the Stock Option Plan. Based on the number of shares subject to outstanding options at December 31, 1998 and currently reserved for issuance under such plan, such registration statement would cover approximately 933,333 shares issuable on exercise of the options of which 108,750 options have vested as of such date. Such registration statement will automatically become effective upon filing. As of December 31, 1998, there were outstanding warrants to purchase an aggregate of 311,819 shares of our common stock (all of which are currently exercisable) at an exercise price of $10.65 per share. The holders of all of these warrants are subject to lock-up agreements that restrict the holders' ability to sell or otherwise dispose of our common stock acquired upon the exercise of such warrants for 180 days from the date of this prospectus. LOCK-UP AGREEMENTS Holders of approximately 14.1 million shares of our common stock (including all of our directors, Named Officers and holders of stock options) have entered into lock-up agreements under which, without the prior written consent of Gerard Klauer Mattison & Co., Inc. on behalf of the underwriters and some other permitted transfers, they have agreed not to offer, sell or otherwise dispose of any such shares of our common stock, any options or warrants to acquire shares of our common stock or any securities convertible into shares of our common stock (or any shares of our common stock issuable upon exercise or conversion of such securities) owned by them for a period of 180 days after the date of this prospectus. Beginning 180 days after the date of this prospectus, approximately 14.9 million shares will be eligible for sale in the public market, subject to some timing, manner of sale and volume limitations pursuant to Rule 144. Gerard Klauer Mattison & Co., Inc. may, in its sole discretion and at any time without notice, release all or any portion of the securities subject to such lock-up agreements. Gerard Klauer Mattison & Co., Inc. currently has no plans to release any portion of the securities subject to such lock-up agreements. The Company has agreed that it will not, directly or indirectly, without the prior written consent of Gerard Klauer Mattison & Co., Inc., contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option right or warrant to purchase, or otherwise transfer or dispose of any shares of common stock, or any securities convertible into or exchangeable for common stock, for a period of 180 days from the date of this prospectus, except that the Company may grant additional options under the Stock Option Plan or issue shares of common stock under outstanding options, warrants and convertible securities. REGISTRATION RIGHTS Some holders of shares of common stock outstanding prior to the closing of our initial public offering (including shares held by Messrs. Krisbergh and Wachob), as well as some holders of warrants, are parties to registration rights agreements with us. These registration rights agreements, which relate to approximately 13.8 million shares of common stock (assuming the exercise of all warrants and conversion of all preferred stock), provide for "piggyback" and demand registration rights. Some holders of common stock are entitled to unlimited piggyback registration rights in most registrations by the Company of its securities, provided that the number of shares of common stock being registered may be cut back by the Company's underwriters in such offerings. These holders have waived their piggyback registration rights with respect to this offering. Additionally, holders of at least 30% of the common stock entitled to registration rights may request, on not more that two occasions, that the Company use its best efforts to file a registration statement covering at least 20% of such common stock, provided that no demand right may be exercised during any period beginning on the date the 60 Company files a registration statement and ending on the earlier of 120 days after such registration statement is declared effective or 180 days after the filing date of such registration statement. The Company will have the right to delay such demand registrations under some circumstances for up to 120 days. Finally, subject to some limitations, some holders of common stock have two demand registration rights on Form S-3 at any time the Company is eligible to use Form S-3. These piggyback and demand registration rights may be assigned to any transferee who acquires at least 20% of the common stock of some holders. By exercising these registration rights, such holders could cause a significant number of shares to be registered and sold in the public market. Such sales may have an adverse effect on the market price for the common stock and could impair the Company's ability to raise capital through an offering of its equity securities. 61 UNDERWRITING Under the terms and subject to the conditions contained in an Underwriting Agreement dated the date of this prospectus (the "Underwriting Agreement"), the underwriters named below (the "Underwriters"), for whom Gerard Klauer Mattison & Co., Inc. and Jefferies & Company, Inc. are acting as representatives (the "Representatives"), have severally, but not jointly, agreed to purchase from us the following respective number of shares of common stock:
UNDERWRITER NUMBER OF SHARES - --------------------------------------------------------------------------- ----------------- Gerard Klauer Mattison & Co., Inc.......................................... Jefferies & Company, Inc................................................... ----------------- ----------------- -----------------
The Underwriting Agreement provides that the obligations of the Underwriters are subject to some conditions precedent, and that the Underwriters will be obligated to purchase all of the shares of common stock offered hereby (other than those shares covered by the over-allotment option described below) if any are taken. The Underwriting Agreement provides that in the event of a default by an Underwriter, in some circumstances the purchase commitments of non-defaulting Underwriters may be increased. The Underwriters propose to offer the shares of common stock to the public initially at the public offering price set forth on the cover page of this prospectus and to some dealers at a price that represents a concession not in excess of $ per share. After the initial offering of the shares of common stock, the offering price and concession and discount to dealers may be changed by the Representatives. The Company has granted to the Underwriters an option exercisable by the Representatives, expiring at the close of business on the 30(th) day after the date of this prospectus, to purchase up to additional shares of common stock at the offering price, less underwriting discounts, all as set forth on the cover page of this prospectus. Such option may be exercised only to cover over-allotments in the sale of the shares of common stock. To the extent that the option is exercised, each Underwriter will become obligated, subject to some conditions, to purchase a number of additional shares of the common stock proportionate to such Underwriter's initial amount reflected in the foregoing table. The Underwriters have informed the Company that they do not intend sales to discretionary accounts to exceed five percent of the total number of shares of common stock offered by them. At the request of the Company, the Underwriters have reserved up to 5% of the shares of common stock offered hereby for sale at the initial public offering price to some employees of the Company and to some other persons. The number of shares available for sale to the general public will be reduced to the extent that such persons purchase such reserved shares. The Underwriters will offer any reserved share not so purchased to the general public on the same basis as the other shares of common stock offered hereby. The following table summarizes the compensation to be paid to the Underwriters by the Company and the expenses payable by the Company.
TOTAL ------------------------------ WITHOUT WITH PER SHARE OVER-ALLOTMENT OVER-ALLOTMENT ----------- -------------- -------------- Underwriting discounts paid by the Company............................. Expenses payable by the Company........................................
62 Each of the Company and some of its directors, officers and stockholders have agreed that they will not offer, sell, contract to sell, announce their intention to sell, pledge or otherwise dispose of, directly or indirectly, or, in the case of the Company file with the SEC a registration statement under the Securities Act relating to any additional shares of the common stock or securities convertible into or exchangeable or exercisable for any shares of the common stock, without the prior written consent of the Representatives for a period of 180 days after the date of this prospectus. The Representatives, on behalf of the Underwriters, may engage in over-allotment, stabilizing transactions, syndicate covering transactions, penalty bids and "passive" market making in accordance with Regulation M under the Securities Exchange Act of 1934. Over-allotment involves syndicate sales in excess of the offering size, which creates a syndicate short position. Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum. Syndicate covering transactions involve purchases of the shares of common stock in the open market after the distribution has been completed in order to cover syndicate short positions. Penalty bids permit the Representatives to reclaim a selling concession from a syndicate member when the shares of common stock originally sold by such syndicate member are purchased in a syndicate covering transaction to cover syndicate short positions. In "passive" market making, market makers in the securities offered hereby who are Underwriters or prospective Underwriters may, subject to some limitations, make bids for or purchases of such securities until the time, if any, at which a stabilizing bid is made. Such stabilizing transactions, syndicate covering transactions and penalty bids may cause the price of the common stock to be higher than it would otherwise be in the absence of such transactions. These transactions may be effected on the Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time. The Company has agreed to indemnify the Underwriters against some liabilities, including civil liabilities under the Securities Act. PRICING OF THE OFFERING Prior to this offering, there has been no public market for the common stock. The initial public offering price will be determined by negotiations between the Company and the Representatives. Among the factors to be considered in determining the initial public offering price will be the future prospects of the Company and its industry in general, sales, losses and some other financial and operating information of the Company in recent periods, and the price-sales ratios, market prices of securities and some financial and operating information of companies engaged in activities similar to those of the Company. The estimated initial public offering price set forth on the cover page of this prospectus is subject to change as a result of market conditions and other factors. LEGAL MATTERS The validity of the issuance of the shares of common stock offered hereby will be passed upon for the Company by Drinker Biddle & Reath LLP, Philadelphia, Pennsylvania. Certain legal matters in connection with this offering are being passed upon for the underwriters by Hale and Dorr LLP, Boston, Massachusetts. EXPERTS The balance sheets as of December 31, 1997 and 1998 and the statements of operations, stockholders' deficit and redeemable preferred stock and cash flows for each of the years ended December 31, 1996, 1997 and 1998 included in this prospectus and the registration statement of which this prospectus is part, have been included herein in reliance upon the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of that firm as experts in accounting and auditing. 63 ADDITIONAL INFORMATION The Company has filed with the SEC a Registration Statement on Form S-1 under the Securities Act with respect to the shares of common stock offered hereby. As permitted by the rules and regulations of the SEC, this prospectus, which is a part of the registration statement, omits some information contained in the registration statement. For further information with respect to the Company and the common stock offered hereby, please reference the registration statement, including its exhibits and schedules. Statements contained in this prospectus regarding the contents of any agreement or other document filed with the SEC as an exhibit to the registration statement are not necessarily complete, and in each instance reference is made to the copy of such agreement filed as an exhibit to the registration statement, each such statement being qualified in all respects by such reference. A copy of the registration statement, including the exhibits and schedules thereto, may be inspected without charge at the public reference facilities maintained by the SEC at 450 Fifth Street, N.W., Washington, DC 20549, and copies of all or any part thereof may be obtained from such office upon payment of the prescribed fees. In addition, the Commission maintains a Web site at http://www.sec.gov that contains reports, proxy statements, information statements and other information regarding the Company. 64 WORLDGATE COMMUNICATIONS, INC. INDEX TO FINANCIAL STATEMENTS
PAGE ---------- Report of Independent Accountants..................................................................... F-2 Balance Sheets as of December 31, 1997 and 1998....................................................... F-3 Statements of Operations for the years ended December 31, 1996, 1997 and 1998......................... F-4 Statements of Stockholders' Deficit and Redeemable Preferred Stock for the years ended December 31, 1996, 1997 and 1998................................................................................. F-5 Statements of Cash Flows for the years ended December 31, 1996, 1997 and 1998......................... F-6 Notes to Financial Statements......................................................................... F-7-F-20
F-1 [THIS IS THE REPORT WHICH WILL BE ISSUED UPON THE EFFECTIVENESS OF THE STOCK SPLIT AS DESCRIBED IN NOTE 10.] REPORT OF INDEPENDENT ACCOUNTANTS The Board of Directors and Stockholders of WorldGate Communications, Inc.: In our opinion, the accompanying balance sheets and the related statements of operations, stockholders' deficit and redeemable preferred stock and of cash flows present fairly, in all material respects, the financial position of WorldGate Communications, Inc. at December 31, 1997 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Philadelphia, Pennsylvania February 8, 1999, except as to the information in Note 10, for which the date is , 1999 F-2 WORLDGATE COMMUNICATIONS, INC. BALANCE SHEETS
DECEMBER 31, ------------------------------------ PRO FORMA 1997 1998 1998 ---------- ----------- ----------- ASSETS Current assets: Cash and cash equivalents................................................... $4,879,560 $ 127,587 $ 7,727,587 Restricted cash............................................................. 240,000 240,000 Short-term investments...................................................... 12,438,365 Accounts receivable, trade.................................................. 105,865 572,120 572,120 Inventory................................................................... 619,905 2,736,512 2,736,512 Prepaid and other assets.................................................... 75,968 171,624 171,624 ---------- ----------- ----------- Total current assets.................................................... 18,119,663 3,847,843 11,447,843 ---------- ----------- ----------- Property and equipment, at cost............................................... 270,862 780,257 780,257 Less: accumulated depreciation and amortization............................. (22,296) (136,866) (136,866) ---------- ----------- ----------- Property and equipment, net............................................. 248,566 643,391 643,391 Deposits and other............................................................ 43,862 1,129,461 1,129,461 ---------- ----------- ----------- Total assets............................................................ $18,412,091 $ 5,620,695 $13,220,695 ---------- ----------- ----------- ---------- ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Current portion, notes payable.............................................. $ 182,445 $ 515,798 $ 515,798 Current portion, capital lease.............................................. 3,788 4,210 4,210 Accounts payable............................................................ 647,795 5,166,141 5,166,141 Accrued expenses............................................................ 459,484 128,466 128,466 Accrued compensation and benefits........................................... 644,216 1,282,456 1,282,456 ---------- ----------- ----------- Total current liabilities............................................... 1,937,728 7,097,071 7,097,071 Notes payable............................................................... 387,806 595,559 595,559 Capital leases.............................................................. 16,526 11,735 11,735 ---------- ----------- ----------- Total liabilities....................................................... 2,342,060 7,704,365 7,704,365 ---------- ----------- ----------- Commitments and contingent liabilities Series A Convertible Mandatory Redeemable Preferred Stock, $.01 par value, 2,752,111 shares authorized and outstanding................................. 14,315,448 16,578,165 Series B Convertible Mandatory Redeemable Preferred Stock, $.01 par value, 4,041,641 and 3,270,760 shares authorized, 2,783,031 and 2,803,031 outstanding at December 31, 1997 and 1998................................... 20,050,950 23,568,947 Series C Convertible Mandatory Redeemable Preferred Stock, $.01 par value, 3,181,819 shares authorized, 832,277 outstanding at December 31, 1998....... 9,128,995 Warrant for Series B Convertible Mandatory Redeemable Preferred Stock......... 880,582 880,582 Stockholders' equity (deficit): Class A common stock, $0.01 par value; 50,000,000 shares authorized, no shares issued at December 31 1997 and 1998. (15,658,690 shares issued Pro Forma at December 31, 1998)............................................... 156,587 Class B common stock, $0.01 par value; 27,608,000 shares authorized, 9,100,801 shares issued and outstanding at December 31, 1997 and 1998 (no shares issued Pro Forma at December 31, 1998)............................. 91,008 91,008 Additional paid-in capital.................................................. 56,810,528 Warrant for Class A Common Stock............................................ 880,582 Accumulated deficit......................................................... (19,165,931) (51,876,639) (51,876,639) Unearned stock-based compensation........................................... (102,026) (454,728) (454,728) ---------- ----------- ----------- Total stockholders' equity (deficit).................................... (19,176,949) (52,240,359) 5,516,330 ---------- ----------- ----------- Total liabilities and stockholders' equity (deficit).................... $18,412,091 $ 5,620,695 $13,220,695 ---------- ----------- ----------- ---------- ----------- -----------
The accompanying notes are an integral part of these financial statements. F-3 WORLDGATE COMMUNICATIONS, INC. STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, --------------------------------------------- 1996 1997 1998 ------------- -------------- -------------- Revenues.......................................................... $ 140,865 $ 1,022,162 ------------- -------------- -------------- Costs and expenses: Product costs, engineering and development...................... $ 1,408,441 8,510,597 19,603,365 Sales and marketing............................................. 427,631 3,622,590 5,156,717 General and administrative...................................... 1,092,502 2,432,363 3,485,442 Depreciation and amortization................................... -- 22,296 119,144 ------------- -------------- -------------- Total costs and expenses.................................... 2,928,574 14,587,846 28,364,668 ------------- -------------- -------------- Loss from operations.............................................. (2,928,574) (14,446,981) (27,342,506) Interest and other income, net.................................... 8,154 422,743 422,807 Interest expense.................................................. (2,081) (17,110) (100,562) ------------- -------------- -------------- Net loss.................................................... (2,922,501) (14,041,348) (27,020,261) Accretion on preferred stock...................................... (75,880) (2,435,470) (6,145,105) ------------- -------------- -------------- Net loss available to common stockholders................... $ (2,998,381) $ (16,476,818) $ (33,165,366) ------------- -------------- -------------- ------------- -------------- -------------- Pro forma net loss per common share............................... $ (2.24) -------------- -------------- Pro forma weighted average common shares outstanding.............. 14,785,714 -------------- --------------
The accompanying notes are an integral part of these financial statements. F-4 WORLDGATE COMMUNICATIONS, INC. STATEMENTS OF STOCKHOLDERS' DEFICIT AND REDEEMABLE PREFERRED STOCK
REDEEMABLE PREFERRED STOCK -------------------------------------------------------------------------- SERIES A SERIES B SERIES C ------------------------ ------------------------ ---------------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ---------- ------------ ---------- ------------ --------- ----------- BALANCE AT DECEMBER 31, 1995....................... Cash capital contributions......................... Capital contributed for services................... Merger of WorldGate Communications, Inc............ Sale of Preferred Stock, net of expenses........... 1,933,000 $ 8,495,535 Accretion on Preferred Stock....................... 75,880 Net loss for the year.............................. ---------- ------------ ---------- ------------ --------- ----------- BALANCE AT DECEMBER 31, 1996....................... 1,933,000 8,571,415 Warrants issued for services provided.............. Deferred compensation.............................. Amortization of deferred compensation.............. Non-employee stock option compensation expense..... Sale of Preferred Stock, net of expenses........... 819,111 3,599,993 2,783,031 $ 19,759,520 Accretion on Preferred Stock....................... 2,144,040 291,430 Net loss for the year.............................. ---------- ------------ ---------- ------------ --------- ----------- BALANCE AT DECEMBER 31, 1997....................... 2,752,111 14,315,448 2,783,031 20,050,950 Deferred compensation.............................. Amortization of deferred compensation.............. Sale of Preferred Stock, net of expenses........... 20,000 142,000 832,277 $ 8,622,604 Accretion on Preferred Stock....................... 2,262,717 3,375,997 506,391 Net loss for the year.............................. ---------- ------------ ---------- ------------ --------- ----------- BALANCE AT DECEMBER 31, 1998....................... 2,752,111 $ 16,578,165 2,803,031 $ 23,568,947 832,277 $ 9,128,995 ---------- ------------ ---------- ------------ --------- ----------- ---------- ------------ ---------- ------------ --------- ----------- STOCKHOLDERS' DEFICIT ----------------------------------------------------------------- WARRANT CLASS B COMMON STOCK FOR ------------------------------------ REDEEMABLE WORLDGATE, ADDITIONAL PREFERRED LLC CAPITAL PAID-IN ACCUMULATED STOCK CONTRIBUTED SHARES AMOUNT CAPITAL DEFICIT ----------- ------------ ----------- --------- ------------ ------------- BALANCE AT DECEMBER 31, 1995....................... $ 180,950 $ (149,325) Cash capital contributions......................... 873,498 Capital contributed for services................... 816,230 Merger of WorldGate Communications, Inc............ (1,870,678) 9,100,801 $ 91,008 $ 1,779,670 Sale of Preferred Stock, net of expenses........... (174,169) Accretion on Preferred Stock....................... (75,880) Net loss for the year.............................. (2,922,501) ----------- ------------ ----------- --------- ------------ ------------- BALANCE AT DECEMBER 31, 1996....................... 9,100,801 91,008 1,529,621 (3,071,826) Warrants issued for services provided.............. $ 880,582 Deferred compensation.............................. 108,875 Amortization of deferred compensation.............. Non-employee stock option compensation expense..... 63,000 Sale of Preferred Stock, net of expenses........... (1,318,783) Accretion on Preferred Stock....................... (382,713) (2,052,757) Net loss for the year.............................. (14,041,348) ----------- ------------ ----------- --------- ------------ ------------- BALANCE AT DECEMBER 31, 1997....................... 880,582 9,100,801 91,008 (19,165,931) Deferred compensation.............................. 454,658 Amortization of deferred compensation.............. Sale of Preferred Stock, net of expenses........... Accretion on Preferred Stock....................... (454,658) (5,690,447) Net loss for the year.............................. (27,020,261) ----------- ------------ ----------- --------- ------------ ------------- BALANCE AT DECEMBER 31, 1998....................... $ 880,582 9,100,801 $ 91,008 $ (51,876,639) ----------- ------------ ----------- --------- ------------ ------------- ----------- ------------ ----------- --------- ------------ ------------- UNEARNED TOTAL STOCK-BASED STOCKHOLDERS COMPENSATION DEFICIT ------------- ------------- BALANCE AT DECEMBER 31, 1995....................... $ 31,625 Cash capital contributions......................... 873,498 Capital contributed for services................... 816,230 Merger of WorldGate Communications, Inc............ Sale of Preferred Stock, net of expenses........... (174,169) Accretion on Preferred Stock....................... (75,880) Net loss for the year.............................. (2,922,501) ------------- ------------- BALANCE AT DECEMBER 31, 1996....................... (1,451,197) Warrants issued for services provided.............. Deferred compensation.............................. $ (108,875) Amortization of deferred compensation.............. 6,849 6,849 Non-employee stock option compensation expense..... 63,000 Sale of Preferred Stock, net of expenses........... (1,318,783) Accretion on Preferred Stock....................... (2,435,470) Net loss for the year.............................. (14,041,348) ------------- ------------- BALANCE AT DECEMBER 31, 1997....................... (102,026) (19,176,949) Deferred compensation.............................. (454,658) Amortization of deferred compensation.............. 101,956 101,956 Sale of Preferred Stock, net of expenses........... Accretion on Preferred Stock....................... (6,145,105) Net loss for the year.............................. (27,020,261) ------------- ------------- BALANCE AT DECEMBER 31, 1998....................... $ (454,728) $ (52,240,359) ------------- ------------- ------------- -------------
The accompanying notes are an integral part of these financial statements. F-5 WORLDGATE COMMUNICATIONS, INC. STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, --------------------------------------------- 1996 1997 1998 ------------- -------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss........................................................ $ (2,922,501) $ (14,041,348) $ (27,020,261) Adjustments to reconcile net loss to cash used in operating activities: Depreciation and amortization............................... -- 22,296 119,144 Amortization of deferred compensation....................... -- 6,849 101,956 Non-employee stock option compensation expense.............. -- 63,000 -- Stock and warrants issued for services provided............. 816,230 880,582 -- Loss on sale of equipment................................... -- -- 15,425 Changes in operating assets and liabilities: Accounts receivable....................................... -- (105,865) (466,255) Inventories............................................... -- (619,905) (2,116,607) Prepaid and other assets.................................. (9,496) (110,334) (1,181,255) Accounts payable.......................................... 333,112 314,683 4,518,346 Accrued expenses.......................................... 129,805 329,679 (331,018) Accrued compensation and benefits......................... -- 644,216 638,240 ------------- -------------- -------------- Net cash used in operating activities................... (1,652,850) (12,616,147) (25,722,285) ------------- -------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures............................................ -- (248,817) (533,394) Purchases of short-term investments............................. (5,881,025) (16,443,761) (1,947,716) Proceeds from maturities of short-term investments.............. -- 9,900,000 14,386,081 Proceeds from sale of equipment................................. -- -- 4,000 Restricted cash................................................. -- -- (240,000) ------------- -------------- -------------- Net cash (used in) provided by investing activities..... (5,881,025) (6,792,578) 11,668,971 ------------- -------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of preferred stock....................... 8,495,535 23,359,513 9,297,027 Stock issuance costs............................................ (174,169) (1,318,783) (532,423) Capital contributions........................................... 873,498 -- -- Proceeds from notes payable--shareholder........................ 350,000 -- -- Repayment of notes payable--shareholder......................... (350,000) -- -- Proceeds from notes payable..................................... -- 621,161 937,790 Repayments of capital leases and notes payable.................. -- (66,220) (401,053) ------------- -------------- -------------- Net cash provided by financing activities............... 9,194,864 22,595,671 9,301,341 ------------- -------------- -------------- Net increase (decrease) in cash and cash equivalents.... 1,660,989 3,186,946 (4,751,973) Cash and cash equivalents, beginning of period.................... 31,625 1,692,614 4,879,560 ------------- -------------- -------------- Cash and cash equivalents, end of period.......................... $ 1,692,614 $ 4,879,560 $ 127,587 ------------- -------------- -------------- ------------- -------------- -------------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest.......................................... $ 2,081 $ 16,351 $ 96,062 ------------- -------------- -------------- ------------- -------------- -------------- NONCASH INVESTING AND FINANCING ACTIVITIES: Accretion on preferred stock.................................... $ 75,880 $ 2,435,470 $ 6,145,105 Issuance of warrant for services provided....................... -- 880,582 -- Issuance of stock for services provided......................... 816,230 -- -- Acquisition of property under capital lease..................... -- 22,045 --
The accompanying notes are an integral part of these financial statements. F-6 WORLDGATE COMMUNICATIONS, INC. NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION WorldGate Communications, Inc. ("WorldGate" or the "Company") provides a new television based Internet service that delivers the Internet through cable television systems. The Company was originally organized as a Limited Liability Company (the "LLC") on March 21, 1995. On December 6, 1996, pursuant to a plan of merger between WorldGate and the LLC, all assets and liabilities of the LLC were transferred to the Company at book value. From inception through July 1, 1998, the Company was a development stage enterprise as defined in Statement of Financial Accounting Standards No. 7, "Accounting and Reporting by Development Stage Enterprises." The Company operates in a single segment. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The Company prepares its financial statements on the accrual basis of accounting. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the financial statements during the year ended December 31, 1998, the Company incurred a loss of $27,020,261 and has an accumulated deficit of $51,876,639 and cash balance of $367,587. The Company has raised approximately $7.6 million in preferred stock since December 31, 1998, is actively pursuing additional debt or equity financing and has received non-binding commitments from current and new investors and its chairman to provide additional funding if and when necessary. If appropriate financing is not obtained, either privately or through this public offering, the Company has a plan to modify its operations to continue its existence through 1999. UNAUDITED PRO FORMA BALANCE SHEET In January and February 1999, the Company sold 697,437 shares of Series C Convertible Preferred Stock ("Series C Preferred") (464,958 shares of Class A Common Stock post-split) (see Note 10) for approximately $7.6 million. The board of directors has authorized the Company to file a Registration Statement with the Securities and Exchange Commission permitting the Company to sell shares of Common Stock in an initial public offering ("IPO"). If the IPO is consummated as presently anticipated, all shares of the Series C Preferred and Series B Convertible Preferred will automatically convert into an equal number of Class A Common Stock and Class B Common Shares, respectively, and all shares of Series A Convertible Preferred Stock will automatically convert into two shares of Class B Common Stock. All of the outstanding Class B Common Stock will then convert into Class A Common Stock. The unaudited pro forma balance sheet reflects the sale of the Series C Preferred shares in 1999 and the subsequent conversion of Series A, Series B and Series C Preferred shares into Class A Common Stock as if such sale and conversion had occurred as of December 31, 1998. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. F-7 WORLDGATE COMMUNICATIONS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) RESTRICTED CASH The Company pledged $240,000 as collateral for its corporate credit card obligations. The amount has been classified as restricted cash on the balance sheet as of December 31, 1998. SHORT-TERM INVESTMENTS The Company considers all investments to be short-term in nature and intends to hold such investments until maturity. Investments are stated at cost, which approximates fair market value. INVENTORIES Inventories are stated at the lower of cost or market on an average cost basis. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is recorded on the straight-line method over the estimated useful lives of the related assets. The Company depreciates furniture and fixtures over seven years; office equipment over five years; and computer equipment over three years. Leasehold improvements are capitalized and amortized on the straight-line basis over the shorter of their useful life or the term of the lease. Maintenance and repairs are expensed as incurred. When the property or equipment is retired or otherwise disposed of, related costs and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in operations. The Company reviews assets for impairment whenever events or changes in circumstances indicate the carrying value of the asset may not be recoverable. A determination of impairment (if any) is made based on estimates of undiscounted future cash flows. For the years ended December 31, 1997 and 1998, there have been no asset impairments. REVENUE RECOGNITION The Company derives its revenue principally from the sale of headend units and other equipment to cable operators. Revenue is recognized by the Company when products are shipped and accepted by the customer. PRODUCT, ENGINEERING AND DEVELOPMENT COSTS Product, engineering and development costs are expensed as incurred. ADVERTISING COSTS Advertising costs, included in sales and marketing expense, are expensed in the period incurred. Advertising expenses were $0, $274,040 and $392,513 for the years ended December 31, 1996, 1997 and 1998, respectively. INCOME TAXES From inception through December 5, 1996, the Company was an LLC under the Internal Revenue Code, whereby taxes are the responsibility of the individual members. Accordingly, there was no F-8 WORLDGATE COMMUNICATIONS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) provision for income taxes in the Company's statement of operations. Accumulated losses through December 5, 1996 totaled approximately $2,180,000. The Company began operations as a C Corporation on December 6, 1996. The Company has incurred losses from operations in the period from December 6, 1996 through December 31, 1996 and for the years ended December 31, 1997 and 1998; therefore, there is no provision for income taxes in the Company's statement of operations. Provision for income taxes is determined based on the asset and liability method. The asset and liability method provides that deferred tax balances are recorded based on the difference between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax liabilities or assets at the end of each period are determined using the tax rate enacted under the current tax law. The measurement of net deferred tax assets is reduced by the amount of any tax benefits that, based on available evidence, are not expected to be realized, and a corresponding valuation allowance is established. CONCENTRATION OF CREDIT RISK Financial instruments which potentially subject the Company to a concentration of credit risk principally consist of cash and cash equivalents and short-term investments. The Company has its cash and cash equivalents placed with high quality, creditworthy financial institutions. The balances at such institutions at December 31, 1998 and periodically throughout the year are in excess of federally insured limits. As part of its cash management process, the Company performs periodic evaluation of the relative credit standing of these institutions. At December 31, 1997, short-term investments were composed of mortgage-backed securities issued by U.S. government agencies. Accounts receivable, trade consists of receivables from cable operators. The Company performs ongoing credit evaluations of its customers' financial condition and generally requires no collateral. Accounts receivable from major customers as a percentage of total accounts receivable were as follows:
CUSTOMER 1997 1998 - ------------------------------------------------------------------------------- ----- ----- A.......................................................................... -- 31% B.......................................................................... -- 17% C.......................................................................... -- 12% D.......................................................................... 10% 10% E.......................................................................... -- 10% F.......................................................................... -- 10% G.......................................................................... 47% -- H.......................................................................... 43% 8% -- --- 100% 98% -- -- --- ---
F-9 WORLDGATE COMMUNICATIONS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Sales to major customers, as a percentage of revenues, were as follows for each of the years ended December 31:
CUSTOMER 1996 1997 1998 - ---------------------------------------------------------------------- ----- ----- ----- A................................................................. -- 32% 44% B................................................................. -- -- 10% C................................................................. -- 34% -- D................................................................. -- 34% -- -- -- --- 100% 54% -- -- -- -- --- ---
FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments consist primarily of cash and cash equivalents, short-term investments, accounts receivable, accounts payable, debt, capital lease obligations and preferred stock. The book value of cash and cash equivalents, accounts receivable, and accounts payable is considered to be representative of their fair value because of their short maturities. The carrying value of short-term investments approximates their fair value. Management believes that determining a fair value for the Company's convertible mandatory redeemable preferred stock is impractical due to the closely-held nature of these instruments. VULNERABILITY DUE TO CERTAIN CONCENTRATIONS The Company's growth and future success is substantially dependent upon its ability to convince cable operators to offer the WORLDGATE Service to their subscribers. Although a number of large cable operators have begun testing the WORLDGATE Service, only a limited number have entered into written agreements with the Company obligating them to offer the service to their subscribers. The Company is highly reliant on two suppliers of cable boxes. At present the agreements with these manufacturers do not require them to install the WORLDGATE technology in their current or next generation cable boxes or prohibit them from establishing relationships with the Company's competitors. The Company is working with both manufacturers to develop an integrated product. These manufacturers have agreed to cooperate with the Company to certify and market such products. The Company continues to seek additional capital resources to further the development of its service, to expand and improve its product line and to fund its operations. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS 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 reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. F-10 WORLDGATE COMMUNICATIONS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) STOCK-BASED COMPENSATION Stock-based compensation is recognized using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations. Accordingly, compensation expense for stock options is measured as the excess, if any, of the fair value of the Company's stock at the date of grant over the amount an individual must pay to acquire the stock and amortized over the vesting period. All transactions, with other than employees, in which goods and services are the consideration received for the issuance of equity instruments, such as stock options, are expensed based on the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measured. The Company has adopted the disclosure only provisions of Statement of Accounting Standards No. 123, "Accounting for Stock-Based Compensations" (SFAS 123) (see Note 7). PRO FORMA NET LOSS PER COMMON SHARE Pro forma net loss per common share for the year ended December 31, 1998 is computed using the weighted average number of shares of Class B Common Stock outstanding during the period and gives effect to the subsequent conversion of Series A, Series B, and Series C Preferred shares into common stock upon effectiveness of the IPO as if such conversion occurred on January 1, 1998 or at the date of original issuance, if later. The resulting pro forma adjustment includes an increase in the weighted average shares of 5,684,913 used to compute basic and diluted net loss per common share for the year ended December 31, 1998. The calculation of diluted net loss per common share excludes potential common shares as the effect would be antidilutive. Potential common shares are composed of shares of common stock issuable upon the exercise of stock options and warrants. HISTORICAL NET LOSS PER SHARE The Company computes net loss per common share in accordance with SFAS No. 128, "Earnings per Share" and SEC Staff Accounting Bulletin No. 98 ("SAB 98"). Under the provisions of SFAS No. 128 and SAB 98, basic and diluted net loss per common share is computed by dividing the net loss available to common stockholders for the period by the weighted average number of shares of common stock outstanding during the period. The calculation of diluted net loss per common share excludes potential common shares if the effect is antidilutive. Potential common shares are composed of shares of common stock issuable upon the exercise of stock options and warrants and upon conversion of Series A, Series B, and Series C Preferred Stock. Net loss per common share on a historical basis is as follows:
YEAR ENDED DECEMBER 31, --------------------------------------------- 1996 1997 1998 ------------- -------------- -------------- Net loss available to common stockholders..... $ (2,998,381) $ (16,476,818) $ (33,165,366) Basic and diluted net loss per common share... $ (0.33) $ (1.81) $ (3.64) ------------- -------------- -------------- ------------- -------------- -------------- Weighted average shares outstanding-- basic and diluted................................. 9,100,801 9,100,801 9,100,801 ------------- -------------- -------------- ------------- -------------- --------------
F-11 WORLDGATE COMMUNICATIONS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) RECENT ACCOUNTING PRONOUNCEMENTS In April 1998, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position No. 98-5 (SOP 98-5), "Reporting on the Costs of Start-Up Activities." SOP 98-5 generally requires costs of start-up activities to be expensed instead of being capitalized and amortized and is required to be adopted no later than Janaury 1, 1999. The Company does not expect the adoption of SOP 98-5 to have a material effect on its results of operations and financial condition. In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use". SOP 98-1 provides, among other things, guidance for determining whether computer software is for internal use and when the cost related to such software should be expensed as incurred or capitalized and amortized. SOP 98-1 is required to be applied prospectively and adopted no later than January 1, 1999. The Company does not expect the adoption of SOP 98-1 to have a material effect on its results of operations, financial position or cash flows. In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income" (SFAS 130), which is effective for years beginning after December 15, 1997. This statement establishes standards for the reporting and display of comprehensive income and its components. Comprehensive income is defined to include all changes in equity during a period except those resulting from investments by owners and distributions to owners. The Company adopted SFAS 130 in 1998; however, as of December 31, 1998, there were no components of comprehensive income for disclosure. RECLASSIFICATIONS Certain amounts have been reclassified from previous years to conform with the 1998 presentation. 3. INVENTORIES Inventories as of December 31, 1997 and 1998 are summarized as follows:
1997 1998 ---------- ------------ Raw material........................................................ $ 148,629 $ 991,670 Work-in-progress.................................................... 179,205 16,461 Finished goods...................................................... 292,071 1,728,381 ---------- ------------ $ 619,905 $ 2,736,512 ---------- ------------ ---------- ------------
F-12 WORLDGATE COMMUNICATIONS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 4. PROPERTY AND EQUIPMENT Property and equipment consist of the following at December 31, 1997 and 1998:
1997 1998 ---------- ---------- Computer equipment.................................................... $ 50,893 $ 184,502 Office equipment...................................................... 11,299 203,646 Furniture and fixtures................................................ 165,315 323,095 Leasehold improvements................................................ 21,310 46,969 Capital leases: Equipment........................................................... 22,045 22,045 ---------- ---------- 270,862 780,257 Less accumulated depreciation and amortization: Property and equipment.............................................. (18,626) (128,787) Capital leases...................................................... (3,670) (8,079) ---------- ---------- Property and equipment, net........................................... $ 248,566 $ 643,391 ---------- ---------- ---------- ----------
5. FINANCING AGREEMENT During 1997, the Company entered into a $1,000,000 equipment facility of which $429,749 remained available at December 31, 1997. During 1998, the amount of the equipment facility was increased to $2,000,000, of which $419,044 remained available at December 31, 1998. The weighted average interest rate on the outstanding notes payable borrowings at December 31, 1997 and 1998 was 8.89%. Notes payable are summarized as follows:
1997 1998 ---------- ------------ Notes payable....................................................... $ 570,251 $ 1,111,357 Less: current maturities............................................ 182,445 515,798 ---------- ------------ Total long-term debt............................................ $ 387,806 $ 595,559 ---------- ------------ ---------- ------------
At December 31, 1998, the installments of the notes payable maturing in each of the following years were: 1999--$515,798, 2000--$490,521 and 2001--$105,038. The notes payable are collateralized by certain equipment, furniture and fixtures. F-13 WORLDGATE COMMUNICATIONS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 6. INCOME TAXES The significant components of deferred tax assets at December 31, 1997 and 1998 are as follows:
1997 1998 ------------ ------------- Federal tax loss carryforward.................................... $ 4,136,503 $ 12,678,426 State tax loss carryforward...................................... 999,000 999,000 Property and equipment........................................... 838,625 1,107,971 Research and experimentation credit.............................. 99,327 173,174 Section 263(A) adjustment........................................ -- 33,819 Officers' compensation........................................... -- 26,891 Compensation on non-qualified stock options...................... -- 58,689 Warrant issuance................................................. 357,428 -- ------------ ------------- 6,430,883 15,077,970 Less: valuation allowance........................................ (6,430,883) (15,077,970) ------------ ------------- $ -- $ -- ------------ ------------- ------------ -------------
A valuation allowance was established against the Company's net deferred tax asset due to the Company's lack of earnings history and, accordingly, the uncertainty as to the realizability of the asset. At December 31, 1998, the Company had a net operating loss carryforward of approximately $38,288,000 for federal tax purposes, with $735,000 expiring in 2011, $12,008,000 expiring in 2012 and $25,545,000 expiring in 2018 if not utilized. The net operating loss carryforward for state tax purposes is approximately $10,000,000, which will expire in 2009. These carryforwards may be applied as a reduction to future taxable income of the Company, if any. The state net operating loss carryforwards are limited by state tax law to a maximum utilization of $1,000,000 per year. The Company also has research and experimentation credit carryforwards of approximately $173,000, with $11,500 expiring in 2011, $87,500 expiring in 2012 and $74,000 expiring in 2013. The Company's ability to utilize its net operating loss carryforwards and credit carryforwards may be subject to annual limitations as a result of prior or future changes in ownership and state tax law. The IPO as presently contemplated will cause such a change. 7. STOCKHOLDERS' DEFICIT COMMON STOCK On December 6, 1996, the date of the merger of WorldGate and the LLC, the Company allocated 9,100,801 shares of common stock to the shareholders in the LLC and certain key employees, who had been granted profit interests. As a result of the conversion of such profit interests to equity, the Company recognized $816,230 in compensation expense. On April 27, 1998, the board of directors authorized an amendment to the Company's Articles of Incorporation creating Class A and Class B Common Stock, each having 27,608,000 shares authorized. Each outstanding share of common stock was reclassified as one share of Class B Common Stock. Class A and B Common Stock have one and five votes per share, respectively. On July 13, 1998, the board of directors further amended the Articles of Incorporation to increase the number of authorized shares of Class A Common Stock to 50,000,000 shares and the number of authorized shares of preferred stock to 13,500,000 shares. F-14 WORLDGATE COMMUNICATIONS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 7. STOCKHOLDERS' DEFICIT (CONTINUED) CONVERTIBLE MANDATORY REDEEMABLE PREFERRED STOCK The Company has authorized 13,500,000 shares of $0.01 par value preferred stock of which 2,752,111, 3,270,760 and 3,181,819 shares have been designated as Series A Convertible Preferred Stock ("Series A Preferred"), Series B Convertible Preferred Stock ("Series B Preferred") and Series C Convertible Preferred Stock ("Series C Preferred"), respectively (collectively the "Preferred Stocks"). In December 1996 the Company sold 1,933,000 shares of Series A Preferred (2,577,333 shares of Class B Common Stock, post-split) for $4.395 per share for $8,321,366, net of $174,169 of offering expenses. In 1997, the Company completed its Series A Preferred sale in which it issued an additional 819,111 shares (1,092,148 shares of Class B Common Stock, post-split) for $3,400,733, net of $199,260 of offering expenses. In December 1997, the Company sold 2,783,031 shares of Series B Preferred (1,855,354 shares of Class B Common Stock, post-split) at $7.10 per share for $18,640,017, net of $1,119,503 of offering expenses. In September through December 1998, the Company sold 832,277 shares of Series C Preferred (554,851 shares of Class A Common Stock, post-split) for $11.00 per share for $8,622,604, net of $532,423 of offering expenses. The Series B and C Preferred provides certain anti-dilutive provisions that may be triggered by an initial public offering. All holders of outstanding shares of the Preferred Stocks have the right to convert their shares into common stock at any time. Each share of Series A Preferred is initially convertible into two shares of Class B Common Stock and each share of Series B Preferred and Series C Preferred is initially convertible into one share of Class B Common Stock and Class A Common Stock, respectively. Each share of the Preferred Stocks will be automatically converted into shares of common stock at the then applicable conversion rate and price, upon the earlier of (1) completion by the Company of a qualified (as defined) underwritten public offering of common stock or (2) the conversion date selected by the holders of a majority of the outstanding shares of each Series A, Series B and Series C Preferred Stock. The redemption price of the shares corresponds to the original purchase price of each share plus any declared and unpaid dividends, or if the Company fails to meet certain financial performance goals, the original purchase price of each share plus interest at 15% per annum. The Preferred shareholders are permitted to redeem their shares commencing December 2000 provided that the Company shall not be required to redeem more than 50% of each of the Preferred Stocks during the twelve-month period commencing December 2000. The Company is accreting the mandatory redemption amount, at the rate of 15% compounded per annum, such that the carrying value of the preferred stock will equate to the redemption amount at the time of redemption. The difference between the redemption amount and the fair value of the preferred stock at the date of issue is being amortized from the date of issuance assuming the preferred stockholders redeem 50% of their shares in December 2000 and the balance in December 2001. For the year ended December 31, 2000, the Company may be required to redeem up to 1,376,056 Series A Preferred shares for $11,618,988, up to 1,401,516 Series B Preferred shares for $16,757,459 and up to 416,139 Series C Preferred shares for $7,662,786. At December 31, 2001, the Company may be required to redeem all the Series A, Series B and Series C Preferred shares for $23,237,976, $33,514,917 and $15,325,572, respectively. F-15 WORLDGATE COMMUNICATIONS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 7. STOCKHOLDERS' DEFICIT (CONTINUED) The holders of the Preferred Stocks have voting rights on a converted basis equivalent to those of common stockholders on most matters. However, the approval of a majority of the Series A, Series B and Series C Preferred stockholders is required for certain transactions. The Series A, Series B and Series C Preferred stockholders fully participate in any dividends declared by the board of directors of the Company at the rate of $0.35, $0.57 and $0.88, respectively, per share per annum. These dividends are non-cumulative. No dividends have been declared through December 31, 1998. Upon any liquidation, dissolution, or winding up of the Company, liquidation proceeds will be distributed: (1) first, on a PARI PASSU basis, to the holders of Series C Preferred at $11.00 per share plus any unpaid dividends, Series B Preferred at $7.10 per share plus any unpaid dividends and to the holders of Series A Preferred at $4.395 per share plus any unpaid dividends, (2) second to the holders of common stock in an amount equal to $2 million and (3) equally thereafter. The liquidation value of each of the Preferred Stocks at December 31, 1997 and 1998 is equal to the respective carrying amounts on the balance sheet. The agreements with the holders of the Preferred Stocks contain certain provisions which, among other things, restrict borrowings and changes in capital structure and ownership. Events of noncompliance under these provisions entitle the holders of these shares to the right of an immediate voluntary redemption. In January and February 1999, the Series A, Series B and Series C Preferred stockholders agreed to waive certain rights under their respective stock agreements. WARRANTS In November 1997, the Company issued a warrant to purchase 394,880 shares of Series B Preferred (263,253 shares of Class B Common Stock, post-split) at $7.10 per share which expires June 30, 2002 to a strategic investor under the terms of a master affiliation agreement. As a result of the issuance of the warrant, the Company recorded approximately $881,000 as marketing expense which was the estimated fair market value of the warrant at that time. Also, in connection with the Series B Preferred private placement, the underwriter received warrants to purchase 60,474 and 12,375 shares of Series B Preferred (40,316 and 8,250 shares of Class B Common Stock, post-split) at $7.10 per share which expire in November and December 2002, respectively. STOCK OPTION PLAN In December 1996, the Company adopted the 1996 Stock Option Plan ("1996 Plan"), as amended. This plan provides for the granting of stock options to officers, directors, employees and consultants. Grants under this plan may consist of options intended to qualify as incentive stock options ("ISOs"), or nonqualified stock options that are not intended to so qualify ("NQSOs"). The option price of any ISO will not be less than the fair market value on the date the option is granted (110% of fair value in certain instances). The option price of a NQSO may be greater than, equal to, or less than the fair market value on the date the option is granted. The 1996 Plan authorizes a maximum of 933,333 shares of common stock. The Plan is administered by a committee of the board of directors. The committee determines the term of each option, provided, however, that the exercise period may not exceed ten years from the F-16 WORLDGATE COMMUNICATIONS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 7. STOCKHOLDERS' DEFICIT (CONTINUED) date of grant, and for ISOs, in certain instances, may not exceed five years. The options granted under this plan vest ratably over a four-year period from the date of grant. Compensation expense of approximately $109,000 and $455,000 is being recognized, over the four-year vesting period for certain options which were granted to employees in 1997 and 1998, respectively, at below the estimated fair market value at the time of grant, to acquire 87,667 and 213,343 shares of common stock, respectively. Compensation expense of approximately $7,000 and $102,000 was recognized in 1997 and 1998, respectively. Also, compensation expense of approximately $63,000 was recognized in 1997 for stock options granted to non-employees in connection with consulting services provided. If compensation expense had been determined based on the fair value of the options at the grant dates for those options for which no compensation expense has been recognized, consistent with the method of SFAS 123, the Company's net loss and loss per share would have been:
1997 1998 -------------- -------------- Net loss available to common stockholders: As reported................... $ (16,476,818) $ (33,165,366) Pro forma..................... $ (16,493,691) $ (33,241,555) Net loss per common share: basic and diluted: As reported................... $ (1.81) $ (3.64) Pro forma..................... $ (1.81) $ (3.65)
Such pro forma disclosures may not be representative of future compensation expense because options vest over several years and additional grants are made each year. The fair value of each option grant is estimated on the date of grant using the Black-Scholes minimum value option valuation model. The following weighted-average assumptions were used for grants in 1997 and 1998, respectively: expected volatility of 0% and 0%; risk-free interest rates of 6.2% and 5.4%; dividend yield of 0% and 0%; and expected lives of 5 and 5.91 years. The weighted-average fair value of the options granted during the year was $0.615 and $3.36 per option at December 31, 1997 and 1998, respectively. F-17 WORLDGATE COMMUNICATIONS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 7. STOCKHOLDERS' DEFICIT (CONTINUED) A summary of the Company's stock plan is presented below:
STOCK WEIGHTED-AVERAGE OPTIONS EXERCISE PRICE --------- ----------------- Outstanding, December 31, 1996................................... -- -- Granted.......................................................... 435,000 $ 2.26 Exercised........................................................ -- -- Cancelled/forfeited.............................................. -- -- --------- Outstanding, December 31, 1997................................... 435,000 2.26 Granted.......................................................... 219,643 4.50 Exercised........................................................ -- -- Cancelled/forfeited.............................................. (13,300) 3.54 --------- Outstanding, December 31, 1998................................... 641,343 $ 3.00 --------- ---------
The following table summarizes information about stock options outstanding at December 31, 1998:
STOCK OPTIONS STOCK OPTIONS OUTSTANDING --------------------------------------- EXERCISABLE WEIGHTED- ----------------------- AVERAGE WEIGHTED- WEIGHTED- REMAINING AVERAGE AVERAGE RANGE OF CONTRACTUAL EXERCISE EXERCISE EXERCISE PRICES SHARES LIFE (YEARS) PRICE SHARES PRICE - ------------------------------------------------------ --------- --------------- ----------- ---------- ----------- $0.75--$1.50.......................................... 87,333 7.5 $ 1.245 21,833 $ 1.245 $1.51--$2.25.......................................... 297,000 7.8 2.22 75,667 2.22 $2.26--$4.50.......................................... 257,010 8.9 4.50 11,250 4.50 --------- ----------- ---------- ----------- 641,343 8.1 $ 3.00 108,750 $ 2.25 --------- ---------- --------- ----------
EMPLOYEE STOCK PURCHASE PLAN In November 1997, the Company approved and adopted an Employee Stock Purchase Plan (the "ESPP") to provide employees, directors, officers, consultants or advisors of the Company the ability to purchase Series B Preferred at $7.10 per share. During 1998, 20,000 shares of Series B Preferred (13,333 shares of Class B Common Stock, post-split) were sold for $142,000. 8. COMMITMENTS AND CONTINGENCIES SIGNIFICANT AGREEMENTS The Company has entered into various agreements in which the Company has obtained the right to use and distribute licensed software and certain proprietary technology as incorporated into the WORLDGATE Service until September 2002 for total minimum subscription fees of $550,000. For the years ended December 31, 1997 and 1998, approximately $110,000 and $208,000 has been expensed, respectively. In addition, in one of the agreements, the Company will be required to pay an annual maintenance service fee of $0.02 per subscriber over two million subscribers. F-18 WORLDGATE COMMUNICATIONS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 8. COMMITMENTS AND CONTINGENCIES (CONTINUED) LEGAL The Company is a party to various pending legal actions. The Company does not expect that the ultimate resolution of pending legal matters in future periods will have a material effect on its financial position or cash flows, but it could have a material effect on its results of operations. LEASES The Company has entered into operating leases for its office facilities and certain equipment. The future minimum rental commitments under capital leases and operating leases for each fiscal year ended December 31 are as follows:
CAPITAL OPERATING FISCAL YEAR LEASES LEASES - --------------------------------------------------------------------- --------- ------------ 1999............................................................... $ 5,699 $ 757,000 2000............................................................... 5,699 1,046,000 2001............................................................... 5,699 921,000 2002............................................................... 2,354 891,000 2003............................................................... -- 909,000 Thereafter......................................................... -- 5,301,000 --------- ------------ Total minimum lease payments....................................... 19,451 $ 9,825,000 ------------ ------------ Less amounts representing interest................................. (3,506) --------- Present value of net minimum lease payments (including $4,210 currently payable)............................................... $ 15,945 --------- ---------
Total rent expense for operating leases for the years ended December 31, 1997 and 1998 amounted to approximately $299,497 and $554,510, respectively. 9. RELATED PARTY TRANSACTIONS In 1997, the Company entered into an agreement with a cable operator who is an investor. Revenues recognized from this investor were approximately $0, $46,000 and $451,000 for the years ended December 31, 1996, 1997 and 1998, respectively. Accounts receivable amounted to approximately $11,000 and $176,000 at December 31, 1997 and 1998, respectively. In 1997 and 1998, the Company entered into agreements with investors to provide engineering and development support. As a result of these agreements, the Company has expensed approximately $14,000, $1,033,000 and $3,072,000 for the years ended December 31, 1996, 1997 and 1998, respectively. An additional $1,000,000 of work remains to be funded and performed under these contracts. Accounts payable amounted to approximately $93,000 and $18,000 as of December 31, 1997 and 1998, respectively. Revenues recognized from these investors for the year ended December 31, 1998 amounted to approximately $99,000. In 1998, the Company entered into a leasing arrangement for a building with an entity formed by non-employee investors. Included in Deposits and other is $1,000,000 related to this lease. During 1996, the Company borrowed approximately $350,000 from its Chairman. The note bore interest at 7% and was repaid in December 1996. F-19 WORLDGATE COMMUNICATIONS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 10. SUBSEQUENT EVENTS In January and February 1999, the Company sold 697,437 shares of Series C Preferred (464,958 shares of Class A Common Stock, post-split) for $11.00 per share for approximately $7,600,000. Upon completion of the IPO as presently anticipated, these shares will convert into shares of Class A Common Stock. In January 1999, the board of directors approved a 2-for-3 reverse stock split effective immediately prior the IPO. All common stock share data have been retroactively adjusted to reflect this change. F-20 TABLE OF CONTENTS
PAGE --------- Prospectus Summary............................. 3 Cautionary Note Regarding Forward-Looking Statements................................... 8 Risk Factors................................... 8 Use of Proceeds................................ 19 Dividend Policy................................ 19 Capitalization................................. 20 Dilution....................................... 21 Selected Financial Information................. 22 Management's Discussion and Analysis of Financial Condition and Results of Operations........................ 23 Business....................................... 29 Management..................................... 48 Certain Transactions........................... 53 Principal Stockholders......................... 55 Description of Capital Stock................... 57 Shares Eligible for Future Sale................ 59 Underwriting................................... 62 Legal Matters.................................. 63 Experts........................................ 63 Additional Information......................... 64 Index to Financial Statements.................. F-1
[LOGO] GERARD KLAUER MATTISON & CO., INC. JEFFERIES & COMPANY, INC. PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following is an itemization of all expenses (subject to future contingencies) incurred or expected to be incurred by the Company in connection with the issuance and distribution of the securities being offered hereby (other than underwriting discounts and commissions and underwriters' non-accountable expense allowance): Securities and Exchange Commission registration fee............... $ 17,904 NASD filing fee................................................... 6,940 Nasdaq filing fee................................................. 95,000 Printing and engraving expenses................................... 175,000 Legal fees and expenses........................................... 200,000 Accounting fees and expenses...................................... 150,000 Blue Sky fees and expenses (including legal fees)................. 10,000 Transfer agent and registrar fees and expenses.................... 4,000 Miscellaneous..................................................... 41,156 --------- Total............................................................. $ 700,000 --------- ---------
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The registrant's Certificate of Incorporation, as amended, currently states that a director of the registrant shall have no personal liability to the registrant or its stockholders for monetary damages for breach of fiduciary duty as a director except to the extent that Section 102(b)(7) (or any successor provision) of the Delaware General Corporation Law, as amended from time to time, expressly provides that the liability of a director may not be eliminated or limited. No amendment or repeal of this provision shall apply to or have any effect on the liability or alleged liability of any director of the registrant for or with respect to any acts or omissions of such director occurring prior to such amendment or repeal. The registrant's Bylaws require the registrant to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that such person is or was a director or officer of the registrant, or is or was serving while a director or officer of the registrant at its request as a director, officer, employee, agent, fiduciary or other representative of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against expenses (including attorneys' fees), judgments, fines, excise taxes and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding to the full extent permissible under Delaware law. Any person claiming indemnification as provided in the Bylaws shall be entitled to advances from the registrant for payment of the expenses of defending actions against such person in the manner and to the full extent permissible under Delaware law. On the request of any person requesting indemnification under such provisions, the Board of Directors of the registrant or a committee thereof shall determine whether such indemnification is permissible or such determination shall be made by independent legal counsel if the Board or committee so directs or if the Board or committee is not empowered by statute to make such determination. The indemnification and advancement of expenses provided by the Bylaws shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any insurance or other agreement, vote of shareholders or disinterested directors or otherwise, II-1 both as to actions in their official capacity and as to actions in another capacity while holding an office, and shall continue as to a person who has ceased to be a director or officer and shall inure to the benefit of the heirs, executors and administrators of such person. The registrant shall have the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the registrant or is or was serving at its request as a director, officer, employee, agent, fiduciary or other representative of another corporation, partnership, joint venture, trust, employee benefit plan 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 registrant would have the power to indemnify him against such liability under the provisions of the Bylaws. The duties of the registrant to indemnify and to advance expenses to a director or officer provided in the Bylaws shall be in the nature of a contract between the registrant and each such director or officer, and no amendment or repeal of any such provision of the Bylaws shall alter, to the detriment of such director or officer, the right of such person to the advancement of expenses or indemnification related to a claim based on an act or failure to act which took place prior to such amendment, repeal or termination. Delaware law also permits indemnification in connection with a proceeding brought by or in the right of the registrant to procure a judgment in its favor. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling the registrant pursuant to the foregoing provisions, the registrant has been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in that Securities Act and is therefore unenforceable. The registrant has directors and officers liability insurance. The Underwriting Agreement provides that the underwriters are obligated, under some circumstances, to indemnify directors, officers and controlling persons of the registrant against some liabilities, including liabilities under the Act. Reference is made to Section of the form of Underwriting Agreement which will be filed by amendment as Exhibit 1.1 hereto. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. In the three years preceding the filing of this registration statement, the registrant has issued the following securities that were not registered under the Act: Since its inception, the Company has sold to employees and various institutional and other accredited investors: (1) an aggregate of 9,100,801 shares of Class B Common Stock, (2) an aggregate of 2,752,111 shares of Series A Preferred Stock at a price of $4.395 per share, (3) an aggregate of 2,803,031 shares of Series B Preferred Stock at a price of $7.10 per share, (4) warrants to purchase an aggregate of 467,729 shares of Series B Preferred Stock at an exercise price of $7.10 per share, and (5) an aggregate of 1,529,714 shares of Series C Preferred Stock at a price of $11 per share. All of such sales were made under the exemption from registration provided under Section 4(2) of the Act. Pursuant to the Company's Stock Option Plan, as amended, the Company has granted options to purchase a total of 680,410 shares of Class B Common Stock to its employees and some other persons during the past three fiscal years at a weighted average exercise price of $3.00 per share. For a more detailed description of the Company's Stock Option Plan, see "Management--Stock Option Plan" in this registration statement. In granting the options and selling the underlying securities upon exercise of the options, the Company is relying upon exemptions from registration set forth in Rule 701 and Section 4(2) of the Act. II-2 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (A) EXHIBITS:
EXHIBIT NUMBER DESCRIPTION - ----------------- ------------------------------------------------------------------------------------------------- 1.1 Form of Underwriting Agreement.# 3.1 Form of Amended and Restated Certificate of Incorporation of the Company.# 3.2 Form of Amended and Restated By-laws of the Company.# 5.1 Opinion of Drinker Biddle & Reath LLP.# 10.1 Lease Agreement dated October 7, 1998 between WorldGate and Balanced Capital LLC, as amended by First Amendment to Lease Agreement dated December 7, 1998 between WorldGate and Balanced Capital LLC, as further amended by Second Amendment to Lease Agreement dated December 17, 1998 between WorldGate and Balanced Capital LLC.* 10.2 Agreement of Lease dated January 14, 1997 between Glenview Corporate Center and WorldGate, as amended by First Amendment to Agreement of Lease dated October 24, 1997 between Glenview Corporate Center and WorldGate.* 10.3 Agreement of Lease dated November 26, 1997 between Glenview Corporate Center and WorldGate.* 10.4 Development Agreement dated October 15, 1998 between WorldGate and Scientific-Atlanta, Inc.#+ 10.5 Memorandum of Understanding dated September 2, 1998 between WorldGate and General Instrument Corporation.#+ 10.6 Senior Loan and Security Agreement No. 0098 dated July 15, 1997 between Phoenix Leasing Incorporated and WorldGate, as amended by Amendment No. 1 to Senior Loan and Security Agreement No. 0098 dated June 18, 1998 between Phoenix Leasing Incorporated and WorldGate.* 10.7 Master Agreement dated November 7, 1997 between Charter Communications, Inc. ("Charter") and WorldGate.#+ 10.8 Warrant Agreement dated November 7, 1997 between Charter and WorldGate.* 10.9 Affiliation Agreement dated November 7, 1997 between Charter and WorldGate.#+ 10.10 Affiliation Agreement dated December 8, 1998 between WorldGate and Prestige Cable, Inc.#+ 10.11 Affiliation Agreement dated October 19, 1998 between WorldGate and Massillon CableTV, Inc.#+ 10.12 Affiliation Agreement dated September 25, 1998 between WorldGate and TVCable, S.A.#+ 10.13 Affiliation Agreement (undated), between WorldGate and City of Tacoma, Tacoma Public Utilities, d/b/a Click!Network.#+ 10.14 Amended and Restated 1996 Stock Option Plan, as further amended by First Amendment to 1996 Stock Option Plan dated June 12, 1998.* 10.15 Agreement dated June 15, 1998 between WorldGate and Thomas R. Baxter.* 10.16 First Amended and Restated Stockholders' Agreement dated September 2, 1998 among WorldGate and the stockholders identified therein.* 23.1 Consent of PricewaterhouseCoopers LLP.* 23.2 Consent of Drinker Biddle & Reath LLP (to be included in Exhibit 5.1).# 24.1 Power of Attorney (included on signature page).*
II-3
EXHIBIT NUMBER DESCRIPTION - ----------------- ------------------------------------------------------------------------------------------------- 27.1 Financial Data Schedule.*
- ------------------------ * Filed herewith. # To be filed by amendment. + Confidential Treatment Requested. The entire agreement will be filed separately with the Securities and Exchange Commission. (B) FINANCIAL STATEMENT SCHEDULES All information for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission is either included in the financial statements or is not required under the related instructions or is inapplicable, and therefore has been omitted. ITEM 17. UNDERTAKINGS. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For purposes of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) It will provide to the underwriters at the closing specified in the underwriting agreements certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act of 1933 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 Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, 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. II-4 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 Bensalem, Pennsylvania on February 8, 1999. WORLDGATE COMMUNICATIONS, INC. BY: /S/ HAL M. KRISBERGH ----------------------------------------- Hal M. Krisbergh CHIEF EXECUTIVE OFFICER KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Hal M. Krisbergh, Randall J. Gort and David A. Dill or each of them acting alone, his or her true and lawful attorney-in-fact and agent, with full power of substitution and revocation, for him or her and in his or her name, place and stead, in any and all capacities, to sign (i) any and all amendments (including post-effective amendments) to this registration statement and to file the same with all exhibits thereto, and other documents in connection therewith and (ii) any registration statement and any and all amendments thereto, relating to the offer covered hereby filed pursuant to Rule 462(b) under the Securities Act of 1933, 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 as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated. SIGNATURES TITLES DATE - ------------------------------ --------------------------- ------------------- Chairman and Chief /s/ HAL M. KRISBERGH Executive Officer, - ------------------------------ Director (Principal February 8, 1999 Hal M. Krisbergh Executive Officer) /s/ DAVID A. DILL Chief Financial Officer - ------------------------------ (Principal Financial and February 8, 1999 David A. Dill Accounting Officer) /s/ DAVID E. WACHOB Vice President and General - ------------------------------ Manager, Director February 8, 1999 David E. Wachob /s/ ALAN GERRY Director - ------------------------------ February 5, 1999 Alan Gerry /s/ MARCIA J. HOOPER Director - ------------------------------ February 5, 1999 Marcia J. Hooper /s/ RONALD A. WALTER Director - ------------------------------ February 3, 1999 Ronald A. Walter /s/ THOMAS G. BAXTER Director - ------------------------------ February 8, 1999 Thomas G. Baxter /s/ GRAHAM PATTISON Director - ------------------------------ February 8, 1999 Graham Pattison II-5 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION PAGE NO. - ----------------- --------------------------------------------------------------------------------------- ----------- 1.1 Form of Underwriting Agreement.# 3.1 Form of Amended and Restated Certificate of Incorporation of the Company.# 3.2 Form of Amended and Restated By-laws of the Company.# 5.1 Opinion of Drinker Biddle & Reath LLP.# 10.1 Lease Agreement dated October 7, 1998 between WorldGate and Balanced Capital LLC, as amended by First Amendment to Lease Agreement dated December 7, 1998 between WorldGate and Balanced Capital LLC, as further amended by Second Amendment to Lease Agreement dated December 17, 1998 between WorldGate and Balanced Capital LLC.* 10.2 Agreement of Lease dated January 14, 1997 between Glenview Corporate Center and WorldGate, as amended by First Amendment to Agreement of Lease dated October 24, 1997 between Glenview Corporate Center and WorldGate.* 10.3 Agreement of Lease dated November 26, 1997 between Glenview Corporate Center and WorldGate* 10.4 Development Agreement dated October 15, 1998 between WorldGate and Scientific-Atlanta, Inc.#+ 10.5 Memorandum of Understanding dated September 2, 1998 between WorldGate and General Instrument Corporation.#+ 10.6 Senior Loan and Security Agreement No. 0098 dated July 15, 1997 between Phoenix Leasing Incorporated and WorldGate, as amended by Amendment No. 1 to Senior Loan and Security Agreement No. 0098 dated June 18, 1998 between Phoenix Leasing Incorporated and WorldGate.* 10.7 Master Agreement dated November 7, 1997 between Charter Communications, Inc. ("Charter") and WorldGate.#+ 10.8 Warrant Agreement dated November 7, 1997 between Charter and WorldGate.* 10.9 Affiliation Agreement dated November 7, 1997 between Charter and WorldGate.#+ 10.10 Affiliation Agreement dated December 8, 1998 between WorldGate and Prestige Cable, Inc.#+ 10.11 Affiliation Agreement dated October 19, 1998 between WorldGate and Massillon CableTV, Inc.#+ 10.12 Affiliation Agreement dated September 25, 1998 between WorldGate and TVCable, S.A.#+ 10.13 Affiliation Agreement (undated), between WorldGate and City of Tacoma, Tacoma Public Utilities, d/b/a Click!Network.#+
II-6
EXHIBIT NUMBER DESCRIPTION PAGE NO. - ----------------- --------------------------------------------------------------------------------------- ----------- 10.14 Amended and Restated 1996 Stock Option Plan, as further amended by First Amendment to 1996 Stock Option Plan dated June 12, 1998.* 10.15 Agreement dated June 15, 1998 between WorldGate and Thomas R. Baxter.* 10.16 First Amended and Restated Stockholders' Agreement dated September 2, 1998 among WorldGate and the stockholders identified therein.* 23.1 Consent of PricewaterhouseCoopers LLP.* 23.2 Consent of Drinker Biddle & Reath LLP (to be included in Exhibit 5.1).# 24.1 Power of Attorney (included on signature page).* 27.1 Financial Data Schedule.*
- ------------------------ * Filed herewith. # To be filed by amendment. + Confidential Treatment Requested. The entire agreement will be filed separately with the Securities and Exchange Commission. II-7 EX-10.1 2 EXHIBIT 10.1 Exhibit 10.1 AGREEMENT OF LEASE BETWEEN BALANCED CAPITAL LLC Landlord AND WORLDGATE COMMUNICATIONS, INC. Tenant TABLE OF CONTENTS LEASE
Section Page - ------- ---- 1. REFERENCE DATA 1 2. DEMISE 4 3. TERM 4 4. OPTION TO RENEW - HOLDING OVER 5 5. RENT 6 6. OPERATING EXPENSE 6 7. AS IS 13 8. ALTERATIONS OR IMPROVEMENTS BY TENANT 13 9. PERMITTED USES 13 10. BUILDING OPERATION AND SERVICES; ELECTRICITY 14 11. INTERRUPTION OF SERVICES 15 12. REPAIRS 15 13. INTENTIONALLY OMITTED 16 14. QUIET ENJOYMENT 16 15. LANDLORD'S RIGHT OF ENTRY 16 16. SURRENDER OF LEASED PREMISES 17 17. MISCELLANEOUS COVENANTS 17 18. RULES AND REGULATIONS 18 19. PERFORMANCE OF COVENANTS 19 20. EMINENT DOMAIN 19 21. CASUALTY DAMAGE 20 22. HOLD HARMLESS; PUBLIC LIABILITY INSURANCE; WAIVER OF SUBROGATION 22 23. MORTGAGEE AND OTHER AGREEMENTS 23 24. SUBORDINATION AND ATTORNMENT 23 25. ASSIGNMENT AND SUBLETTING 24 26. DEFAULT 25 27. LANDLORD'S REMEDIES 26 28. LEGAL FEES AND OTHER COSTS 29 29. LATE CHARGE 30 30. SUCCESSORS AND ASSIGNS 30 31. WAIVERS 30 32. WAIVER OF TRIAL BY JURY 30 33. SEVERABILITY 30 34. NOTICES; PAYMENT OF RENTS 30 35. AMENDMENT AND MODIFICATIONS 32 36. SECURITY DEPOSIT; OPTION TO USE LETTER OF CREDIT 32
37. ENVIRONMENTAL MATTERS 33 38. BROKERS 36 39. FINANCIAL STATEMENTS 36 40. PARKING 36 41. OPTION TO PURCHASE. 36 42. HEADINGS AND TERMS 40 43. GOVERNING LAW 40 44. PRESENT LEASE 40 45. SIGNS 40 46. MEMORANDUM OF LEASE 41 47. ANTENNA(S) INSTALLATION 41 48. LANDLORD'S WAIVER 42 49. MOVING COSTS 42 50. LANDLORD'S CONDITION 42
EXHIBITS - -------- Exhibit "A" Rules and Regulations Exhibit "B" Tenant Estoppel Letter Exhibit "C" Janitorial Specifications Exhibit "D" Form of Landlord's Waiver Exhibit "E" Representations from Seller in Sale Agreement Lease Dated: October 7, 1998 1. REFERENCE DATA Any reference in this Lease to the following subjects shall incorporate therein the data stated for the subject(s) in this Section: LANDLORD: Balanced Capital LLC LANDLORD'S ADDRESS: 580 Virginia Drive, Suite 202 Fort Washington, Pennsylvania 19034 TENANT: WorldGate Communications, Inc. TENANT'S ADDRESS: Glenview Corporate Center 3220 Tillman Drive, Suite 300 Bensalem, Pennsylvania 19020 LEASED PREMISES: Building known as 3190 Tremont Avenue in Bensalem, Bucks County, PA, provided that until possession of entire Building has been delivered to Tenant, the term "Leased Premises" shall refer only to that portion of the Building which has been delivered. RENTABLE AREA OF LEASED PREMISES:72,000 Rentable Square Feet, anticipated to be delivered in two phases as described below. Within 15 days after execution of this Lease, the Building is to be measured according to BOMA standards and methodology; if the actual rentable square feet varies by 1,000 feet or more, Rent and other charges shall be revised to reflect actual rentable square footage, and references in this Lease to 72,000 shall be deemed amended to refer to the actual square footage of the Building. LEASE TERM: Ten (10) years plus the partial year ("Commencement Partial Year") beginning when the first space is delivered and ending on the last day of the calendar month in which the Last Delivery Date occurs (or if the Last Delivery Date is the first day of a calendar month, then the Commencement Partial Year shall end on the last day of the calendar month preceding Last Delivery Date). COMMENCEMENT DATE: February 15, 1999 as to at least 40,000 rentable square feet, and July 1, 1999 as to the remainder of the Building. LAST DELIVERY DATE: July 1, 1999 or such other date as the parties may agree. ANNUAL FIXED RENT: From the Commencement Date through the last day of the Commencement Partial Year, Annual Fixed Rent shall be $12.00 per square foot of space delivered. For the balance of the Lease Term, Annual Fixed Rent shall be as follows:
Annual Monthly Lease Year 1 (7/1/1999 through 6/30/2000) 864,000. 72,000 Lease Year 2 (7/1/2000 through 6/30/2001) 882,000. 73,500 Lease Year 3 (7/1/2001 through 6/30/2002) 882,000. 73,500 Lease Year 4 (7/1/2002 through 6/30/2003) 900,000. 75,000 Lease Year 5 (7/1/2003 through 6/30/2004) 918,000. 76,500 Lease Year 6 (7/1/2004 through 6/30/2005) 936,000. 78,000 Lease Year 7 (7/1/2005 through 6/30/2006) 954,000. 79,500 Lease Year 8 (7/1/2006 through 6/30/2007) 972,000. 81,000 Lease Year 9 (7/1/2007 through 6/30/2008) 990,000. 82,500 Lease Year 10 (7/1/2008 through 6/30/2009) 990,000. 82,500
The dates used for each Lease Year assume that the balance of the Building is delivered in June 1999 or on July 1, 1999. If delivery of the balance of the Building is not in June 1999 or on July 1, 1999, then the rent change dates listed above shall be adjusted to reflect actual Lease Years. If Tenant exercises the applicable renewal options pursuant to Section 4(a), Annual Fixed Rent for the Lease Years of the option periods shall be as follows:
Annual Monthly Lease Year 11 990,000. 82,500 Lease Year 12 999,900. 83,325 Lease Year 13 1,009,899. 84,158 Lease Year 14 1,019,998. 85,000 Lease Year 15 1,030,198. 85,850 Lease Year 16 1,040,500. 86,708 Lease Year 17 1,050,905. 87,575 Lease Year 18 1,061,413. 88,451 Lease Year 19 1,072,027. 89,336 Lease Year 20 1,082,748. 90,229
OPERATING EXPENSE ESTIMATE: $324,000 per year ($4.50 per square foot), subject to adjustment as provided in Section 6 below. LEASE YEAR: "Lease Year" shall mean the 12 month period beginning on the Last Delivery Date if the Last Delivery Date is the first day of a calendar month, or beginning on the first day of the next succeeding calendar month if the Last Delivery Date is not the first day of a month ("Lease Year 1"), and each succeeding 12 month period, provided however that the Commencement Partial Year shall be part of Lease Year 1. 2 TENANT'S PROPORTIONATE SHARE: 100.00% following delivery of entire Building; until delivery of entire Building, calculated by dividing rentable square feet delivered by 72,000 PERMITTED USES: general office, together with associated incidental uses including miscellaneous assembly and testing of electronic parts, Channel HyperLinking and WorldGate Service Operations. SECURITY DEPOSIT: $1,026,000 until the last day of the sixth month of Lease Year 2, then reducing as follows: 990,000 until the last day of the sixth month of Lease Year 3; 864,000 until the last day of the sixth month of Lease Year 4; 750,000 until the last day of the sixth month of Lease Year 7 (i.e., for 3 years); 612,000 until the last day of the sixth month of Lease Year 8; 432,000 until the last day of the sixth month of Lease Year 9; 288,000 until the last day of the sixth month of Lease Year 10 ADVANCE RENTAL PAYMENT: $-0- BROKER: Kelley & Associates, Inc. LANDLORD: BALANCED CAPITAL LLC By: /s/ Steven D. Brand By: /s/ Frank Seidman ----------------------------- ----------------------------- Steven D. Brand, Manager Frank Seidman, Manager TENANT: WORLDGATE COMMUNICATIONS, INC. /s/ Kevin Flannery By: /s/ Randall J. Gort - -------------------------------- ---------------------------- Attest Name: Title: 3 2. DEMISE. Landlord hereby demises and lets to Tenant and Tenant takes and hires from Landlord, for the term and subject to the provisions hereof, the existing building (hereafter referred to as the "Building" or the "Leased Premises") containing approximately 72,000 rentable square feet located on the parcel of land (the "Lot") commonly known as 3190 Tremont Avenue in Bensalem Township, Bucks County, Pennsylvania, together with the use of all existing parking spaces on the Lot for itself and its employees and invitees, such use of parking to be subject to common use and occupancy by Landlord's agents and invitees in the exercise of Landlord's rights and responsibilities under this Lease. The Building and Lot are sometimes collectively called the "Property". 3. TERM. (a) This demise shall be for the term (hereinafter referred to as "the Term") beginning on the date when possession of any portion of the Building is delivered to Tenant (the "Commencement Date") and ending, without the necessity of notice from either party to the other, on the last day of the calendar month in which occurs the tenth (10th) anniversary of the Last Delivery Date (unless the Last Delivery Date is the first day of the month, in which event the Term shall end on the last day of the calendar month preceding such tenth anniversary), subject to the renewal options set forth in paragraph 4 below. Upon delivery of any part of the Building, the parties shall sign a letter confirming the Commencement Date; upon delivery of the balance of the Building, they shall sign a letter confirming the expiration date. (b) Landlord shall use all reasonable efforts to deliver not less than 40,000 square feet of the Premises by February 15, 1999, and the balance of the Building no later than July 1, 1999 (the respective "Delivery Deadlines"). The parties acknowledge that the Building is occupied and that the current occupant is required by the governing documentation to vacate prior to the Delivery Deadlines. Landlord shall use prompt, diligent efforts to enforce the timely surrender of the Building. However, if Landlord fails to meet a Delivery Deadline for any reason not within Landlord's control, Landlord shall not be subject to any liability to Tenant, and failure to deliver the Premises to Tenant by the respective Delivery Deadline or any other date shall not in any respect affect the validity or continuance of this Lease or any obligation of Tenant hereunder. (c) Tenant shall have the right to terminate this Lease as of the end of Lease Year 1 or the last day of any calendar month thereafter, in any such case upon 12 full calendar months' prior written notice (the date designated in said written notice as the termination date being referred to herein as the Early Termination Date), provided that Tenant pays an early termination fee (the "Early Termination Fee") that is to be calculated as follows, and further provided that Tenant pays such Early Termination Fee no later than the dates set forth in clause (c)(iv) below. (i) If the Tenant elects to terminate as of the last day of Lease Year 1, the Early Termination Fee will be $2,052,000. Thereafter, if Tenant elects to terminate as of the last day of the sixth month of any subsequent Lease Year, the Early Termination Fee will the amount set forth below: 4
EARLY TERMINATION DATE EARLY TERMINATION FEE - ----------------------- --------------------- Last Day of sixth month of Lease Year 2 1,980,000. Last Day of sixth month of Lease Year 3 1,728,000. Last Day of sixth month of Lease Year 4 1,476,000. Last Day of sixth month of Lease Year 5 1,188,000. Last Day of sixth month of Lease Year 6 864,000. Last Day of sixth month of Lease Year 7 612,000. Last Day of sixth month of Lease Year 8 432,000. Last Day of sixth month of Lease Year 9 288,000. Last Day of sixth month of Lease Year 10 0
(ii) The last day of the sixth month of each Lease Year is referred to herein as the "Change Date." If the Tenant elects to terminate as of the last day of a calendar month which is not a Change Date, then the Early Termination Fee shall be the sum of the two following numbers: (A) multiply the fixed early termination fee set forth above for the Change Date preceding the Early Termination Date times a fraction, the denominator of which is 12 and the numerator of which is the number of calendar months remaining after the Early Termination Date until the next Change Date; and (B) multiply the early termination fee set forth above for the Change Date next succeeding the Early Termination Date times a fraction, the denominator of which is 12 and the numerator of which is the number of calendar months from the last Change Date to (and including) the Early Termination Date. FOR EXAMPLE, if Tenant gives notice of its election to terminate as of the last day of the fourth month of Lease Year 6, the early termination fee would be $918,000, calculated as follows: (A) $1,188,000 [the fee for the preceding Change Date - the last day of the sixth month of Lease Year 5] times 2/12ths [the number of months remaining after termination until the next Change Date - the last day of the sixth month of Lease Year 6 - divided by 12] = $198,000, plus (B) $864,000 [the fee for the next Change Date - the last day of Lease Year 6] times 10/12ths [the number of months until termination from the last Change Date, divided by 12] = $720,000. (A) $198,000 plus (B) $720,000 = $918,000. (iii) This subparagraph 3(c)(iii) applies only if Landlord and Tenant (each in their sole and absolute discretion) sign and deliver a written agreement (the "New Agreement") for Landlord to develop or purchase a replacement facility (the "Replacement Facility") for Tenant to occupy instead of the Leased Premises. The Early Termination Fee will not be payable under this Lease if Tenant takes occupancy of the Replacement Facility under the New Agreement. The Early Termination Fee will not be payable if by agreement of the parties the New Agreement is terminated, Tenant's notice of early termination is rescinded, and Tenant remains in the Leased Premises under this Lease. If Tenant shall have paid the Early Termination Fee (or any portion thereof) and it is subsequently waived, the amount paid for the Fee shall be returned to Tenant within ten business days after Tenant takes possession of the Replacement Facility. (iv) The Early Termination Fee payment dates are as follows: one fourth shall be paid concurrently with the Tenant's notice of early termination; one fourth shall 5 be paid in four equal monthly installments with Tenant's payment of Fixed Rent on the first day of the sixth, seventh, eighth and ninth months of the 12-month notice period (but if Tenant shall vacate the Leased Premises, that second fourth shall be payable in one installment no later than the date Tenant vacates the Leased Premises); the remaining one-half shall be paid no later than thirty (30) days prior to the Early Termination Date, Upon due exercise of the early termination right and payment of the Early Termination Fee required herein, this Lease shall expire on the date set forth in Tenant's notice as if such date were the scheduled expiration date of the Term. 4. OPTION TO RENEW - HOLDING OVER. (a) Tenant is hereby granted the option(s) to renew the Term of this Lease for two (2) additional periods of five (5) years on each such option provided that there shall not be an uncured Event of Default hereunder (as hereinafter defined) by Tenant either at the time Tenant exercises the option or on the Commencement Date of the renewal term and further provided that Tenant shall exercise such option in writing not later than nine (9) months prior to the expiration of the initial Term or the first renewal Term, as the case may be, said renewal term to be upon the same terms and conditions of this Lease except that the Annual Fixed Rent during the renewal Term shall be in the amount set forth for the respective Lease Years in Section 1 above. (b) If Tenant retains possession of the Leased Premises or any part thereof after the termination of this Lease by expiration of the Lease Term or otherwise without the consent of Landlord, Tenant shall pay Landlord (a) as rent for such holding over, an amount, calculated on a per diem basis for each day of such unlawful retention, equal to the greater of (i) 150% of the Annual Fixed Rent, or (ii) the established market rental for the Leased Premises, for the time Tenant thus remains in possession, plus, in each case, all Additional Rent and other sums payable hereunder, and (b) all other damages, costs and expenses sustained by Landlord by reason of Tenant's holding over. Without limiting any rights and remedies of Landlord resulting by reason of the wrongful holding over by Tenant (such as eviction proceedings), or creating any right in Tenant to continue in possession of the Leased Premises, all Tenant's obligations with respect to the use, occupancy and maintenance of the Leased Premises shall continue during such period of unlawful retention. 5. RENT. Rent is payable by Tenant beginning on the Commencement Date in monthly installments of one-twelfth (1/12th) of the Annual Fixed Rent and one-twelfth (1/12th) of the Operating Expense Estimate, without prior notice or demand, and without any set-off or deduction whatsoever, in advance, on the first day of each month at Landlord's office or at such other place as Landlord may direct in writing. If the Lease Term commences on a day other than the first day of a calendar month, Annual Fixed Rent and Annual Operating Expenses for the partial month shall be apportioned pro rata using a fraction the numerator of which is the actual number of days in the month in which the Lease Term commences and the denominator of which is 365. Tenant hereby covenants and agrees to pay the Annual Fixed Rent, Operating Expense Estimate, Additional Rent and other sums payable to Landlord hereunder when due, and to pay interest to Landlord at the Overdue Interest Rate (a) on all overdue installments of Fixed 6 Rent and the Operating Expense Estimate from the due date thereof to the date of payment and (b) on all payments of Additional Rent or other sums payable to Landlord hereunder from the tenth business day after demand for payment until the date of payment. Upon default by Tenant in the payment of such Additional Rent or other sums payable hereunder, Landlord shall be entitled to all rights and remedies to which it would be entitled in default of the payment of Fixed Rent and Operating Expense Estimate. As used herein, the term "Overdue Interest Rate" shall mean and equal three percent (3%) per annum over the prime interest rate announced from time to time by the largest commercial bank whose principal office is located in Philadelphia or Montgomery County, Pennsylvania as being its "prime" or benchmark rate of interest. 6. OPERATING EXPENSE. Tenant shall pay to Landlord as Additional Rent an amount equal to Tenant's Proportionate Share of Operating Expense for each Operating Year. Commencing with the first month of the Lease Term, Tenant shall pay to Landlord, on account of the Operating Expense for such Operating Year, monthly installments in advance equal to one-twelfth (1/12th) of the Tenant's Operating Expense Estimate for such Operating Year. If Tenant occupies the Leased Premises or portion thereof for less than a full Operating Year, the Operating Expense will be allocated proportionately to the amount of time in such Operating Year that Tenant so occupies such space. Within one hundred twenty (120) days following the end of each Operating Year, Landlord shall furnish Tenant an Operating Expense Statement setting forth (i) the Operating Expense for the preceding Operating Year, (ii) Tenant's Proportionate Share, (iii) the Operating Expense Estimate paid by Tenant, and (iv) the amount overpaid or underpaid by Tenant on account of Operating Expense for such Operating Year (referred to herein as the "Operating Expense Adjustment"). Within fifteen (15) days following the receipt of such Operating Expense Statement (the "Expense Adjustment Date") Tenant shall pay to Landlord as Additional Rent any underpaid Operating Expense Adjustment for such Operating Year, or Landlord shall credit any overpaid Operating Expense Adjustment against the next installments of Annual Fixed Rent and Operating Expense Estimates becoming due under this Lease. The Operating Expense Statement shall also set forth a revised Operating Expense Estimate for the then current Operating Year (which revised estimate shall be based on the actual Operating Expense for the preceding Operating Year, adjusted by reasonable changes, such as changes in taxes or service contracts known to Landlord as of the date of the issuance of the Operating Expense Statement). The new Operating Expense Estimate shall be retroactive to the first day of the then current Operating Year, and any credits or adjustments shall be handled in the same manner as overpayments and underpayments for the preceding Operating Year. As used in this Section 6 and Section 1 where applicable, the following words and terms shall be defined as hereinafter set forth: (a) "OPERATING YEAR" shall mean each calendar year occurring during the Lease Term. (b) "OPERATING EXPENSE ESTIMATE" shall mean and equal the amount set forth in Section 1 of this Lease multiplied by the rentable area of the Leased Premises. 7 (c) "OPERATING EXPENSE STATEMENT" shall mean a statement in writing signed by Landlord, setting forth in reasonable detail (i) the Operating Expense for the preceding Operating Year, (ii) Tenant's Proportionate Share, (iii) the Operating Expense Estimate paid by Tenant, and (iv) the Operating Expense Adjustment for such Operating Year, or portion thereof. If requested by Tenant no later than December 31 of any Operating Year, the Operating Expense for such Operating Year shall be audited and certified by Landlord's independent certified public accountant whose report thereon shall be available for inspection by Tenant at Landlord's office during normal business hours, provided that the cost thereof shall be included in Operating Expenses payable by Tenant. Tenant shall have the right, at its own cost and expense, to audit or inspect Landlord's records (but not more than once in any calendar year) with respect to Taxes and Operating Expenses, as well as all other additional rent payable by Tenant hereunder. Tenant shall give Landlord not less than 30 days prior written notice of its intention to conduct any such audit. Landlord shall cooperate with Tenant during the course of such audit, which shall be conducted during normal business hours in Landlord's office. Landlord agrees to make such personnel available to Tenant as is reasonably necessary for Tenant, or for Tenant's employees or agents to conduct such audit, but in no event shall such audit last more than five business days in duration. If such audit discloses that the amount paid by Tenant as Tenant's Proportionate Share or of other additional rental payable by Tenant hereunder has been overstated by more than four (4) percent, then, in addition to immediately repaying such overpayment to Tenant, Landlord shall also pay the reasonable cost incurred by Tenant in connection with such audit. (d) "OPERATING EXPENSE" shall mean the following expenses incurred by Landlord in connection with the operation, repair and maintenance of the Building and the Lot which expenses shall be consistent with those incurred by other owners and operators of first class office buildings in the same geographical area in which the Building is located: (i) Wages, salaries, fees and other compensation and payments and payroll taxes and contributions to any social security, unemployment insurance, welfare, pension or similar fund and payments for other fringe benefits required by law or by union agreement (or, if the employees or any of them are non-union, then payments for benefits comparable to those generally required by union agreement in first class office buildings in the Philadelphia suburban area, which are unionized) made to or on behalf of all employees of Landlord performing services rendered in connection with the operation and maintenance of the Building and the Lot, including, without limitation: window cleaners; janitors; miscellaneous handymen; watchmen; persons engaged in patrolling and protecting the Building and the Lot; carpenters; engineers; mechanics; electricians; plumbers; persons engaged in the operation and maintenance of the Building and the Lot; building superintendent and assistants; building manager; and clerical and administrative personnel. (ii) The uniforms of all such employees, and the cleaning, pressing and repair thereof. (iii) Cleaning costs for the Building and the Lot, including the windows and sidewalks, all snow and rubbish removal (including separate contracts therefor) and the costs of all labor, supplies, equipment and materials incidental thereto. 8 (iv) Premiums and other charges incurred by Landlord with respect to all insurance relating to the Building and the Lot and the operation and maintenance thereof, including, without limitation: fire and extended coverage insurance, including windstorm, hail, explosion, riot, rioting attending a strike, civil commotion, aircraft, vehicle and smoke insurance; public liability; elevator; workmen's compensation; boiler and machinery; rent; use and occupancy; and health, accident and group life insurance of all employees. (v) All taxes, charges, imposts and burdens and special assessments of every kind and nature imposed by any governmental authority on and/or with respect to the Lot or Building which Landlord shall become obligated to pay because of or in connection with the ownership, leasing or operation of the Lot or the Building. Notwithstanding anything to the contrary contained in the Lease, Landlord and Tenant agree that the following items are specifically excluded from the definition of taxes: o Landlord's personal and corporate income taxes (whether local, state or federal). o Franchise taxes, gift taxes, transfer taxes and gross receipt taxes. (vi) The cost of water and sewer and any and all other utility services used in connection with the operation and maintenance of the Building and the Lot, excluding, however, electricity which shall be billed monthly to tenants pursuant to Section 10 hereof. (vii) Costs incurred for operation, service, maintenance, inspection, repairs and alterations of the Building, the Lot and the heating, air-conditioning, ventilating, plumbing, electrical, security and elevator systems of the Building (including any separate contract therefor) and the costs of labor, materials, supplies and equipment used in connection with all of the aforesaid items. (viii) Gross receipts taxes, sales taxes and excise taxes and the like upon any of the expenses enumerated herein. (ix) Management fees of the managing agent for the Building not to exceed in any one (1) year four percent (4%) of the Fixed Rent and Operating Expense Estimate payable for such year. (x) The cost of replacements for tools and equipment used in the operation and maintenance of the Building and the Lot. (xi) Cost of repainting or otherwise redecorating the common areas of the Building. (xii) Christmas decorations for the lobby and other public portions of the Building below the second floor. 9 (xiii) The cost of telephone service, postage, office supplies, maintenance and repair of office equipment and similar costs related to operation of the Building Superintendent's office. (xiv) The cost of licenses, permits and similar fees and charges related to operation, repair and maintenance of the Building. (xv) Auditing fees necessarily incurred in connection with the maintenance and operation of the Building, and accounting fees incurred in connection with the preparation and certification of a real estate tax escalation and the operating expense escalation statements pursuant to this Section 6. (xvi) All costs incurred by Landlord to retrofit any portion or all of the Building to comply with a change in existing legislation or introduction of new legislation, whether Federal, State or Municipal; repairs, replacements and improvements which are appropriate for the continued operation of the Building as a first class building. (xvii) All expenses associated with the installation of any energy, labor or cost saving devices for the Building not to exceed the savings realized from the installation of the energy, labor or cost saving device. (xviii) The pro rata share of all costs and expenses reasonably allocated to the Building and the Lot relating to the maintenance, operation and repair of any common atrium or other facilities connecting the Building or any of its facilities to any other building or facilities on adjacent lots. (xix) Any and all other expenditures of Landlord in connection with the operation, repair or maintenance of the Lot or the Building which are properly expensed in accordance with generally accepted accounting principles consistently applied with respect to the operation, repair and maintenance of first-class office buildings in the Philadelphia suburbs. If Landlord shall purchase any item of capital equipment or make any capital expenditure as described in subsections (xvi) and (xvii) above, then the costs for the same shall be included in Operating Expenses in the year of installation and in subsequent years amortized on a straight line basis, over an appropriate period, but not more than ten (10) years, with an interest factor equal to the prime interest rate, as defined in Section 5 hereof. If Landlord shall lease such item of capital equipment, then the rentals or other operating costs paid pursuant to such leasing shall be included in Operating Expenses for each year in which they are incurred. Tenant shall have the right to contest or review all such Taxes by legal proceedings or in such other manner as it may deem suitable (which, if instituted, Tenant shall conduct promptly at its own cost and expense, and free of any expense to Landlord, and, if necessary, in the name of and with the cooperation of Landlord, and Landlord shall execute all documents necessary to accomplish the foregoing). Notwithstanding the foregoing, Tenant shall promptly pay all such Taxes prior to penalties being assessed thereon (unless Tenant posts adequate security with Landlord), or if Landlord shall be subject to any criminal liability arising out of the nonpayment thereof. The legal proceedings shall include appropriate proceedings and 10 appeals from orders therein and appeals from any judgments, decrees or orders. In the event of any reduction, cancellation or discharge, Tenant shall pay the amount finally levied or assessed against the Leased Premises or adjudicated to be due and payable on any such contested Taxes. Landlord covenants and agrees that if there shall be any refund or rebate on account of the Taxes paid by Tenant under the provisions of this Lease, such refund or rebate shall belong to Tenant. Any refunds received by Landlord shall be deemed trust funds and as such are to be received by Landlord in trust and paid to Tenant forthwith. Landlord will, upon the request of Tenant, sign any receipts which may be necessary to secure the payment of any such refund or rebate, and will pay over to Tenant such refund or rebate as received by Landlord. Notwithstanding the foregoing, "Operating Expense" shall not include expenditures for any of the following: (i) The cost of any capital addition made to the Building (other than that specified as part of Operating Expense as provided above), including the cost to prepare space for occupancy by a new tenant. (ii) Repairs or other work occasioned by fire, windstorm or other insured casualty or hazard, to the extent that Landlord shall receive proceeds of such insurance. (iii) Repairs or rebuilding necessitated by condemnation. (iv) Depreciation and amortization of the Building, other than (a.) capital expenditures which under generally applied real estate practice are expensed or regarded as deferred expenses; (b.) capital expenditures appropriate to a first class office building or required by law as described in subsection (xvi) above; and (c.) capital expenditures designed to result in savings or reductions in Operating Expenses as described in subsection (xvii) above. (v) Marketing costs, leasing commissions, brokerage fees, attorney's fees, costs and disbursements and other expenses incurred in connection with negotiations or disputes with tenants, other occupants, or prospective tenants. (vi) The costs of tenant improvements performed for tenants in the Building. (vii) Costs incurred by Landlord due to a violation by Landlord or any tenant of the terms and conditions of any lease. (viii) Amounts paid to any party, including a division or affiliate of Landlord, providing materials, services, labor, or equipment to the extent that such costs exceed the competitive costs of such materials, services, labor or equipment when provided by an independent party in an arms-length transaction. 11 (ix) Payment of principal, interest, points and fees on any mortgages, deeds of trust or other financing instruments relating to the financing of the Property, or rental payments under any ground or underlying lease. (x) Any costs, fines or penalties imposed due to Landlord's actions or omissions with respect to any governmental rule or authority. (xi) Wages, salaries, or other compensation or benefits for any officers or employees of Landlord above the grade of Building Manager. (xii) Costs of installing, maintaining and operating any specialty service, such as an athletic club. (xiii) Any cost for which Landlord is entitled to reimbursement from tenants, insurers, or any third party. (xiv) The costs of any additions to the Property after the original construction of the Building and its parking facility, except for operating expenses attributable thereto (provided that Tenant's pro rata share is equitably adjusted to reflect the addition). (xv) Any costs attributable to any parking facility (e.g., underground or decked parking) owned or operated by Landlord. (xvi) The cost of any environmental clean-up of the Land ordered by any applicable environmental authority or agency unless caused by Tenant. Operating Expense shall be "net" and, for that purpose, shall be reduced by the amounts of any reimbursement or credit received or receivable by Landlord with respect to an item of cost that is included in Operating Expense (other than reimbursements to Landlord by tenants of the Building pursuant to Operating Expense escalation provisions). The Operating Expense for any Operating Year or portion thereof during which less than one hundred percent (100%) of the Rentable Area of the Building is leased to tenants shall be increased to include an imputed cost for unoccupied portions of the Building in an amount with respect to each such area equal to the product of (i) the Landlord's estimate of the marginal Operating Expense saving resulting from such vacancy, times (ii) a fraction, the numerator of which is the number of days during such Operating Year such portion of the Building was unoccupied and the denominator of which is three hundred sixty-five (365), times, (iii) the Rentable Area of such unoccupied space. In the time that more than one such portion of Rentable Area shall be unoccupied on separate dates within a relevant Operating Year, then a separate computation shall be made with respect to each unoccupied portion, and the products of such computations shall be added together, and the total thereof shall be the amount of Operating Expense imputed to such unoccupied portions for such Operating Year. (e) "TENANT'S PROPORTIONATE SHARE" shall mean a fraction, the numerator of which shall be the Rentable Area of Leased Premises, and the denominator of which is 72,000 rentable square feet (subject to adjustment only by reason of any substantial 12 addition to the Building made after the date of the initial completion of construction of the Building), and shall equal, with respect to the Leased Premises, the percentage set forth in Section 1 of this Lease. 7. NO LEASEHOLD IMPROVEMENTS BY LANDLORD. (a) Tenant acknowledges that Landlord has not yet acquired the Property and is not familiar with its condition, and that the only representations as to the condition of the Property which are in the current drafts of the Sale Agreement (defined in subsection 7(b) below) are those set forth on Exhibit "E" hereto. Tenant further acknowledges the intent of both parties that the term of this Lease shall commence immediately following surrender of the Property by the current owner [subject to Tenant's option to defer occupancy until February 1, 1999 if for any reason the current owner surrenders the Property before that date], and agrees that Landlord shall have no obligation to make any leasehold improvements prior to commencement of the Term. Tenant agrees to accept the Leased Premises on the Commencement Date in their condition at that time, provided they are in substantially the same condition as at the time of this Lease, subject to ordinary wear and tear and further subject in any case to the provisions of Paragraphs 20 and 21 regarding condemnation and damage by fire or other casualty, and subject to Landlord's obligations under this Lease with respect to operation and maintenance of the Building during the Term. (b) As part of its due diligence investigations of the Property prior to acquisition of the Property, Landlord may obtain written reports regarding title to and physical condition of the Property, including without limitation engineering and environmental reports (collectively, "Landlord's Reports"). As an accommodation to Tenant, Landlord agrees to furnish to Tenant copies of Landlord's Reports received prior to the Commencement Date, provided, however, that (i) this does not constitute an agreement by Landlord to obtain any reports other than those Landlord receives from the seller or chooses to obtain itself as part of its own due diligence investigations of the Property, and (ii) the delivery of copies of Landlord's Reports shall not be deemed to constitute the making of any representations or warranties to Tenant by Landlord or any of its agents or representatives (including without limitation the person or entity generating a Report). Upon written notice to Landlord, Tenant shall also be entitled to have its representatives inspect the Property during the twenty-day period beginning when Landlord notifies Tenant that an agreement for the sale and purchase of the Property has been signed with Osiris Holding Corporation (the "Sale Agreement"), such inspections to be done at Tenant's cost and expense, subject to the same conditions as are imposed upon Landlord under the Sale Agreement (which conditions shall be copied to Tenant upon notice from Tenant that it desires to undertake inspections). If any material adverse condition is disclosed in any of Landlord's Reports or in any written report generated pursuant to any of Tenant's inspections ("Tenant's Reports") (and for purposes of this paragraph a material adverse condition is defined as a condition which would lead a reasonably prudent mortgage lender to decline to finance the Property), then Tenant, by written notice to Landlord given no later than December 7, 1998 specifying the material adverse condition with detailed reference to the relevant Report (and a copy of the applicable Report if it is one of Tenant's Reports), may terminate this Lease by reason of such material adverse condition. If Tenant issues a termination notice pursuant to the preceding sentence, Landlord may nullify Tenant's termination notice by giving Tenant written 13 notice within ten days that Landlord will cause the cure of the material adverse condition prior to February 1, 1998. 8. ALTERATIONS OR IMPROVEMENTS BY TENANT. Tenant shall not make during the Lease Term any alterations or additions to the Leased Premises which materially affect the Building's structure or mechanical, electrical, plumbing or HVAC systems without Landlord's prior written approval, such approval not to be unreasonably withheld or delayed. Any such alterations or additions which may be approved by Landlord and made by Tenant shall be deemed part of the Building (provided that Tenant shall at all times have the right to remove any equipment, fixtures or other improvements installed by Tenant) and shall not thereafter be removed by Tenant unless Landlord shall require removal of same either in conjunction with its approval or by notice to Tenant given prior to the termination of this Lease, in which case Tenant shall remove any such alterations or additions and repair any damage to the Building or the Leased Premises occasioned by their installation or removal (including, without limitation, repairing and patching holes, replacing ceiling, wall and floor surfaces and repainting), and restore the Leased Premises to substantially the same condition as existed prior to the time which any such alterations or additions were made, reasonable wear and tear excepted; provided, however, that if in connection with alterations or improvements for which Landlord's consent is required hereunder, Tenant shall at the time Landlord's consent is requested, express its desire that same shall remain on the Premises upon the expiration of the Term and Landlord agrees thereto in writing, then removal of such alterations and improvements shall not be required. All alterations and additions by Tenant and installation of furnishings following occupancy shall be coordinated with any work being performed by Landlord and performed in such manner as not to disrupt harmonious labor relations and so as to not damage the Building or interfere with its operation or with the activities of other tenants and, except for installation of furnishings only, by contractors or workmen first approved by Landlord, which approval will not be unreasonably withheld or delayed.. As further conditions to Landlord's approval of any proposed alterations or additions by Tenant which are to be made after the beginning of the Lease Term, Tenant shall: secure all necessary licenses and permits; deliver to Landlord a waiver, executed by all general contractors who will be furnishing labor or materials waiving the right to file any mechanic's lien against the Building, the Lot or the estate or interest of Landlord or Tenant therein; cause the contractor(s) and subcontractor(s) to carry Workmen's Compensation insurance in statutory amounts and also comprehensive public liability insurance with limits as approved by Landlord, and deliver to Landlord certificates of all such insurance. 9. PERMITTED USES. Tenant covenants and agrees to use and occupy the Leased Premises only in conformity with law and for the uses specified in Section 1 hereof and not to use or permit any use of the Leased Premises which creates any safety hazard, which would be dangerous to the Leased Premises, the Building or the occupants of the same, which would be disturbing to other tenants or occupants of the Building, or which would cause any increase in premium for any insurance which Landlord may then have in effect with respect to the Building generally. 10. BUILDING OPERATION AND SERVICES; ELECTRICITY. Landlord shall furnish, through Landlord's employees or independent contractors, such services, facilities and supplies equal in 14 scope, quality and frequency to those being customarily provided by landlords in high quality office buildings in the Philadelphia suburbs. Heating, ventilating, and air conditioning shall be provided as normal seasonal changes may require to provide reasonably comfortable space temperature and ventilation for occupants of the Building during normal business operation, daily from 8:00 a.m. to 6:00 p.m. (Saturdays to 1:00 p.m.), except Sundays and holidays. Heating, ventilating and air conditioning service shall be subject to such regulations as the Department of Energy or other governmental agency shall adopt from time to time. Maintenance and cleaning shall be provided Monday through Friday (excluding holidays), after business hours, as follows: janitor service, consisting of the removal of customary office trash, dusting of furniture, desks and pictures, and vacuuming; maintenance and service of the toilet rooms in the Building; and cleaning and maintenance of common areas in the Building, all as more particularly set forth in the specifications attached hereto as Exhibit "C". Fully automatic elevator service shall be provided for the use of all tenants and the general public for access to and from all floors of the Building. Elevator service for freight shall be supplied by a passenger/freight elevator in common with service to other tenants at reasonable times during business hours and at other times. Hot and cold water for normal lavatory and drinking purposes shall be provided. Electricity, water, telephone, and other utilities serving the Building shall be arranged and paid for by Tenant as a direct customer of the applicable utility. If for any reason any required utility cannot be arranged directly by Tenant, then Landlord shall contract for the applicable utility service and Tenant shall pay the cost thereof within 15 days after invoicing from Landlord. Any utility invoices issued by Landlord to Tenant shall be based upon actual cost to Landlord and, if they cover any period or any space occupied by another tenant, shall be appropriately apportioned between the space users for the relevant periods. Landlord shall not be liable in any way to Tenant for any failure or defect in the supply or character of electric energy furnished on the Leased Premises by reason of any requirement, act or omission of the public utility serving the Building with electricity. Tenant's use of electric energy in the Leased Premises shall not at any time exceed the capacity of any of the electric conductors and equipment in or otherwise serving the Leased Premises. 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 consent shall not be unreasonably withheld or delayed, connect to the Building's electric distribution system any fixtures, appliances or equipment other than minicomputers, terminals, duplicating machines, lamps, typewriters and similar small office machines which operate on a voltage not in excess of 110 volts or make any alterations or additions to the electric system of the Leased Premises. Should Landlord grant such consent, all additional risers or other 15 equipment required therefor shall be provided by Landlord and the reasonable cost thereof shall be paid by Tenant upon Landlord's demand. Landlord shall furnish and install at Tenant's expense all replacement lighting tubes, lamps, bulbs, and ballasts required in the Leased Premises. 11. INTERRUPTION OF SERVICES. In case Landlord is prevented or delayed in furnishing any service as set forth in Section 10 herein or otherwise by reason of any cause beyond Landlord's reasonable control, Landlord shall not be liable to Tenant therefor nor shall Tenant be entitled to any abatement or reduction in rent by reason thereof unless the delay is directly caused by Landlord's negligence, willful actions or omissions and Tenant is materially impaired in its use of the Leased Premises for more than three (3) consecutive business days, nor shall the same give rise to a claim in Tenant's favor that such absence of building services constitutes actual or constructive, total or partial eviction or renders the Leased Premises untenantable. Landlord reserves the right to stop any service or utility system, when necessary by reason of accident or emergency, or until necessary repairs have been completed, provided, however, that in each instance of stoppage, Landlord shall exercise reasonable diligence to eliminate the cause thereof. Except in case of emergency repairs, Landlord will give Tenant reasonable advance notice of any contemplated stoppage and will use reasonable efforts to avoid unnecessary inconvenience to Tenant by reason thereof. 12. REPAIRS. Landlord shall make, as an Operating Expense of the Building, all repairs necessary to maintain the plumbing, heating, ventilating, air conditioning, electric systems, external windows and floors (excluding carpeting and floor coverings), provided, however, that Landlord shall not be obligated to make any such repairs until the expiration of a reasonable period of time after receipt of written notice from Tenant that such repair is needed. Landlord shall make, at its own expense (except for repairs which are expensed in accordance with GAAP, the cost of which shall be an Operating Expense), all repairs necessary to maintain the structure of the Building, the roof, all exterior walls and the building floor slabs. Landlord will repair any damage caused by any act, omission or negligence of Tenant or its employees, agents, invitees, licensees, subtenants, or contractors, and Tenant will reimburse Landlord for the cost of such repair within thirty (30) days after receipt of an invoice. If Tenant requires maintenance, servicing, repair or replacement of any special plumbing, heating or air conditioning systems installed specifically for Tenant's benefit in the Leased Premises, whether or not such systems are tied into the standard Building systems, such maintenance, servicing, repair or replacement shall be made at the sole expense of Tenant, unless the need for such repairs is caused, in whole or in part, by the negligence or willful misconduct of Landlord, its agents or employees. Tenant shall maintain the Leased Premises and the fixtures and appurtenances therein in good repair at all times, reasonable wear and tear excepted. Except to the extent released by Landlord pursuant to the waiver of subrogation provision in Section 22 hereof, Tenant shall reimburse Landlord for all costs and expenses of repairing and replacing all damage or injury to the Leased Premises and the Building and to fixtures and equipment caused by Tenant or its employees, agents, invitees, licensees, subtenants, or contractors, or as the result of all or any of them moving in or out of the Building or by its or their installation or removal of 16 furniture, fixtures or other property. Such costs and expenses shall be collectible as Additional Rent and paid by Tenant within fifteen (15) days after rendition of a bill therefor. Landlord shall not be liable by reason of any injury to or interference with Tenant's business arising from the making of any repairs, alterations, additions or improvements in or to the Leased Premises or the Building or to any appurtenances or equipment therein unless Landlord or its agents, employees or contractors are negligent in performing such repairs, etc. There shall be no abatement of rent because of such repairs, alterations, additions or improvements or because of any delay by Landlord in making the same except that Landlord shall reimburse Tenant for any actual damages (but not consequential damages) in the event Landlord is negligent in performing such repairs, etc.. Tenant shall give to Landlord prompt written notice of any accidents to, or defects in plumbing, electrical, heating and air conditioning systems and apparatus located in the Leased Premises. Landlord shall give Tenant written notice of any repairs, alterations, additions or improvements which Landlord intends to undertake either in the Leased Premises or the Building. 13. INTENTIONALLY OMITTED. 14. QUIET ENJOYMENT. Tenant, upon paying the Annual Fixed Rent, all Additional Rent and all other sums and charges herein provided for and, upon observing, keeping and performing all covenants, agreements and conditions of this Lease on Tenant's part to be observed, kept and performed, shall quietly have and enjoy the Leased Premises throughout the Lease Term without hindrance or molestation by Landlord or by anyone claiming by, through or under Landlord, subject, however, to the exceptions, reservations and conditions of this Lease. 15. LANDLORD'S RIGHT OF ENTRY. Landlord, any ground lessor, mortgagee or any agent thereof, shall have the right to enter the Leased Premises at reasonable times: to perform Landlord's covenants as set forth in this Lease, for purposes of inspection and to insure Tenant's compliance with the provisions of this Lease, to make any repairs, replacements or alterations to the Building or do any work which Landlord may deem necessary, or to show the Leased Premises to prospective purchasers of the Building, and also, during the last six (6) months of the Lease Term, to show the Leased Premises to prospective tenants; PROVIDED, HOWEVER, that except for emergencies, Landlord shall (a) give Tenant at least 24 hours' prior notice of such entry, and (b) enter upon the Leased Premises only during normal business hours. With the exception of emergency repairs by Landlord, its agents, employees and contractors, no persons shall enter the Leased Premises unless accompanied by a representative of Tenant. Landlord also shall have the right to enter the Leased Premises at any reasonable times after giving prior notice to Tenant to exhibit the Leased Premises to any prospective purchaser, tenant and/or mortgagee thereof provided that a representative of Tenant shall accompany any prospective purchaser, tenant and/or mortgagee inspecting the Leased Premises and further provided that Tenant may restrict access to certain portions of the Leased Premises in order to safeguard the confidentiality of proprietary equipment. In the event Tenant abandons the Leased Premises prior to the expiration of the Lease Term, Landlord shall have the right to enter the Leased Premises at any time thereafter to show 17 the Leased Premises to prospective tenants and to retrofit all or a portion thereof for new tenants. No such entry and construction work shall be deemed to be an acceptance of surrender by landlord of all or a portion of the Leased Premises until a replacement tenant actually occupies the same for its business purposes. Acceptance of surrender shall be deemed to occur upon the occupancy by a replacement tenant, but only as to such portion of the Leased Premises which such replacement tenant occupies. Notwithstanding any such acceptance of surrender, Tenant shall remain liable for the difference between the rent reserved hereunder and the rent Landlord receives under a lease with the replacement tenant. 16. SURRENDER OF LEASED PREMISES. Any alterations, improvements or additions to the Leased Premises made by or at the request of Tenant shall remain upon the Leased Premises at the expiration or earlier termination of this Lease and shall become the property of Landlord unless Landlord shall, in accordance with Article 8, give written notice to Tenant to remove such alterations, improvements and additions. Tenant shall repair any damage caused by the installation and/or removal (including, without limitation, repairing and patching holes, replacing ceiling, floor and wall surfaces and repainting), and restore the Leased Premises to substantially the same condition in which it existed prior to the time that any such alterations, improvements or additions were made, reasonable wear and tear excepted. Tenant shall have the right to remove any of its fixtures, equipment or furnishings from the Leased Premises provided that Tenant shall repair any damage to the Leased Premises or the Building resulting from such removal. Should Tenant fail to remove any such alterations, improvements or additions or to repair such damage when required or requested by Landlord so to do pursuant to this Section 16, Landlord may do so, and the cost and expense thereof shall be paid by Tenant to Landlord as Additional Rent. Any personal property which shall remain in the Leased Premises or any part thereof after the expiration or earlier termination of this Lease shall be deemed to have been abandoned and either may be retained by Landlord as Landlord's property or may be disposed of in such manner as Landlord may see fit, provided that notwithstanding the foregoing Tenant shall, upon request of Landlord made no later then ten (10) days after the expiration or earlier termination of this Lease, promptly remove from the Building any such personal property at Tenant's own cost and expense. Should Tenant fail so to do, Landlord may do so, and the cost and expense thereof shall be paid by Tenant to Landlord as Additional Rent. If such personal property or any part thereof shall be sold by Landlord, Landlord may receive and retain the proceeds of such sale(s) as Landlord's property. The covenants contained in this Section 16 shall survive the expiration or earlier termination of this Lease. 17. MISCELLANEOUS COVENANTS. In addition to those covenants and conditions which are set forth elsewhere herein, Tenant agrees: (a) To secure and maintain in effect any governmental approvals, licenses and permits as may be required for Tenant's use and occupancy of the Leased Premises. (b) To comply with all applicable laws, codes and regulations of governmental authorities applicable to Tenant's use and occupancy of the Leased Premises and all rules and regulations of insurers of the Leased Premises and the National Board of Fire Underwriters as they apply to Tenant's use and occupancy of the Leased Premises. 18 Notwithstanding anything to the contrary in this paragraph (b), if any such laws, ordinances, regulations or orders shall require structural alterations to be made in or to the Leased Premises (such as the installation of sprinklers), and provided that such alterations are required generally in all office buildings in Bensalem Township and are not required as a result of the specific nature of Tenant's design, layout, configuration or use of the Leased Premises or caused by Tenant or any of its employees, agents, contractors or subtenant's, then it shall be Landlord's responsibility to make such structural alterations, the cost of which shall be included in Operating Expenses after being amortized over the useful life of such alterations, but in no event over a period of less than ten (10) years. (c) If the Leased Premises include less than an entire floor of the Building, to not place, erect, maintain or display any sign or other marking of any kind whatsoever on the exterior surface of the walls of the Leased Premises or on any door which faces any common corridor or hallway, without the prior written approval of Landlord, which approval shall not be unreasonably withheld for a single sign, provided that the same conforms to the sign standards as are then established by Landlord generally for the Building, and to not install or replace any entrance door or other door facing on any common corridor or hallway other than the standard door supplied by Landlord, without the prior written approval of Landlord. (d) Not to use or place any curtains, blinds, drapes, coverings or signs over any exterior windows or upon the window surfaces as would be visible from the outside of the Building without the prior written approval of Landlord. (e) Without the prior written consent of Landlord, not to place within the Leased Premises or bring into the Building any machinery, equipment or other personality other than customary office furnishings and small machinery such as typewriters and other similar items of office equipment, and customary kitchen equipment to be used exclusively by Tenant's employees, or any machinery or other personality having a weight on the average in excess of the floor bearing capacity of one hundred (100) pounds per square foot. Landlord in its sole discretion, may condition any consent given pursuant to this sub-section 17(e) upon the requirement that Tenant pay all costs of all structural and other alterations, changes or additions reasonably required to be made to the Leased Premises and the Building, in the sole judgment of Landlord, for the safe support of such machinery, equipment or personality, together with all costs of engineering or other studies required in the sole judgment of Landlord, to determine the required structural and other alterations, changes or additions. 18. RULES AND REGULATIONS. Tenant covenants and agrees that Tenant, its servants, employees, agents, invitees, licensees and other visitors shall observe faithfully, and comply strictly with, the Rules and Regulations contained in Exhibit "A", attached hereto and made a part hereof, and such other and further reasonable Rules and Regulations as Landlord or Landlord's agents may, after written notice to Tenant, from time to time adopt. Nothing in this Lease contained shall be construed to impose upon Landlord any duty or obligation to enforce the Rules and Regulations or terms, covenants or conditions in any other lease as against any other tenant, and Landlord shall not be liable to Tenant for violation of the same by any other tenant, its servants, employees, agents, invitees, licensees or other visitors. Landlord agrees that the Rules and Regulations shall not be enforced so as to discriminate against Tenant or unreasonably interfere with Tenant's use of the Leased Premises and that the Rules and Regulations shall be 19 enforced uniformly against all tenants in the Building; PROVIDED, HOWEVER, that Landlord shall not be liable to Tenant for Landlord's failure to enforce the Rules and Regulations against any other tenants. Tenant shall not be obligated to comply with any Rules and Regulations or amendments thereto until Tenant has received a written copy of such Rules and Regulations. 19. PERFORMANCE OF COVENANTS. (a) If Tenant fails to perform any covenant or observe any condition to be performed or observed by Tenant hereunder or acts in violation of any covenant or condition hereof, Landlord may, but shall not be required to on behalf of Tenant, perform such covenant and/or take such steps, including entering upon the Leased Premises, as may be necessary or appropriate to meet the requirements of any such covenant or condition, provided that Landlord shall have given Tenant at least five (5) business days prior written notice of Landlord's intention to do so, unless an emergency situation exists, in which case Landlord shall have the right to proceed immediately after telephonic notice to Tenant; and all costs and expenses incurred by Landlord in so doing, including reasonable legal fees, shall be paid by Tenant to Landlord upon demand, plus interest at the Overdue Interest Rate from the date of expenditure(s) by Landlord, as Additional Rent. Landlord's proceeding under the rights reserved to Landlord under this Section shall not in any way prejudice or waive any rights as Landlord might otherwise have against Tenant by reason of Tenant's default. (b) In the event of the failure by Landlord, after thirty (30) days' prior written notice thereof, to perform any of the provisions, covenants, agreements or conditions of this Lease on its part to be performed the non-performance of which affect Tenant's use and occupancy of the Leased Premises, Tenant may, in addition to any remedies available to it at law or in equity, perform the same for and on behalf of Landlord, the cost of which performance, upon the proper payment thereof, shall be paid to Tenant by Landlord upon demand plus interest at the Overdue Interest Rate from the date of demand, provided, however that nothing herein shall require Landlord to reimburse Tenant for any cost which is payable by Tenant as an Operating Expense pursuant to Section 6 of this Lease. 20. EMINENT DOMAIN. In the event of the exercise of the power of eminent domain (a) whereby such portion of the Building is taken such that access to the Leased Premises is permanently impaired thereby and reasonable alternate access is not provided by Landlord within a time period which is reasonable under the circumstances, (b) all or substantially all of the Leased Premises or the Building is taken, (c) if less than substantially all of the Building is taken but Landlord, acting in good faith, determines that it is economically unfeasible to continue to operate the uncondemned portion as a first-class office building, or (d) if less than substantially all of the Leased Premises is taken, but Tenant, acting in good faith, determines that because of such taking it is economically unfeasible to continue to conduct its business in the uncondemned portion of the Leased Premises, then in the case of (a) or (b), either party, and in the case of (c), Landlord, and in the case of (d), Tenant, shall have the right to terminate this Lease as of the date when possession of that part which was taken is required to be delivered or surrendered to the condemning authority; and in such case all rent and other charges shall be adjusted to the date of termination. Notwithstanding that the entire Leased Premises are not condemned or taken for any public or quasi-public use or purpose, Tenant shall have the right to terminate this Lease in the event that (i) vehicular access to the parking lot servicing the Leased Premises is taken, or (ii) 20 more than ten percent of the existing parking spaces servicing the Leased Premises are taken (unless Landlord replaces the lost parking spaces with new parking spaces within reasonable proximity to the Leased Premises). The foregoing right of termination shall be applicable to the taking of any estate or interest whatsoever which, as a matter of law, would deprive Landlord or Tenant of any right to possession (in common with others, as to common areas of the Building) for any period in excess of sixty (60) consecutive days from the date of taking, whether or not the taking be in fee, for a term of years or of any other estate or interest; and a taking shall include the transfer of title or of any interest in the Building by deed or other instrument in settlement of or in lieu of transfer by operation of law incident to condemnation proceedings. Tenant shall have no right to participate or share in any condemnation claim, damage award or settlement in lieu thereof with respect to any taking of any nature; provided, however, that Tenant shall not be precluded from claiming or receiving payment for Tenant's relocation and moving expenses and the unamortized cost of any improvements installed by Tenant as may be specifically permitted under applicable law to tenants generally so long as the amount of the same is not subtracted from the award which Landlord is entitled to receive. 21. CASUALTY DAMAGE. In the event of damage to or destruction of the Leased Premises caused by fire or other casualty, or of the entrances and other common facilities necessary to provide normal access to the Leased Premises, or to other portions of the Building or its equipment which portions and equipment are necessary to provide services to the Leased Premises in accordance herewith, Landlord shall undertake to make and complete repairs and restorations as hereafter provided, unless this Lease be terminated by Landlord or Tenant or unless any mortgagee which is entitled to receive casualty insurance proceeds fails to make available to Landlord a sufficient amount of such proceeds to cover the cost of such repairs and restoration. If (a) the damage is of such nature or extent, in Landlord's sole judgment, that more than one hundred and eighty (180) consecutive days, after commencement of the work, would be required (with normal work crews and hours) to repair and restore the part of the Leased Premises or the Building which has been damaged, or (b) a substantial portion of the Leased Premises or the Building is so damaged that, in Landlord's sole judgment, it is uneconomic to restore or repair the Leased Premises or the Building, as the case may be, or (c) less than two (2) years remain on the Lease Term (unless there are renewal right(s) available to Tenant, and Tenant elects to exercise such available renewal right), Landlord shall so advise Tenant promptly, and either party, in the case described in clause (a) above, or Landlord, in the case described in clauses (b) or (c) above, for a period of ten (10) days thereafter, shall have the right to terminate this Lease by written notice to the other, as of the date specified in such notice, which termination date shall be no later than thirty (30) days after the date of such notice. In the event of such fire or other casualty, if this Lease is not terminated pursuant to the terms of this Section 21, if sufficient casualty insurance proceeds are available for use for such restoration or repair, and if this Lease is then in full force and effect, Landlord shall proceed diligently to restore the Leased Premises (including the Improvements) to substantially its condition prior to the occurrence of the damage, provided that Landlord shall not be obligated to repair or restore any alterations, additions or fixtures which Tenant may have installed (whether or not Tenant has the right or the obligation to remove the same or is required to leave the same 21 on the Leased Premises as of the expiration or earlier termination of this Lease) unless Tenant, in a manner satisfactory to Landlord, assures payment in full of all cost as may be incurred by Landlord in connection therewith. Landlord is not required hereunder to insure any improvements or alterations made by Tenant, to the Leased Premises, or any fixtures, equipment or other property of Tenant. Tenant shall have the right, at its sole expense, to insure the value of its leasehold improvements, fixtures, equipment or other property located in the Leased Premises, for the purpose of providing funds to Landlord to repair and restore the Leased Premises to substantially its condition prior to the occurrence of the damage. If there be any such alteration, fixtures or additions and Tenant does not assure or agree to assure payment of the cost of restoration or repair as aforesaid, Landlord shall have the right to determine the manner in which the Leased Premises shall be restored so as to be substantially as the Leased Premises existed prior to the damage occurring, as if such alterations, additions or fixtures had not then been made or installed. The validity and effect of this Lease shall not be impaired in any way by the failure of Landlord to complete repairs and restoration of the Leased Premises or of the Building within one hundred eighty (180) consecutive days after commencement of work, even if Landlord had in good faith notified Tenant that the repair and restoration could be completed within such period, provided that Landlord proceeds diligently with such repair and restoration, further provided that in the event Landlord fails to complete the repairs and restoration within two hundred ten (210) consecutive days after commencement of work for any reason other than a delay caused by Tenant, Tenant shall have the right to terminate this Lease upon thirty (30) days prior written notice to Landlord, in which event this Lease shall terminate automatically at the end of such 30-day period unless Landlord has completed the repairs and restorations prior to the end of the 30-day period. In the case of damage to the Leased Premises which is of a nature or extent that Tenant's continued occupancy is substantially impaired as reasonably determined by Tenant, the Annual Fixed Rent otherwise payable by Tenant hereunder shall be equitably abated or adjusted for the duration of such impairment. Anything to the contrary in this Lease notwithstanding, expressed or implied, Landlord shall have no liability to Tenant for and shall have no duty to repair, replace or restore any damage whatsoever, occurring as a result of leakage or seepage of water or any other liquid from any source whatsoever, or breakage of any pipes, mains or other plumbing located in or about the Building, or snow, frost, steam, excessive heat or cold, falling plaster, sewage, gas, odors, noise, or by air conditioning or heating apparatus. Provided, however, Landlord shall repair, replace and restore as an Operating Expense (unless Landlord receives insurance proceeds for the cost of such repair) of the Building, all damage to the Building structure, systems and fixtures. Tenant shall be responsible to insure and/or repair all of Tenant's leasehold improvements and all equipment, fixtures and personal property located in the Leased Premises. 22. HOLD HARMLESS; PUBLIC LIABILITY INSURANCE; WAIVER OF SUBROGATION. (a) Tenant covenants and agrees to exonerate, indemnify, defend, protect and save Landlord, owner of the Lot and Landlord's managing agent, if any, harmless from and against any and all claims, demands, expenses, losses, suits and damages as may be occasioned by reason of (a) any accident or matter occurring on the Leased Premises, causing injury to persons or damage to property (including, without limitation, the Leased Premises), unless such accident or other matter resulted from the negligence or otherwise tortious act of Landlord or 22 Landlord's agents or employees, or (b) the negligence or otherwise tortious act of Tenant or anyone in or about the Building on behalf or at the invitation or right of Tenant. (b) Tenant shall keep in force at its own expense comprehensive general liability insurance (including a contractual liability insurance endorsement) in companies acceptable to Landlord sufficient to cover such indemnification and naming as additional insured Landlord, owner of the Lot, Landlord's managing agent, if any, and Tenant against claims for personal injury, including bodily injury, death or property damage in amounts not less than $1,000,000 (or such higher limits as may be determined by Landlord), and Tenant will further deposit the policy or policies of such insurance, or certificates thereof, with Landlord. Said policy or policies of insurance or certificates thereof shall have attached thereto an endorsement that such policy shall not be canceled without at least ten (10) days prior written notice to Landlord and Landlord's managing agent, if any, and that no act or omission of Tenant shall invalidate the interest of Landlord under said insurance. (c) Landlord covenants and agrees to exonerate, indemnify, defend, protect and save Tenant harmless from and against any and all claims, demands, expenses, losses, suits and damages as may be occasioned by reason of (a) any accident or matter occurring on the Lot outside of the Leased Premises, causing injury to persons or damage to property (including, without limitation, the Leased Premises), unless such accident or other matter resulted from the negligence or otherwise tortious act of Tenant or Tenant's agents or employees, or (b) the negligence or otherwise tortious act of Landlord or anyone in or about the Building on behalf or at the invitation or right of Landlord. (d) Landlord shall keep in force as an Operating Expense 100% replacement value "all-risk" property insurance and comprehensive general liability insurance (including a contractual liability insurance endorsement) sufficient to cover such indemnification against claims for personal injury, including bodily injury, death or property damage in amounts not less than $2,000,000. (e) Landlord and Tenant hereby release the other from any and all liability or responsibility to the other or anyone claiming through or under them by way of subrogation or otherwise for any loss or damage to property covered by any insurance then in force, even if such fire or other casualty shall have been caused by the fault or negligence of the other party, or anyone for whom such party may be responsible, provided, however, that this release shall be applicable and in force and effect only to the extent of and with respect to any loss or damage occurring during such time as the policy or policies of insurance covering said loss shall contain a clause or endorsement to the effect that this release shall not adversely affect or impair said insurance or prejudice the right of the insured to recover thereunder. 23. MORTGAGEE AND OTHER AGREEMENTS. In the event any person, firm, corporation or other entity who is a party to any instrument to which this Lease is subject or subordinate (including, without limitation, any mortgage now or hereafter placed upon the Building or Lot or on any interest created therein) or their successor(s), succeeds thereunder to the interest of Landlord hereunder in the Building or the Lot, or acquires the right to possession of the Building or the Lot, such person, firm, corporation or other entity shall not be (a) liable for any act or omission of the party named above as Landlord under this Lease; (b) liable for the performance of 23 Landlord's covenants hereunder which arise and accrue prior to such person, firm, corporation or other entity succeeding to the interest of Landlord hereunder or acquiring such right to possession; (c) subject to any offsets or defenses which Tenant may have at any time against Landlord; (d) bound by any rent which Tenant may have paid previously for more than one (1) month in advance; and (e) shall not be bound by any amendment or modification hereof relating to the reduction of rent, shortening of term, or effecting a cancellation or surrender hereof and made without the consent of such person, firm, corporation or other entity. The parties hereto agree, from time to time as may be requested, to execute, acknowledge and deliver an estoppel letter certifying to such party as may be designated in the request, including any mortgagee, that this Lease is in full force and effect and has not been amended, modified or superseded, that Landlord has satisfactorily completed all construction work required by this Lease, that Tenant has accepted the Leased Premises and is now in possession thereof, that Tenant has no defense, offsets or counterclaims hereunder or otherwise against Landlord with respect to this Lease or the Leased Premises and neither Landlord nor Tenant is in default hereunder (or if any of the foregoing not be the case, specifying in reasonable detail the extent and nature thereof), that Tenant has no knowledge of any pledge or assignment of this Lease or rentals hereunder, that rent is accruing under this Lease but has not been paid more than one (1) month in advance and the date to which rent has been paid; and any other instrument as may be reasonably requested to be executed by Tenant by any mortgagee of the Lot or the Building or any interest therein, so long as the rights of Tenant as provided for by this Lease are not materially affected by any such other instrument. Tenant's estoppel letter shall be in the form of Exhibit "B" attached hereto and made a part hereof, or in such other form as Landlord or its mortgagee shall hereafter proscribe. 24. SUBORDINATION AND ATTORNMENT. This Lease and the estate, interest and rights hereby created are subordinate to any mortgage now or hereafter placed upon the Lot, the Building or any estate or interest therein, including, without limitation, any mortgage on any leasehold estate, and to all renewals, modifications, consolidations, replacements and extensions of the same as well as any substitutions therefor. Tenant agrees that in the event any person, firm, corporation or other entity acquires the right to possession of the Lot and the Building including any mortgagee or holder of any estate or interest having priority over this Lease, Tenant shall, if requested by such person, firm, corporation or other entity, attorn to and become the tenant of such person, firm, corporation or other entity, upon the same terms and conditions as are set forth herein for the balance of the Lease Term. Notwithstanding the foregoing, any mortgagee may, at any time, subordinate its mortgage to this Lease, without Tenant's consent, by notice in writing to Tenant, and thereupon this Lease shall be deemed prior to such mortgage without regard to their respective dates of execution and delivery, and in that event, such mortgagee shall have the same rights with respect to this Lease as though it had been executed prior to the execution and delivery of the mortgage. Landlord shall, as an express condition to Tenant's agreement to subordinate this Lease to any mortgage or other encumbrance now or hereafter placed upon the Building, obtain a non-disturbance agreement from the holder of such mortgage or other encumbrance now or hereafter placed upon the Building providing that (i) the holder of such mortgage or other encumbrance shall not disturb Tenant's possession under this Lease in the event of foreclosure, transfer in lieu thereof, and other enforcement proceedings, provided that tenant shall not be in 24 default hereunder, (ii) the holder of such mortgage or other encumbrance agrees that a foreclosure will not terminate or void any option to renew or purchase, and (iii) provided Tenant leases more than 50% of the Building's rentable area the holder of such Mortgage or other encumbrance shall permit insurance proceeds and condemnation award to be used to restore the Leased Premises and Building. 25. ASSIGNMENT AND SUBLETTING. Tenant shall not assign, pledge, mortgage or otherwise transfer or encumber this Lease, nor sublet all or any part of the Leased Premises or permit the same to be occupied or used by anyone other than Tenant or its employees without Landlord's prior written consent, which consent shall not be unreasonably withheld or delayed. It will not be unreasonable for Landlord to withhold its consent if the reputation, financial responsibility, or business of a proposed assignee or subtenant is unsatisfactory to Landlord in the exercise of its reasonable business judgment. Anything contained herein to the contrary notwithstanding, Tenant may assign this Lease or sublet the Leased Premises or any portion thereof, without Landlord's consent, to any corporation which controls, is controlled by or is under common control with Tenant, or to any corporation resulting from a merger or consolidation with Tenant, or to any person or entity which acquires all the assets of Tenant's business as a going concern, provided that (i) the assignee or sublessee assumes, in full, the obligations of Tenant under this Lease, (ii) Tenant remains fully liable under this Lease, (iii) the use of the Leased Premises remains unchanged, and (iv) provided that the surviving corporation or acquirer has a "net worth" (excluding intangible assets) in excess of that of Tenant at the time of the merger, consolidation or acquisition. Tenant's request for consent shall be in writing and contain the name, address, and description of the business of the proposed assignee or subtenant, its most recent financial statement and the other evidence of financial responsibility, its intended use of the Leased Premises, and the terms and conditions of the proposed assignment or subletting. Within fifteen (15) days from receipt of such request, Landlord shall either: (a) grant or refuse consent; or (b) elect to require Tenant (i) to execute an assignment of lease or sublease of Tenant's interest hereunder to Landlord or its designee upon the same terms and conditions as are contained herein, together with an assignment of Tenant's interest as sublessor in any such proposed sublease, or (ii) if the request is for consent to a proposed assignment of this Lease, to terminate this Lease and the term hereof effective as of the last day of the second month following the month in which the request was received. Each assignee hereunder shall assume and be deemed to have assumed this Lease and shall be and remain liable jointly and severally with Tenant for all payments and for the due performance of all terms, covenants, conditions and provisions herein contained on Tenant's part to be observed and performed. No assignment shall be binding upon Landlord unless the assignee shall deliver to Landlord an instrument in recordable form containing a covenant of assumption by the assignee, but the failure or refusal of assignee to execute the same shall not release assignee from its liability as set forth herein. All the foregoing notwithstanding, Tenant shall not enter into any lease, sublease, license, concession or other agreement for the use, occupancy or utilization of the Leased Premises or any portion thereof, which provides for a rental or other payment for such use, 25 occupancy or utilization based in whole or in part on the income or profits derived by any person from the property leased, used, occupied or utilized (other than an amount based on a fixed percentage or percentages of receipts or sales). Any such purported lease, sublease, license, concession or other agreement shall be absolutely void and ineffective as a conveyance or any right or interest in the possession, use or occupancy of any part of the Leased Premises. Any consent by Landlord hereunder shall not constitute a waiver of strict future compliance by Tenant of the provisions of this Section 25 or a release of Tenant from the full performance by Tenant of any of the terms, covenants, provisions, or conditions in this Lease contained. 26. DEFAULT. Any other provisions in the Lease notwithstanding, it shall be an Event of Default under this Lease if Tenant fails to pay any installment of Fixed Rent, Additional Rent or other sum payable by Tenant hereunder when due and such failure continues for a period of ten (10) days after written notice given by or on behalf of Landlord to Tenant, provided, however, Landlord need not give any such written notice, for non-payment of rent and Tenant shall not be entitled to any such period of grace, more than twice in any twelve (12) month period, Tenant abandons the Leased Premises or uses or occupies the Leased Premises otherwise than as permitted by Sections 1 and 9 hereof, or assigns or sublets, or purports to assign or sublet, the Leased Premises or any part thereof otherwise than in the manner and upon the conditions set forth in Section 25 hereof, Tenant fails to observe or perform any other covenant or agreement of Tenant herein contained and such failure continues after written notice given by or on behalf of Landlord to Tenant for more than thirty (30) days and such additional time, if any, as is reasonably necessary to cure such failure, provided Tenant commences to cure such failure within such thirty (30) day period and diligently thereafter prosecutes such cure to completion, without Landlord's prior written consent, Tenant removes or attempts to remove or manifests an intention to remove any or all of Tenant's property from the Leased Premises otherwise than in the ordinary and usual course of business, Tenant makes any assignment for the benefit of creditors; Tenant commits an act of bankruptcy or files a petition or commences any proceeding under any bankruptcy or insolvency law; a petition is filed or any proceeding is commenced against Tenant under any bankruptcy or insolvency law and such petition or proceeding is not dismissed within thirty (30) days; Tenant is adjudicated a bankrupt; Tenant by any act indicates its consent to, approval of or acquiescence in, or a court approves, a petition filed or proceeding commenced against Tenant under any bankruptcy or insolvency law; a receiver or other official is appointed for Tenant or for a substantial part of Tenant's assets or for Tenant's interests in this Lease; any attachment or execution against a substantial part of Tenant's assets or of Tenant's interest in this Lease remains unstayed or undismissed for a period of more than ten (10) days; a substantial part of Tenant's assets or of Tenant's interest in this Lease is taken by legal process in any action against Tenant, or any of the foregoing occur as to any guarantor or surety of Tenant's performance under this Lease, or such guarantor or surety defaults on any provision under its guaranty or suretyship agreement. If Landlord should be in default in the performance of any of its obligations under this Lease, which default continues for a period of more than thirty (30) days after receipt of written notice from Tenant specifying such default, or if such default is of a nature to require more than thirty (30) days for remedy and continues beyond the time reasonably necessary to cure (and Landlord has not undertaken procedures to cure the default within such thirty (30) day 26 period and diligently pursued such efforts to complete such cure), Tenant may, in addition to any other remedy available at law or in equity at its option, upon written notice, incur any expense necessary to perform the obligation of Landlord specified in such notice and Landlord shall reimburse Tenant promptly after receipt of a statement therefor from Tenant. 27. LANDLORD'S REMEDIES. (a) If an Event of Default hereunder shall have happened and be continuing, Landlord may, at its option: (i) declare due and payable and sue for and recover, all unpaid Fixed Rent for the unexpired period of the Lease Term (and also all Additional Rent as the amounts(s) of same can be determined or reasonably estimated) as if by the terms of this Lease the same were payable in advance, together with all legal fees and other expenses incurred by Landlord in connection with the enforcement of any of Landlord's rights and remedies hereunder, such sum to be discounted at the prevailing yield to maturity on United States Treasury Notes having the closest maturity to the expiration date of the Lease Term; provided, however, that the remedies set forth in this subparagraph (i) shall only be available to Landlord in the event Tenant defaults by failing to pay any installment of Fixed Rent or Operating Expense Estimate or Operating Expense Adjustment in accordance with Section 26 above, and/or (ii) collect or bring action for such Fixed Rent and Additional Rent as being rent in arrears, or may enter judgment therefor in an amicable action as herein elsewhere provided for in case of rent in arrears, or may file a Proof of Claim in any bankruptcy or insolvency proceeding for such Fixed Rent and Additional Rent, or institute any other proceedings, whether similar or dissimilar to the foregoing, to enforce payment thereof, and/or (iii) terminate the Lease Term by giving written notice thereof to Tenant and, upon the giving of such notice, the Lease Term and the estate hereby granted shall expire and terminate with the same force and effect as though the date of such notice was the date hereinbefore fixed for the expiration of the Lease Term, and all rights of Tenant hereunder shall expire and terminate, but Tenant shall remain liable as hereinafter provided, and/or (iv) exercise any other rights and remedies available to Landlord at law or in equity. (b) If any Event of Default shall have happened and be continuing, Landlord may, whether or not the Lease Term has been terminated as herein provided, re-enter and repossess the Leased Premises or any part thereof by summary proceedings, ejectment or otherwise and Landlord shall have the right to remove all persons and property therefrom. Landlord shall be under no liability for or by reason of any such entry, repossession or removal; and no such re-entry or taking of possession of the Leased Premises by Landlord shall be construed as an election on Landlord's part to terminate the Lease Term unless a written notice of such intention be given to Tenant pursuant to Section 26(a)(ii) or unless the termination of this Lease be decreed by a court of competent jurisdiction. 27 (c) At any time or from time to time after the repossession of the Leased Premises or any part thereof pursuant to Section 26(b), whether or not the Lease Term shall have been terminated pursuant to Section 26(a)(ii), Landlord will attempt to relet all or any part of the Leased Premises for the account of Tenant for such term or terms (which may be greater or less than the period which would otherwise have constituted the balance of the Lease Term) and on such conditions (which may include concessions or free rent) and for such uses as Landlord, in its absolute discretion, may determine, and Landlord may collect and receive any rents payable by reason of such reletting; provided that Landlord shall not be obligated to relet the Leased Premises so long as Landlord has other comparable space available for lease in the Building. Landlord shall not be required to accept any tenant offered by Tenant or observe any instruction given by Tenant about such reletting, or do any act or exercise any care or diligence with respect to such reletting or to the mitigation of damages. For the purpose of such reletting, Landlord may decorate or make repairs, changes, alterations or additions in or to the Leased Premises or any part thereof to the extent deemed by Landlord desirable or convenient, and the cost of such decoration, repairs, changes, alterations or additions shall be charged to and be payable by Tenant as Additional Rent hereunder, as well as any reasonable brokerage and legal fees expended by Landlord. (d) No expiration or termination of the Lease Term pursuant to Section 26(a)(ii), by operation of law or otherwise, and no repossession of the Leased Premises or any part thereof pursuant to Section 26(b), or otherwise, and no reletting of the Leased Premises or any part thereof pursuant to Section 26(c) shall relieve Tenant of its liabilities and obligations hereunder, all of which shall survive such expiration, termination, repossession or reletting. (e) In the event of any expiration or termination of this Lease or repossession of the Leased Premises or any part thereof by reason of an occurrence of an Event of Default, and Landlord has not elected to accelerate rent pursuant to Section 27(a)(i), Tenant shall pay to Landlord the Fixed Rent, Additional Rent and other sums required to be paid by Tenant to and including the date of such expiration, termination or repossession; and, thereafter, Tenant shall, until the end of what would have been the expiration of the Lease Term in the absence of such expiration, termination or repossession, and whether or not the Leased Premises or any part thereof shall have been relet, be liable to Landlord for, and shall pay to Landlord, as liquidated and agreed current damages, the Fixed Rent, Additional Rent and other sums which would be payable under this Lease by Tenant in the absence of such expiration, termination or repossession, less the net proceeds, if any, of any reletting effected for the account of Tenant pursuant to Section 26(c), after deducting from such proceeds all of Landlord's reasonable expenses in connection with such reletting (including, without limitation, all related reasonable repossession costs, brokerage commissions, legal expenses, attorneys' fees, employees' expenses, alteration costs and expenses of preparation for such reletting). Tenant shall pay such current damages on the days on which the Fixed Rent would have been payable under this Lease in the absence of such expiration, termination or repossession, and Landlord shall be entitled to recover the same from Tenant on each such day. (f) At any time after such expiration or termination of this Lease or repossession of the Leased Premises or any part thereof by reason of the occurrence of an Event of Default, whether or not Landlord shall have collected any current damages pursuant to Section 26(e), Landlord shall be entitled to recover from Tenant, and Tenant shall pay to Landlord on 28 demand, unless Tenant has paid the whole of accelerated rent pursuant to Section 27(a)(i), as and for liquidated and agreed final damages for Tenant's default and in lieu of all current damages beyond the date of such demand (it being agreed that it would be impracticable or extremely difficult to fix the actual damages), an amount equal to the excess, if any, of Fixed Rent, Additional Rent and other sums which would be payable under this Lease for the remainder of the Lease Term from the date of such demand (or, if it be earlier, the date to which Tenant shall have satisfied in full its obligations under Section 26(e) to pay current damages) for what would have been the then unexpired term of this Lease in the absence of such expiration, termination or repossession, discounted at the prevailing yield to maturity on United States Treasury Notes having the closest maturity to the expiration date of the Lease Term, over the then fair rental value of the Leased Premises for the same period, discounted at a like rate. If any statute or rule of law shall validly limit the amount of such liquidated final damages to less than the amount above agreed upon, Landlord shall be entitled to the maximum amount allowable under such statute or rule of law. (g) Tenant, in consideration for the execution of this Lease by Landlord and for the covenants and agreements on the part of Landlord herein contained, and fully comprehending the relinquishment of certain rights including rights of pre-judgment notice and hearing, hereby expressly authorizes any attorney of any Court of Record to accept service of process for, to appear for, and to confess judgment against Tenant in any and all actions brought hereunder by Landlord against Tenant to recover possession from time to time of the Leased Premises in accordance with the terms hereof (and Tenant agrees that upon the entry of each judgment for said possession a Writ of Possession or other appropriate process may issue forthwith). (h) In any action for ejectment or for distraint, Landlord shall first cause to be filed in such action an affidavit made by it or someone acting for it setting forth the facts necessary to authorize the entry of judgment, of which facts such affidavit shall be conclusive evidence, and if a true copy of this Lease be filed in such action, it shall not be necessary to file the original as a warrant of attorney, any rule of court, custom or practice to the contrary notwithstanding. The authority to confess judgment against Tenant hereunder shall not be exhausted by one (1) exercise thereof, but judgment may be confessed as provided herein from time to time as often as any Event of Default occurs under this Lease, and such authority may be exercised as well after the expiration of the Lease Term and/or during or after the expiration of any extended or renewal term. (i) No right or remedy herein conferred upon or reserved to either party is intended to be exclusive of any other right or remedy herein by law provided, but each shall be cumulative and in addition to every right or remedy given herein or now or hereafter existing at law or in equity or by statute. (j) No waiver by either party of any breach by the other of any of the other's obligations, agreements or covenants herein shall be a waiver of any subsequent breach or of any obligation, agreement or covenant, nor shall any forbearance by either party to seek a remedy for any breach by the other be a waiver by either party or any rights and remedies with respect to such or any subsequent breach. 29 (k) In the event of a breach or threatened breach by either party of any of the covenants or provisions hereof, the other shall have the right of injunction and right to invoke any remedy allowed at law or in equity as if re-entry summary proceedings and other remedies were not herein provided for. (l) Tenant hereby expressly waives any and all rights of redemption granted by or under any present or future laws in the event of Tenant being evicted or dispossessed for any cause, or in the event of Landlord obtaining possession of the Leased Premises, by reason of the violation by Tenant of any of the covenants and conditions of this Lease, or otherwise. 28. LEGAL FEES AND OTHER COSTS. The prevailing party in any enforcement proceeding shall be entitled to reimbursement of all reasonable legal fees and expenses by the non-prevailing party. 29. LATE CHARGE. If any installment of Fixed Rent, Additional Rent or other sums payable by Tenant to Landlord under this Lease shall not be paid on the due date thereof, Tenant shall pay to Landlord a "late charge" of three percent (3%) of the amount so due for the purpose of defraying the expense incident to handling such delinquent payment. 30. SUCCESSORS AND ASSIGNS. The obligations of this Lease shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns; provided that Landlord and each successive owner of the Building and/or the Lot shall be liable only for obligations accruing during the period of its ownership or interest in the Building or the Lot; and from and after the transfer by Landlord or such successive owner of its ownership or other interest in the Building or the Lot, Tenant shall look solely to the successors in title for the performance of Landlord's obligations hereunder. The liability of Landlord or any successive owner of the Building and/or the Lot hereunder and all of its officers, employees, shareholders or joint venturers or partners, if any, whether general or limited, shall be limited to Landlord's estate or other title or interest in the Building and/or the Lot. 31. WAIVERS. No delay or forbearance by either party in exercising any right or remedy hereunder or in undertaking or performing any act or matter which is not expressly required to be undertaken by such party shall be construed, respectively, to be a waiver of such party's rights or to represent any agreement by such party to undertake or perform such act or matter thereafter. 32. WAIVER OF TRIAL BY JURY. It is mutually agreed by and between Landlord and Tenant that the respective parties hereto shall and they hereby do waive trial by jury in any action, proceeding or counterclaim brought by either of the parties hereto against the other on any matter whatsoever arising out of or in any way connected with this Lease, the relationship of Landlord and Tenant, Tenant's use of or occupancy of the Leased Premises and/or any claim of injury or damage and any emergency statutory or any other statutory remedy. 33. SEVERABILITY. Each covenant and agreement in this Lease shall for all purposes be construed to be a separate and independent covenant or agreement. If any provision in this Lease or the application thereof shall to any extent be invalid, illegal or otherwise unenforceable, the remainder of this Lease, and the application of such provision other than as invalid, illegal or 30 unenforceable, shall not be affected thereby; and such provisions in this Lease shall be valid and enforceable to the fullest extent permitted by law. 34. NOTICES; PAYMENT OF RENT. (a) Each notice, demand, request or other communication required or permitted under the terms of this Lease shall be in writing and, unless and until otherwise specified in a written notice by the party to receive it, shall be sent to the parties at the following respective addresses: if intended for Tenant: WorldGate Communications, Inc. 3220 Tillman Drive, Suite 300 Bensalem, PA 19020 Attention: Randall J. Gort, V.P. and General Counsel FAX NO.: (215) 633-9590 If intended for Landlord: c/o Balanced Capital LLC 580 Virginia Drive, Suite 202 Fort Washington, PA 19034 Attention: Frank Seidman FAX NO.: (215) 542-8824 with a copy to: Virginia M. Duffy, Esquire 801 Old York Road, Suite 301 Jenkintown, PA 19026-1611 FAX NO.: (215) 885-7543 Notices may be given on behalf of any party by its legal counsel. (b) Each such notice, demand, request or other communication shall be deemed to have been properly given for all purposes if (i) hand delivered or (ii) mailed by registered or certified mail of the United States Postal Service, return receipt requested, postage prepaid or (iii) delivered to a nationally recognized overnight courier service for next business day (or sooner) delivery or (iv) delivered via telecopier or facsimile transmission to the facsimile number listed in this Section, provided, however, that if such communication is given via telecopier or facsimile transmission, an original counterpart of such communication shall concurrently be sent in the manner specified in either clause (iii) of this subsection (b) or be hand delivered by the next business day. 31 (c) Each such notice, demand, request or other communication shall be deemed to have been received by its addressee, and to have been effectively given, upon the earlier of (i) actual delivery, (ii) refusal of acceptance at the proper address or (iii) three business days after deposit thereof at any main or branch United States post office, if sent in accordance with clause (ii) of subsection (b) of this Section and (iv) one business day after delivery to the courier, if sent pursuant to clause (iii) of subsection (b) of this Section; provided that in the case of delivery by telecopier or facsimile transmission, any transmission not received by 5:00 p.m. on a business day shall be deemed to have been given on the next business day after receipt. (d) All payments of rent and any other charges under this Lease shall be paid to Landlord at the address of Landlord provided in this Section or at such other address as Landlord may specify in written notice given pursuant hereto. 35. AMENDMENT AND MODIFICATIONS. This Lease contains the entire agreement between the parties hereto, and shall not be amended, modified or supplemented unless by agreement in writing signed by both Landlord and Tenant. 36. SECURITY DEPOSIT; OPTION TO USE LETTER OF CREDIT. (a) Tenant shall deposit the sum of $1,026,000 with Landlord as a security deposit (the "Security Deposit") to be held by Landlord as security for Tenant's performance of all of Tenant's obligations under this Lease. Landlord shall deposit the Security Deposit in a segregated interest-bearing account, and all interest earned on the account shall be paid to Tenant at such time as the Security Deposit is returned to Tenant. Landlord, in its sole discretion, may apply the Security Deposit to cure any Event of Default under this Lease. If any such application is made, upon notice by Landlord to Tenant, Tenant shall promptly replace the amount so applied. Within thirty (30) days after expiration or earlier termination of this Lease, Landlord shall return the Security Deposit (less any portion thereof applied to reimburse Landlord for amounts due by reason of an Event of Default) to Tenant. Tenant will not look to any foreclosing mortgagee on the Lot or Building or any interest therein for the return of the Security Deposit unless the mortgagee has expressly assumed Landlord's obligations under this Lease or has actually received the balance of the Security Deposit. In the event Landlord sells the Lot and Building and transfers the Security Deposit to a new owner of the Lot and Building, Tenant shall look solely to such new owner for the return of the balance of the Security Deposit. (b) As long as Tenant has not exercised its right of termination under Section 3(c) of this Lease and there is no uncured monetary Event of Default, the amount of the Security Deposit shall be reduced at the end of the sixth month of each Lease Year as provided in Section 1, and any excess Security Deposit shall be returned to Tenant within ten (10) business days after Tenant's written request therefor. The Security Deposit shall be waived (and returned to Tenant within ten (10) business days after Tenant's written request therefor) if Tenant becomes a public company characterized as investment grade by Standard & Poors, and in the latter event, the requirement of a Security Deposit shall be waived as long as Tenant remains an Standard & Poors investment grade company. Upon cancellation of this Lease by Tenant under Section 3(c) and payment of the early termination payment set forth therein (to the extent not waived as set 32 forth therein), the Security Deposit shall be returned to Tenant, within ten (10) business days after Tenant's written request therefor. (c) In lieu of a cash Security Deposit, Tenant may replace the Security Deposit required under Section 1 with a letter of credit (referred to in this Agreement as the "Letter of Credit." If Tenant elects to deliver a Letter of Credit, then the Letter of Credit, the following provisions shall apply: (i) The Letter of Credit shall be irrevocable, shall be drawn on a commercial bank reasonably acceptable to Landlord, shall name the Landlord as Beneficiary, shall have a term of at least twelve months at a time and shall initially be in the amount of $1,026,000. No later than thirty five (35) days prior to the then scheduled expiration date of the Letter of Credit, Tenant shall deliver a new letter of credit or an amendment extending the expiration date of the existing letter for at least twelve additional months. If and when Tenant is entitled to a reduction in the amount of the Security Deposit as provided in Section 1 and Section 36(b), Landlord will accept an amendment to the Letter of Credit reducing the amount thereof to the reduced amount permitted hereunder. (ii) The Letter of Credit shall state that it may be drawn by the Landlord upon presentation to the issuing bank of the original letter of credit and a letter referencing this Lease by date and names of the parties, signed by a partner, member or officer of the Landlord, certifying that (A) "This letter of credit expires less than thirty five (35) days from the date of this draw, and WorldGate Communications, Inc. (Tenant) has failed to deliver to the undersigned a new letter of credit or amendment of the existing letter of credit extending the expiration date for at least twelve additional months" OR (B) "An Event of Default has occurred under the Lease which has not been cured as of the close of business on the business day preceding presentation of this Letter of Credit." (iii) If Landlord draws upon the Letter of Credit under this Section 36(c), the cash proceeds of the Letter of Credit shall be held and disposed of in accordance with the provisions of this Lease applicable to the cash Security Deposit. Nothing in this Section shall be deemed a waiver of any rights Tenant may have against Landlord if Landlord makes a certification under clause (ii) which is false when made. (iv) If Tenant elects to secure its obligations with a Letter of Credit, (A) upon transfer of the Property by Landlord, Landlord may require amendment of the Letter of Credit to name the new owner as Beneficiary; and (B) upon change in the amount of the required Security Deposit under Subsection 36(b) above, Landlord shall accept a modification reducing the amount in accordance with Section 36(b). (d) Tenant shall deliver the Security Deposit to Landlord no later than December 15, 1998 (the "Security Deposit Delivery Date"), provided, however, that if settlement on Landlord's acquisition of the Property is scheduled for a date later than December 17, 1998, 33 Landlord shall so notify Tenant and in that event, the Security Deposit Delivery Date shall be extended by Landlord to the date which is two business days before Landlord's scheduled settlement. If the Security Deposit is cash, Tenant shall deliver immediately available funds by wire transfer on the Security Deposit Delivery Date, to an account designated by Landlord. If the Security Deposit is to be a Letter of Credit, then Tenant shall deliver a draft of the proposed letter for Landlord's approval no later than December 5th, and shall delivery the signed original Letter of Credit at Landlord's offices by 5:00 p.m. on the Security Deposit Delivery Date. Tenant acknowledges that Landlord will not acquire the Property without the Security Deposit, and accordingly that time for delivery is strictly of the essence of this Agreement. Notwithstanding any other provision of this Lease, there shall be no notice and cure period for failure to deliver the Security Deposit on time. If Tenant fails to deliver the Security Deposit on time, it shall be an immediate Event of Default entitling Landlord to cancel this Lease at Landlord's option. 37. ENVIRONMENTAL MATTERS. (a) Tenant shall promptly deliver to Landlord copies of any of the following documents that Tenant receives or prepares: (i) applications or other materials regarding the Land, Building, or Leased Premises submitted to any governmental agency in compliance with Environmental Statutes; (ii) any notifications regarding the Land, Building, or Leased Premises submitted to any person pursuant to Environmental Statutes; (iii) any permit, license, approval, amendment or modification thereto granted regarding the Land, Building, or Leased Premises pursuant to Environmental Statutes; (iv) any record or manifest required to be maintained regarding the Land, Building, or Leased Premises pursuant to Environmental Statutes; and (v) any correspondence, notice of violation, summons, order, complaint or other document received by Tenant or its lessees, sublessees or assigns (if permitted), pertaining to the Land, Building, or Leased Premises and to compliance with any Environmental Statutes. "Environmental Statutes" shall mean all statutes, ordinances, regulations, orders and requirements of common law regulating environmental matters concerning (a) activities at the Land, Building or Leased Premises, (b) repairs or construction of any improvements located on the Land, (c) handling of any materials, (d) discharges to the air, soil, surface water or ground water, and (e) storage, treatment or disposal of any waste at or connected with any activity at the Land, Building or Leased Premises. (b) In the event that Landlord or Landlord's mortgagee performs or causes to perform an investigation of the Lot or Building for any of the below matters, Tenant shall cooperate with Landlord or Landlord's mortgagee with respect to such investigation: 34 (i) compliance at the Land, Building, or Leased Premises with Environmental Statutes; (ii) the presence of hazardous substances or contamination at the Land, Building, or Leased Premises; (iii) the presence at the Land, Building, or Leased Premises of polychlorinated biphenyls, substances containing polychlorinated biphenyls, asbestos, materials containing asbestos, or unreaformaldehyde foam insulation; (iv) the presence at the Land of (A) a wetland or other "water of the United States" for purposes of Section 404 of the federal Clean Water Act, 33 U.S.C. Section 1344, or any similar area regulated under any state law, (B) a flood plain or other flood hazard area as defined pursuant to the Pennsylvania Flood Plain Management Act, Pa. Stat. tit. 32, Sections 679.101 to .601 (Purdon Sup. 1989), (C) a portion of the coastal zone for purposes of the federal Coastal Zone Management Act, 16 U.S.C. Sections 1451-1464, or (D) any other area development of which is specifically restricted under applicable law by reason of its physical characteristics or prior use; (v) the presence at the Land, Building, or Leased Premises of radon products; or (vi) the presence at the Land, Building, or Leased Premises of tanks presently or formerly used for the storage of any liquid or gas above or below ground. (c) Intentionally omitted. (d) In the event any present or future Federal, State or municipal statute, ordinance, law, rule or regulation requires Landlord or Tenant to obtain a clearance certificate or Declaration of Non-Applicability, similar or dissimilar to those required by the New Jersey Environmental Clean-Up Responsibility Act, upon the expiration or earlier termination of the Lease Term, or upon the sale of the Lot or Building by Landlord, Tenant will apply therefor, or execute and deliver an application therefor to Landlord without delay, and take such action as may be necessary under such applicable statute, ordinance, law, rule or regulation to obtain such clearance certificate or Declaration of Non-Applicability. (e) Landlord shall defend, indemnify and hold harmless Tenant and its directors, officers, employees, contractors, agents, parents, subsidiaries, successors and assigns from and against any and all loss, damage, cost, expense or liability (including attorneys' fees and actual litigation costs) directly or indirectly arising out of or attributable to the use, generation, manufacture, production, storage, release, threatened release, discharge, disposal or presence of a Hazardous Substance on, under or about the Leased Premises prior to Tenant's taking possession of the Leased Premises, or a breach of any representation, warranty, covenant or agreement contained herein including, without limitation, (i) all actual damages, and (ii) the costs of any required or necessary repairs, cleanup, remediation or detoxification of the Leased Premises. 35 (f) Tenant will not engage in activities in or about the Property which involve the generation, manufacturing, refining, transportation, treatment, storage, emission, release, disposal or handling of hazardous substances, hazardous wastes or hazardous materials (hereinafter collectively called "Hazardous Substances") as such terms are defined under applicable Environmental Statutes except that materials routinely used in office buildings (such as toner for copiers and printers, and maintenance materials) and materials routinely used in the manufacturing and design of circuit boards and similar electronic hardware (such as cleaning solutions) that are or contain Hazardous Substances may be used and stored on the Leased Premises, provided such is incident to and reasonably necessary for the operation and maintenance of the Leased Premises as permitted under the provisions of this Lease and is in compliance with applicable laws, and further provided that the quantity of Hazardous Substances is not such as would trigger reporting requirements (other than routine requirements under OSHA and other workplace safety laws) under any Environmental Statutes. Should any release of Hazardous Substances or solid waste occur at the Leased Premises or elsewhere on the Property by reason of any act or omission of Tenant, its agents, employees or invitees, the Tenant shall immediately take all measures necessary to contain, remove and dispose off of the Property of all materials released or contaminated by the release and remedy and mitigate all threats to public health or the environment relating to such release. When conducting any such measures the Tenant shall comply with Environmental Statutes. Tenant agrees to indemnify, defend and hold Landlord harmless of, from and against any and all expense, loss, cost or liability incurred or suffered by reason of Tenant's breach of this Section 37(f), but nothing herein shall be deemed to render Tenant liable for actions or omissions of Landlord or for any contamination pre-existing at the Commencement Date. The obligations of Tenant under this Section 37 shall survive any expiration or termination of this Lease. 38. BROKERS. Landlord and Tenant each represent and warrant to the other that it has not engaged any broker, finder or other person other than the broker, if any, listed in Section 1 hereof, who would be entitled to any commission or fees in respect of the negotiation, execution or delivery of this Lease. Landlord and Tenant each agree to indemnify and hold harmless the other against any loss, cost, liability or expense incurred by the other as a result of any claim asserted by any other broker, finder or other person on the basis of any arrangements or agreements made or alleged to have been made by or on behalf of the other. Landlord shall be responsible for the payment of a brokerage fee to the broker listed in Section 1 at Landlord's scheduled commission rate or as otherwise agreed in writing between Landlord and such broker. 39. FINANCIAL STATEMENTS. Within ninety (90) days following the end of Tenant's fiscal year, Tenant shall deliver to Landlord a copy of Tenant's financial statements (consisting, at a minimum, of Tenant's balance sheet and income statement) for Tenant's fiscal year just ended, certified by an independent certified public accountant as presenting fairly, in all material respects, the financial position of Tenant and the results of its operations in accordance with generally accepted accounting principles. Landlord shall keep any information provided to Landlord in accordance with this Section 39 confidential and shall not disclose such information to any third party. In the event at any time in the future Tenant's stock becomes publicly traded, Tenant may satisfy the requirements of this Section 39 by providing to Landlord the financial information which Tenant files with the Securities and Exchange Commission. 40. INTENTIONALLY OMITTED. 36 41. OPTION TO PURCHASE. (a) GRANT; EXERCISE. Tenant shall have the option to purchase the Property (the "Purchase Option") at any time after Landlord's acquisition of the Property at the purchase price set forth below provided it gives Landlord at least thirty (30) days prior written notice of its desire to exercise the Purchase Option, provided Tenant is not in default of this Lease at the time of such exercise, and further provided that Tenant may not exercise its Purchase Option after the occurrence of a casualty or condemnation which would give either party the right to terminate this Lease unless and until both sides have elected to waive their option to terminate this Lease and any applicable restoration has been completed: (i) The purchase price for the Property shall be an amount determined by capitalizing the aggregate Annual Fixed Rent payable for the Lease Year in which settlement will occur under the Purchase Option using a nine percent (9%) capitalization rate. (b) SETTLEMENT. Closing shall take place at the offices of Tenant's attorney or title company in the county in which the Leased Premises are located and shall take place no sooner than thirty (30) days and no more than one hundred twenty (120) days after Tenant gives notice of exercise of the Purchase Option and no later than the date on which this Lease is then scheduled to expire by its terms, or as otherwise agreed between the parties. The purchase price shall be paid at closing in cash or by bank certified, treasurer's or cashier's check or by plain check of the title insurance company insuring Tenant's title to the Leased Premises. (c) PROPERTY; TITLE. (i) The Property shall include the Lot, together with the Building and other buildings, structures and improvements thereon erected and together with all easements, rights and privileges appurtenant thereto, being all of the real property owned by landlord at the location of the Leased Premises. The Property is to be conveyed subject to all easements, conditions, covenants and restrictions of record when Landlord acquires title and otherwise free and clear of all liens, restrictions, encumbrances, and easements of every kind, excepting only: (1) easements and other matters of record that do not affect the use of the Leased Premises as contemplated under this Lease, and (2) such matters as may have been consented to be Tenant between the date of this Lease and the date of closing on the Purchase Option; otherwise, title to the Property shall be good and marketable and such as will be insured by a reputable title company of Tenant's election at regular rates. If Landlord is unable to give a good and marketable title and such as will be so insured, as required in the preceding paragraph, then Tenant shall have the option of (1) accepting such title as Landlord is able to convey, with no deduction from or adjustment of the purchase price except for deduction of the amount of the then principal, accrued interest and penalties of any encumbrance or other lien or the amount of any outstanding money judgment (with accrued interest and penalties, if applicable) so encumbering the Property, or (2) declining to consummate this purchase; and in the latter event Tenant shall be reimbursed forthwith for all title insurance charges actually incurred in searching title to the Property, there shall be no 37 further obligation or liability on either of the parties hereunder with respect to the Purchase Option and this Lease shall continue in accordance with its terms. (ii) Provided there is a closing hereunder, Tenant will be responsible for and shall comply, at Tenant's expense, with the requirements of any and all notices or orders served upon Landlord after the date of this Lease and for the payment of any assessments and charges thereafter made for any public improvements, if work in connection therewith is thereafter begun in or about the Leased Premises or adjacent thereto. (d) LOSS OR CASUALTY; CONDEMNATION. (i) Loss or damage to all or any portion of the Leased Premises caused by fire or other casualty shall not nullify, cause a termination of or otherwise affect the Purchase Option, except as follows: If neither party would have been entitled to cancel this Lease under Section 21 by reason of such casualty, then the Purchase Option shall remain in effect but closing thereunder shall be extended until the date which is 10 business days after Landlord gives notice to Tenant that the damage has been repaired or restored. If the casualty damage is such that either or both parties have a right to cancel this Lease under Section 21, then the following shall apply. If Tenant exercises a right granted in Section 21 to cancel this Lease by reason of the casualty, then the Tenant shall be deemed to have automatically canceled its exercise of the Purchase Option concurrently with the exercise of notice of termination under Section 21. If Tenant has not elected to terminate this Lease under Section 21 but Landlord exercises a right of termination of this Lease under Section 21, then by written notice given to Landlord within 10 business days after Tenant's receipt of Landlord's notice of election to terminate under Section 21, Tenant shall notify Landlord as to whether or not Tenant elects to cancel this Purchase Option. If Tenant elects not to cancel the Purchase Option, then the parties shall proceed to closing hereunder on a date selected by Tenant no sooner than five business days and no later than 15 business days after Tenant's notice of election. At closing, Tenant shall pay the entire purchase price, Landlord shall assign to Tenant all of Landlord's rights under the property insurance policy for the Building arising out of such casualty, and Landlord shall pay to (or credit Tenant in the amount of) insurance proceeds theretofore received by Landlord arising out of the casualty, less any out-of-pocket costs incurred by Landlord to collect such proceeds, to make and to pay for repairs (including demolition, debris removal and related restoration) completed by Landlord prior to closing, and also net of any rent loss or business interruption proceeds applicable to rent and business losses prior to the date of closing. (ii) Any taking or condemnation for public or quasi-public purpose or use by any competent authority in appropriate proceedings or by any right of eminent domain of all or any part of the Leased Premises between the date of Tenant's exercise of the Purchase Option and the time of closing hereunder shall not affect the purchase option except as follows. The property conveyed shall be net of any land taken by the condemning authority (or subject to the notice of taking) and all of Landlord's rights with respect thereto shall be assigned to Tenant at settlement. However, if the extent of the taking or condemnation is such that Tenant would have the right to cancel this Lease under Section 20 hereof, and Tenant elects to exercise such termination right under Section 20, then the cancellation of this Lease by Tenant under Section 20 shall be deemed to effect an automatic cancellation of the Purchase Option. 38 (e) FIXTURES, TREES, SHRUBBERY, ETC. All plumbing, heating, air conditioning, ventilating, electrical and lighting fixtures and systems appurtenant to and forming a part of the Leased Premises; all other fixtures of whatever nature or description now in or located on the Leased Premises; any remaining heating fuels stored on the Leased Premises; and all trees, shrubbery and plants in or on the Leased Premises on the date of this Lease are included in the sale and purchase price and shall become the property of Tenant at closing hereunder. None of the foregoing shall be removed or permitted to be removed by Landlord from the Leased Premises after the date of Tenant's exercise of this Option to Purchase provided that settlement takes place. (f) DEFAULT BY TENANT. Should Tenant violate or fail to fulfill or perform any of the terms or conditions of this Lease insofar as they relate to the Purchase Option and if as a result of such breach a closing hereunder shall not occur, then Landlord, as its exclusive remedy for such breach, shall be entitled to receive forthwith from Tenant the sum of $10,000, which sum shall be treated as liquidated damages (and not as a penalty) for such breach; and upon such remittance by Tenant of said sum mentioned herein, Landlord and Tenant shall each be released from all liability or obligation hereunder relating to the Purchase Option and the Purchase Option shall become null and void; provided, however, all other provisions of this Lease shall continue in full force and effect as if Tenant had never exercised the Purchase Option. (g) APPORTIONMENTS; EXPENSES. (i) All rent for the month in which closing takes place shall be apportioned at closing. Utilities, taxes and other Operating Expenses shall not be apportioned, it being acknowledged that Tenant is responsible for all such costs under this Lease. Landlord shall use all reasonable efforts to make final calculations of any amounts due from Tenant or credits owing to Tenant by reason of Operating Expenses as of the date of closing, and preliminary credits or payments shall be made at closing based on such numbers, subject to post settlement adjustment with respect to any items for which Landlord is reasonably unable to obtain final numbers by closing. All adjustments shall be completed no later than 60 days after closing. (ii) All realty transfer taxes, if any, imposed by any governmental authority on the conveyance of the Leased Premises by the deed contemplated hereby shall be divided equally between Landlord and Tenant. (iii) Each party shall pay all its own expenses incurred in connection with the Purchase Option and the transactions contemplated hereby. (iv) A survey will be secured and paid for by Landlord if (1) the title insurer shall reasonably reason require such a survey, or (2) there has been a physical change in the metes or bounds of the Leased Premises by subdivision, highway or road changes or improvements on or bounding the Leased Premises which would render the existing legal description incomplete, incorrect or inadequate to describe properly the Property to be conveyed hereunder. 39 (h) TENDER. Formal tender of an executed deed and purchase money is hereby waived; but nothing herein shall be deemed a waiver, concurrently with a settlement hereunder, of the obligation of Landlord to execute, acknowledge and deliver (or cause to be executed, acknowledged and delivered) a special warranty deed for the Property or the concurrent obligation of Tenant to pay the purchase price. (i) RIGHT OF FIRST OFFER. In the event Landlord receives an expression of serious interest from a third party to purchase the Leased Premises which Landlord is willing to accept, Landlord shall notify Tenant of such offer and Tenant shall then have the right for a period of ten (10) business days following receipt of Landlord's notice to decide if Tenant desires to purchase the Leased Premises in accordance with the terms and conditions set forth in the offer. If Tenant does not notify Landlord within ten (10) business days after receipt of Landlord's notice of Tenant's desire to purchase the Leased Premises, or if Tenant fails to execute an Agreement of Sale within ten (10) days after receipt of the Agreement of Sale for any reason other than delays caused by Landlord, then Landlord shall be free to sell the Leased Premises to the offering party or its assignee or nominee, and this right shall be of no further force or effect with respect to the Leased Premises unless Landlord fails to complete the sale of the Leased Premises to the offering party or its assignee or nominee; provided, however, that Landlord agrees not to sell the Leased Premises upon terms materially more favorable to the purchaser than those offered to Tenant. "Materially more favorable" shall mean changes which, in the aggregate, effectively reduce the purchase price set forth in the offer by more than two percent (2%). If Landlord complies with the provisions of this Section 41(i) and the Property is sold, all of Tenant's rights under this subparagraph (i) terminate absolutely and become void. 42. HEADINGS AND TERMS. The title, headings and table of contents of this Lease are for convenience of reference only and shall not in any way be utilized to construe or interpret the agreement of the parties as otherwise set forth herein. The term "Landlord" and the term "Tenant" as used herein shall mean, where appropriate, all persons acting by or on behalf of the respective parties, except as to any required approvals, consents or amendments, modifications or supplements hereunder when such terms shall only mean the parties originally named on the first page of this Lease as Landlord and Tenant, respectively, and their agents so authorized in writing. 43. GOVERNING LAW. This Lease shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania. 44. PRESENT LEASE. With respect to Tenant's three existing leases for space at 3220 and 3260 Tillman Drive in Glenview Corporate Center between Pitcairn Properties, Inc., as Landlord and Tenant as Tenant (collectively the "Glenview Lease"), the parties agree as follows: As of the date of the beginning of Annual Fixed Rent payments under this Lease, Landlord will contribute up to $363,000 ("Landlord's Contribution") towards the payment of minimum and additional rent due from Tenant under the Glenview Lease from time to time. Payments of Landlord's Contribution shall be made on a monthly basis, by check payable to Tenant on the first day of each month (except that if the Commencement Date of this Lease is not the first day of the month, then the first payment of Landlord's Contribution, apportioned for that month, shall be made on the Commencement Date concurrently with Tenant's first payment of rent under this Lease). The amount of each monthly installment of Landlord's Contribution shall not 40 exceed 79.25% of the applicable monthly payment due from Tenant under the Glenview Lease for minimum rent and any additional rent that is collected in monthly installments under the Glenview Lease. The balance of the monthly payment due under the Glenview Lease shall be the responsibility of Tenant. After Tenant surrenders its space under the Glenview Lease, Landlord and Tenant shall use joint efforts to mitigate the expense under the Glenview Lease by subleasing or negotiating a buyout of the Glenview Lease. Any savings obtained by reason of such efforts shall be shared by Landlord and Tenant in the same proportion (that is 79.25% to Landlord and 20.75% to Tenant). 45. SIGNS. So long as Tenant is paying Fixed and Additional Rent due under this Lease, Tenant shall have the right to erect signage exterior to the Building exclusive to Tenant at Tenant's own expense provided that (i) such signage is in conformity with all governmental statutes, ordinances and regulations, and (ii) until July 1, 1999, signage shall be subject to Landlord's approval, which will not be withheld as long as the other tenant of the Building does not object. 46. MEMORANDUM OF LEASE. Landlord agrees, upon Tenant's request, to execute a short form of this Lease within thirty (30) days after the execution and delivery of this Lease. Tenant may record such short form lease at its sole cost and expense. The provisions of this Lease shall control, however, with regard to any omissions from said short form, or with respect to any provisions hereof which may be in conflict with such short form. 47. ANTENNA(S) INSTALLATION. Should Tenant wish to install an antenna(s) and associated equipment on property belonging to Landlord, including on the roof of the Building, Landlord agrees that said property may be used for such purposes at no additional cost to Tenant, subject to such reasonable approvals, rules and regulations as Landlord may adopt. Landlord grants Tenant the right in common with Landlord and other tenants, subject to the following provisions of this Section, to install, operate and maintain for use by Tenant and any affiliated company (but not to transferred or assigned to a third party), at Tenant's expense and risk, a lawfully permitted antenna(s) and associated equipment (the "Antenna Leased Premises"): (a) Tenant shall submit, at Tenant's expense, a full set of engineering plans and specifications of the proposed antenna(s) installation to Landlord for approval, such approval not to be unreasonably withheld, conditioned or delayed; (b) Tenant shall make all connections by conduit or cable as required between Tenant's equipment in the Leased Premises and the Antenna Leased Premises utilizing Building services, subject to Tenant's payment for reasonable costs of such services, as necessary to effect the operation of the antenna(s). Said connections shall be approved by Landlord, which approval shall not be unreasonably withheld, conditioned or delayed; (c) Any antenna(s) installed by Tenant shall be erected and operated so as not to interfere with the operation of any previously erected antenna(s). Tenant agrees to remedy at Tenant's expense any interference with other tenants or third parties caused by the operation of Tenant's antenna(s), and Tenant agrees to indemnify and hold harmless Landlord from all liability and claims, including, without limitation, court costs, attorneys' fees and costs of investigation, related to or arising from the operation and/or maintenance of Tenant's antenna(s); 41 (d) Tenant or Tenant's representatives shall, at all reasonable times, have the unrestricted right to enter or leave the Antenna Leased Premises where the antenna(s) and equipment are located; (e) Landlord agrees that it will not give unauthorized persons access to Tenant's Antenna Leased Premises or equipment; (f) Tenant shall obtain all necessary municipal, state and federal permits and authorizations required to install, maintain and operate an antenna(s) and associated equipment and pay any charges levied by government agencies annually or otherwise which are the sole result of Tenant's having an antenna(s); (g) Tenant agrees to maintain the Antenna Leased Premises and associated equipment in a good state of repair, to save Landlord harmless from any loss, costs or damages as a result of the erection, operation, maintenance, existence or removal of said antenna(s); (h) At the conclusion of the Term, unless Landlord permits otherwise, Tenant shall remove the antenna(s) and surrender and restore the Antenna Leased Premises to Landlord in as good order and same condition as when received; (i) The liability insurance to be carried by Tenant pursuant to the provisions of this Lease shall include coverage for the activity of Tenant on the Antenna Leased Premises. Tenant shall pay any increase in rates for insurance which Landlord is required to carry under the Lease because of the installation and use of the antenna(s) by Tenant; and (j) Any notice or demand required or permitted to be given hereunder shall be made in accordance with the terms of this Lease. 48. LANDLORD'S WAIVER. Landlord agrees to execute landlord's waivers in conjunction with the financing of Tenant's fixtures, machinery, inventory and/or equipment in form attached hereto as Exhibit "C" and made a part hereof. Tenant shall have the right at all times to remove and/or replace any fixtures, machinery and/or equipment owned by Tenant. 49. MOVING COSTS. Within ten days after receipt of an invoice therefor (but not prior to Tenant taking possession of the Leased Premises), Landlord shall pay Eighteen Thousand Dollars ($18,000) toward Tenant's costs to move its property to the Leased Premises. 50. LANDLORD'S CONDITION. The parties acknowledge that Landlord has not yet acquired fee title to the Property, and that it is presently contemplated that Landlord's purchase of the Property from Osiris Holding Corporation ("Existing Owner") is anticipated to proceed to settlement on or prior to December 31, 1998. If for any reason whatsoever [including without limitation an election by Landlord to terminate the agreement prior to expiration of Landlord's due diligence period], the purchase by Landlord (or its assignee or nominee) of the Property from the Existing Owner is not consummated, this Lease shall lapse and become void. Landlord shall respond promptly to inquiries from Tenant as to the status of the proposed acquisition. If the Sale Agreement is not signed by October 15, 1998, or if settlement on the sale and purchase does 42 not occur by January 31, 1999, either party may cancel this Lease by written notice to the other, provided however that Landlord may not exercise its right of termination of this Lease unless and until negotiations and proceedings with the Existing Owner have been terminated. 43 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed the date first mentioned. LANDLORD: BALANCED CAPITAL LLC By: /s/ Steven D. Brand By: /s/ Frank Seidman ----------------------------- --------------------------- Steven D. Brand, Manager Frank Seidman, Manager TENANT: WORLDGATE COMMUNICATIONS, INC. /s/ David A. Dill By: /s/ Randall J. Gort - ------------------------------- --------------------------- Attest Name: Randall J. Gort Title: V.P. Corporate Affairs Title: 44 FIRST AMENDMENT TO LEASE This First Amendment to Lease is made as of the 7th day of December 1998 by and between BALANCED CAPITAL LLC, a Pennsylvania limited liability company ("Landlord") and WORLDGATE COMMUNICATIONS, INC., a corporation ("Tenant"). Whereas, Landlord and Tenant entered into an agreement dated October 7, 1998 (the "Lease") pursuant to which Landlord agreed to lease to Tenant, on the terms and conditions set forth in the Lease, a building containing approximately 72,000 square feet of space located at 3190 Tremont Avenue, Bensalem, Bucks County, Pennsylvania; and Whereas, Landlord and Tenant desire to amend the Lease in certain respects; Now therefore, in consideration of the mutual promises contained in this Amendment, and intending to be legally bound, Landlord and Tenant agree as follows: 1. DEFINITIONS. Capitalized terms not otherwise defined in this Amendment shall have the meaning given to such terms in the Lease. 2. CONFIRMATION OF SQUARE FOOTAGE. Landlord and Tenant confirm that the gross square footage of the Building is approximately 72,000 square feet, and they hereby agree, notwithstanding any measurement right or other provision of the Lease to the contrary, to use 72,000 square feet as the size of the Leased Premises (after delivery of the entire Building) for all purposes under the Lease, including calculation of Rent and other charges under the Lease. 3. TREMONT AVENUE. (a) The definition of Operating Expense set forth in subsection 6(d) of the Lease is hereby amended to include costs incurred for snow and ice removal, maintenance, repairs and repaving of Tremont Avenue, the private street abutting the Lot, until the date (if any) when Tremont Avenue is dedicated to the Township of Bensalem. (b) Section 10 of the Lease is hereby amended to add to the following to the services to be furnished by Landlord: snow and ice removal, maintenance, repairs and repaving of Tremont Avenue, the private street abutting the Lot, until the date (if any) when Tremont Avenue is dedicated to the Township of Bensalem. 4. PRESENT LEASE. Section 44 of the Lease is hereby amended and, as amended, restated in its entirety as follows: 44. PRESENT LEASE. Landlord will contribute Three Hundred Sixty Three Thousand Dollars ($363,000) ("Landlord's Contribution") toward Tenant's obligations for minimum rent and additional rent under Tenant's three existing leases for space at 3220 and 3260 Tillman Drive in Glenview Corporate Center between Pitcairn Properties, Inc. as landlord and Tenant as tenant (collectively the "Glenview Lease"). Landlord's Contribution shall be paid to Tenant in its entirety by check delivered to Tenant within five days after the date Tenant takes possession of the first 40,000 square feet of space in the Building and begins paying Annual Fixed Rent under this Lease. Any savings generated by the sublease, buyout or other early disposition of Tenant's obligations under the Glenview Lease shall belong solely to Tenant. 5. RATIFICATION OF LEASE. Landlord and Tenant hereby confirm that the Lease remains in full force and effect, unmodified except as amended in this First Amendment. In witness whereof, Landlord and Tenant have executed and delivered this First Amendment as a sealed instrument as of the date first written above. LANDLORD: BALANCED CAPITAL LLC By: /s/ Steven D. Brand By: /s/ Frank Seidman -------------------------- --------------------------- Steven D. Brand, Manager Frank Seidman, Manager TENANT: WORLDGATE COMMUNICATIONS, INC. /s/ Mary Stinsman By: /s/ Randall J. Gort - ----------------------------- --------------------------- Attest Name: Randall J. Gort Title: Vice President - Corporate Affairs SECOND AMENDMENT TO LEASE This Second Amendment to Lease is made as of the 17th day of December 1998 by and between BALANCED CAPITAL LLC, a Pennsylvania limited liability company ("Landlord") and WORLDGATE COMMUNICATIONS, INC., a corporation ("Tenant"). Whereas, Landlord and Tenant entered into an agreement dated October 7, 1998 and previously amended December 7, 1998 (collectively, the "Lease") pursuant to which Landlord agreed to lease to Tenant, on the terms and conditions set forth in the Lease, a building containing approximately 72,000 square feet of space located at 3190 Tremont Avenue, Bensalem, Bucks County, Pennsylvania, and Landlord and Tenant desire to amend the Lease in certain respects; Now therefore, in consideration of the mutual promises contained in this Amendment, and intending to be legally bound, Landlord and Tenant agree as follows: 1. DEFINITIONS. Capitalized terms not otherwise defined in this Amendment shall have the meaning given to such terms in the Lease. "GMAC Mortgage" means the first mortgage on the Property which will be granted concurrently with the acquisition of the Property, presently anticipated to occur in December 1998, to secure the purchase money loan (the "GMAC Loan") which will be used to acquire the Property. "GMAC Loan Documents" means the GMAC Mortgage and the other documents evidencing and securing the GMAC Loan. "Lender" means the then holder of the GMAC Mortgage and the other GMAC Loan Documents. 2. AMENDMENT OF PERMITTED USES. In Section 1 of the Lease, the definition of Permitted Uses is hereby revised to read as follows: PERMITTED USES: general office, engineering research and development, assembly and testing of electronic parts, Channel HyperLinking and WorldGate service operations. 3. SECURITY DEPOSIT. Subsection 36(c) is hereby amended to clarify that the Tenant may at any time and from time to time replace a cash Security Deposit with a Letter of Credit or a Letter of Credit Security Deposit with a cash Security Deposit. In such event, Tenant shall give Landlord at least three business days' notice that the form of Security Deposit will be changed, and in the case of an exchange from cash to Letter of Credit, the notice shall be accompanied by a draft of the proposed Letter of Credit for Landlord's review for compliance with the requirements of Subsection 36(c). Landlord shall cooperate with Tenant's efforts to arrange simultaneous exchange of the cash Security Deposit for the approved Letter of Credit, or the simultaneous surrender the Letter of Credit in exchange for the required cash Security Deposit, provided that Landlord shall not at any time be without one or the other form of Security Deposit. 4. AMENDMENT OF PURCHASE OPTION. Section 41 of the Lease, captioned "Option to Purchase," is hereby amended to add the following new subsection (j): (j) EARLY EXERCISE OF PURCHASE OPTION. If Tenant exercises the Purchase Option and the settlement date for the Purchase Option (the "Option Settlement"), as determined under subsection Section 41(b), would occur prior to THE EARLIER OF February 15, 2002 or the date when prepayment of the GMAC Loan is permitted under the terms of the GMAC Loan Documents, then at Landlord's request the purchaser will either (A) defer the Option Settlement until after the date when prepayment of the GMAC Loan is permitted under the terms of the GMAC Loan Documents, or (B) take title to the Property subject to the GMAC Loan Documents. If the purchaser elects to take title subject to the GMAC Loan Documents: (1) The transfer will be subject to the approval of the Lender, and Tenant will furnish such information as the Lender may reasonably require to identify the purchaser and evaluate its creditworthiness. (2) At least thirty (30) days prior to the Option Settlement Landlord will deliver to the purchaser (A) copies of the GMAC Loan Documents certified as accurate and complete by the Landlord, and (B) an estoppel signed by the Lender confirming the then outstanding principal balance of the GMAC Loan, the amount of any other charges that may be due and unpaid as of the settlement date, the amount of any escrow funds (for insurance, taxes or otherwise) then held by the Lender or its servicing agent, and further confirming that there are then no uncured monetary defaults under the GMAC Loan Documents and further that the Lender has not issued any notice of a non-monetary default under the GMAC Loan Documents which remains uncured. (3) At the Option Settlement the seller and the purchaser will sign and deliver an assignment and assumption of the GMAC Loan Documents, pursuant to which purchaser will assume the obligation to pay the GMAC Loan, in such form as may be required by the Lender. (4) At the Option Settlement, seller will pay any additional fees and costs incurred because of the fact that the Property is being transferred subject to the GMAC Loan (including without limitation Lender's transfer fee). Accrued and unpaid charges then due to the Lender will be paid by the seller, the seller will receive a credit for escrow funds then held by Lender for use in payment of costs of the Property (such as real estate taxes) and the purchaser will receive credits against the Purchase Price for the then outstanding principal balance of the GMAC Loan, and for seller's share of interest on the GMAC Loan for the calendar month in which the Option Settlement occurs. 5. RATIFICATION OF LEASE. Landlord and Tenant hereby confirm that the Lease remains in full force and effect, unmodified except as amended in this Second Amendment. In witness whereof, Landlord and Tenant have executed and delivered this Second Amendment as a sealed instrument as of the date first written above. BALANCED CAPITAL LLC By: /s/ Steven D. Brand By: /s/ Frank Seidman ---------------------------- ---------------------------- Steven D. Brand, Manager Frank Seidman, Manager WORLDGATE COMMUNICATIONS, INC. /s/ David A. Dill By: /s/ Randall J. Gort - ------------------------------ ---------------------------- Attest Name: Randall J. Gort Title: V.P. EX-10.2 3 EXHIBIT 10.2 AGREEMENT OF LEASE BETWEEN GLENVIEW CORPORATE CENTER LIMITED PARTNERSHIP, Landlord AND WORLDGATE COMMUNICATIONS, Tenant TABLE OF CONTENTS LEASE SECTION PAGE 1. REFERENCE DATA....................................................1 2. DEMISE............................................................3 3. TERM..............................................................3 4. HOLDING OVER......................................................3 5. RENT..............................................................3 6. OPERATING EXPENSE ESCALATION......................................4 7. COMPLETION OF IMPROVEMENTS; AS IS.................................9 8. [Intentionally Omitted]...........................................9 10. PERMITTED USES...................................................10 11. BUILDING OPERATION AND SERVICES; ELECTRICALLY....................10 12. INTERRUPTION OF SERVICES.........................................12 13. REPAIRS..........................................................13 14. INTENTIONALLY OMITTED............................................13 15. QUIET ENJOYMENT..................................................14 16. LANDLORD'S RIGHT OF ENTRY........................................14 17. SURRENDER OF PREMISES............................................14 18. MISCELLANEOUS COVENANTS..........................................15 19. RULES AND REGULATIONS............................................16 20. PERFORMANCE OF TENANT'S COVENANTS................................16 21. EMINENT DOMAIN...................................................16 22. CASUALTY DAMAGE..................................................17 23. HOLD HARMLESS: PUBLIC LIABILITY INSURANCE; WAIVER OF SUBROGATION.18 24. MORTGAGEE AND OTHER AGREEMENTS...................................19 25. SUBORDINATION AND ATTORNMENT.....................................20 26. ASSIGNMENT AND SUBLETTING........................................20 27. DEFAULT..........................................................22 28. LANDLORD'S REMEDIES..............................................23 29. LEGAL FEES AND OTHER COSTS.......................................26 30. LATE CHARGE......................................................26 31. SUCCESSORS AND ASSIGNS...........................................26 32. WAIVERS..........................................................27 33. WAIVER OF TRIAL BY JURY..........................................27 34. SEVERABILITY.....................................................27 35. NOTICES..........................................................27 36. AMENDMENT AND MODIFICATIONS......................................27 37. SECURITY DEPOSIT.................................................28 38. ENVIRONMENTAL MATTERS............................................28 39. BROKERS..........................................................30 40. FINANCIAL STATEMENTS.............................................30 41. TENANT'S TERMINATION RIGHTS......................................30 42. PARKING..........................................................30 43. OPTIONS TO EXTEND................................................31 44. HEADINGS AND TERMS...............................................31 45. GOVERNING LAW....................................................32 EXHIBITS A Plan of Leased Premises B Rules and Regulations C Tenant Estoppel Letter GLENVIEW CORPORATE CENTER Bensalem, Pennsylvania 1. REFERENCE DATA. Lease Dated: January 14, 1997 --------------- Any reference in this Lease to the following subjects shall incorporate therein the data stated for the subject(s) in this Section: LANDLORD: Glenview Corporate Center Limited Partnership, a Delaware Limited Partnership LANDLORD'S ADDRESS: c/o Pitcairn Properties Incorporated Glenview Corporate Center, P.O. Box 863 3220 Tillman Drive, Suite 407 Bensalem, Pennsylvania 19020-2032 LANDLORD'S CONSTRUCTION REPRESENTATIVE: R. Clifford Zimmerman TENANT: WorldGate Communications TENANT'S ADDRESS: TENANT'S CONSTRUCTION REPRESENTATIVE: N/A LEASED PREMISES: RENTABLE AREA OF LEASED PREMISES: 16,195 Rentable Square Feet LEASE TERM: Three (3) years SCHEDULED COMMENCEMENT DATE: March 1, 1997 COMMENCEMENT DATE: March 1, 1997 ANNUAL FIXED RENT: Year I - $263,168.75; Year 2 - $287,461.25; Year 3 - $295,558.75 OPERATING EXPENSE ALLOWANCE: $6.00 Per Rentable Square Foot TENANT'S PROPORTIONATE SHARE: 11. 30 % PERMITTED USES: general office SECURITY DEPOSIT: $21,930.73 ADVANCE RENTAL PAYMENT: $-0- BROKER: Lanard & Axilbund Colliers CONSTRUCTION ALLOWANCE: N.A. GLENVIEW CORPORATE CENTER LIMITED PARTNERSHIP By: BPPI-I Limited Partnership, its general partner By: PITCAIRN PROPERTIES INCORPORATED By: /s/ illegible -------------------------------------- BY: BERGEN OF PHILADELPHIA, INC. BY: /s/ illegible -------------------------------------- TENANT: WORLDGATE CO UNICATTONS By: /s/ Hal Krisbergh -------------------------------------- Name: Hal Krisbergh Title: Chairman/CEO Attest: /s/ David E. Wachob --------------------------------------- Name: David E. Wachob Title: VP/GM 2. DEMISE . Landlord hereby demises and lets to Tenant and Tenant takes and hires from Landlord that certain space (the "Leased Premises") delineated in Exhibit "A", attached hereto and made part hereof, in the five (5) story office building (the "Building") erected upon a parcel of ground located at 3220 Tillman Drive, Bensalem Township, Pennsylvania (the "Lot"), TOGETHER WITH, appurtenant to the Leased Premises, the right to use in common with Landlord and other tenants, occupants and visitors to the Building, the common walkways, sidewalks and parking lots of the Lot, the common lobbies and facilities of the Building and, if the Leased Premises include less than an entire floor of the Building, the common lobbies, hallways and toilets and other common facilities of such floor. The computation of the gross rentable area for the Leased Premises includes an agreed upon loss factor representing Tenant's allocable share of common areas and has been agreed upon and stipulated by Landlord and Tenant. 3. TERM. The Lease Term shall commence on the Commencement Date which shall be the earlier of (a) the date on which Tenant shall take possession of the Leased Premises, or (b) March 1, 1997. 4. HOLDING OVER. If Tenant retains possession of the Leased Premises or any part thereof after the termination of this Lease by expiration of the Lease Term or otherwise without the consent of Landlord, Tenant shall pay Landlord (a) as agreed liquidated damages for such holding over alone, an amount, calculated on a per them basis for each day of such unlawful retention, equal to the greater of (i) twice the Annual Fixed Rent, or (ii) the established market rental for the Leased Premises, for the time Tenant thus remains in possession, plus, in each case, all Additional Rent and other sums payable hereunder, and (b) all other damages, costs and expenses sustained by Landlord by reason of Tenant's holding over. Without limiting any rights and remedies of Landlord resulting by reason of the wrongftil holding over by Tenant, or creating any right in Tenant to continue in possession of the Leased Premises, all Tenant's obligations with respect to the use, occupancy and maintenance of the Leased Premises shall continue during such period of unlawful retention. 5. RENT. Rent is payable by Tenant beginning on the Commencement Date in monthly installments of one-twelfth (1/12th) of the Annual Fixed Rent, without prior notice or demand, and without any set-off or deduction whatsoever, in advance, on the first day of each month at Landlord's office in Bensalem, Pennsylvania or at such other place as Landlord may direct in writing, except that the advance rent in the amount set forth as the Advance Rental Payment in Section I hereof will be paid on the date of the execution of this Lease and will be applied against the Fixed Rent in the first full month of the Lease Term. If the Lease Term commences on a day other than the first day of a calendar month, the monthly installments of rent (including Fixed Rent and any Additional Rent as herein provided), for the first and last months of the Lease Term and for each Lease Month in which the rental rate changes shall be apportioned pro rata in proportion to the number of days in the month. As used herein, the term "Lease Month" shall mean the 28, 3 29, 30 or 31 day period ending at midnight on the day preceding each monthly anniversary of the Commencement Date. Tenant hereby covenants and agrees to pay the Annual Fixed Rent, Additional Rent and other sums payable to Landlord hereunder when due, and to pay interest to Landlord at the Overdue Interest Rate (a) on all overdue installments of Fixed Rent from the due date thereof to the date of payment and (b) on all payments of Additional Rent or other sums payable to Landlord hereunder from the date of demand for payment until the date of payment. Upon default by Tenant in the payment of such Additional Rent or other sums payable hereunder, Landlord shall be entitled to all rights and remedies to which it would be entitled in default of the payment of Fixed Rent. As used herein, the term "Overdue Interest Rate" shall mean and equal three percent (3 %) per annum over the prime interest rate announced from time to time by the largest commercial bank whose principal office is located in Philadelphia or Montgomery County, Pennsylvania as being its "prime" or benchmark rate of interest. 6. OPERATING EXPENSE ESCALATION. If Landlord's Operating Expense for any Operating Year shall be greater than the Operating Expense Allowance, Tenant shall pay to Landlord as Additional Rent an amount equal to Tenant's Proportionate Share (as defined below) of the difference (the amount of Tenant's Proportionate Share of such difference is hereinafter- referred to as the "Operating Expense Adjustment"). If Tenant occupies the Leased Premises or portion thereof for less than a full Operating Year, the Operating Expense Adjustment will be allocated proportionately to the amount of time in such Operating Year that Tenant so occupies such space. Such Additional Rent shall be paid in the following manner: within one hundred twenty (120) days following the end of each Operating Year, Landlord shall furnish Tenant an Operating Expense Statement setting forth (i) the Operating Expense for the preceding Operating Year, (H) the Operating Expense Allowance and (iii) the Tenant's Operating Expense Adjustment for such Operating Year. Within fifteen (15) days following the receipt of such Operating Expense Statement (the "Expense Adjustment Date") Tenant shall pay to Landlord as Additional Rent the Operating Expense Adjustment for such Operating Year. Commencing with the first month of the lease term, tenant shall pay to landlord, on account of the operating expense adjustment for such Operating Year, monthly installments in advance equal to one-twelfth (1/12TH) OF THE estimated Operating Expense Adjustment for such Operating Year. On the next succeeding Expense Adjustment Date, Tenant shall pay to Landlord (or Landlord shall credit to Tenant) any deficiency (or excess) between the installments paid on account of the preceding year's Operating Expense Adjustment and the actual Operating Expense Adjustment for such Operating Year. As used in this Section 6 and Section 1 where applicable, the following words and terms shall be defined as hereinafter set forth: 4 (h) To constantly have pass keys to the Leased Premises. (i) To grant to anyone the exclusive right to conduct any particular business or undertaking in the Building. 0) To exhibit the Leased Premises to others and to display "For Rent" signs on the Leased Premises. (k) To take any and all measures, including inspections, repairs, alterations, additions and improvements to the Leased Premises or to the Building as may be necessary or desirable in the operation of the Building. Landlord may enter upon the Leased Premises and may exercise any or all of the foregoing rights hereby reserved without being deemed guilty of an eviction or disturbance of Tenant's use or possession and without being liable in any manner to Tenant. REGULATION CHANGE Landlord shall have the right to amend these Rules and Regulations, and to make such other and further reasonable Rules and Regulations, as in the judgment of Landlord, may from time to time be needful for the safety, appearance, care or cleanliness of the Building or for the preservation of good order therein. Landlord shall not be responsible to Tenant for the enforcement of the Rules and Regulations or by the violation thereof by other tenants. 5 (a) "OPERATING YEAR" shall mean each calendar year, or such other period of twelve (12) months as hereafter may be adopted by Landlord as its fiscal year, occurring during the Lease Term. (b) "OPERATING EXPENSE ALLOWANCE" shall mean and equal the amount set forth in Section I of this Lease multiplied by the rentable area of the Building. (c) "OPERATING EXPENSE STATEMENT" shall mean a statement in writing signed by Landlord, setting forth in reasonable detail (i) the Operating Expense for the preceding Operating Year, (ii) the Operating Expense Allowance and (iii) the Tenant's Operating Expense Adjustment for such Operating Year, or portion thereof. The Operating Expense for each Operating Year shall be audited and certified by Landlord's independent certified public accountant whose report thereon shall be available for inspection by Tenant at Landlord's office during normal business hours. The Operating Expense Statement duly prepared in accordance herewith shall constitute a final determination as between Landlord and Tenant of the Operating Expense and the Operating Expense Adjustment for any Operating Year. (d) "OPERATING EXPENSE" shall mean the following expenses incurred by Landlord in connection with the operation, repair and maintenance of the Building and the Lot: (i) Wages, salaries, fees and other compensation and payments and payroll taxes and contributions to any social security, unemployment insurance, welfare, pension or similar fund and payments for other fringe benefits required by law or by union agreement (or, if the employees or any of them are non-union, then payments for benefits comparable to those generally required by union agreement in first class office buildings *in the Philadelphia suburban area, which are unionized) made to or on behalf of all employees of Landlord performing services rendered in connection with the operation and maintenance of the Building and the Lot, including, without limitation: window cleaners; janitors; miscellaneous handymen; watchmen; persons engaged in patrolling and protecting the building and the lot; carpenters; engineers; mechanics; electricians; plumbers; persons engaged in the operation and maintenance of the Building and the Lot; building superintendent and assistants; building manager; and clerical and administrative personnel. (ii) The uniforms of all employees, and the cleaning, pressing and repair thereof (iii) Cleaning costs for the Building and the Lot, including the windows and sidewalks, all snow and rubbish removal (including separate contracts therefor) and the costs of all labor, supplies, equipment and materials incidental thereto. 6 (iv) Premiums and other charges incurred by Landlord with respect to all insurance relating to the Building and the Lot and the operation and maintenance thereof, including, without limitation: fire and extended coverage insurance, including windstorm, hail, explosion, riot, rioting attending a strike, civil commotion, aircraft, vehicle and smoke insurance; public liability; elevator; workmen's compensation; boiler and machinery; rent; use and occupancy; and health, accident and group life insurance of all employees. (v) All taxes, charges, imposts and burdens and special assessments of every kind and nature imposed by any governmental authority on and/or with respect to the Lot or Building which Landlord shall become obligated to pay because of or in connection with the ownership, leasing or operation of the Lot or the Building. (vi) The cost of water and sewer and any and all other utility services used in connection with the operation and maintenance of the Building and the Lot, excluding, however, electricity which shall be billed monthly to tenants pursuant to Section 11 hereof. (vii) Costs incurred for operation, service, maintenance, inspection, repairs and alterations of the Building, the Lot and the heating, air-conditioning, ventilating, plumbing, electrical, security and elevator systems of the Building (including any separate contract therefor) and the costs of labor, materials, supplies and equipment used in connection with all of the aforesaid items. (viii) Gross receipts taxes, sales taxes and excise taxes and the like upon any of the expenses enumerated herein. (ix) Management fees of the managing agent for the Building. (x) The cost of replacements for tools and equipment used in the operation and maintenance of the Building and the Lot. (xi) The cost of repainting or otherwise redecorating any part of the Building other than premises demised to tenants in the Building. (xii) Christmas decorations for the lobby and other public portions of the Building below the second floor. (xiii) The cost of telephone service, postage, office supplies, maintenance and repair of office equipment and similar costs related to operation of the Building Superintendent's office. (xiv) The cost of licenses, permits and similar fees and charges related to operation, repair and maintenance of the Building. 7 (xv) Auditing fees necessarily incurred in connection with the maintenance and operation of the Building, and accounting fees incurred in connection with the preparation and certification of a real estate tax escalation and the operating expense escalation statements pursuant to this Section 6. (xvi) All costs incurred by Landlord to retrofit any portion or all of the Building to comply with a change in existing legislation or introduction of new legislation, whether Federal, State or Municipal; repairs, replacements and improvements which are appropriate for the continued operation of the Building as a first class building. (xvii) All expenses associated with the installation of any energy or cost saving devices. (xviii) The pro rata share of all costs and expenses allocated to the Building and the Lot relating to the maintenance, operation and repair of any common atrium or other facilities connecting the Building or any of its facilities to any other building or facilities on adjacent lots. (xix) All assessments against Landlord for the Lot and the Building's share of the costs of Glenview Corporate Center as provided in the Declaration of Protective Covenants (the "Protective Covenants") for Glenview Corporate Center. (xx) Any and all other expenditures of Landlord in connection with the operation, repair or maintenance of the Lot or the Building which are properly expensed in accordance with generally accepted accounting principles consistently applied with respect to the operation, repair and maintenance of first-class office buildings in the Philadelphia suburbs. If Landlord shall purchase any item of capital equipment or make any capital expenditure as described in subsections (xvii) and (xviii) above, then the costs for the same shall be included in Operating Expenses in the year of installation and in subsequent years amortized on a straight line basis, over an appropriate period, but not more than ten (10) years,, with an interest factor equal to the prime interest rate, as defined in Section 5 hereof. If Landlord shall lease such item of capital equipment, then the rentals or other operating costs paid pursuant to such leasing shall be included in Operating Expenses for each year in which they are incurred. Notwithstanding the foregoing, "Operating Expense" shall not include expenditures for any of the following: (A) The cost of any capital addition made to the Building (other than-that specified as part of Operating Expense as provided above), including the cost to prepare space for occupancy by a new tenant. 8 (B) Repairs or other work occasioned by fire, windstorm or other insured casualty or hazard, to the extent that Landlord shall receive proceeds of such insurance. (C) Leasing commissions, advertising expenses and other costs incurred in leasing or procuring new tenants. (D) Repairs or rebuilding necessitated by condemnation. (E) Depreciation and amortization of the Building, other than (I) capital expenditures which under generally applied real estate practice are expensed or regarded as deferred expenses; (II) capital expenditures appropriate to a first class office building or required by law as described in subsection (xvii) above; and (III) capital expenditures designed to result in savings or reductions in Operating Expenses as described in subsection (xviii) above. (F) The salaries and benefits of executive officers of Landlord if any. Operating Expense shall be "net" and, for that purpose, shall be reduced by the amounts of any reimbursement or credit received or receivable by Landlord with respect to an item of cost that is included in Operating Expense (other than reimbursements to Landlord by tenants of the Building pursuant to Operating Expense escalation provisions). To the extent that any item of Operating Expense is incur-red in common with another building or lot in the Glenview Corporate Center, such item of expense shall be apportioned equitably among the properties incurring such expenses. If landlord shall eliminate the payment of any wages or OTHER LABOR costs or otherwise reduce Operating Expense as a result of the installation of new devices or equipment, or by any other means, then in computing the Operating Expense the corresponding items shall be deducted from the Operating Expense Allowance and Operating Year. The Operating Expense for any Operating Year or portion thereof during which less than one hundred percent (100%) of the Rentable Area of the Building is leased to tenants shall be increased to include an imputed cost for unoccupied portions of the Building in an amount with respect to each such area equal to the product of (I) the Landlord's estimate of the marginal Operating Expense saving resulting from such vacancy, times (II) a fraction, the numerator of which is the number of days during such Operating 9 Year such portion of the Building was unoccupied and the denominator of which is three hundred sixty-five (365), times (III) the Rentable Area of such unoccupied space. In the time that more than one such portion of Rentable Area shall be unoccupied on separate dates within a relevant Operating Year, then a separate computation shall be made with respect to each unoccupied portion, and the products of such computations shall be added together, and the total thereof shall be the amount of Operating Expense imputed to such unoccupied portions for such Operating Year. (e) "TENANT'S PROPORTIONATE SHARE" shall mean a fraction, the numerator of which shall be the Rentable Area of Leased Premises, and the denominator of which is 142,745 rentable square feet (subject to adjustment only by reason of any substantial addition to the Building made after the date of the initial completion of construction of the Building), and shall equal, with respect to the Leased Premises, the percentage set forth in Section I of this Lease. 7. COMPLETION OF IMPROVEMENTS: AS-IS. Tenant agrees to accept the Leased Premises in its "As-Is" condition. Landlord shall have no obligation to complete any work in connection with Tenant's occupancy of the Leased Premises with the exception of building standard painting of the Leased Premises, which shall be completed promptly following the Commencement Date. Any other work completed by Tenant shall be at Tenant's sole cost and expense and otherwise in accordance with the terms of this Lease. Tenant agrees that Landlord's obligation to deliver the Leased Premise "As-Is" does not include any obligation on the part of Landlord to remove the workstations owned by the current Tenant of the Leased Premises. 8. [Intentionally Omitted]. 9. ALTERATIONS OR IMPROVEMENTS BY TENANT. Tenant shall not make during the Lease Term any alterations or additions to the Leased Premises which affect the Building's structure or mechanical, electrical, plumbing or HVAC systems without Landlord's prior written approval, such approval not to be unreasonably withheld. Any such alterations or additions which may be approved by landlord and made by tenant shall be deemed part of the Building and shall not thereafter be removed by Tenant unless Landlord shall require removal of same, either in conjunction with its approval or by notice to Tenant given prior to the termination of this Lease, in which case Tenant shall remove any such alterations or additions and repair any damage to the Building or the Leased Premises occasioned by their installation or removal (including, without limitation, repairing and patching holes, replacing ceiling, wall and floor surfaces and repainting), and restore the Leased Premises to substantially the same condition as existed prior to the time which any such alterations or additions were made, reasonable wear and tear excepted. All alterations and additions by Tenant. and installation of furnishings following occupancy shall be coordinated with any work being performed by Landlord and 10 performed in such manner and by such union contractor(s) as to assure harmonious labor relations and so as to not damage the Building or interfere with its operation or with the activities of other tenants and, except for installation of furnishings only, by contractors or workmen first approved by Landlord. As further conditions to Landlord's approval of any proposed alterations or additions by Tenant which are to be made after the beginning of the Lease Term, Tenant shall: secure all necessary licenses and permits; deliver to Landlord a waiver, executed by all persons or firms who will be furnishing labor or materials waiving the right to file any mechanic's Hen against the Building, the Lot or the estate or interest of Landlord or Tenant therein; cause the contractor(s) and subcontractor(s) to carry Workmen's Compensation insurance in statutory amounts and also comprehensive public liability insurance with limits as approved by Landlord, and deliver to Landlord certificates of all such insurance. Failure to comply with any of the provisions of this Section 9 (including, without limitation, any of the terms or conditions of any consent granted hereunder) shall constitute a default under this Lease and upon such default Landlord may pursue any or all of the remedies provided for in Section 28 hereof, or any other remedy. available to Landlord in law or in equity. Tenant shall promptly pay when due the cost of all such alterations and additions as referred to in this Section 9 and shall cause any mechanics' liens which may be filed with respect thereto to be immediately discharged, and shall indemnify Landlord against any loss, cost or expense occasioned, directly or indirectly as a result of such alterations and additions. 10. PERMITTED USES. Tenant covenants and agrees to use and occupy the Leased Premises only in conformity with law and for the uses specified in Section I hereof and not to use or permit any use of the Leased Premises which creates any safety hazard, which would be dangerous to the Leased Premises, the Building or the occupants of the same, which would be disturbing to other tenants or occupants of the Building, or which would cause any increase in premium for any insurance which Landlord may then have in effect with respect to the building generally. 11. BUILDING OPERATION AND SERVICES, ELECTRICITY. Landlord shall furnish, through Landlord's employees or independent contractors, such services, facilities and supplies equal in scope, quality and frequency to those being customarily provided by landlords in high quality office buildings in the Philadelphia suburbs. Heating, ventilating, and air conditioning shall be provided as normal seasonal changes may require to provide reasonably comfortable space temperature and ventilation for occupants of the Building during normal business operation, daily from 8:00 a.m. to 6:00 p.m. (Saturdays to 1:00 p.m.), except Sundays and holidays. Heating, 11 ventilating and air conditioning service shall be subject to such regulations as the Department of Energy or other governmental agency shall adopt from time to time. The air conditioning system in the Building is designed to accommodate a population load of one (1) person per one hundred (100) square feet and an electrical load of four (4) watts per foot. If as a result of the layout or use of the Leased Premises, the population load exceeds one (1) person per one hundred (100) square feet, or if as a result of the installation of lights, equipment and appliances by Tenant in the Leased Premises, the electrical load exceeds this design criteria of four (4) watts per square foot, Landlord shall have the right to require Tenant to install in the Leased Premises, at Tenant's sole cost and expense, additional cooling systems to enable the proper cooling of the Leased Premises. Landlord shall install a timed override switch in the Leased Premises as a part of the initial construction thereof to permit Tenant to activate the air-conditioning system in the Leased Premises outside of normal office hours. Tenant can also arrange for the air conditioning system to be activated outside of normal office hours by giving the Building manager at least four (4) hours written notice. Tenant shall pay Landlord for such additional air-conditioning as a part of the cost of electricity set forth below. Maintenance and cleaning shall be provided Monday through Friday (excluding holidays), after business hours, as follows: janitor service, consisting of the removal of customary office trash, dusting of furniture, desks and pictures, and vacuuming; maintenance and service of the toilet rooms in the Building; and cleaning and maintenance of common areas in the Building. Fully automatic elevator service shall be provided for the use of all tenants and the general public for access to and from all floors of the Building. Elevator service for freight shall be supplied by a passenger/freight elevator in common with service to other tenants at reasonable times during business hours and at other times at reasonable charges payable by Tenant to Landlord in advance. Hot and cold water for normal lavatory purposes shall be provided. If Tenant requires water for additional purposes, Tenant shall pay the cost thereof as shown on a meter to be installed and maintained at Tenant's expense to measure such additional consumption. Landlord will install as a portion of the original construction of each tenant space in the Building, an electric meter to measure the consumption of electricity in such space. Landlord reserves the right to install only i single electric meter on each floor and, in such event, the cost of such meter and electricity will be equitably apportioned by Landlord among the tenants on such floor. Landlord will install during the construction of the Building an energy management system which measures the useage of heating, ventilating and air conditioning used by each Tenant in the Building and the common areas of the 12 Building. Landlord will measure the electricity used by the heating, ventilating and air conditioning system in the Building and will allocate such electricity among the tenants in the Building in proportion to such tenant's useage thereof as measured by the energy management system. Landlord shall also determine the amount of electricity used for the common areas of the Building and the Lot for heating, ventilating and air conditioning, elevator service, site lighting and the like and apportion such electricity among all tenants in the Building in accordance with such tenant's Proportionate Share of the Building. Landlord will bill Tenant monthly for electricity used by or allocable to Tenant as aforesaid and Tenant shall pay for the same as Additional Rent within fifteen (15) days after receiving Landlord's statement. The charge to Tenant for all electricity used by or allocable to Tenant as aforesaid shall be at the average rate per KVM that is paid by Landlord to the utility providing the same, plus all surcharges, taxes, fuel adjustments, transfer charges or other similar charges. If submetering or allocation of electricity in the Building is not permitted under future laws or regulations, the Annual Fixed Rent will then be equitably and periodically adjusted to include an additional payment to Landlord reflecting the cost to Landlord of furnishing electricity to or for the benefit of Tenant. Landlord shall not be liable in any way to Tenant for any failure or defect in the supply or character of electric energy furnished on the Leased Premises by reason of any requirement, act or omission of the public utility serving the Building with electricity. Tenant's use of electric energy in the Leased Premises shall not at any time exceed the capacity of any of the electric conductors and equipment in or otherwise serving the Leased Premises. 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, connect to the Building's electric distribution system any fixtures, appliances or equipment other than minicomputers, terminals, duplicating machines, lamps, typewriters and similar small office machines which operate on a voltage not in excess of 110 volts or make any alterations or additions to the electric system of the Leased Premises. Should Landlord grant such consent, all additional risers or other equipment required therefor shall be provided by Landlord and the reasonable cost thereof shall be paid by Tenant upon Landlord's demand. Landlord shall furnish and install at Tenant's expense all replacement lighting tubes, lamps, bulbs, and ballasts required in the Leased Premises. 12. INTERRUPTION OF SERVICES. In case Landlord is prevented or delayed in furnishing any service as set forth in Section 11 herein or otherwise by reason of any cause beyond Landlord's reasonable control, Landlord shall not be liable to Tenant therefor nor shall Tenant be entitled to any abatement or reduction in rent by reason thereof, nor shall the same give rise to a claim in Tenant's favor that such absence of building services constitutes actual or constructive, total or partial eviction or renders the Leased Premises untenantable. 13 Landlord reserves the right to stop any service or utility system, when necessary by reason of accident or emergency, or until necessary repairs have been completed, provided, however, that in each instance of stoppage, Landlord shall exercise reasonable diligence to eliminate the cause thereof. Except in case of emergency repairs, Landlord will give Tenant reasonable advance notice of any contemplated stoppage and will use reasonable efforts to avoid unnecessary inconvenience to Tenant by reason thereof. 13. REPAIRS. Landlord shall make, as an Operating Expense of the Building, all repairs necessary to maintain the plumbing, heating, ventilating, air conditioning, electric systems, external windows and floors (excluding carpeting and floor coverings), provided, however, that Landlord shall not be obligated to make any such repairs until the expiration of a reasonable period of time after receipt of written notice from Tenant that such repair is needed. In no event shall Landlord be obligated under this Section 13 to repair any damage caused by any act, omission or negligence of Tenant or its employees, agents, invitees, licensees, subtenants, or contractors. If Tenant requires maintenance, servicing, repair or replacement of any special plumbing, heating or air conditioning systems installed for Tenant's benefit in the Leased Premises, whether or not such systems are tied into the standard Building systems, such maintenance, servicing, repair or replacement shall be made at the sole expense of Tenant, unless the need for such repairs is caused, in whole or in part, by the negligence or wilful misconduct of Landlord, its agents or employees. Tenant shall maintain the Leased Premises and the fixtures and appurtenances therein in good repair at all times, reasonable wear and tear excepted. Except to the extent released by Landlord pursuant to the waiver of subrogation provision in Section 23 hereof, Tenant shall reimburse Landlord for all costs and expenses of repairing and replacing all damage or injury to the Leased Premises and the Building and to fixtures and equipment caused by Tenant or its employees, agents, invitees, licensees, subtenants, or contractors, or as the result of all or any of them moving in or out of the Building or by installation or removal of furniture, fixtures or other property. Such costs and expenses shall be collectible as Additional Rent and paid by Tenant within fifteen (15) days after rendition of a bill therefor. Landlord shall not be liable by reason of any injury to or interference with Tenant's business arising from the making of any repairs, alterations, additions or improvements in or to the Leased Premises or the Building or to any appurtenances or equipment therein. There shall be no abatement of rent because of such repairs, alterations, additions or improvements or because of any delay by Landlord in making the same. Tenant shall give to Landlord prompt written notice of any accidents to, or defects in plumbing, electrical, heating and air conditioning systems and apparatus located in the Leased Premises. 14. INTENTIONALLY OMITTED 14 15. QUIET ENJOYMENT. Tenant, upon paying the Annual Fixed Rent, all Additional Rent and all other sums and charges herein provided for and, upon observing, keeping and performing all covenants, agreements and conditions of this Lease on Tenant's part to be observed, kept and performed, shall quietly have and enjoy the Leased Premises throughout the Lease Term without hindrance or molestation by Landlord or by anyone claiming by, through or under Landlord, subject, however, to the exceptions, reservations and conditions of this Lease. 16. LANDLORD'S RIGHT OF ENTRY. Landlord, any ground lessor, mortgagee or any agent thereof, shall have the right to enter the Leased Premises at reasonable times: to perform Landlord's covenants as set forth in this Lease, for purposes of inspection and to insure Tenant's compliance with the provisions of this Lease, to make any repairs, replacements or alterations to the Building or do any work which Landlord may deem necessary, or to show the Leased Premises to prospective purchasers of the Building, and also, during the last six (6) months of the Lease Term, to show the Leased Premises to prospective tenants. In the event Tenant vacates the Leased Premises prior to the expiration of the Lease Term, Landlord shall have the right to enter the Leased Premises at any time thereafter to show the Leased Premises to prospective tenants and to retrofit all or a portion thereof for new tenants. No such entry and construction work shall be deemed to be an acceptance of surrender by landlord of all or a portion of the Leased Premises until a replacement tenant actually occupies the same for its business purposes. Acceptance of surrender shall be deemed to occur upon the occupancy by a replacement tenant, but only as to such portion of the Leased Premises which such replacement tenant occupies. Notwithstanding any such acceptance of surrender, Tenant shall remain liable for the difference between the rent reserved hereunder and the rent Landlord receives under a lease with the replacement tenant. 17. SURRENDER OF PREMISES. Any alterations, improvements or additions to the Leased Premises made by or at the request of Tenant shall remain upon the Leased Premises at the expiration or earlier termination of this Lease and shall become the property of Landlord unless Landlord shall, prior to the expiration or earlier termination of this Lease, give written notice to Tenant to remove such alterations, improvements and additions. Tenant shall repair any damage caused by the installation and/or removal (including, without limitation, repairing and patching holes, replacing ceiling, floor and wall surfaces and repainting), and restore the Leased Premises to substantially the same condition in which it existed prior to the time that any such alterations, improvements or additions were made, reasonable wear and tear excepted. Should Tenant fail to remove any such alterations, improvements or additions or to repair such damage wh6n required or requested by Landlord so to do pursuant to this Section 17, Landlord may do so, and the cost and expense thereof shall be paid by Tenant to Landlord as Additional Rent. 16 Any personal property which shall remain in the Leased Premises or any part thereof after the expiration or earlier termination of this Lease shall be deemed to have been abandoned and either may be retained by Landlord as Landlord's property or may be disposed of in such manner as Landlord may see fit, provided that notwithstanding the foregoing Tenant shall, upon request of Landlord made no later then ten (10) days after the expiration or earlier termination of this Lease, promptly remove from the Building any such personal property at Tenant's own cost and expense. Should Tenant fail so to do, Landlord may do so, and the cost and expense thereof shall be paid by Tenant to Landlord as Additional Rent. If such personal property or any part thereof shall be sold by Landlord, Landlord may receive and retain the proceeds of such sale(s) as Landlord's property. The covenants contained in this Section 17 shall survive the expiration or earlier termination of this Lease. 18. MISCELLANEOUS COVENANTS. Tenant shall faithfully perform all of the covenants and conditions to be performed and observed by Tenant hereunder and in addition to those covenants and conditions which are set forth elsewhere herein, Tenant agrees: (a) To secure and maintain in effect any governmental approvals, licenses and permits as may be required for Tenant's use and occupancy of the Leased Premises. (b) To comply with all applicable laws, codes and regulations of governmental authorities applicable to Tenant's use and occupancy of the Leased Premises and all rules and regulations of insurers of the Leased Premises and the National Board of Fire Underwriters as they apply to Tenant's use and occupancy of the Leased Premises. (c) If the Leased Premises include less than an entire floor of the Building, to not place, erect, maintain or display any sign or other marking of any kind whatsoever on the exterior surface of the walls of the Leased Premises or on any door which faces any common corridor or hallway, without the prior written approval of Landlord, which approval shall not be unreasonably withheld for a single sign, provided that the same conforms to the sign standards as are then established by Landlord generally for the Building, and to not install or replace any entrance door or other door facing on any common corridor or hallway other than the standard door supplied by Landlord, without the prior written approval of Landlord. (d) Not to use or place any curtains, blinds, drapes,, coverings or signs over any exterior windows or upon the window surfaces as would be visible from the outside of the Building without the prior written approval of Landlord. (e) Without the prior written consent of Landlord, not to place within the Leased Premises or bring into the Building any machinery, equipment or other personalty other than customary office furnishings and small machinery such as typewriters and other similar items of office equipment, or any machinery or other personalty having a weight on 16 the average in excess of the floor bearing capacity of one hundred (100) pounds per square foot. Landlord in its sole discretion, may condition any consent given pursuant to this Section 18(e) upon the requirement that Tenant pay all costs of all structural and other alterations, changes or additions required to be made to the Leased Premises and the Building, in the sole judgment of Landlord, for the safe support of such machinery, equipment or personalty, together with all costs of engineering or other studies required in the sole judgment of Landlord, to determine the required structural and other alterations, changes or additions. 19. RULES AND REGULATIONS. Tenant covenants and agrees that Tenant, its servants, employees, agents, invitees, licensees and other visitors shall observe faithfully, and comply strictly with, the Rules and Regulations contained in Exhibit "B", attached hereto and made a part hereof, and such other and further reasonable Rules and Regulations as Landlord or Landlord's agents may, after written notice to Tenant, from time to time adopt. Nothing in this Lease contained shall be construed to impose upon Landlord any duty or obligation to enforce the Rules and Regulations or terms, covenants or conditions in any other lease as against any other tenant, and Landlord shall not be liable to Tenant for violation of the same by any other tenant, its servants, employees, agents, invitees, licensees or other visitors. 20. PERFORMANCE OF TENANT'S COVENANTS. If Tenant fails to perform any covenant or observe any condition to be performed or observed by Tenant hereunder or acts in violation of any covenant or condition hereof, Landlord, may, but shall not be required to on behalf of Tenant, perform such covenant and/or take such steps, including entering upon the Leased Premises, as may be necessary or appropriate to meet the requirements of any such covenant or condition, provided that Landlord shall have given Tenant at least three (3) days prior written notice of Landlord's intention to do so, unless an emergency situation exists, in which case Landlord shall have the right to proceed immediately; and all costs and expenses incurred by Landlord in so doing, including reasonable legal fees, shall be paid by Tenant to Landlord upon demand, plus interest at the Overdue Interest Rate from the date of expenditure(s) by Landlord, as Additional Rent. Landlord's proceeding under the rights reserved to Landlord under this Section shall not in any way prejudice or waive any rights as Landlord might otherwise have against Tenant by reason of Tenant's default. 21. EMINENT DOMAIN. In the event of the exercise of the power of eminent domain whereby (a) such portion of the Building is taken that access to the Leased Premises is permanently impaired thereby and reasonable alternate access is not provided by Landlord within a time period which is reasonable under the circumstances, (b) all or substantially all of the Leased Premises or the Building is taken, (c) if less than substantially all of the Building is taken but Landlord, acting in good faith, determines that it is economically unfeasible to continue to operate the uncondemned portion as a first-class office building, or (d) if less than substantially all of the Leased Premises is taken, but Tenant, acting in good faith, determines that because of such taking it is economically unfeasible to continue to conduct its business in the uncondemned portion of the Leased Premises, then in the case of (a) or (b), either party, and in the case of (c), Landlord, and in the case of (d), Tenant, shall 17 have the right to terminate this Lease as of the date when possession of that part which was taken is required to be delivered or surrendered to the condemning authority; and in such case all rent and other charges shall be adjusted to the date of termination. The foregoing right of termination shall be applicable to the taking of any estate or interest whatsoever which, as a matter of law, would deprive Landlord or Tenant of any right to possession (in common with others, as to common areas of the Building) for any period in excess of sixty (60) consecutive days from the date of taking, whether or not the taking be in fee, for a term of years or of any other estate or interest; and a taking shall include the transfer of title or of any interest in the Building by deed or other instrument in settlement of or in lieu of transfer by operation of law incident to condemnation proceedings. Tenant shall have no right to participate or share in any condemnation claim, damage award or settlement in lieu thereof with respect to any taking of any nature; provided, however, that Tenant shall not be precluded from claiming or receiving payment for Tenant's relocation and moving expenses as may be permitted under applicable law so long as the amount of the same is not subtracted from the award which Landlord is entitled to receive. 22. CASUALTY DAMAGE. In the event of damage to or destruction of the Leased Premises caused by fire or other casualty, or of the entrances and other common facilities necessary to provide normal access to the Leased Premises, or to other portions of the Building or its equipment which portions and equipment are necessary to provide services to the Leased Premises in accordance herewith, Landlord shall undertake to make and complete repairs and restorations as hereafter provided, unless this Lease be terminated by Landlord or Tenant or unless any mortgagee which is entitled to receive casualty insurance proceeds fails to make available to Landlord a sufficient amount of such proceeds to cover the cost of such repairs and restoration. If (a) the damage is of such nature or extent, in Landlord's sole judgment, that. more than one hundred and eighty (180) consecutive days, after commencement of the work, would be required (with normal work crews and hours) to repair and restore the part of the Leased Premises or the Building which has been damaged, or (b) a substantial portion of the Leased Premises or the Building is so damaged that, in Landlord's .sole judgment, it is uneconomic to restore or repair the Leased Premises or the Building, as the case may be, or (c) less than two (2) years remain on the Lease Term, Landlord shall so advise Tenant promptly, and either party, in the case described in clause (a) above, or Landlord, in the case described in clauses (b) or (c) above, for a period of ten (10) days thereafter, shall have the right to terminate this Lease by written notice to the other, as of the date specified in such notice, which termination date shall be no later than thirty (30) days after the date of such notice. In the event of such fire or other casualty, if this Lease is not terminated pursuant to the terms of this Section 22, if sufficient casualty insurance proceeds are available for use for such restoration or repair, and if this Lease is then in full force and 18 effect, Landlord shall proceed diligently to restore the Leased Premises to substantially its condition prior to the occurrence of the damage, provided that Landlord shall not be obligated to repair or restore any alterations, additions or fixtures which Tenant may have installed (whether or not Tenant has the right or the obligation to remove the same or is required to leave the same on the Leased Premises as of the expiration or earlier termination of this Lease) unless Tenant, in a manner satisfactory to Landlord, assures payment in full of all cost as may be incurred by Landlord in connection therewith. Landlord is not required hereunder to insure any improvements or alterations made by Tenant, to the Leased Premises, or any fixtures, equipment or other property of Tenant. Tenant shall have the right, at its sole expense, to insure the value of its leasehold improvements, fixtures, equipment or other property located in the Leased Premises, for the purpose of providing funds to Landlord to repair and restore the Leased Premises to substantially its condition prior to the occurrence of the damage. If there be any such alteration, fixtures or additions and Tenant does not assure or agree to assure payment of the cost of restoration or repair as aforesaid, Landlord shall have the right to determine the manner in which the Leased Premises shall be restored so as to be substantially as the Leased Premises existed prior to the damage occurring, as if such alterations, additions or fixtures had not then been made or installed. The validity and effect of this Lease shall not be impaired in any way by the failure of Landlord to complete repairs and restoration of the Leased Premises or of the Building within one hundred eighty (180) consecutive days after commencement of work, even if Landlord had in good faith notified Tenant that the repair and restoration could be completed within such period, provided that Landlord proceeds diligently with such repair and restoration. In the case of damage to the Leased Premises which is of a nature or extent that Tenant's continued occupancy is substantially impaired, the Annual Fixed Rent otherwise payable by Tenant hereunder shall be equitably abated or adjusted for the duration of such impairment. Anything to the contrary in this Lease notwithstanding, expressed or implied, Landlord shall have no liability to Tenant for and shall have no duty to repair, replace or restore any damage whatsoever, occurring as a result of leakage or seepage of water or any other liquid from any source whatsoever, or breakage of any pipes, mains or other plumbing located in or about the Building, or snow, frost, steam, excessive heat or cold, falling plaster, sewage, gas, odors, noise, or by air conditioning or heating apparatus. Provided, however, Landlord shall repair, replace and restore as an Operating Expense of the Building, all damage to the Building structure, systems and fixtures. Tenant shall be responsible to insure and/or repair all of Tenant's leasehold improvements and all equipment, fixtures and personal property located in the Leased Premises. 23. HOLD HARMLESS: PUBLIC LIABILITY INSURANCE: WAIVER OF SUBROGATION. Tenant covenants and agrees to exonerate, indemnify, defend, protect and save Landlord, owner of the Lot and Landlord's managing agent, if any, harmless from and against any and all claims, demands, expenses,. losses, suits and damages as may be occasioned by reason of (a) any accident or matter occurring on the Leased Premises, causing injury to persons or damage to property (including, without limitation, the Leased Premises), unless such accident 19 or other matter resulted from the negligence or otherwise tortious act of Landlord or Landlord's agents or employees, (b) the failure of Tenant to fully and faithfully perform the obligations and observe the conditions of this Lease, or (c) the negligence or otherwise tortious act of Tenant or anyone in or about the Building on behalf or at the invitation or right of Tenant. Tenant shall keep in force at its own expense comprehensive general liability insurance (including a contractual liability insurance endorsement) in companies acceptable to Landlord sufficient to cover such indemnification and naming as additional insured Landlord, owner of the Lot, Landlord's managing agent, if any, and Tenant against claims for personal injury" including bodily injury, death or property damage in amounts not less than $1,000,000 (or such higher limits as may be determined by Landlord), and Tenant will further deposit the policy or policies of such insurance, or certificates thereof, with Landlord. Said policy or policies of insurance or certificates thereof shall have attached thereto an endorsement that such policy shall not be cancelled without at least ten (10) days prior written notice to Landlord and Landlord's managing agent, if any, and that no act or omission of Tenant shall invalidate the interest of Landlord under said insurance. Landlord and Tenant hereby release the other from any and all liability or responsibility to the other or anyone claiming through or under them by way of subrogation or otherwise for any loss or damage to property covered by any insurance then in force, even if such fire or other casualty shall have been caused by the fault or negligence of the other party, or anyone for whom such party may be responsible, provided, however, that this release shall be applicable and in force and effect only to the extent of and with respect to any loss or damage occurring during such time as the policy or policies of insurance covering said loss shall contain a clause or endorsement to the effect that this release shall not adversely affect or impair said insurance or prejudice the right of the insured to recover thereunder. -24. MORTGAGEE AND OTHER AGREEMENTS. In the event any person, firm, corporation or other entity who is a party to any instrument to which this Lease is subject or subordinate (including, without limitation, any mortgage now or hereafter placed upon the building or lot or on any interest created therein) or their successor(s), succeeds thereunder to the interest of landlord hereunder in the building or the lot, or acquires the right to possession of the Building or the Lot, such person, firm, corporation or other entity shall not be (a) liable for any act or omission of the party named above as Landlord under this Lease; (b) liable for the performance of Landlord's covenants hereunder which arise and accrue prior to such person, firm, corporation or other entity succeeding to the interest of Landlord hereunder or acquiring such right to possession; (c) subject to any offsets or defenses which Tenant may have at any time against Landlord; (d) bound by any rent which Tenant may have paid previously for more than one (1) month in advance; and (e) shall not be bound by any amendment or modification hereof relating to the reduction of rent, shortening of term, or effecting a cancellation or surrender hereof and made without the consent of such person, firm, corporation or other entity. 20 Tenant agrees, from time to time as may be requested by Landlord, to execute, acknowledge and deliver to Landlord all or any of the following: an estoppel letter certifying to such party as Landlord reasonably may designate, including any mortgagee, that this Lease is in full force and effect and has not been amended, modified or superseded, that Landlord has satisfactorily completed all construction work required by this Lease (subject to completion of punch-list items), that Tenant has accepted the Leased Premises and is now in possession thereof, that Tenant has no defense, offsets or counterclaims hereunder or otherwise against Landlord with respect to this Lease or the Leased Premises and Landlord is not in default hereunder (or if any of the foregoing not be the case, specifying in reasonable detail the extent and nature thereof), that Tenant has no knowledge of any pledge or assignment of this Lease or rentals hereunder, that rent is accruing under this Lease but has not been paid more than one (1) month in advance and the date to which rent has been paid; and any other instrument as may be reasonably requested to be executed by Tenant by any mortgagee of the Lot or the Building or any interest therein, so long as the rights of Tenant as provided for by this Lease are not materially affected by any such other instrument. Tenant's estoppel letter shall be in the form of Exhibit "D" attached hereto and made a part here of, or in such other form as Landlord or its mortgagee shall hereafter proscribe. 25. SUBORDINATION AND ATTORNMENT. This Lease and the estate, interest and rights hereby created are subordinate to any mortgage now or hereafter placed upon the Lot, the Building or any estate or interest therein, including, without limitation, any mortgage on any leasehold estate, and to all renewals, modifications, consolidations, replacements and extensions of the same as well as any substitutions therefor. Tenant agrees that in the event any person, firm, corporation or other entity acquires the right to possession of the Lot and the Building including any mortgagee or holder of any estate or interest having priority over this Lease, Tenant shall, if requested by such person, firm, corporation or other entity, attorn to and become the tenant of such person, firm, corporation or other entity, upon the same terms and conditions as are set forth herein for the balance of the Lease Term. Notwithstanding the foregoing, any mortgagee may, at any time, subordinate its mortgage to this Lease, without Tenant's consent, by notice in writing to Tenant, and thereupon this Lease shall be deemed prior to such mortgage without regard to their respective dates of execution and delivery, and in that event, such mortgagee shall have the same rights with respect to this lease as though it had been executed prior to the execution and delivery of the mortgage. Tenant, if requested by Landlord, shall execute any such instruments in recordable form as ma~ be reasonably required by Landlord in order to confirm or effect the subordination of this Lease and the attornment of Tenant to future landlords in accordance with the terms of this Section. 26. ASSIGNMENT AND SUBLETTING . Tenant shall not assign, pledge, mortgage or otherwise transfer or encumber this Lease, nor sublet all or any part of the Leased Premises or permit the same to be occupied or used by anyone other than Tenant or its employees without Landlord's prior written consent, which consent shall not be unreasonably 21 withheld or delayed. It will not be unreasonable for Landlord to withhold its consent if Landlord is acting in its best interests and not with the express intent of interfering with Tenant's proposed assignment or Sublease, and if the reputation, financial responsibility, or business of a proposed assignee or subtenant is unsatisfactory to Landlord, or if Landlord deems such business to not be consonant with that of other tenants in the Building, or if the intended use by the proposed assignee or subtenant conflicts with any commitment made by Landlord to any other tenant in the Building, or if the proposed rental rate is lower than the then current rate at which similar space in the Building is being offered by Landlord, or if the proposed subletting is to a prospective subtenant for less than fifty percent (50%) of the Leased Premises. Notwithstanding the foregoing, Tenant may assign or sublet the Leased Premises without Landlord's consent to a corporation which is a parent or subsidiary of Tenant or is affiliated with Tenant in a common group of corporations provided no such assignment or subletting shall relieve Tenant of its obligations and liabilities hereunder. Tenant's request for consent shall be in writing and contain the name, address, and description of the business of the proposed assignee or subtenant, its most recent financial statement and the other evidence of financial responsibility, its intended use of the Leased Premises, and the terms and conditions of the proposed assignment or subletting. Within thirty (30) days from receipt of such request, Landlord shall either: (a) grant or refuse consent; or (b) elect to require Tenant (i) to execute an assignment of lease or sublease of Tenant's interest hereunder to Landlord or its designee upon the same terms and conditions as are contained herein, together with an assignment of Tenant's interest as sublessor in any such proposed sublease, or (ii) if the request is for consent to a proposed assignment of this Lease, to terminate this Lease and the term hereof effective as of the last day of the third month following the month in which the request was received. Each assignee hereunder shall assume and be deemed to have assumed this Lease and -shall be and remain liable jointly and severally with Tenant for all payments and for the due performance of all terms, covenants, conditions and provisions herein contained on Tenant's part to be observed and performed. No assignment shall be binding upon Landlord unless the assignee shall deliver to Landlord an instrument in recordable form containing a covenant of assumption by the assignee, but the failure or refusal of assignee to execute the same shall not release assignee from its Habifity as set forth herein. All the foregoing notwithstanding, Tenant shall not enter into any lease, sublease, license, concession or other agreement for the use, occupancy or utilization of the Leased Premises or any portion thereof, which provides. for a rental or other payment for such use, occupancy or utilization based in whole or in part on the income or profits derived by any person from the property leased, used, occupied or utilized (other than an amount based on a fixed percentage or percentages of receipts or sales). Any such purported lease, sublease, license, concession or other agreement shall be absolutely void and ineffective as a 22 conveyance or any right or interest in the possession, use or occupancy of any part of the Leased Premises. Any consent by Landlord hereunder shall not constitute a waiver of strict future compliance by Tenant of the provisions of this Section 26 or a release of Tenant from the full performance by Tenant of any of the terms, covenants, provisions, or conditions in this Lease contained. 27. DEFAULT. Any other provisions in the Lease notwithstanding, it shall be an Event of Default under this Lease if (a) Tenant fails to pay any installment of Fixed Rent, Additional Rent or other sum payable by Tenant hereunder when due and such failure continues for a period of ten (10) days after written notice given by or on behalf of Landlord to Tenant, provided, however, Landlord need not give any such written notice, for nonpayment of rent and Tenant shall not be entitled to any such period of grace, more than twice in any twelve (12) month period, (b) Tenant vacates the Leased Premises or uses or occupies the Leased Premises otherwise than as permitted by Sections 1 and 10 hereof, or assigns or sublets, or purports to assign to sublet, the Leased Premises or any part thereof otherwise than in the manner and upon the conditions set forth in Section 26 hereof, (c) Tenant fails to observe or perform any other covenant or agreement of Tenant herein contained and such failure continues after written notice given by or on behalf of Landlord to Tenant for more than thirty (30) days and such additional time, if any, as is reasonably necessary to cure such failure, provided Tenant commences to cure such failure within such thirty (30) day period and diligently thereafter prosecutes such cure to completion, (d) without Landlord's prior written consent, Tenant removes or attempts to remove or manifests an intention to remove any or all of Tenant's property from the Leased Premises otherwise than in the ordinary and usual course of business, (e) Tenant makes any assignment for the benefit of creditors; Tenant commits an act of bankruptcy or files a petition or commences any proceeding under any bankruptcy or insolvency law; a petition is filed or any proceeding is commenced against Tenant under any bankruptcy or insolvency law and such petition or proceeding is not dismissed within thirty (30) days; Tenant is adjudicated a bankrupt; Tenant by any act indicates its consent to, approval of or acquiescence in, or a court approves, a petition filed or proceeding commenced against Tenant under any bankruptcy or insolvency law; a receiver or other official is appointed for Tenant or for a substantial part of Tenant's assets or for Tenant's interests in this Lease; any attachment or execution against a substantial part of Tenant's assets or of Tenant's interest in this Lease remains unstayed or undismissed for a period of more than ten (10) days; a substantial part of Tenant's assets or of Tenant's interest in this Lease is taken by legal process in any action against Tenant, or (f) any of the foregoing occur as to any guarantor or surety of Tenant's performance under this Lease, or 'such guarantor or surety defaults on any provision under its guaranty or suretyship agreement. 23 28. LANDLORD'S REMEDIES. (a) If an Event of Default hereunder shall have happened and be continuing, Landlord may, at its option: (i) declare due and payable and sue for and recover, all unpaid Fixed Rent for the unexpired period of the Lease Term (and also all Additional Rent as the amount(s) of same can be determined or reasonably estimated) as if by the terms of this Lease the same were payable in advance, together with all legal fees and other expenses incurred by Landlord in connection with the enforcement of any of Landlord's rights and remedies hereunder, and/or (ii) distrain, collect or bring action for such Fixed Rent and Additional Rent as being rent in arrears, or may enter judgment therefor in an amicable action as herein elsewhere provided for in case of rent in arrears, or may file a Proof of Claim in any bankruptcy or insolvency proceeding for such Fixed Rent and Additional Rent, or institute any other proceedings, whether similar or dissimilar to the foregoing, to enforce payment thereof, and/or (iii) terminate the Lease Term by giving written notice thereof to Tenant and, upon the giving of such notice, the Lease Term and the estate hereby granted shall expire and terminate with the same force and effect as though the date of such notice was the date hereinbefore fixed for the expiration of the Lease Term, and all rights of Tenant hereunder shall expire and terminate, but Tenant shall remain liable as hereinafter provided, and/or (iv) exercise any other rights and remedies available to Landlord at law or in equity. (b) If any Event of Default shall have happened and be continuing, Landlord may, whether or not the Lease Term has been terminated as herein provided, reenter and repossess the Leased Premises or any part thereof by force, summary proceedings, ejectment or otherwise and Landlord shall have the right to remove all persons and property therefrom. Landlord shall be under no liability for or by reason of any such entry, repossession or removal; and no such re-entry or taking of possession of the Leased Premises by Landlord shall be construed as an election on Landlord's part to terminate the Lease Term unless a written notice of such intention be given to Tenant pursuant to Section 28(a)(iii) or unless the termination of this Lease be decreed by a court of competent jurisdiction. (c) At any time or from time to time after the repossession of the Leased Premises or any part thereof pursuant to Section 28(b), whether or not the Lease Term shall have been terminated pursuant to Section 28(a)(iii), Landlord may (but shall be under no obligation to) relet all or any part of the Leased Premises for the account of Tenant for such term or terms (which may be greater or less than the period which would otherwise 24 have constituted the balance of the Lease Term) and on such conditions (which may include concessions or free rent) and for such uses as Landlord, in its absolute discretion, may determine, and Landlord may collect and receive any rents payable by reason of such reletting. Landlord shall not be required to accept any tenant offered by Tenant or observe any instruction given by Tenant about such reletting, or do any act or exercise any care or diligence with respect to such reletting or to the mitigation of damages. For the purpose of such reletting, Landlord may decorate or make repairs, changes, alterations or additions in or to the Leased Premises or any part thereof to the extent deemed by Landlord desirable or convenient, and the cost of such decoration, repairs, changes, alterations or additions shall be charged to and be payable by Tenant as Additional Rent hereunder, as well as any reasonable brokerage and legal fees expended by Landlord. (d) No expiration or termination of the Lease Term pursuant to Section 28(a)(iii), by operation of law or otherwise, and no repossession of the Leased Premises or any part thereof pursuant to Section 28(b), or otherwise, and no reletting of the Leased Premises or any part thereof pursuant to Section 28(c) shall relieve Tenant of its liabilities and obligations hereunder, all of which shall survive such expiration, termination, repossession or reletting. (e) In the event of any expiration or termination of this Lease or repossession of the Leased Premises or any part thereof by reason of an occurrence of an Event of Default, and Landlord has not elected to accelerate rent pursuant to Section 28(a)(i), Tenant shall pay to Landlord the Fixed Rent, Additional Rent and other sums required to be paid by Tenant to and including the date of such expiration, termination or repossession; and, thereafter, Tenant shall, until the end of what would have been the expiration of the Lease Term in the absence of such expiration, termination or repossession, and whether or not the Leased Premises or any part thereof shall have been relet, be liable to Landlord for, and shall pay to Landlord, as liquidated and agreed current damages, the Fixed Rent, Additional Rent and other sums which would be payable under this Lease by Tenant in the absence of such expiration, termination or repossession, less the net proceeds, if any, of any reletting effected for the account of Tenant pursuant to Section 28(c), after deducting from such proceeds all of Landlord's reasonable expenses in connection with such reletting (including, without limitation, all related reasonable repossession costs, brokerage commissions, legal expenses, attorneys' fees, employees' expenses, alteration costs and expenses of preparation for such reletting). Tenant shall pay such current damages on the days on which the Fixed Rent would have been payable under this Lease in the absence of such expiration, termination or repossession, and Landlord shall be entitled to recover the same from Tenant on each such day. (f) At any time after such expiration or termination of this Lease or repossession of the Leased Premises or any part thereof by reason of the occurrence of an Event of Default, whether or not Landlord shall have collected any current damages pursuant to Section 28(e), Landlord shall be entitled to recover from Tenant, and Tenant shall pay to Landlord on demand, unless Tenant has paid the whole of accelerated rent pursuant to 25 Section 28(a)(i), as and for liquidated and agreed final damages for Tenant's default and in lieu of all current damages beyond the date of such demand (it being agreed that it would be impracticable or extremely difficult to fix the actual damages), an amount equal to the excess, if any, of (i) Fixed Rent, Additional Rent and other sums which would be payable under this Lease for the remainder of the Lease Term from the date of such demand (or, if it be earlier, the date to which Tenant shall have satisfied in full its obligations under Section 28(e) to pay current damages) for what would have been the then unexpired term of this Lease in the absence of such expiration, termination or repossession, discounted at the prevailing yield to maturity on United States Treasury Notes having the closest maturity to the expiration date of the Lease Term, over (ii) the then fair rental value of the Leased Premises for the same period, discounted at a like rate. If any statute. or rule of law shall validly limit the amount of such liquidated final damages to less than the amount above agreed upon, Landlord shall be entitled to the maximum amount allowable under such statute or rule of law. (g) Tenant, in consideration for the execution of this Lease by Landlord and for the covenants and agreements on the part of Landlord herein contained, and fully comprehending the relinquishment of certain rights including rights of pre-judgment notice and hearing, hereby expressly authorizes any attorney of any Court of Record to accept service of process for, to appear for, and to confess judgment against Tenant in any and all actions brought hereunder by Landlord against Tenant to recover possession from time to time of the Leased Premises in accordance with the terms hereof (and Tenant agrees that upon the entry of each judgment for said possession a Writ of Possession or other appropriate process may issue forthwith). (h) Tenant further hereby expressly authorizes and empowers (which power is coupled with an interest) Landlord, upon the occurrence of an Event of Default and so long as the same is continuing, to enter upon the Leased Premises, distrain upon and remove therefrom all inventory, equipment, machinery, trade fixtures, and personal property of whatsoever kind or nature, owned by Tenant and to proceed, without judicial decree, writ of execution or assistance of constables, to conduct a private sale, by auction or sealed bid, of such personal property, at which sale Landlord may bid without restriction. Tenant hereby waives the benefit of all laws, whether now in force or hereafter enacted, exempting any personal property on the Leased Premises from sale or levy, whether execution thereon is had by order of ANY COURT OR THROUGH PRIVATE sale as herein authorized. Landlord agrees, on the request of a secured party holding a valid purchasing money security interest in personal property located at the Leased Premises, to execute a Landlord's waiver on terms and conditions reasonably acceptable to Landlord. (i) In any action for ejectment or for distraint, Landlord shall first cause to be filed in such action an affidavit made by it or someone acting for it setting forth the facts necessary to authorize the entry of judgment, of which facts such affidavit shall be conclusive evidence, and if a true copy of this Lease be filed in such action, it shall not be necessary to file the original as a warrant of attorney, any rule of court, custom or practice 26 to the contrary notwithstanding. The authority to confess judgment against Tenant hereunder shall not be exhausted by one (1) exercise thereof, but judgment may be confessed as provided herein from time to time as often as any Event of Default occurs under this Lease, and such authority- may be exercised as well after the expiration of the Lease Term and/or during or after the expiration of any extended or renewal term. (j) No right or remedy herein conferred upon or reserved to either party is intended to be exclusive of any other right or remedy herein by law provided, but each shall be cumulative and in addition to every right or remedy given herein or now or hereafter existing at law or in equity or by statute. (k) No waiver by either party of any breach by the other of any of the other's obligations, agreements or covenants herein shall be a waiver of any subsequent breach or of any obligation, agreement or covenant, nor shall any forbearance by either party to seek a remedy for any breach by the other be a waiver by either party or any rights and remedies with respect to such or any subsequent breach. (l) In the event of a breach or threatened breach by either party of any of the covenants or provisions hereof, the other shall have the right of injunction and right to invoke any remedy allowed at law or in equity as if re-entry summary proceedings and other remedies were not herein provided for. (in) Tenant hereby expressly waives any and all rights of redemption granted by or under any present or future laws in the event of Tenant being evicted or dispossessed for any cause, or in the event of Landlord obtaining possession of the Leased Premises, by reason of the violation by Tenant of any of the covenants and conditions of this Lease, or otherwise. 29. LEGAL FEES AND OTHER COSTS. The prevailing party in any enforcement proceeding shall be entitled to reimbursement of all reasonable legal fees and expenses by the non-prevailing party. 30. LATE CHARGE. If any installment of fixed rent, additional rent or other sums payable by tenant to landlord under this lease shall not be paid on the due date thereof, Tenant shall pay to Landlord a "late charge" of five percent (5 %) of the amount so due for the purpose of defraying the. expense incident to handling such delinquent payment. 31. SUCCESSORS AND ASSIGNS. The obligations of this Lease shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns; provided that Landlord and each successive owner of the Building and/or the Lot shall be liable only for obligations accruing during the period of its ownership or interest in the Building or the Lot; and from and after the transfer by Landlord or such successive owner of its ownership or other interest in the Building or the Lot, Tenant shall look solely to the successors in title for the performance of Landlord's obligations hereunder. The liability of 27 Landlord or any successive owner of the Building and/or the Lot hereunder and all of its officers, employees, shareholders or joint venturers or partners, if any, whether general or limited, shall be limited to Landlord's estate or other title or interest in the Building and/or the Lot. 32. Waivers. No delay or forbearance by Landlord in exercising any right or remedy hereunder or in undertaking or performing any act or matter which is not expressly required to be undertaken by Landlord shall be construed, respectively, to be a waiver of Landlord's rights or to represent any agreement by Landlord to undertake or perform such act or matter thereafter. 33. WAIVER OF TRIAL BY JURY. It is mutually agreed by and between Landlord and Tenant that the respective parties hereto shall and they hereby do waive trial by jury in any action, proceeding or counterclaim brought by either of the parties hereto against the other on any matter whatsoever arising out of or in any way connected with this Lease, the relationship of Landlord and Tenant, Tenant's use of or occupancy of the Leased Premises and/or any claim of injury or damage and any emergency statutory or any other statutory remedy. 34. SEVERABILITY. Each covenant and agreement in this Lease shall for all purposes be construed to be a separate and independent covenant or agreement. If any provision in this Lease or the application thereof shall to any extent be invalid, illegal or otherwise unenforceable, the remainder of this Lease, and the application of such provision other than as invalid, illegal or unenforceable, shall not be affected thereby; and such provisions in this Lease shall be valid and enforceable to the fullest extent permitted by law. 35. NOTICES. All notices or other communications required or permitted hereby shall be effective only if the same are in writing and are signed by the party giving the notice or by an agent or other person authorized in writing to so act on behalf of such party. Notices.-to Tenant shall be given by registered or certified mail, return receipt requested, addressed to Tenant at the address set forth in Section I hereto; and notices to Landlord shall be given by registered or certified mail, return receipt requested to the address set forth in section I hereof. All notices shall be deemed given unless otherwise specified herein, on the date when same are delivered, if delivered, or on the date when the same are deposited in the mail. 36. AMENDMENT AND MODIFICATIONS. This Lease contains the entire agreement between the parties hereto, and shall not be amended, modified or supplemented unless by agreement in writing signed by both Landlord and Tenant and the same shall not be valid unless approved in writing by all mortgagees and holders of any estate or interest in the Building or the Lot by virtue of leases or other instruments expressly referred to herein or which are then of record. 28 37. SECURITY DEPOSIT. Upon execution of this Lease, Tenant shall deposit the sum set forth in Section I hereof with Landlord as a security deposit (the "Security Deposit") to be held by Landlord as security for Tenant's performance of all of Tenant's obligations under this Lease. Landlord may commingle the Security Deposit with its general funds and any interest earned on the Security Deposit shall belong to Landlord. Landlord, in its sole discretion, may apply the Security Deposit to cure any Event of Default under this Lease. If any such application is made, upon notice by Landlord to Tenant, Tenant shall promptly replace the amount so applied. If there has been no Event of Default within thirty (30) days after expiration or earlier termination of this Lease, Landlord shall return the entire balance of the Security Deposit to Tenant. Tenant will not look to any foreclosing mortgagee on the Lot or Building or any interest therein for the return of the Security Deposit unless the mortgagee has expressly assumed Landlord's obligations under this Lease or has actually received the balance of the Security Deposit. In the event Landlord sells the Lot and Building and transfers the Security Deposit to a new owner of the Lot and Building, Tenant shall look solely to such new owner for the return of the balance of the Security Deposit. 38. ENVIRONMENTAL MATTERS. (a) Tenant shall promptly deliver to Landlord copies of any of the following documents that Tenant receives or prepares: (i) applications or other materials regarding the Land, Building, or Premises submitted to any governmental agency in compliance with Environmental Statutes; (ii) any notifications regarding the Land, Building, or Premises submitted to any person pursuant to Environmental Statutes; (iii) any permit, license, approval, amendment or modification thereto granted regarding the Land, Building, or Premises pursuant to Environmental Statutes; (iv) any record or manifest required to be maintained regarding the land, building, or premises pursuant to environmental statutes; and (v) any correspondence, notice of violation, summons, order, complaint or other document received by Tenant or its lessees, sublessees or assigns (if permitted), pertaining to the Land, Building, or Premises and to compliance with any Environmental Statutes. "Environmental Statutes" shall mean all statutes, ordinances, regulations, orders and requirements of common law regulating environmental matters concerning (A) activities at the Land, Building or Premises, (B) repairs or construction of any improvements located on the Land, (C) handling of any materials, (D) discharges to the 29 air, soil, surface water, or ground water, and (E) storage, treatment or disposal of any waste at the Land, Building or Premises. (b) In the event that Landlord or Landlord's mortgagee performs or n of the Lot or Building for any of the below matters, lord or Landlord's mortgagee with respect to such investigation: (i) compliance at the Land, Building, or Premises with Environmental Statutes; (ii) the presence of hazardous substances or contamination at the Land, Building, or Premises; (iii) the presence at the Land, Building, or Premises of polychlorinated biphenyls, substances containing polychlorinated biphenyls, asbestos, materials containing asbestos, or unreaformaldehyde foam insulation; (iv) the presence at the Land of (A) a wetland or other "water of the United States" for purposes of Section 404 of the federal Clean Water Act, 33 U.S.C. Section 1344, or any similar area regulated under any state law, (B) a flood plain or other flood hazard area as defined pursuant to the Pennsylvania Flood Plain Management Act, Pa. Stat. tit. 32, Sections 679.101 to .601 (Purdon Sup. 1989), (C) a portion of the coastal zone for purposes of the federal Coastal Zone Management Act, 16 U.S.C. Sections 1451-1464, or (D) any other area development of which is specifically restricted under applicable law by reason of its physical characteristics or prior use; (v) the presence at the Land, Building, or Premises of radon products; or (vi) the presence at the Land, Building, or Premises of tanks presently or formerly used for the storage of any liquid or gas above or below ground. (C) In the event Tenant brings any hazardous or toxic substances or waste into the Leased Premises of the nature described in clause (b) above, Tenant shall notify Landlord thereof and Tenant shall promptly clean up the same. (d) In the event any present or future Federal, State or municipal statute, ordinance, law, rule, or regulation requires Landlord or Tenant to obtain a clearance certificate or Declaration of Non-Applicability, similar or dissimilar to those required by the New Jersey Environmental Clean-Up Responsibility Act, upon the expiration or earlier termination of the Lease Term, or upon the sale of the Lot or Building by Landlord, Tenant will apply therefore and deliver an application therefor to Landlord without delay, 30 and take such action as may be necessary under such applicable statute, ordinance, law, rule or regulation to obtain such clearance certificate or Declaration of Non-Applicability. 39. BROKERS. Landlord and Tenant each represent and warrant to the other that it has not engaged any broker, finder or other person other than the broker, if any, listed in Section I hereof, who would be entitled to any commission or fees in respect of the negotiation, execution or delivery of this Lease. Landlord and Tenant each agree to indemnify and hold harmless the other against any loss, cost, liability or expense incurred by the other as a result of any claim asserted by any other broker, finder or other person on the basis of any arrangements or agreements made or alleged to have been made by or on behalf of the other. Landlord shall be responsible for the payment of a brokerage fee to the broker listed in Section I at Landlord's scheduled commission rate or as otherwise agreed in writing between Landlord and such broker. 40. FINANCIAL STATEMENTS. Within ninety (90) days following the end of Tenant's fiscal year, Tenant shall deliver to Landlord a copy of Tenant's financial statements (consisting, at a minimum, of Tenant's balance sheet and income statement) for Tenant's fiscal year just ended, certified by an independent certified public accountant as presenting fairly, in all material respects, the financial position of Tenant and the results of its operations in accordance with generally accepted accounting principles. In addition, Tenant shall provide from time to time, on request of Landlord, bank references necessary to verify Tenant's continued good credit. 41. TENANT'S TERMINATION RIGHTS. Tenant shall have the right and option to terminate this Lease at the end of the twenty-fourth (24th) Lease Month (the "Termination Date") of the initial Lease Term by giving Landlord not less than six (6) months prior written notice thereof and paying to Landlord at the time of the giving of such notice a termination fee of $73,889.68 (the "Termination Fee"). If Tenant gives notice of its election to terminate this lease under this Section 41, but fails to pay the Termination Fee or fails to vacate the Leased Premises on or before the Termination Date, Landlord shall have the option of treating such failure as either (a) an Event of Default hereunder, (b) a rescission of Tenant's notice of termination, or (c) a holdover under Section 4 hereof. In any event, Tenant shall pay Landlord, as Additional Rent hereunder, all damages, losses, costs and expenses (including reasonable legal fees and expenses) Landlord may have incurred by reason of Tenant's failure to vacate, including, without limitation, any costs or lost profits from any reletting or proposed reletting of the Leased Premises and Landlord's efforts to regain possession of the Leased Premises. 42. PARKING. At no additional rent to * Tenant, Landlord shall provide on the Lot on which the Building is located parking for all tenants (including Tenant), their guests and customers at an overall rate of five (5) parking spaces per 1,000 square feet of office space in the Building, which shall include two (2) spaces in the underground parking structure. 31 43. OPTIONS TO Extend. Provided no Event of Default under this Lease has occurred and is CONTINUING, TENANT shall have the right and option, exercisable by giving Landlord written notice at least nine (9) months prior to the expiration of the initial Term, to to extend the Lease Term for one (1) additional period of four (4) years (the "Extended Term") and, upon the giving of such notice, this Lease shall automatically be extended for such four (4) year period and no further agreement of extension need be executed. In the even that Tenant fails to give such notice to Landlord as herein provided, this Lease shall automatically terminate at the end of the then current Lease Term and Tenant shall have no further right or option to extend this Lease. The Extended Term shall be upon the same covenants, agreements, provisions, terms and conditions as during the original Lease Term except that the Annual Fixed Rent during the Extended Term shall equal the Fair Market Rent for the Leased Premises, but not less than the aggregate rent paid during the last year of the initial Term. The "Fair Market Rent" for the Leased Premises shall mean the rent for comparable space in a Class A mid-rise building in lower Bucks County for a new tenant entering into a new four (4) year lease and with the Operating Expense Allowance being adjusted to reflect the expense allowance used in calculating the Fair Market Rent. At least nine (9) months prior to the expiration of the then current Lease Term, Tenant may request Landlord to quote the Fair Market Rent effective for the first day of the Extended Term. If Tenant objects thereto, Landlord and Tenant shall negotiate for a period of thirty (30) days to determine whether the Fair Market Rent can be agreed upon. In the event Landlord and Tenant cannot agree on the Fair Market Rent within such thirty (30) day period, Landlord and Tenant shall mutually select a real estate appraiser (MAI or equal) knowledgeable of rents obtained in Class A mid-rise office buildings in lower Bucks County, Landlord shall submit to such appraiser the lowest Annual Fixed Rent which Landlord is willing to accept, together with any information with respect thereto that Landlord deems relevant and Tenant shall submit to such appraiser the highest Annual Fixed Rent which Tenant is wining to pay, together with any information with respect thereto that Tenant deems relevant, and the appraiser will then select which of Landlord's or Tenant's submissions most clearly reflect the Fair Market Rent for Class A mid-rise office buildings in lower Bucks County for new leases for a four (4) year term as aforesaid. The appraiser's decision shall be rendered within forty-five (45) days following his selection and to determine the Fair market rent of the leased premises as aforesaid. Such determination shall be final, binding and or conclusive on Landlord and Tenant. 44. HEADINGS AND TERMS. The title, headings and table of contents of this Lease are for convenience of reference only and shall not in any way be utilized to construe or interpret the agreement of the parties as otherwise set forth herein. The term "Landlord" and the term "Tenant" as used herein shall mean, where appropriate, all persons acting by or on behalf of the respective parties, except as to any required approvals, consents or amendments, modifications or supplements hereunder when such terms shall only mean the parties originally named on the first page of this Lease as Landlord and Tenant, respectively, and their agents so authorized in writing. 32 45. GOVERNING LAW. This Lease shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed the date first mentioned. LANDLORD: GLENVIEW CORPORATE CENTER LIMITED PARTNERSHIP By: BPPI-I, L.P. By: Bergen of Philadelphia, Inc. By: /s/ illegible ---------------------------------------- By: Pitcairn Properties, Inc. By: /s/ illegible ---------------------------------------- TENANT: WORLDGATE COMMUNICATIONS By: /s/ Hal Krisbergh ---------------------------------------- Name: Hal Krisbergh -------------------------------------- Title: Chairman/CEO ------------------------------------- Attest: /s/ David E. Wachob ------------------------------------ Name: David E. Wachob ------------------------------------- Title: VP/GM ------------------------------------ 33 EXECUTION FIRST AMENDMENT TO LEASE FIRST AMENDMENT TO LEASE dated October 24, 1997 by and between GLENVIEW CORPORATE CENTER LIMITED PARTNERSHIP, Landlord ("Landlord"), and WORLDGATE COMMUNICATIONS, as Tenant ("Tenant"). BACKGROUND A. Landlord and Tenant entered into a Lease dated January 14, 1997 (the "Original Lease") pursuant to which Tenant leased approximately 16,195 rentable square feet (the "Premises") at 3220 Tillman Drive, Bensalem Township, Pennsylvania (the "Building"). Capitalized terms not otherwise defined herein shall have the meaning assigned to them in the Original Lease. B. Tenant desires to Lease an additional approximately 3,130 rentable square feet on the second (2nd) floor of the Building (the "Additional Premises"). Landlord has agreed to the lease of the Additional Promises upon the terms and conditions hereinafter set forth. AGREEEMENT NOW, THEREFORE, in consideration of the foregoing, the parties hereto, intending to be legally bound hereby, agree as follows: 1. DEFINITIONS; EFFECTIVENESS. The Original Lease as amended by this Amendment is hereafter referred to as the Lease. The respective obligations of Landlord and Tenant prior to the Effective Date (as defined in Section 3 below) shall be governed in all respects by the Original Lease. 2. PREMISES. Landlord hereby leases the Additional Premises to Tenant for the Annual Rent set forth in Section 3 below and upon the terms and conditions set forth in the Original Lease. EXHIBIT "A" to the Lease is hereby amended to include as the Premises the area in the Building depicted on EXHIBIT "A" attached hereto. 3. BASE RENT. Tenant shall pay to Landlord as Annual Fixed Rent for the Additional Premises the sum of Twenty and 50/100 Dollars ($20.50) per rentable square foot, or Sixty Four Thousand one Hundred Sixty Five ($64,165), per annum, commencing December 1, 1997 (the "Effective Date"), payable as provided in the Original Lease. 4. CONSTRUCTION OF ADDITIONAL PREMISES. (a) Landlord will construct the improvements in the Additional Premises in accordance with the plans attached or described in EXHIBIT "B". Landlord will provide Tenant with a Tenant Improvement Allowance in the amount of $29,200. To the extent that Tenant makes any changes in finish or scope of the work described in EXHIBIT "B" Tenant shall pay such excess monthly in proportion to the overall Cost of Construction within fifteen (15) days of receiving Landlord's statement therefor. The "Cost of Construction" shall mean the actual charges of Landlord's contractors, designers and engineers and Landlord's overhead in an amount equal to ten percent (10%) of such charges. (b) All construction work required or permitted by the Lease, whether by Landlord or Tenant, shall be done in a good and workmanlike manner and in compliance with all applicable laws, ordinances, regulations and orders of governmental authorities and with all applicable codes of all insurers of the Building. Each party may inspect the work of the other at reasonable times and shall promptly give notice of observed defects. Each party hereby agrees to be bound by and authorizes the other to rely upon, in connection with design and construction, approval and other actions by their respective construction representative, as identified by written notice to the other. Landlord's construction representation is R. Clifford Zimmerman. (c) Within five (5) days after written notice from Landlord to Tenant of the date on which Landlord reasonably expects that the construction of the Additional Premises will be Substantially Completed or, in the absence of such notice, within five (5) days after Tenant commences occupancy of the Additional Premises, or any part thereof, Landlord's and Tenant's construction representatives shall make such inspection of the Additional Premises as Tenant deems appropriate, and, except as otherwise notified by Tenant in writing to Landlord within such period, Tenant shall be deemed to have accepted the Additional Premises in their then condition and as being in the condition in which Landlord is obligated to deliver the Additional Premises hereunder. If as a result of such inspection Tenant discovers deviations or variations from the plans and specifications for the construction of the Additional Premises of a nature commonly found on a "punch list" (as that term is used in the construction industry), Tenant shall promptly notify Landlord of such deviations. The existence of such punch list items shall not postpone the Effective Date of this Lease nor the obligations of Tenant to pay rent. After the Effective Date, Landlord, its agents and/or contractors may enter the Additional Premises from time to time to complete unfinished details and adjustments with reasonable dispatch, and such entry shall not constitute an eviction, in whole or in part, entitle Tenant to any abatement or diminution of rent, relieve Tenant of any of its obligations under the Lease, or impose any liability on Landlord to Tenant or its agents or contractors by reason thereof. 5. COMPLETION OF IMPROVEMENTS. (a) The Additional Premises shall be deemed to be substantially completed ("Substantially Completed" or "Substantial Completion") when all work specified to be done in the plans attached or described in EXHIBIT "B", attached hereto and made a part hereof, has BEEN substantially completed, except for minor items of finishing and construction of a nature which are not necessary to make the Additional Premises reasonably tenantable for Tenant's use as stated herein. (b) If TENANT MAKES any changes in such plans, Tenant shall bear any additional construction or other expense to Landlord caused directly or indirectly by any delay caused BY such changes and shall pay to Landlord as Additional Rent, at the Effective Date as defined in Section 3, an amount equal to the aggregate number of days of delay caused by such changes, multiplied by one three hundred sixty-fifth (1/365th) of the Annual Fixed Rent. Landlord and Tenant, understanding the difficulty in determining or estimating the actual damages that will result from Tenant's changes, have agreed upon the foregoing as an appropriate method of liquidating such damages. (c) Landlord shall have the Additional Premises Substantially Completed by the Effective Date, except for delays due to governmental regulation, unusual scarcity of or inability to obtain labor or materials, labor difficulties, casualty or other causes beyond Landlord's reasonable control, any of which shall extend the Effective Date for a period equal to the total of the duration of each such delay. However, if the Additional Premises is not Substantially Completed within one (1) month following the Effective Date, as the same may be extended in accordance herewith, Tenant, as Tenant's sole right thereby arising, may terminate the Lease (as to the Additional Premises ONLY) by written notice to Landlord given within fifteen (15) days thereafter, provided that the Lease Term for the Additional Premises shall not have commenced prior to the giving of such notice to Tenant, the Lease as to the Additional Premises to terminate in such case upon Landlord's receipt of such notice, whereupon Landlord shall return all rent and other monies paid by Tenant to Landlord in advance on account of the Additional Premises, except as hereinafter stated, and all further obligaTIONS OF the parties hereunder shall end. The termination right provided herein is applicable to the Additional Premises only, and shall not terminate or otherwise effect the Tenant's obligations under the Lease as to the Leased Premises under the Original Lease. (d) it is understood that in the event of such termination by Tenant, Landlord shall have no responsibility to reimburse Tenant for ANY COST or expenses AS TENANT MAY have directly or indirectly incurred toward this leasing or the occupancy of the Additional Premises, whether with respect to arranging for or termination of arrangements for other space. 6. TERM. The term of the Lease with respect to the Additional Area shall commence on the Effective Date (as defined in Section 3 above) and thereafter be coterminous with the Lease Term as provided in the Original Lease. 7. ADDITIONAL RENT. The Additional Premises shall be considered part of the Rentable Area of the Leased Premises for the purposes of determining Tenant's Proportionate Share under Paragraph 6 of the Original Lease. Tenant acknowledges and agrees that from and after the Effective Date, Tenant's Proportionate Share shall be 13.53%. S. TENANT'S TERMINATION RIGHTS. In the event that Tenant exercises its right and option to terminate the Lease in accordance with Section 41 of the original Lease, Tenant shall pay to Landlord, in addition to any and all costs and charges provided in Section 41 of the Original Lease (including, but not limited to the Termination Fee), the unamortized portion of the Tenant Improvement Allowance provided in Section 4(a) hereof. 9. BROKERS. Landlord and Tenant each represent and warrant to the other that it has not engaged any broker, finder or other person other than the broker, if any, listed in Section I of the Original Lease, who would be entitled to any commission or fees in respect of the negotiation, execution or delivery of this Lease. Landlord and Tenant each agree to indemnify and hold harmless the other against any loss, cost, liability or expense incurred by the other as a result of any claim asserted by any other broker, finder or other person on the basis of any arrangements or agreements made or alleged to have been made by or on behalf of the other. Landlord shall be responsible for the payment of a brokerage fee to the broker listed in Section 1 of the Original Lease at Landlord's scheduled commission rate or as otherwise agreed in writing between Landlord and such broker. 10. GENERAL PROVISIONS. (a) GOVERNING LAW. This Amendment shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania. (b) ENTIRE AGREEMENT. This Amendment constitutes the entire agreement between the parties hereto and may not be modified except by a written instrument executed by the parties hereto. (c) CAPTIONS. Paragraph headings are used herein solely for reference purposes and are not to be construed as part of this Amendment. (d) COUNTERPARTS. This Amendment may be executed in counterpart copies, each of which shall constitute an original but all of which together shall constitute one and the same instrument. (e) FULL FORCE AND EFFECT. Except as expressly modified herein or inconsistent with the terms hereof, THE Original Lease shall remain in full force and effect and all of the provisions thereof are hereby ratified and confirmed. IN WITNESS WHEREOF, the undersigned have executed this First Amendment to Lease on and as of the date first above set forth. Attest: LANDLORD: GLENVIEW CORPORATE CENTER LIMITED PARTNERSHIP By: /s/ James M. Watson By: Pitcairn Properties Incorporated ----------------------------- Title: By: /s/ James M. Watson ---------------------------------- Authorized Officer Pitcairn Properties Incorporated executes This Lease in its capacity as the General Partner of PPI-LDP-I which is the general partner of Land and Development Partnership -I which is the General Partner of Landlord. Attest: TENANT: WORLDGATE COMMUNICATIONS By: /s/ illegible ----------------------------- Title: By: /s/ Randall J. Gort ------------------------------ Name: Randall J. Gort Title: VP, General Counsel EX-10.3 4 EXHIBIT 10.3 Exhibit 10.3 AGREEMENT OF LEASE BETWEEN GLENVIEW CORPORATE CENTER LIMITED PARTNERSHIP, Landlord AND WORLDGAGE COMMUNICATIONS, Tenant TABLE OF CONTENTS LEASE
Section Page - ------- ---- 1. REFERENCE DATA ......................................................... 1 2. DEMISE ................................................................. 3 3. TERM ................................................................... 3 4. HOLDING OVER ........................................................... 3 5. RENT ................................................................... 3 6. ESCALATION ............................................................. 4 7. COMPLETION OF IMPROVEMENTS; AS IS ...................................... 9 8. [INTENTIONALLY DELETED] ................................................ 9 9. ALTERATIONS OR IMPROVEMENTS BY TENANT .................................. 9 10. PERMITTED USES ......................................................... 10 11. BUILDING OPERATION AND SERVICES ........................................ 10 12. INTERRUPTION OF SERVICES ............................................... 11 13. REPAIRS ................................................................ 11 14. [INTENTIONALLY DELETED] ................................................ 12 15. QUIET ENJOYMENT ........................................................ 12 16. LANDLORD'S RIGHT OF ENTRY .............................................. 12 17. SURRENDER OF PREMISES .................................................. 12 18. MISCELLANEOUS COVENANTS ................................................ 13 19. RULES AND REGULATIONS .................................................. 13 20. PERFORMANCE OF TENANT'S COVENANTS ...................................... 14 21. EMINENT DOMAIN ......................................................... 14 22. CASUALTY DAMAGE ........................................................ 15 23. HOLD HARMLESS; PUBLIC LIABILITY INSURANCE; WAIVER OF SUBROGATION ....... 16 24. MORTGAGEE AND OTHER AGREEMENTS ......................................... 17 25. SUBORDINATION AND ATTORNMENT ........................................... 18 26. ASSIGNMENT AND SUBLETTING .............................................. 18 27. DEFAULT ................................................................ 19 28. LANDLORD'S REMEDIES .................................................... 20 29. LANDLORD'S COSTS AND EXPENSES .......................................... 24 30. LATE CHARGE ............................................................ 24 31. SUCCESSORS AND ASSIGNS ................................................. 24 32. WAIVERS ................................................................ 25 33. WAIVER OF TRIAL BY JURY ................................................ 25 34. SEVERABILITY ........................................................... 25
35. NOTICES ................................................................ 25 36. AMENDMENT AND MODIFICATIONS ............................................ 26 37. [INTENTIONALLY OMITTED] ................................................ 26 38. ENVIRONMENTAL MATTERS .................................................. 26 39. HEADINGS AND TERMS ..................................................... 27 40. GOVERNING LAW .......................................................... 27 41. TENANT'S TERMINATION RIGHTS ............................................ 28
GLENVIEW CORPORATE CENTER Bensalem, Pennsylvania Lease Dated: November 26, 1997 1. REFERENCE DATA Any reference in this Lease to the following subjects shall incorporate therein the data stated for the subject(s) in this Section: LANDLORD: Glenview Corporate Center Limited Partnership, a Delaware Limited Partnership LANDLORD'S ADDRESS: c/o Pitcairn Properties Incorporated One Pitcairn Place 165 Township Line Road Jenkintown, Pennsylvania 19046 LANDLORD'S CONSTRUCTION REPRESENTATIVE: Clifford Zimmerman TENANT: Worldgate Communications TENANT'S ADDRESS: 3220 Tillman Drive, Bensalem, PA TENANT'S CONSTRUCTION REPRESENTATIVE: N/A LEASED PREMISES: A portion of 3260 Tillman Drive, Bensalem, Pennsylvania RENTABLE AREA OF LEASED PREMISES: 6,066 Rentable Square Feet LEASE TERM: Two (2) years, Three (3) months SCHEDULED COMMENCEMENT DATE: December 1, 1997 COMMENCEMENT DATE: December 1, 1997 ANNUAL FIXED RENT: $97,056.00 OPERATING EXPENSE ALLOWANCE: 6.00 Per Rentable Square Foot TENANT'S PROPORTIONATE SHARE: 6,066/29,157 20.80% PERMITTED USES: General Office 1 SECURITY DEPOSIT: -0- CONSTRUCTION ALLOWANCE: N/A GLENVIEW CORPORATE CENTER LIMITED PARTNERSHIP By: BPPI-I, L.P., its general partner By: Bergen of Philadelphia, Inc. general partner By: /s/ Elizabeth A. Owens -------------------------------------------- By: Pitcairn Properties Incorporated, general partner By: /s/ James M. Watson -------------------------------------------------- TENANT: WORLDGATE COMMUNICATIONS By: /s/ [illegible] -------------------------------------------------- 2 2. DEMISE. Landlord hereby demises and lets to Tenant and Tenant takes and hires from Landlord that certain space (the "Leased Premises") delineated in Exhibit "A", attached hereto and made part hereof, in the one (1) story office building (the "Building") erected upon a parcel of ground located at 3260 Tillman Drive, Bensalem Township, Pennsylvania (the "Lot") TOGETHER WITH, appurtenant to the Leased Premises, the right to use in common with Landlord and other tenants, occupants and visitors to the Building, the common walkways, sidewalks and parking lots of the Lot. 3. TERM. The Lease Term shall commence on the Commencement Date which shall be the earlier of (A) the date on which Tenant shall take possession of the Leased Premises, or (B) December 1, 1997 and shall continue for the period of years set forth in Section 1 hereof, unless extended or sooner terminated as provided herein. When the Commencement Date and, consequently, the Lease Term have been so determined, Landlord and Tenant shall confirm the Commencement Date accordingly by an amendment to Section 1. 4. HOLDING OVER. If Tenant retains possession of the Leased Premises or any part thereof after the termination of this Lease by expiration of the Lease Term or otherwise, Tenant shall pay Landlord (A) as agreed liquidated damages for such holding over alone, an amount, calculated on a per diem basis for each day of such unlawful retention, equal to the greater of (i) twice the Annual Fixed Rent, or (ii) the established market rental for the Leased Premises, for the time Tenant thus remains in possession, plus, in each case, all Additional Rent and other sums payable hereunder, and (B) all other damages, costs and expenses sustained by Landlord by reason of Tenant's holding over. Without limiting any rights and remedies of Landlord resulting by reason of the wrongful holding over by Tenant, or creating any right in Tenant to continue in possession of the Leased Premises, all Tenant's obligations with respect to the use, occupancy and maintenance of the Leased Premises shall continue during such period of unlawful retention. 5. RENT. Rent is payable by Tenant beginning on the Commencement Date in monthly installments of one-twelfth (1/12th) of the Annual Fixed Rent, without prior notice or demand, and without any set-off or deduction whatsoever, in advance, on the first day of each month at Landlord's office in Bensalem, Pennsylvania or at such other place as Landlord may direct, except that the rent for the first full month of the Lease Term will be paid on the date of the execution of this Lease. In addition, if the Lease Term commences on a day other than the first day of a calendar month, Tenant shall pay to Landlord, on or before the Commencement Date of the Lease Term, a pro rata portion of the monthly installment of rent (including Fixed Rent and any Additional Rent as herein provided), such pro rata portion to be based on the number of days remaining in such partial month after the Commencement Date of the Lease Term. 3 Tenant hereby covenants and agrees to pay the Annual Fixed Rent, Additional Rent and other sums payable to Landlord hereunder when due, and to pay interest to landlord at the Overdue Interest Rate (A) on all overdue installments of Fixed Rent from the due date thereof to the date of payment and (B) on all payments of Additional Rent or other sums payable to Landlord hereunder from the date of demand for payment until the date of payment. Upon default by Tenant in the payment of such Additional Rent or other sums payable hereunder, Landlord shall be entitled to all rights and remedies to which it would be entitled in default of the payment of Fixed Rent. As used herein, the term "Overdue Interest Rate" shall mean and equal three percent (3%) per annum over the prime interest rate announced from time to time by the largest commercial bank whose principal office is located on Philadelphia or Montgomery County, Pennsylvania as being its prime interest rate charged to its most credit-worth commercial customers on ninety (90) days unsecured loans. 6. ESCALATION. OPERATING EXPENSE. If Landlord's Operating Expense for any Operating Year shall be greater than the Operating Expense Allowance, Tenant shall pay to Landlord as Additional Rent an amount equal to Tenant's Proportionate Share (as defined below) of the difference (the amount of Tenant's Proportionate Share of such difference is hereinafter referred to as the "Operating Expense Adjustment"). If Tenant occupies the Leased Premises or portion thereof for less than full Operating Year, the Operating Expense Adjustment will be allocated proportionally to the amount of time in such Operating Year that Tenant so occupies such space. Such additional Rent shall be paid in the following manner: within one hundred twenty (120) days following the end of each Operating Year, Landlord shall furnish Tenant an Operating Expense Statement setting forth (i) the Operating Expense for the preceding Operating Year, (ii) the Operating Expense Allowance and (iii) the Tenant's Operating Expense Adjustment for such Operating Year. Within fifteen (15) days following the receipt of such Operating Expense Statement (the "Expense Adjustment Date") Tenant shall pay to Landlord as Additional Rent the Operating Expense Adjustment for such Operating Year. Commencing with the first month of the Lease Term, Tenant shall pay to Landlord, on account of the Operating Expense Adjustment for such Operating Year, monthly installments in advance equal to one-twelfth (1/12th) o the estimated Operating Expense Adjustment for such Operating Year. ON the next succeeding Expense Adjustment Date, Tenant shall pay to Landlord (or Landlord shall credit to Tenant) any deficiency (or excess) between the installments paid on account of the preceding year's Operating Expense Adjustment and the actual Operating Expense Adjustment for such Operating Year. As used in this Section 6 and Section 1 where applicable, the following words and terms shall be defined as hereinafter set forth: 4 (i) "OPERATING YEAR" shall mean each calendar year, or such other period of twelve (12) months as hereafter may be adopted by Landlord as its fiscal year, occurring during the Lease Term. (ii) "OPERATING EXPENSE ALLOWANCE" shall mean and equal the amount set forth in Section 1 of this Lease multiplied by the rentable area of the Building. (iii) "OPERATING EXPENSE STATEMENT" shall mean a statement in writing signed by Landlord, setting forth in reasonable detail (a) the Operating Expense for the preceding Operating Year, (b) the Operating Expense Allowance and (c) the Tenant's Operating Expense Adjustment for such Operating Year, or portion thereof. The Operating Expense for each Operating Year shall be audited and certified by Landlord's independent certified public accountant whose report thereon shall be available for inspection by Tenant at Landlord's office during normal business hours. The Operating Expense Statement shall constitute a final determination as between Landlord and Tenant of the Operating Expense and the Operating Expense Adjustment for any Operating Year. (iv) "OPERATING EXPENSE" shall mean the following expenses incurred by Landlord in connection with the operation, repair and maintenance of the Building and the Lot: (a) Wages, salaries, fees and other compensation and payments and payroll taxes and contributions to any social security, unemployment insurance, welfare, pension or similar fund and payments for other fringe benefits required by law or by union agreement (or, if the employees or any of them are non-union, then payments for benefits comparable to those generally required by union agreement in first class office buildings in the Philadelphia suburban area, which are unionized) made to or on behalf of all employees of Landlord performing services rendered in connection with the operation and maintenance of the Building and the Lot, including, without limitation: window cleaners; janitors; miscellaneous handymen; watchmen; persons engaged in patrolling and protecting the Building and the Lot; carpenters; engineers; mechanics; electricians; plumbers; persons engaged in the operation and maintenance of the Building and the Lot; building superintendent and assistants; building manager; an clerical and administrative personnel. (b) The uniforms of all employees, and the cleaning, pressing and repair thereof. (c) Cleaning costs for the Building and the Lot, including the windows and sidewalks, all snow and rubbish removal (including separate contracts therefor) and the costs of all labor, supplies, equipment, and materials incidental thereto. 5 (d) Premiums and other charges incurred by Landlord with respect to all insurance relating to the Building and the Lot and the operation and maintenance thereof, including, without limitation: fire and extended coverage insurance, including windstorm, hail, explosion, riot, rioting attending a strike, civil commotion, aircraft, vehicle and smoke insurance; public liability; elevator; workmens' compensation; boiler and machinery; rent; use and occupancy; and health, accident and group life insurance of all employes. (e) All taxes, liens, charges, imposts and burdens and special assessments of every kind and nature imposed by any governmental authority on and/or with respect to the Lot or Building which Landlord shall become obligated to pay because of or in connection with the ownership, leasing or operation of the Lot or the Building. (f) The cost of electricity used for site lighting and the cost of water and sewer and any and all other utility services used in connection with the operation and maintenance of the Building and the Lot. (g) Costs incurred for operation, service, maintenance, inspection, repairs and alterations of the Building, the Lot and the heating, air-conditioning, ventilating, plumbing and electrical systems of the Building (including any separate contract therefor) and the costs of labor, materials, supplies and equipment used in connection with all of the aforesaid items. (h) Gross receipts taxes, sales taxes and excise taxes and the like upon any of the expenses enumerated herein. (i) Management fees of the managing agent for the Building. (j) The cost of replacements for tools and equipment used in the operation and maintenance of the building and the Lot. (k) (l) The cost of telephone service, postage, office supplies, maintenance and repair of office equipment and similar costs related to operation of the Building Superintendent's office. (m) The cost of licenses, permits and similar fees and charges related to operation, repair and maintenance of the Building. 6 (n) Auditing fees necessarily incurred in connection with the maintenance and operation of the Building, and accounting fees incurred in connection with the preparation and certification of a real estate tax escalation and the operating expense escalation statements pursuant to this Section 6. (o) All costs incurred by Landlord to retrofit any portion or all of the Building to comply with a change in existing legislation or introduction of new legislation, whether Federal, State or Municipal; repairs, replacements and improvements which are appropriate for the continued operation of the Building as a first class building. (p) All expenses associated with the installation of any energy or cost saving devices. (q) All assessments against Landlord's pro rata share of the costs of Glenview Corporate Center as provided in the Declaration of Protective Covenants for Glenview Corporate Center. (r) Any and all other expenditures of Landlord in connection with the operation, repair or maintenance of the Lot or the Building which are properly expensed in accordance with generally accepted accounting principles consistently applied with respect to the operation, repair and maintenance of first-class office buildings in the Philadelphia suburbs. If Landlord shall purchase any item of capital equipment or make any capital expenditure as described in subsections (o) and (p) above, then the costs for the same shall be included in Operating Expenses in the year of installation and in subsequent years amortized on a straight line basis, over an appropriate period, but not more than ten (10) years, with an interest factor equal to the prime interest rate, as defined in Section 5 hereof. If Landlord shall lease such item of capital equipment, then the rentals or other operating costs paid pursuant to such leasing shall be included in Operating Expenses for each year in which they are incurred. Notwithstanding the foregoing, "Operating Expense" shall not include expenditures for any of the following: (a) The cost of any capital addition made to the Building (other than that specified as part of Operating Expense as provided above), including the cost to prepare space for occupancy by a new tenant. (b) Repairs or other work occasioned by fire, windstorm or other insured casualty or hazard, to the extent that Landlord shall receive proceeds of such insurance. 7 (c) Leasing commissions, advertising expenses and other costs incurred in leasing or procuring new tenants. (d) Repairs or rebuilding necessitated by condemnation. (e) Depreciation and amortization of the Building, other than (I) capital expenditures which under generally applied real estate practice are expensed or regarded as deferred expenses; (II) capital expenditures appropriate to a first class office building or required by law as described in subsection (o) above; and (III) capital expenditures designed to result in savings or reductions in Operating Expenses as described in subsection (p) above. (f) The salaries and benefits of executive officers of Landlord, if any. Operating Expense shall be "net" and, for that purpose, shall be reduced by the amounts of any reimbursement or credit received or receivable by Landlord with respect to an item of cost that is included in Operating Expense (other than reimbursements to Landlord by tenants of the Building pursuant to Operating Expense escalation provisions). To the extent that any item of Operating Expense is incurred in common with another building or lot in the Glenview Corporate Center, such item of expense shall be apportioned equitably among the properties incurring such expenses. If Landlord shall eliminate the payment of any wages or other labor costs or otherwise reduce Operating Expense as a result of the installation of new devices or equipment, or by any other means, then in computing the Operating Expense the corresponding items shall be deducted from the Operating Expense Allowance and Operating Years. The Operating Expense for any Operating Year or portion thereof during which less than one hundred percent (100%) of the Rentable Area of the Building is leased to tenants shall be increased to include an imputed cost for unoccupied portions of the Building in an amount with respect to each such area equal to the product of (a) the Landlord's estimate of the marginal Operating Expense saving resulting from such vacancy, times (b) a fraction, the numerator of which is the number of days during such Operating Year such 8 portion of the Building was unoccupied and the denominator of which is three hundred sixty-five (365), times (c) the Rentable Area of such unoccupied space. In the time that more than one such portion of Rentable Area shall be unoccupied on separate dates within a relevant Operating Year, then a separate computation shall be made with respect to each unoccupied portion, and the products of such computations shall be added together, and the total thereof shall be the amount of Operating Expense imputed to such unoccupied portions for such Operating Year. (v) "TENANT'S PROPORTIONATE SHARE" shall mean a fraction, the numerator of which shall be the Rentable Area of Leased Premises, and the denominator of which is 29,157 rentable square feet (subject to adjustment only by reason of any substantial addition to the Building made after the date of the initial completion of construction of the Building), and shall equal, with respect to the Leased Premises, the percentage set forth in Section 1 of this Lease. 7. COMPLETION OF IMPROVEMENTS; AS IS. Tenant agrees to accept the Leased Premises in its "As-Is" condition. Landlord shall have no obligation to complete any work in connection with Tenant's occupancy of the Leased Premises with the exception of (i) building standard painting of the Leased Premises, (ii) replacement of tiles in bathroom, where necessary, and (iii) shampoo carpets, when necessary, which work shall be completed prior to the Commencement Date. Any other work completed by Tenant shall be at Tenant's sole cost and expense and otherwise in accordance with the terms of the Lease. 8. [INTENTIONALLY DELETED]. 9. ALTERATIONS OR IMPROVEMENTS BY TENANT. Tenant shall not make during the Lease Term any alterations or additions to the Leased Premises which (affect the Building's structure or mechanical, electrical, plumbing or HVAC systems without the prior written approval of Landlord and then only in accordance with plans and specifications previously approved by Landlord which approval shall not be unreasonably withheld). Any such alterations or additions which may be approved by Landlord and made by Tenant shall be deemed part of the Building and shall not thereafter be removed by Tenant unless Landlord shall require removal of same, either in conjunction with its approval or by notice to Tenant given prior to the termination of this Lease, in which case Tenant shall remove any such alterations or additions and repair any damage to the Building or the Leased Premises occasioned by their installation or removal (including, without limitation, repairing and pathing holes, replacing ceiling, wall and floor surfaces and repainting), and restore the Leased Premises to substantially the same condition as existed prior to the time which any such alterations or additions were made. 9 All alterations and additions by Tenant and installation of furnishings following occupancy shall be coordinated with any work being performed by Landlord and performed in such manner and by such union contractor(s) as to assure harmonious labor relations and so as to not damage the Building or interfere with its operation or with the activities of other tenants and, except for installation of furnishings only, by contractors or workmen first approved by Landlord. As further conditions to Landlord's approval of any proposed alterations or additions by Tenant which are to be made after the beginning of the Lease Term, Tenant shall: secure all necessary licenses and permits; deliver to Landlord a waiver, executed by all persons or firms who will be furnishing labor or materials waiving the right to file any mechanic's lien against the Building, the Lot or the estate or interest of Landlord or Tenant therein; cause the contractor(s) and subcontractor(s) to carry Workmen's Compensation insurance in statutory amounts and also comprehensive public liability insurance with limits as approved by Landlord, and deliver to Landlord certificates of all such insurance. Failure to comply with any of the provisions of this Section 9 (including, without limitation, any of the terms or conditions of any consent granted hereunder) shall constitute a default under this Lease and upon such default Landlord may pursue any or all of the remedies provided for in Section 28 hereof, or any other remedy available to Landlord in law or in equity. Tenant shall promptly pay when due the cost of all such alterations and additions as referred to in this Section 9 and shall cause any mechanics' liens which may be filed with respect thereto to be immediately discharged, and shall indemnify Landlord against any loss, cost or expense occasioned, directly or indirectly as a result of such alterations and additions. 10. PERMITTED USES. Tenant covenants and agrees to use and occupy the Leased Premises only in conformity with law and for the uses specified in Section 1 hereof and not to use or permit any use of the Leased Premises which creates any safety hazard, which would be dangerous to the Leased Premises, the Building or the occupants of the same, which would be disturbing to other tenants or occupants of the Building, or which would cause any increased in premium for any insurance which landlord may then have in effect with respect to the Building generally. 11. BUILDING OPERATION AND SERVICES. Landlord shall furnish, through Landlord's employees or independent contractors, such services, facilities and supplies equal in scope, quality and frequency to those being customarily provided by landlords in one story office buildings in the Philadelphia suburbs. 10 During the construction of the Leased Premises, Landlord shall install and provide thereafter for the duration of the Term a heat pump or other HVAC system to provide heating, ventilating and air conditioning to the Leased Premises. Such system shall service only the Leased Premises and Tenant shall have the right to control the hours of operation thereof. Electricity for the operation shall be routed through Tenant's electric meter. Maintenance and cleaning shall be provided Monday through Friday (excluding holidays), after business hours, as follows: janitor service, consisting of the removal of customary office trash, dusting of furniture, desks and pictures, and vacuuming; maintenance and service of the toilet rooms in the Leased Premises. Hot and cold water for normal lavatory purposes shall be provided. If Tenant requires water for additional purposes, Tenant shall pay the cost thereof as shown on a meter to be installed and maintained at Tenant's expense to measure such additional consumption. During the construction of the Leased Premises, Landlord shall connect the electrical service in the Leased Premises to the electric public utility serving the Building and Tenant shall be responsible to pay for such electricity directly to such electric public utility. Landlord shall furnish and install at Tenant's expense all replacement lighting tubes, lamps, bulbs, and ballasts required in the Leased Premises. 12. INTERRUPTION OF SERVICES. In case Landlord is prevented or delayed in furnishing any service as set forth in Section 11 herein or otherwise by reason of any cause beyond Landlord's reasonable control, Landlord shall not be liable to Tenant therefor nor shall Tenant be entitled to any abatement or reduction in rent by reason thereof, nor shall the same give rise to a claim in Tenant's favor that such absence of building services constitutes actual or constructive, total or partial eviction or renders the Leased Premises untenantable. Landlord reserves the right to stop any service or utility system, when necessary by reason of accident or emergency, or until necessary repairs have been completed, provided, however, that in each instance of stoppage, Landlord shall exercise reasonable diligence to eliminate the cause thereof. Except in cash of emergency repairs, Landlord will give Tenant reasonable advance notice of any contemplated stoppage and will use reasonable efforts to avoid unnecessary inconvenience to Tenant by reason thereof. 13. REPAIRS. Landlord shall make, as an Operating Expense of the Building, all repairs necessary to maintain the plumbing, heating, ventilating, air conditioning, electric systems, external windows and floors (excluding carpeting and floor coverings), provided, however, that Landlord shall not be obligated to make any such repairs until the expiration of a 11 reasonable period of time after receipt of written notice from Tenant that such repair is needed. In no event shall Landlord be obligated under this Section 13 to repair any damage caused by any act, omission or negligence of Tenant or its employees, agents, invitees, licensees, subtenants, or contractors. If Tenant requires maintenance, servicing, repair or replacement of any special plumbing, heating or air conditioning systems installed for Tenant's benefit in the Leased Premises, such maintenance, servicing, repair or replacement shall be made at the sole expense of Tenant, unless the need for such repairs is caused solely by the negligence or wilful misconduct of Landlord, its agents or employees. Tenant shall maintain the Leased Premises and the fixtures and appurtenances therein in good repair at all times. Except to the extent released by Landlord pursuant to the waiver of subrogation provision in Section 23 hereof, Tenant shall reimburse Landlord for all costs and expenses of repairing and replacing all damage or injury to the Leased Premises and the Building and to fixtures and equipment caused by Tenant or its employees, agents, invitees, licensees, subtenants, or contractors, or as the result of all or any of them moving in or out of the Building or by installation or removal of furniture, fixtures or other property. Such costs and expenses shall be collectible as Additional Rent and paid by Tenant within fifteen (15) days after rendition of a bill therefor. Landlord shall not be liable by reason of any injury to or interference with Tenant's business arising from the making of any repairs, alterations, additions or improvements in or to the Leased Premises or the Building or to any appurtenances or equipment therein. There shall be no abatement of rent because of such repairs, alterations, additions or improvements or because of any delay by Landlord in making the same. Tenant shall give to Landlord prompt written notice of any accidents to, or defects in plumbing, electrical, heating and air conditioning systems and apparatus located in the Leased Premises. 14. [INTENTIONALLY DELETED]. 15. QUIET ENJOYMENT. Tenant, upon paying the Annual Fixed Rent, all Additional Rent and all other sums and charges herein provided for and, upon observing, keeping and performing all covenants, agreements and conditions of this Lease on Tenant's part to be observed, kept and performed, shall quietly have and enjoy the Leased Premises throughout the Lease Term without hindrance or molestation by Landlord or by anyone claiming by, through or under Landlord, subject, however, to the exceptions, reservations and conditions of this Lease. 16. LANDLORD'S RIGHT OF ENTRY. Landlord, any ground lessor, mortgagee or any agent thereof, shall have the right to enter the Leased Premises at reasonable times: to perform Landlord's covenants as set forth in this Lease, for purposes of inspection and to insure Tenant's 12 compliance with the provisions of this Lease, to make any repairs, replacements or alterations to the Building or do any work which Landlord may deem necessary, or to show the Leased Premises to prospective purchasers of the Building, and also, during the last six (6) months of the Lease Term, to show the Leased Premises to prospective tenants. 17. SURRENDER OF PREMISES. Any alterations, improvements or additions to the Leased Premises made by or at the request of Tenant shall remain upon the Leased Premises at the expiration or earlier termination of this Lease and shall become the property of Landlord unless Landlord shall, prior to the expiration or earlier termination of this Lease, give written notice to Tenant to remove such alterations, improvements and additions. Tenant shall repair any damage caused by the installation and/or removal (including, without limitation, repairing and patching holes, replacing ceiling, floor and wall surfaces and repainting), and restore the Leased Premises to substantially the same condition in which it existed prior to the time that any such alterations, improvements or additions were made. Should Tenant fail to remove any such alterations, improvements or additions or to repair such damage when required or requested by Landlord so to do pursuant to this Section 17, Landlord may do so, and the cost and expense thereof shall be paid by Tenant to Landlord as Additional Rent. Any personal property which shall remain in the Leased Premises or any part thereof after the expiration or earlier termination of this Lease shall be deemed to have been abandoned and either may be retained by the Landlord as Landlord's property or may be disposed of in such manner as Landlord may see fit, provided that notwithstanding the foregoing Tenant shall, upon request of Landlord made no later then ten (10) days after the expiration or earlier termination of this Lease, promptly remove from the Building any such personal property at Tenant's own cost and expense. Should Tenant fail so to do, Landlord may do so, and the cost and expense thereof shall be paid by Tenant to Landlord as Additional Rent. If such personal property or any part thereof shall be sold by Landlord, Landlord may receive and retain the proceeds of such sale(s) as Landlord's property. The covenants contained in this Section 17 shall survive the expiration or earlier termination of this Lease. 18. MISCELLANEOUS COVENANTS. Tenant shall faithfully perform all of the covenants and conditions to be performed and observed by Tenant hereunder and in addition to those covenants and conditions which are set forth elsewhere herein, Tenant agrees: A. To secure and maintain in effect any governmental approvals, licenses and permits as may be required for Tenant's use and occupancy of the Leased Premises. B. To comply with all applicable laws, codes and regulations of governmental authorities applicable to Tenan's use and occupancy of the Leased Premises and all rules and regulations of insurers of the Leased Premises and the National Board of Fire Underwriters as they apply to Tenant's use and occupancy of the Leased Premises. 13 C. Not to use or place any curtains, blinds, drapes, coverings or signs over any exterior windows or upon the window surfaces as would be visible from the outside of the Building without the prior written approval of Landlord. 19. RULES AND REGULATIONS. Tenant covenants and agrees that Tenant, its servants, employees, agents, invitees, licensees and other visitors shall observe faithfully, and comply strictly with, the Rules and Regulations contained in Exhibit "B", attached hereto and made a part hereof, and such other and further reasonable Rules and Regulations as Landlord or Landlord's against may, after written notice to Tenant, from time to time adopt. Nothing in this Lease contained shall be construed to impose upon Landlord any duty or obligation to enforce the Rules and Regulations or terms, covenants or conditions in any other lease as against any other Tenant, and Landlord shall not be liable to Tenant for violation of the same by any other tenant, its servants, employees, agents, invitees, licensees or other visitors. 20. PERFORMANCE OF TENANT'S COVENANTS. If Tenant fails to perform any covenant or observe any condition to be performed or observed by Tenant hereunder or acts in violation of any covenant or condition hereof, Landlord may, but shall not be required to on behalf of Tenant, perform such covenant and/or take such steps, including entering upon the Leased Premises, as may be necessary or appropriate to meet the requirements of any such covenant or condition, provided that the Landlord shall have given Tenant at least three (3) days prior written notice of Landlord's intention to do so, unless an emergency situation exists, in which case Landlord shall have the right to proceed immediately; and all costs and expenses incurred by Landlord in so doing, including reasonable legal fees, shall be paid by Tenant to Landlord upon demand, plus interest at the Overdue Interest Rate from the date of expenditure(s) by Landlord, as Additional Rent. Landlord's proceeding under the rights reserved to Landlord under this Section shall not in any way prejudice or waive any rights as Landlord might otherwise have against Tenant by reason of Tenant's default. 21. EMINENT DOMAIN. In the event of the exercise of the power of eminent domain whereby (A) such portion of the Building is taken that access to the Leased Premises is permanently impaired thereby and reasonable alternate access is not provided by Landlord within a time period which is reasonable under the circumstances, (B) all or substantially all of the Leased Premises or the Building is taken, (C) if less than substantially all of the Building is taken but Landlord, acting in good faith, determines that it is economically unfeasible to continue to operate the uncondemned portion as a first-class office building, or (D) if less than substantially all of the Leased Premises is taken, but Tenant, acting in good faith, determines that because of such taking it is economically unfeasible to continue to conduct its business in the uncondemned portion of the Leased Premises, then in the case of (A) or (B), either party, and in the case of (C), Landlord, and in the case of (D), Tenant, shall have the right to terminate this Lease as of the date when possession of that part which was taken is required to be delivered or surrendered to the condemning authority; and in such case all rent and other charges shall be adjusted to the date of termination. The foregoing right of termination shall 14 be applicable to the taking of any estate or interest whatsoever which, as a matter of law, would deprive Landlord or Tenant of any right to possession (in common with others, as to common areas of the Building) for any period in excess of sixty (60) consecutive days from the date of taking, whether or not the taking be in fee, for a term of years or of any other estate or interest; and a taking shall include the transfer of title or of any interest in the Building by deed or other instrument in settlement of or in lieu of transfer by operation of law incident to condemnation proceedings. Tenant shall have no right to participate or share in any condemnation claim, damage award or settlement in lieu thereof with respect to any taking of any nature; provided, however, that Tenant shall not be precluded from claiming or receiving payment for Tenant's relocation and moving expenses as may be permitted under applicable law so long as the amount of the same is not subtracted from the award which Landlord is entitled to receive. 22. CASUALTY DAMAGE. In the event of damage to or destruction of the Leased Premises caused by fire or other casualty, or of the entrances and other common facilities necessary to provide normal access to the Leased Premises, or to other portions of the Building or its equipment which portions and equipment are necessary to provide services to the Leased Premises in accordance herewith, Landlord shall undertake to make repairs and restorations as hereafter provided, unless this Lease be terminated by Landlord or Tenant or unless any mortgagee which is entitled to receive casualty insurance proceeds fails to make available to Landlord a sufficient amount of such proceeds to cover the cost of such repairs and restoration. If (A) the damage is of such nature or extent, in Landlord's sole judgment, that more than one hundred and eighty (180) consecutive days, after commencement of the work, would be required (with normal work crews and hours) to repay and restore the part of the Leased Premises or the Building which has been damaged, or (B) a substantial portion of the Leased Premises or the Building is so damaged that, in Landlord's sole judgment, it is uneconomic to restore or repair the Leased Premises or the Building, as the case may be, or (C) less than two (2) years remain on the Lease Term, Landlord shall so advise Tenant promptly, and either party, in the case described in clause (A) above, or Landlord, in the case described in clauses (B) or (C) above, for a period of ten (10) days thereafter, shall have the right to terminate this Lease by written notice to the other, as of the date specified in such notice, which termination date shall be no later than thirty (30) days after the date of such notice. In the event of such fire or other casualty, if this Lease is not terminated pursuant to the terms of this Section 22, if sufficient casualty insurance proceeds are available for use for such restoration or repair, and if this Lease is then in full force and effect, Landlord shall proceed diligently to restore the Leased Premises to substantially its condition prior to the occurrence of the damage, provided that Landlord shall not be obligated to repair or restore any alterations, additions or fixtures which Tenant may have installed (whether or not Tenant has the right or the obligation to remove the same or is required to 15 leave the same on the Leased Premises as of the expiration or earlier termination of this Lease) unless Tenant, in a manner satisfactory to Landlord, assures payment in full of all cost as may be incurred by Landlord in connection therewith. Landlord shall not insure any improvements or alterations to the Leased Premises in excess of Building Standard tenant improvements, or any fixtures, equipment or other property of Tenant. Tenant shall have the right, at its sole expense, to insure the value of its leasehold improvements, fixtures, equipment or other property located in the Leased Premises, for the purpose of providing funds to Landlord to repair and restore the Leased Premises to substantially its condition prior to the occurrence of the damage. If there be any such alteration, fixtures or additions and Tenant does not assure or agree to assure payment of the cost of restoration or repair as aforesaid, Landlord shall have the right to determine the manner in which the Leased Premises shall be restored so as to be substantially as the Leased Premises existed prior to the damage occurring, as if such alterations, additions or fixtures had not then been made or installed. The validity and effect of this Lease shall not be impaired in any way by the failure of Landlord to complete repairs and restoration of the Leased Premises or of the Building within one hundred eighty (180) consecutive days after commencement of work, even if Landlord had in good faith notified Tenant that the repair and restoration could be completed within such period, provided that Landlord proceeds diligently with such repair and restoration. In the case of damage to the Leased Premises not caused by the negligence or other tortious acts of Tenant which is of a nature or extent that Tenant's continued occupancy is substantially impaired, the Annual Fixed Rent otherwise payable by Tenant hereunder shall be equitably abated or adjusted for the duration of such impairment. Anything to the contrary in this Lease notwithstanding, expressed or implied, Landlord shall have no liability to Tenant for and shall have no duty to repair, replace or restore any damage whatsoever, occurring as a result of leakage or seepage of water or any other liquid from any source whatsoever, or breakage of any pipes, mains or other plumbing located in or about the Building, or snow, frost, steam, excessive heat or cold, falling plaster, sewage, gas, odors, noise, or by air conditioning or heating apparatus. Provided, however, Landlord shall repair, replace and restore as an Operating Expense of the Building, all damage to the Building structure, systems and fixtures. Tenant shall be responsible to insure and/or repair all of Tenant's leasehold improvements and all equipment, fixtures and personal property located in the Leased Premises. 23. HOLD HARMLESS; PUBLIC LIABILITY INSURANCE; WAIVE OF SUBROGATION. Tenant covenants and agrees to exonerate, indemnify, defend, protect and save Landlord, owner of the Lot and Landlord's managing agent, if any, harmless from and against any and all claims, demands, expenses, losses, suits and damages as may be occasioned by reason of (A) any accident or matter occurring on the Leased Premises, causing injury to persons or damage to property (including, without limitation, the Leased Premises), unless such accident or other matter resulted from the negligence or otherwise tortious act of Landlord or Landlord's agents or employees, (B) the failure of Tenant to fully and faithfully perform the 16 obligations and observe the conditions of this Lease, or (C) the negligence or otherwise tortious act of Tenant or anyone in or about the Building on behalf or at the invitation or right of Tenant. Tenant shall keep in force at its own expense comprehensive general liability insurance (including a contractual liability insurance endorsement) in companies acceptable to Landlord sufficient to cover such indemnification and naming as insured Landlord, owner of the Lot, Landlord's managing agent, if any, and Tenant against claims for personal injury" including bodily injury, death or property damage in amounts not less than $1,000,000 (or such higher limits as may be determined by Landlord), and Tenant will further deposit the policy or policies of such insurance, or certificates thereof, with Landlord. Said policy or policies of insurance or certificates thereof shall have attached thereto endorsement that such policy shall not be cancelled without at least ten (10) days prior written notice to Landlord and Landlord's managing agent, if any, and that no act or omission of Tenant shall invalidate the interest of Landlord under said insurance. Landlord and Tenant hereby release the other from any and all liability or responsibility to the other or anyone claiming through or under them by way of subrogation or otherwise for any loss or damage to property covered by any insurance then in force, even if such fire or other casualty shall have been caused by the fault or negligence of the other party, or anyone for whom such party may be responsible, provided, however, that this release shall be applicable and in force and effect only to the extent of and with respect to any loss or damage occurring during such time as the policy or policies of insurance covering said loss shall contain a clause or endorsement to the effect that this release shall not adversely affect or impair said insurance or prejudice the right of the insured to recover thereunder. 24. MORTGAGEE AND OTHER AGREEMENTS. In the event any person, firm, corporation or other entity who is a party to any instrument to which this Lease is subject or subordinate (including, without limitation, any mortgage now or hereafter placed upon the Building or Lot or on any interest created therein) or their successor(s), succeeds thereunder to the interest of Landlord hereunder in the Building or the Lot, or acquires the right to possession of the Building or the Lot, such person, firm, corporation or other entity shall not be (A) liable for any act or omission of the party named above as Landlord under this Lease; (B) liable for the performance of Landlord's covenants hereunder which arise and accrue prior to such person, firm, corporation or other entity succeeding to the interest of Landlord hereunder or acquiring such right to possession; (C) subject to any offsets or defenses which Tenant may have at any time against Landlord; (D) bound by any rent which tenant may have paid previously for more than one (1) month in advance; and (E) shall not be bound by any amendment or modification hereof relating to the reduction of rent, shortening of term, or effecting a cancellation or surrender hereof and made without the consent of such person, firm, corporation nor other entity. 17 Tenant agrees, from time to time as may be requested by Landlord, to execute, acknowledge and deliver to Landlord all or any of the following: an estoppel letter certifying to such party as Landlord reasonably may designate, including any mortgagee, that this Lease is in full force and effect and has not been amended, modified or superseded, that Landlord has satisfactorily completed all construction work required by this Lease (subject to completion of punch-list items), that Tenant has accepted the Leased Premises and is not in possession thereof, that Tenant has no defense, offsets or counterclaims hereunder or otherwise against Landlord with respect to this Lease or the Leased Premises and Landlord is not in default hereunder (or if any of the foregoing not be the case, specifying in reasonable detail the extent and nature thereof), that Tenant has no knowledge of any pledge or assignment of this Lease or rentals hereunder, that rent is accruing under this Lease but has not been paid more than one (1) month in advance and the date to which rent has been paid; and any other instrument as may be reasonably requested to be executed by Tenant by any mortgagee of the Lot or the Building or any interest therein, so long as the rights of Tenant as provided for by this Lease are not materially affected by any such other instrument. Tenant's estoppel letter shall be in the form of Exhibit "D" attached hereto and made a part hereof, or in such other form as Landlord or its mortgagee shall hereafter proscribe. 25. SUBORDINATION AND ATTORNMENT. This Lease and the estate, interest and rights hereby created are subordinate to any mortgage now or hereafter placed upon the Lot, the Building or any estate or interest therein, including, without limitation, any mortgage on any leasehold estate, and to all renewals, modifications, consolidations, replacements and extensions of the same as well as any substitutions therefor. Tenant agrees that in the event any person, firm, corporation or other entity acquires the right to possession of the Lot and the Building including any mortgagee or holder of any estate or interest having priority over this Lease, Tenant shall, if requested by such person, firm, corporation or other entity, attorn to and become the tenant of such person, firm, corporation or other entity, upon the same terms and conditions as are set forth herein for the balance of the Lease Term. Notwithstanding the foregoing, any mortgagee may, at any time, subordinate its mortgage to this Lease, without Tenant's consent, by notice in writing to Tenant, and thereupon this Lease shall be deemed prior to such mortgage without regard to their respective dates of execution and delivery, and in that event, such mortgagee shall have the same rights with respect to this Lease as though it had been executed prior to the execution and delivery of the mortgage. Tenant, if requested by Landlord, shall execute any such instruments in recordable form as may be reasonably required by Landlord in order to confirm or effect the subordination of this Lease and the attornment of Tenant to future landlords in accordance with the terms of this Section. 26. ASSIGNMENT AND SUBLETTING. Tenant shall not assign, pledge, mortgage or otherwise transfer or encumber this Lease, nor sublet all or any part of the Leased Premises or permit the same to be occupied or used by anyone other than Tenant or its employees 18 without Landlord's prior written consent, which consent shall not be unreasonably withheld or delayed. It will not be unreasonable for Landlord to withhold its consent if the reputation, financial responsibility, or business of a proposed assignee or subtenant is unsatisfactory to Landlord, or if Landlord deems such business to not be consonant with that of other tenants in the Building, or if the intended use by the proposed assignee or subtenant conflicts with any commitment made by Landlord to any other tenant in the Building, or if the proposed rental rate is lower than the then current rate at which similar space in the Building is being offered by Landlord, or if the proposed subletting is to a prospective subtenant for less than fifty percent (50%) of the Leased Premises. Notwithstanding the foregoing, Tenant may assign or sublet the Leased Premises without Landlord's consent to a corporation which is a parent or subsidiary of Tenant or is affiliated with Tenant in a common group of corporations provided no such assignment or subletting shall relieve Tenant of its obligations and liabilities hereunder. Tenant's request for consent shall be in writing and contain the name, address, and description of the business of the proposed assignee or subtenant, its most recent financial statement and the other evidence of financial responsibility, its intended use of the Leased Premises, and the terms and conditions of the proposed assignment or subletting. Within thirty (30) days from receipt of such request, Landlord shall either: (A) grant or refuse consent; or (B) elect to require tenant (i) to execute an assignment of lease or sublease of Tenant's interest hereunder to Landlord or its designee upon the same terms and conditions as are contained herein, together with an assignment of Tenant's interest as sublessor in any such proposed sublease, or (ii) if the request is for consent to a proposed assignment of this Lease, to terminate this Lease and the term hereof effective as of the last day of the third month following the month in which the request was received. Each assignee hereunder shall assume and be deemed to have assumed this Lease and shall be and remain liable jointly and severally with Tenant for all payments and for the due performance of all terms, covenants, conditions and provisions herein contained on Tenant's part to be observed and performed. No assignment shall be binding upon Landlord unless the assignee shall deliver to Landlord an instrument in recordable form containing a covenant of assumption by the assignee, but the failure or refusal of assignee to execute the same shall not release assignee from its liability as set forth herein. All the foregoing notwithstanding, Tenant shall not enter into any lease, sublease, license, concession or other agreement for the use, occupancy or utilization of the Leased Premises or any portion thereof, which provides for a rental or other payment for such use, occupancy or utilization based in whole or in part on the income or profits derived by any person from the property leased, used, occupied or utilized (other than an amount based on a fixed percentage or percentages of receipts or sales). Any such purported lease, sublease, 19 license, concession or other agreement shall be absolutely void and ineffective as a conveyance or any right or interest in the possession, use or occupancy of any part of the Leased Premises. Any consent by Landlord hereunder shall not constitute a waiver of strict future compliance by Tenant of the provisions of this Section 26 or a release of Tenant from the full performance by Tenant of any of the terms, covenants, provisions, or conditions in this Lease contained. 27. DEFAULT. Any other provisions in the Lease notwithstanding, it shall be an Event of Default under this Lease if (A) Tenant fails to pay any installment of Fixed Rent, Additional Rent or other sum payable by Tenant hereunder when due and such failure continues for a period of ten (10) days after written notice given by or on behalf of Landlord to Tenant, provided, however, Landlord need not give any such written notice, and Tenant shall not be entitled to any such period of grace, more than twice in any twelve (12) month period, (B) Tenant vacates the Leased Premises or uses or occupies the Leased Premises otherwise than as permitted by Sections 1 and 10 hereof, or assigns or sublets, or purports to assign to sublet, the Leased Premises or any part thereof otherwise than in the manner and upon the conditions set forth in Section 26 hereof, (C) Tenant fails to observe or perform any other covenant or agreement of Tenant herein contained and such failure continues after written notice given by or on behalf of Landlord to Tenant for more than fifteen (15) days and such additional time, if any, as is reasonably necessary to cure such failure, provided Tenant commences to cure such failure within such fifteen (15) day period and diligently thereafter prosecutes such cure to completion, (D) without Landlord's prior written consent, Tenant removes or attempts to remove or manifests an intention to remove any or all of Tenant's property from the Leased Premises otherwise than in the ordinary and usual course of business, (E) Tenant makes any assignment for the benefit of creditors; Tenant commits an act of bankruptcy or files a petition or commences any proceeding under any bankruptcy or insolvency law; a petition is filed or any proceeding is commenced against Tenant under any bankruptcy or insolvency law and such petition or proceeding is not dismissed within thirty (30) days; Tenant is adjudicated a bankrupt; Tenant by any act indicates its consent to, approval of or acquiescence in, or a court approves, a petition filed or proceeding commenced against Tenant under any bankruptcy or insolvency law; a receiver or other official is appointed for Tenant or for a substantial part of Tenant's assets or for Tenant's interests in this Lease; any attachment or execution against a substantial part of Tenant's assets or of Tenant's interest in this Lease remains unstayed or undismissed for a period of more than ten (10) days; a substantial part of Tenant's assets or of Tenant's interest in this Lease is taken by legal process in any action against Tenant, or (F) any of the foregoing occur as to any guarantor or surety of Tenant's performance under this Lease, or such guarantor or surety defaults on any provision under its guaranty or suretyship agreement. 20 28. LANDLORD'S REMEDIES. A. If an Event of Default hereunder shall have happened and be continuing, Landlord may, at its option: (i) declare due and payable and sue for and recover, all unpaid Fixed Rent for the unexpired period of the Lease Term (and also all Additional Rent as the amount(s) of same can be determined or reasonably estimated) as if by the terms of this Lease the same were payable in advance, together will all legal fees and other expenses incurred by Landlord in connection with the enforcement of any of Landlord's rights and remedies hereunder, and/or (ii) distrain, collect or bring action for such Fixed Rent and Additional Rent as being rent in arrears, or may enter judgment therefor in an amicable action as herein elsewhere provided for in case of rent in arrears, or may file a Proof of Claim in any bankruptcy or insolvency proceeding for such Fixed Rent and Additional Rent, or institute any other proceedings, whether similar or dissimilar to the foregoing, to enforce payment thereof, and/or (iii) terminate the Lease Term by giving written notice thereof to Tenant and, upon the giving of such notice, the Lease Term and the estate hereby granted shall expire and terminate with the same force and effect as though the date of such notice was the date hereinbefore fixed for the expiration of the Lease Term, and all rights of Tenant hereunder shall expire and terminate, but Tenant shall remain liable as hereinafter provided, and/or (iv) exercise any other rights and remedies available to Landlord at law or in equity. B. If any Event of Default shall have happened and be continuing, Landlord may, whether or not the Lease Term has been terminated as herein provided, re-enter and repossess the Leased Premises or any part thereof by force, summary proceedings, ejectment or otherwise and Landlord shall have the right to remove all persons and property therefrom. Landlord shall be under no liability for or by reason of any such entry, repossession or removal; and no such re-entry or taking of possession of the Leased Premises by Landlord shall be construed as an election on Landlord's part to terminate the Lease Term unless a written notice of such intention be given to Tenant pursuant to Section 28(A)(iii) or unless the termination of this Lease be decreed by a court of competent jurisdiction. C. At any time or from time to time after the repossession of the Leased Premises or any part thereof pursuant to Section 28(B), whether or not the Lease Term shall have been terminated pursuant to Section 28(A)(iii), Landlord may (but shall be under no 21 obligation to) relet all or any part of the Leased Premises for the account of Tenant for such term or terms (which may be greater or less than the period which would otherwise have constituted the balance of the Lease Term) and on such conditions (which may include concessions or free rent) and for such uses as Landlord, in its absolute discretion, may determine, and Landlord may collect and receive any rents payable by reason of such reletting. Landlord shall not be required to accept any tenant offered by Tenant or observe any instruction given by Tenant about such reletting, or do any act or exercise any care or diligence with respect to such reletting or to the mitigation of damages. For the purpose of such reletting, Landlord may decorate or make repairs, changes, alterations or additions in or to the Leased Premises or any part thereof to the extent deemed by Landlord desirable or convenient, and the cost of such decoration, repairs, changes, alterations or additions shall be charged to and be payable by Tenant as Additional Rent hereunder, as well as any reasonable brokerage and legal fees expended by Landlord. D. No expiration or termination of the Lease Term pursuant to Section 28(A)(iii), by operation of law or otherwise, and no repossession of the Leased Premises or any part thereof pursuant to Section 28(B), or otherwise, and no reletting of the Leased Premises or any part thereof pursuant to Section 28(C) shall relieve Tenant of its liabilities and obligations hereunder, all of which shall survive such expiration, termination, repossession or reletting. E. In the event of any expiration or termination of this Lease or repossession of the Leased Premises or any part thereof by reason of an occurrence of an Event of Default, and Landlord has not elected to accelerate rent pursuant to Section 28(A)(i), Tenant shall pay to Landlord the Fixed Rent, Additional Rent and other sums required to be paid by Tenant to and including the date of such expiration, termination or repossession; and, thereafter, Tenant shall, until the end of what would have been the expiration of the Lease Term in the absence of such expiration, termination or repossession, and whether or not the Leased Premises or any part thereof shall have been relet, be liable to Landlord for, and shall pay to Landlord, as liquidated and agreed current damages, the Fixed Rent, Additional Rent and other sums which would be payable under this Lease by Tenant in the absence of such expiration, termination or repossesssion, less the net proceeds, if any, of any reletting effected for the account of Tenant pursuant to Section 28(C), after deducting from such proceeds all of Landlord's reasonable expenses in connection with such reletting (including, without limitation, all related repossession costs, brokerage commissions, legal expenses, attorneys' fees, employees' expenses, alteration costs and expenses of preparation for such reletting). Tenant shall pay such current damages on the days on which the Fixed Rent would have been payable under this Lease in the absence of such expiration, termination or repossession, and Landlord shall be entitled to recover the same from Tenant on each such day. F. At any time after such expiration or termination of this Lease or repossession of the Leased Premises or any part thereof by reason of the occurrence of an 22 Event of Default, whether or not Landlord shall have collected any current damages pursuant to Section 28(E), Landlord shall be entitled to recover from Tenant, and Tenant shall pay to Landlord on demand, unless Tenant has paid the whole of accelerated rent pursuant to Section 28(A)(i), as and for liquidated and agreed final damages for Tenant's default and in lieu of all current damages beyond the date of such demand (it being agreed that it would be impracticable or extremely difficult to fix the actual damages), an amount equal to the excess, if any, of (i) Fixed Rent, Additional Rent and other sums which would be payable under this Lease for the remainder of the Lease Term from the date of such demand (or, if it be earlier, the date to which Tenant shall have satisfied in full its obligations under Section 28(E) to pay current damages) for what would have been the then unexpired term of this Lease in the absence of such expiration, termination or repossession, discounted at the rate of six percent (6%) per annum, over (ii) the then fair rental value of the Leased Premises for the same period, discounted at a like rate. If any statute or rule of law shall validly limit the amount of such liquidated final damages to less than the amount above agreed upon, Landlord shall be entitled to the maximum amount allowable under such statute or rule of law. G. Tenant, in consideration for the execution of this lease by landlord and for the covenants and agreements on the part of landlord herein contained, and fully comprehending the relinquishment of certain rights including rights of pre-judgment notice and hearing, hereby expressly authorizes any attorney of any court of record to accept service of process for, to appear for, and to confess judgment against tenant (i) in any and all actions brought hereunder by landlord against tenant to recover possession from time to time of the leased premises (and tenant agrees that upon the entry of each judgment for said possession a writ of possession or other appropriate process may issue forthwith), and/or (ii) to enforce payment from time to time of the sums or any part thereof owing hereunder by tenant. H. Tenant further hereby expressly authorizes and empowers (which power is coupled with an interest) landlord, upon the occurrence of an event of default and so long as the same is continuing, to enter upon the leased premises, distrain upon and remove therefrom all inventory, equipment, machinery, trade fixtures, and personal property of whatsoever kind or nature, whether owned by tenant or others, and to proceed, without judicial decree, writ of execution or assistance of constables, to conduct a private sale, by auction or sealed bid, of such personal property, at which sale landlord may bid without restriction. Tenant hereby waives the benefit of all laws, whether now in force or hereafter enacted, exempting any personal property on the leased premises from sale or levy, whether execution thereon is had by order of any court or through private sale as herein authorized. 23 I. In any action for ejectment, for rent in arrears or for distraint, landlord shall first cause to be filed in such action an affidavit made by it or someone acting for it setting forth the facts necessary to authorize the entry of judgment, of which facts such affidavit shall be conclusive evidence, and if a true copy of this lease be filed in such action, it shall not be necessary to file the original as a warrant of attorney, any rule of court, custom or practice to the contrary notwithstanding. The authority to confess judgment against tenant hereunder shall not be exhausted by one (1) exercise thereof, but judgment may be confessed as provided herein from time to time as often as any event of default occurs under this lease, and such authority may be exercised as well after the expiration of the lease term and/or during or after the expiration of any extended or renewal term. J. No right or remedy herein conferred upon or reserved to Landlord is intended to be exclusive of any other right or remedy herein by law provided, but each shall be cumulative and in addition to every right or remedy given herein or now or hereafter existing at law or in equity or by statute. K. No waiver by Landlord of any breach by Tenant of any of Tenant's obligations, agreements or covenants herein shall be a waiver of any subsequent breach or of any obligation, agreement or covenant, nor shall any forbearance by Landlord to seek a remedy for any breach by Tenant be a waiver by Landlord or any rights and remedies with respect to such or any subsequent breach. L. In the event of a breach or threatened breach by Tenant of any of the covenants or provisions hereof, Landlord shall have the right of injunction and right to invoke any remedy allowed at law or in equity as if re-entry summary proceedings and other remedies were not herein provided for. M. Tenant hereby expressly waives any and all rights of redemption granted by or under any present or future laws in the event of Tenant being evicted or dispossessed for any cause, or in the event of Landlord obtaining possession of the Leased Premises, by reason of the violation by Tenant of any of the covenants and conditions of this Lease, or otherwise. 29. LEGAL FEES AND OTHER COSTS. The prevailing party in any enforcement proceeding shall be entitled to reimbursement of all reasonable legal fees and expenses by the non-prevailing party. 24 30. LATE CHARGE. If any installment of Fixed Rent, Additional Rent or other sums payable by Tenant to Landlord under this Lease shall not be paid on the due date thereof, Tenant shall pay to Landlord a "late charge" of 5% of the amount so due for the purpose of defraying the expense incident to handling such delinquent payment. 31. SUCCESSORS AND ASSIGNS. The obligations of this Lease shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns; provided that Landlord and each successive owner of the Building and/or the Lot shall be liable only for obligations accruing during the period of its ownership or interest in the Building or the Lot; and from and after the transfer by Landlord or such successive owner of its ownership or other interest in the Building or the Lot, Tenant shall look solely to the successors in title for the performance of Landlord's obligations hereunder. The liability of Landlord or any successive owner of the Building and/or the Lot hereunder and all of its officers, employees, shareholders or joint venturers or partners, if any, whether general or limited, shall be limited to Landlord's estate or other title or interest in the Building and/or the Lot. 32. WAIVERS. No delay or forbearance by Landlord in exercising any right or remedy hereunder or in undertaking or performing any act or matter which is not expressly required to be undertaken by Landlord shall be construed, respectively, to be a waiver of Landlord's rights or to represent any agreement by Landlord to undertake or perform such act or matter thereafter. 33. WAIVER OF TRIAL BY JURY. It is mutually agreed by and between Landlord and Tenant that the respective parties hereto shall and they hereby do waive trial by jury in any action, proceeding or counterclaim brought by either of the parties hereto against the other on any matter whatsoever arising out of or in any way connected with this Lease, the relationship of Landlord and Tenant, Tenant's use of or occupancy of the Leased Premises and/or any claim of injury or damage and any emergency statutory or any other statutory remedy. It is further mutually agreed that in the event Landlord commences any summary proceeding for non-payment of rent, Tenant will not interpose any counterclaim of whatever nature or description in any such proceeding. 34. SEVERABILITY. Each covenant and agreement in this Lease shall for all purposes by construed to be a separate and independent covenant or agreement. If any provision in this Lease or the application thereof shall to any extent be invalid, illegal or otherwise unenforceable, the remainder of this Lease, and the application of such provision other than as invalid, illegal or unenforceable, shall not be affected thereby; and such provisions in this lease shall be valid and enforceable to the fullest extent permitted by law. 35. NOTICES. All notices or other communications required or permitted hereby shall be effective only if the same are in writing and are signed by the party giving the 25 notice or by an agent or other person authorized in writing to so act on behalf of such party. Notices to Tenant may be given by the leaving of the same at the Leased Premises during business hours or by registered or certified mail, return receipt requested, addressed to Tenant at the address set forth in Section 1 hereto; and notices to Landlord shall be given by registered or certified mail, return receipt requested to the address set forth in Section 1 hereof. All notices shall be deemed given unless otherwise specified herein, on the date when same are delivered, if delivered, or on the date when the same are deposited in the mail. 36. AMENDMENT AND MODIFICATIONS. This Lease contains the entire agreement between the parties hereto, and shall not be amended, modified or supplemented unless by agreement in writing signed by both Landlord and Tenant and the same shall not be valid unless approved in writing by all mortgagees and holders of any estate or interest in the Building or the Lot by virtue of leases or other instruments expressly referred to herein or which are then of record. 37. [INTENTIONALLY OMITTED]. 38. ENVIRONMENTAL MATTERS. A. Tenant shall promptly deliver to Landlord copies of any of the following documents that Tenant receives or prepares: (i) applications or other materials regarding the Lot, Building, or Leased Premises submitted to any governmental agency in compliance with Environmental Statutes; (ii) any notifications regarding the Lot, Building, or Leased Premises submitted to any person pursuant to Environmental Statutes; (iii) any permit, license, approval, amendment or modification thereto granted regarding the Lot, Building, or Leased Premises pursuant to Environmental Statutes; (iv) any record or manifest required to be maintained regarding the Lot, Building, or Leased Premises pursuant to Environmental Statutes; and (v) any correspondence, notice of violation, summons, order, complaint or other document received by Tenant or its lessees, sublessees or assigns (if permitted), pertaining to the Lot, Building, or Leased Premises and to compliance with any Environmental Statutes. 26 "Environmental Statutes" shall mean all statutes, ordinances, regulations, orders and requirements of common law regulating environmental matters concerning (a) activities at the Lot, Building or Leased Premises, (b) repairs or construction of any improvements located on the Lot, (c) handling of any materials, (d) discharges to the air, soil, surface water or ground water, and (e) storage, treatment or disposal of any waste at or connected with any activity at the Lot, Building or Leased Premises. B. In the event that Landlord or Landlord's mortgagee performs or causes to perform an investigation of the Lot or Building of any of the below described matters, Tenant shall cooperate with Landlord or Landlord's mortgagee with respect to such investigation. (i) compliance at the Lot, Building, or Leased Premises with Environmental Statutes; (ii) the presence of hazardous substances or contamination at the Lot, Building, or Leased Premises; (iii) the presence at the Lot, Building, or Leased Premises of polychlorinated biphenyls, substances containing polychlorinated biphenyls, asbestos, materials containing asbestos, or unreaformaldehyde foam insulation; (iv) the presence at the Lot of (a) a wetland or other "water of the United States" for the purposes of Section 404 of the federal Clean Water Act, 33 U.S.C. Section 1344, or any similar area regulated under any state law, (b) a flood plain or other flood hazard area as defined pursuant to the Pennsylvania Flood Plain Management Act, Pa. Stat. tit. 32, Sections 679.101 to .601 (Purdon Sup. 1989), (c) a portion of the coastal zone for purposes of the federal Coastal Zone Management Act, 16 U.S.C. Sections 1451-1464, or (d) any other area development of which is specifically restricted under applicable law by reason of its physical characteristics or prior use; (v) the presence at the Lot, Building, or Leased Premises of radon-products; or (vi) the presence at the Lot, Building, or Leased Premises of tanks presently or formerly used for the storage of any liquid or gas above or below ground. 27 39. HEADINGS AND TERMS. The title, headings and table of contents of this Lease are for convenience of reference only and shall not in any way be utilized to construe or interpret the agreement of the parties as otherwise set forth herein. The term "Landlord" and the terms "Tenant" as used herein shall means, where appropriate, all persons acting by or on behalf of the respective parties, except as to any required approvals, consents or amendments, modifications or supplements hereunder when such terms shall only mean the parties originally named on the first page of this Lease as Landlord and Tenant, respectively, and their agents so authorized in writing. 40. GOVERNING LAW. This Lease shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania. 41. TENANT'S TERMINATION RIGHTS. Tenant shall have the right and option to terminate this Lease on February 28, 1999 (the "Termination Date") by giving Landlord not less than six (6) months prior written notice thereof and paying to Landlord at the time of the giving of such notice a termination fee equal to the unamortized portion of the cost of tenant improvements and brokerage fees (the "Termination Fee"). If Tenant gives notice of its election to terminate this Lease under this Section 41, but fails to pay the Termination Fee or fails to vacate the Leased Premises on or before the Termination Date, Landlord shall have the option of treating such failure as either (a) an Event of Default hereunder, (b) a rescission of Tenant's notice of termination, or (c) a holdover under Section 4 hereof. In any event, Tenant shall pay Landlord, as Additional REnt hereunder, all damages, losses, costs and expenses (including reasonable legal fees and expenses) Landlord may have incurred by reason of Tenant's failure to vacate, including, without limitation, any costs or lost profits from any reletting or proposed reletting of the Leased Premises and Landlord's efforts to regain possession of the Leased Premises. 42. PARKING. At no additional rent to Tenant, Landlord shall provide on the Lot on which the Building is located parking for all tenants (including Tenant), their guests and customers at an overall rate of at least five (5) parking spaces per 1,000 square feet of office space in the Building. 28 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed the date first mentioned. LANDLORD: GLENVIEW CORPORATE CENTER LIMITED PARTNERSHIP By: BPPI-I, L.P., its general partner By: Bergen of Philadelphia, Inc., general partner By: /s/ Elizabeth A. Owens -------------------------------- By: Pitcairn Properties Incorporated, general partner By: /s/ [Illegible] -------------------------------- TENANT: WORLDGATE COMMUNICATIONS By: /s/ [Illegible] ------------------------------------ 29 EX-10.6 5 EXHIBIT 10.6 Exhibit 10.6 SENIOR LOAN AND SECURITY AGREEMENT NO. 0098 THIS SENIOR LOAN AND SECURITY AGREEMENT NO. 0098 (this "Security Agreement") is dated as of July 15,1997 between WORLDGATE COMMUNICATIONS, INC., a Delaware corporation ("Borrower") and PHOENIX LEASING INCORPORATED, a California corporation ("Lender"). RECITALS A. Borrower desires to borrow from Lender in one or more borrowings an amount not to exceed $1,000,000 in the aggregate, and Lender desires to loan, subject to the terms and conditions herein set forth, such amount to Borrower (each, a "Loan" and collectively, the "Loans"). Such borrowings shall be evidenced by one or more Senior Secured Promissory Notes (each, a "Note" and collectively, the "Notes"), in the form attached hereto. B. As security for Borrower's obligations to Lender under this Security Agreement, the Notes and any other written agreement between Borrower and Lender, Borrower will grant to Lender hereunder a first perfected security interest in certain of its equipment, machinery, fixtures, other items and intangibles whether now owned by Borrower or hereafter acquired, and all substitutions and replacements of and additions, improvements, accessions and accumulations to said equipment, machinery and fixtures and other items, together with all rents, issues, income, profits and proceeds therefrom (collectively, the "Collateral") which is described on the Note attached hereto or any subsequently-executed Note entered into by Lender and Borrower and which incorporates this Security Agreement by reference. In addition to the foregoing Collateral, under certain circumstances Borrower's obligations to Lender may also be secured by certain "Additional Collateral" as provided below, in which case the term "Collateral" shall include such Additional Collateral. NOW, THEREFORE, THE PARTIES AGREE AS FOLLOWS: SECTION 1. TERM OF AGREEMENT. The term of this Security Agreement begins on the date set forth above and shall continue thereafter and be in effect so long as and at any time any Note entered into pursuant to this Security Agreement is in effect. The Base Term and monthly payment amount payable with respect to each item of Collateral shall be as set forth in and as stated in the respective Note(s). The terms of each Note hereto are subject to all conditions and provisions of Us Security Agreement as it may at any time be amended. Each Note shall constitute a separate and independent Loan and contractual obligation of Borrower and shall incorporate the terms and conditions of this Security Agreement and any additional provisions contained in such Note. In the event of a conflict between the terms and conditions of this Security Agreement and any provisions of such Note, the provisions of such Note shall prevail with respect to such Note only. SECTION 2. NON-CANCELLABLE LOAN. This Security Agreement and each Note cannot be cancelled or terminated except as expressly provided herein. Borrower agrees that its obligations to pay all monthly payment amounts and other sums payable hereunder (and under any Note) and the rights of Lender and any assignee in and to such rent and other sums, are absolute and unconditional and are not subject to any abatement, reduction, setoff, defense, counterclaim or recoupment due or alleged to be due to, or by reason of, any past, present or future claims which Borrower may have against Lender, any assignee, the manufacturer or seller of the Collateral, or against any person for any reason whatsoever. SECTION 3. LENDER COMMITMENT. (a) GENERAL TERMS. Subject to the terms and conditions of this Security Agreement and so long as no Event of Default or event which with the giving of notice or passage of time, or both, could become an Event of Default has occurred or is continuing, Lender hereby agrees to make one 1 or more senior secured Loans to Borrower, subject to the following conditions: (i) each Loan shall be evidenced by a Note; (ii) the total principal amount of the Loans shall not exceed $1,000,000 in the aggregate (the "Commitment"); (iii) at the time of each Loan, no Event of Default or event which with the giving of notice or passage of time, or both, could become an Event of Default shall have occurred and be continuing, as reasonably determined by Lender, and certified by Borrower; (iv) the amount of each Loan shall be at least $50,000 except for a final Loan which may be less than $50,000; (v) Lender shall not be obligated to make any new Loan after December 3 1, 1997 provided that the funding period may be extended to June 30, 1998 if Lender has received and approved in its sole discretion Borrower's monthly 1998 business plan; (vi) for each Loan, Borrower shall present to Lender a list of proposed Collateral for approval by Lender in its sole discretion; (vii) for each Loan, Borrower shall have provided Lender with each of the closing documents described in Exhibit A hereto (which documents shall be in form and substance acceptable to Lender); (viii) Borrower is performing according to its business plan referred to as "WorldGate Communications, Inc. Confidential 1997 Operating Statements, Balance Sheets and Cash Flow Statements" (the "Business Plan"), as may be amended from time to time in form and substance reasonably acceptable to Lender, (ix) there shall be no material adverse change in Borrower's condition, financial or otherwise, as reasonably determined by Lender, and Borrower so certifies, from (yy) the date of the most recent financial statements delivered by Borrower to Lender to (zz) the date of the proposed Loan; (x) Borrower shall use the proceeds of all Loans hereunder for working capital; (xi) at the time of each Loan, Borrower has reimbursed Lender for all UCC filing and search costs and appraisal fees; (xii) all Collateral has been marked and labeled by Lender or Lender's agent; and (xiii) Lender has received in form and substance acceptable to Lender: (a) Borrower's interim financial statements signed by a financial officer of Borrower, (b) evidence of Borrower's $7,556,000 cash position as of April 30, 1997; and (c) complete copies of the Borrower's audit reports for its most recent fiscal year, which shall include at least Borrower's balance sheet as of the close of such year, and Borrower's statement of income and retained earnings and of changes in financial position for such year, prepared on a consolidated basis and certified by independent public accountants. Such certificate shall not be qualified or limited because of restricted or limited examination by such accountant of any material portion of the company's records. Such reports shall be prepared in accordance with generally accepted accounting principles and practices consistently applied. (b) THE NOTES. Each Loan shall be evidenced by a Note. Each Note shall bear interest and be payable and prepayable at the times and in the manner provided therein. Following payment of the Indebtedness related to each Note, Lender shall promptly return such Note, marked "canceled," to Borrower. (c) SPECIFIC TERMS - TRADE SHOW BOOTH. Borrower and Lender agree that if, upon the expiration of the Commitment Period, the amount funded allocable to Borrower's trade show booth exceeds thirty-five percent (35%) of the Commitment utilized as of such expiration date, then, at Lender's option, Borrower shall pay to Lender an amount equal to such excess ("Excess Payment"). Borrower agrees to pay the Excess Payment to Lender within thirty (30) days of Lender's invoice The Excess Payment shall be applied in pro rata shares to each Note as advance payments under each such Note of (i) first, Borrower's additional interest compensation election (which for purposes of this Excess Payment shall be assumed to be the final payment election) and (ii) next, to Borrower's last monthly payment obligations. Such Excess Payment shall not constitute a prepayment of interest or principal. SECTION 4. SECURITY INTERESTS. (a) Borrower hereby grants to Lender a first security interest in all Collateral; (b) This Security Agreement secures (i) the payment of the principal of and interest on the Notes and all other sums due thereunder and under this Security Agreement (the "Indebtedness") and (ii) the performance by Borrower of all of its other covenants now or hereafter existing under the Notes, this Security Agreement and any other obligation owed by Borrower to Lender (the "Obligations"). 2 SECTION 5. BORROWER'S REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants that (a) it is in good standing under the laws of the state of its formation, duly qualified to do business and will remain duly qualified during the term of each Loan in each state where necessary to carry on its present business and operations, including the jurisdiction(s) where the Collateral will be located as specified on each Exhibit A to each Note except where the failure to so qualify or remain qualified would not have a material adverse effect upon Borrower; (b) it has full authority to execute and deliver this Security Agreement and the Notes and perform the terms hereof and thereof, and this Security Agreement and the Notes have been duly authorized, executed and delivered and constitute valid and binding obligations of Borrower enforceable in accordance with their terms except as such enforceability may be limited by bankruptcy, insolvency or other similar laws affecting the enforcement of creditor's rights generally, and general principles of equity; (c) the execution and delivery of this Security Agreement and the Notes will not contravene any law, regulation or judgment affecting Borrower or result in any breach of any agreement or other instrument binding on Borrower; (d) no consent of Borrower's shareholders or holder of any indebtedness, or filing with, or approval of, any governmental agency or commission, which has not already been obtained or performed, as appropriate, is a condition to the performance of the terms of this Security Agreement or the Notes; (e) there is no action or proceeding pending or threatened against Borrower before any court or administrative agency which might have a materially adverse effect on the business, financial condition or operations of Borrower; (f) Borrower owns and will keep all of the Collateral free and clear of all liens, claims and encumbrances, and, except for this Security Agreement, there is no deed of bust, mortgage, security agreement or other third party interest against any of the Collateral; (g) Borrower has good and marketable title to the Collateral; (h) all Collateral has been received, installed and is ready for use and is satisfactory in all respects for the purposes of this Security Agreement; (i) the Collateral is, and will remain at all times under applicable law, removable personal property, which is free and clear of any lien or encumbrance except in favor of Lender, notwithstanding the manner in which the Collateral may be attached to any real property; (j) all credit and financial information submitted to Lender herewith or at any other time is and will at the time given be true and correct; and (k) the security interest granted to Lender hereunder is a perfected first priority security interest. SECTION 6. METHOD AND PLACE OF PAYMENT. Borrower shall pay to Lender, at such address as Lender specifies in writing, all amounts payable to it under this Security Agreement and the Notes. SECTION 7. LOCATION; INSPECTION; LABELS. All of the Collateral shall be located at the address (the "Collateral Location") shown on Exhibit A to each Note and shall not be moved without Lender's prior written consent which location shall in all events be within the United States. All of the records regarding the Collateral shall be located at 3220 Tillman Drive, Suite 300, Bensalem, PA 19020. Lender shall have the right to inspect Collateral, including records relating thereto, and Borrower's books and records with respect to the same at any time (upon reasonable notification) during regular business hours, such books and records to be maintained in accordance with generally accepted accounting principles. Borrower shall be responsible for all labor, material and freight charges incurred in connection with any removal or relocation of Collateral which is requested by Borrower and consented to by Lender, as well as for any charges due to the installation or moving of the Collateral. Payments under the Notes and under this Security Agreement shall continue during any period in which the Collateral is in transit during a relocation. Lender or its agent shall mark and label Collateral, which labels (to be provided by Lender) shall state that such Collateral is subject to a security interest of Lender, and Borrower shall keep such labels on the Collateral as so labeled. SECTION 8. COLLATERAL MAINTENANCE. For so long as an item of Collateral remains subject to a security interest hereunder, then, with respect to such item of Collateral: (a) GENERAL. Borrower will reasonably permit Lender to inspect each item of Collateral and its maintenance records. Borrower will at its sole expense comply with all applicable laws, rules, regulations, requirements and orders with respect to the use, maintenance, 3 repair, condition, storage and operation of each item of Collateral. Except as required herein, Borrower will not make any addition or improvement to any item of Collateral that is not readily removable without causing material damage to any item or impairing its original value or utility. Any addition or improvement that is so required or cannot be so removed will immediately become Collateral of Lender. (b) SERVICE AND Repair. Borrower will at its sole expense maintain and service and repair any damage to each item of Collateral in a manner consistent with prudent industry practice and Borrower's own practice so that such item of Collateral is at all times (i) in the same condition as when delivered to Borrower, except for ordinary wear and tear, and (ii) in good operating order for the function intended by its manufacturer's warranties and recommendations. SECTION 9. LOSS OR DAMAGE. Borrower assumes the entire risk of loss to the Collateral through use, operation or otherwise. Borrower hereby indemnifies and holds harmless Lender from and against all claims, loss of Loan payments, costs, damages, and expenses relating to or resulting from any loss, damage or destruction of the Collateral, any such occurrence being hereinafter called a "Casualty Occurrence." On the first day payment is due on each Note describing Collateral materially affected by such Casualty Occurrence, following the Casualty Occurrence or, if there is no such payment date, thirty (30) days after such Casualty Occurrence Borrower shall: (a) repair the Collateral, (b) replace the Collateral with comparable Collateral in good condition and repair taking all steps required by Lender to perfect Lender's first priority security interest therein and (which replacement Collateral shall be subject to the terms of this Security Agreement), or (c) pay to Lender an amount equal to the Balance Due (as defined below) for each lost or damaged item of Collateral. The Balance Due for each such item is the sum of. (i) all amounts for each item which may be then due or accrued to the payment date, plus (ii) as of such payment date, an amount equal to the product of the fraction specified below times the sum of all remaining payments under the respective Note, including the amount of any mandatory or optional payment required or permitted to be paid by Borrower to Lender at the maturity of the Note. The numerator of the fraction shall be the Collateral Value (as set forth on the applicable Note) of the item and the denominator shall be the aggregate Collateral Value of all items under the Note. Upon the making of such payments, Lender shall release such item of Collateral from its lien hereunder. Notwithstanding the above, within thirty (30) days following a Casualty Occurrence, Borrower may replace any item of Collateral which has suffered a Casualty Occurrence with Collateral acceptable to Lender in its complete discretion and, in such event the provisions of the previous paragraph shall not apply. Borrower's tender of such Collateral shall constitute a representation and warranty that it is free of all liens, claims and encumbrances and otherwise qualifies as Collateral under this Security Agreement. Following such tender, Lender shall have a first security interest in such Collateral. SECTION 10. INSURANCE. Borrower at its expense shall keep the Collateral insured against all risks of physical loss for at least the replacement value of the Collateral and in no event for less than the amount payable following a Casualty Occurrence (as provided in Section 9). Such insurance shall provide for a loss payable endorsement to Lender and/or any assignee of Lender. Borrower shall maintain commercial general liability insurance with respect to loss or damage for personal injury, death or property damage in an amount not less than $2,000,000 in the aggregate, naming Lender and/or Lender's assignee as additional insured. Such insurance shall contain insurer's agreement to give thirty (30) days' advance written notice to Lender before cancellation or material change of any policy of insurance. Borrower will provide Lender and any assignee of Lender with a certificate of insurance from the insurer evidencing Lender's or such assignee's interest in the policy of insurance. Such insurance shall cover any Casualty Occurrence to any unit of Collateral. Notwithstanding anything in Section 9 or this Section 10 to the contrary, this Security Agreement and Borrower's obligations hereunder shall remain in full force and effect with respect to any unit of Collateral which is not subject to a Casualty Occurrence. If Borrower fails to provide or maintain insurance as required herein, Lender shall have the right, but shall not be obligated, to obtain such insurance. In that event, Borrower shall pay to Lender the cost thereof. 4 SECTION 11. MISCELLANEOUS AFFIRMATIVE COVENANTS. So long as any portion of the Indebtedness is unpaid and as long as any of the Obligations are outstanding Borrower will: (a) duly pay all governmental taxes and assessments at the time they become due and payable; (b) comply with all applicable governmental laws, rules and regulations relating to its business and the Collateral; (c) maintain Lender's security interest in the corresponding Collateral as a first and prior perfected security interest; (d) furnish Lender with its annual financial statements within ninety (90) days following the end of Borrower's fiscal year, quarterly financial statements within forty-five (45) days after the end of each fiscal quarter, and within thirty (30) days of the end of each month a financial statement for that month prepared by Borrower, and including an income statement and balance sheet, all of which shall be certified by an officer of Borrower as true and correct and shall be prepared in accordance with generally accepted accounting principles consistently applied, and such other information as Lender may reasonably request; and (e) promptly (but in no event more than five (5) business days after the occurrence of such event) notify Lender of any material adverse change in Borrower's condition during the commitment period and of the occurrence of any Event of Default. SECTION 12. INDEMNITIES. Borrower will protect, indemnify and save harmless Lender and any assignees on an after-tax basis from and against all liabilities, obligations, claims, damages, penalties, causes of action, costs and expenses (including reasonable attorneys' fees and expenses), imposed upon or incurred by or asserted against Lender or any assignee of Lender by any third party by reason of the occurrence or existence (or alleged occurrence or existence) of any act or event relating to or caused by any portion of the Collateral, or its purchase, acceptance, possession, use, maintenance or transportation, including without limitation, consequential or special damages of any kind, any failure on the part of Borrower to perform or comply with any of the terms of this Security Agreement or any Note, claims for latent or other defects, claims for patent, trademark or copyright infringement and claims for personal injury, death or property damage, including those based on Lender's negligence or strict liability in tort and excluding only those based on Lender's gross negligence or willful misconduct, provided, however, did in the event that any action, suit or proceeding is brought against Lender by reason of any such occurrence, Borrower will, at Borrower's expense, resist and defend such action, suit or proceeding or cause the same to be resisted and defended by counsel designated by Borrower and reasonably approved by Lender. Borrower's obligations under this Section 12 shall survive the payment in full of all the Indebtedness and the performance of all Obligations with respect to acts or events occurring or alleged to have occurred prior to the payment in full of all the Indebtedness and the performance of all Obligations. SECTION 13. TAXES. Borrower agrees to reimburse Lender (or pay directly if instructed by Lender) and any assignee of Lender for, and to indemnify and hold Lender and any assignee harmless from, all fees (including, but not limited to, license, documentation, recording and registration fees), and all sales, use, gross receipts, personal property, occupational, value added or other taxes, levies, imposts, duties, assessments, charges, or withholdings of any nature whatsoever, together with any penalties, fines, additions to tax, or interest thereon (the foregoing collectively "Impositions"), except same as may be attributable to Lender's income, arising at any time prior to or during the term of any Notes or of this Security Agreement, or upon termination or early termination of this Security Agreement and levied or imposed upon Lender directly or otherwise by any Federal, state or local government in the United States or by any foreign country or foreign or international taxing authority upon or with respect to (a) the Collateral, (b) the exportation, importation, registration, purchase, ownership, delivery, leasing, financing, possession, use, operation, storage, maintenance, repair, return, sale, transfer of title, or other disposition thereof, (c) the rentals, receipts, or earnings arising from the Collateral, or any disposition of the rights to such rentals, receipts, or earnings, (d) any payment pursuant to this Security Agreement or the Notes, or (e) this Security Agreement, the Notes or any transaction or any part hereof or thereof. SECTION 14. RELEASE OF LIENS. Upon payment of all of the Indebtedness and performance of all of the Obligations, Lender shall promptly execute UCC termination statements and such other documents as Borrower shall reasonably request to evidence the release of Lender's lien relating to the Collateral. 5 SECTION 15. ASSIGNMENT. WITHOUT LENDER'S PRIOR WRITTEN CONSENT WHICH CONSENT WILL NOT BE UNREASONABLY WITHHELD, BORROWER SHALL NOT (a) ASSIGN, TRANSFER, PLEDGE, HYPOTHECATE OR OTHERWISE DISPOSE OF THIS SECURITY AGREEMENT, ANY NOTE, ANY COLLATERAL, OR ANY INTEREST THEREIN, (b) LEASE OR LEND COLLATERAL OR PERMIT IT TO BE USED BY ANYONE OTHER THAN BORROWER OR BORROWER'S EMPLOYEES AND CONTRACTORS OR (c) MERGE INTO, CONSOLIDATE WITH OR CONVEY OR TRANSFER ITS PROPERTIES SUBSTANTIALLY AS AN ENTIRETY TO ANY OTHER PERSON OR ENTITY EXCEPT TO A SUCCESSOR IN INTEREST TO ALL OR SUBSTANTIALLY ALL OF THE BUSINESS OF BORROWER; PROVIDED, HOWEVER, THAT, THE FINANCIAL CONDITION OF SUCH SUCCESSOR IS GREATER THAN OR EQUAL TO BORROWER AS DETERMINED IN GOOD FAITH BY LENDER. LENDER MAY ASSIGN ANY OF THE NOTES, THIS SECURITY AGREEMENT OR ITS SECURITY INTEREST IN ANY OR ALL COLLATERAL, OR ANY OR ALL OF THE ABOVE, IN WHOLE OR IN PART TO ONE OR MORE ASSIGNEES OR SECURED PARTIES WITHOUT NOTICE TO BORROWER. In the event Lender declines to consent to an assignment pursuant to Section 15(c) above, Borrower shall have the option to early terminate all Notes upon payment to Lender of (i) all amounts under the Notes which may be then due or accrued, (ii) the aggregate sum of all remaining payments under the Notes, including the amount of any mandatory or optional payment required or permitted to be paid by Borrower to Lender at the maturity of the Notes discounted to present value at a rate of 6% per annum, and (iii) all other amounts due under this Security Agreement and under the Notes. If Borrower is given notice of such assignment it agrees to acknowledge receipt thereof in writing and Borrower shall execute such additional documentation as Lender's assignee and/or secured party shall reasonably require. Each such assignee and/or secured party shall have all of the rights, but (except as provided in this Section 15) none of the obligations, of Lender under this Security Agreement, which obligations will be retained by Lender unless such assignee or secured party expressly agrees to assume such obligations in writing. Borrower shall not assert against any assignee and/or secured party any defense, counterclaim or offset that Borrower may have against Lender. Notwithstanding any such assignment, and providing no Event of Default has occurred and is continuing, Lender, or its assignees, secured parties, or their agents or assigns, shall not interfere with Borrower's right to quietly enjoy use of Collateral subject to the terms and conditions of this Security Agreement. Subject to the foregoing, the Notes and this Security Agreement shall inure to the benefit of, and are binding upon, the successors and assignees of the parties hereto. Borrower acknowledges that any such assignment by Lender will not change Borrower's duties or obligations under this Security Agreement and the Notes or increase any burden or risk on Borrower. SECTION 16. DEFAULT. (a) Events of Default. Any of the following events or conditions shall constitute an "Event of Default" hereunder. (i) Borrower's failure to pay any monies due to Lender hereunder or under any Note beyond the tenth (10th) day after the same is due; (ii) Borrower's failure to comply with its obligations under Section 10 or Section 15 if not cured within thirty (30) days of such failure in instances when a cure can be effected; (iii) any representation or warranty of Borrower made in this Security Agreement or the Notes or in any other agreement, statement or certificate furnished to Lender in connection with this Security Agreement or the Notes shall prove to have been incorrect in any material respect when made or given; (iv) Borrower's failure to comply with or perform any term, covenant or condition of this Security Agreement or any Note or under any other agreement between Borrower and Lender or under any lease or mortgage of real property covering the location of the Equipment if such failure to comply or perform is not cured by Borrower within thirty (30) days after Borrower knows of the noncompliance or nonperformance or notice from Lender; (v) seizure of any of the Collateral under legal process; (vi) the filing by or against Borrower or any guarantor under any guaranty executed in connection with this Security Agreement ("Guarantor") of a petition for reorganization or liquidation under the Bankruptcy Code or any amendment thereto or under any other insolvency law providing for the relief 6 of debtors; (vii) the voluntary or involuntary making of an assignment of a substantial portion of its assets by Borrower or by any Guarantor for the benefit of its creditors, the appointment of a receiver or trustee for Borrower or any Guarantor or for any of Borrower's or Guarantor's assets, the institution by or against Borrower or any Guarantor of any formal or informal proceeding for dissolution, liquidation, settlement of claims against or winding up of the affairs of Borrower or any Guarantor provided that in the case of all such involuntary proceedings, same are not dismissed within sixty (60) days after commencement; or (viii) except as permitted under Section 15, the making by Borrower or by any Guarantor of a transfer of all or a material portion of Borrower's or Guarantor's assets or inventory not in the ordinary course of business. (b) REMEDIES. If any Event of Default has occurred, Lender may in its sole discretion exercise one or more of the following remedies with respect to any or all of the Collateral: (i) declare due any or all of the aggregate sum of all remaining payments under the Notes, including the amount of any mandatory or optional payment required or permitted to be paid by Borrower to Lender at the maturity of the Notes ("Remaining Payments"); (ii) proceed by appropriate court action or actions either at law or in equity to enforce Borrower's performance of the applicable covenants of the Notes and this Security Agreement or to recover all direct damages and expenses reasonably incurred by Lender by reason of an Event of Default; (iii) without court order or prior demand, enter upon the premises where the Collateral is located and take immediate possession of and remove it without liability of Lender to Borrower or any other person or entity; (iv) terminate this Security Agreement and sell the Collateral at public or private sale, or otherwise dispose of, hold, use or lease any or all of the Collateral adhering to standards of commercial reasonableness; or (v) exercise any other right or remedy available to it under applicable law. If Lender has declared due any or all of the Remaining Payments, Borrower will pay immediately to Lender (A) the Remaining Payments, (B) all amounts which may be then due or accrued, and (C) all other amounts due under this Security Agreement and under the Notes (Lender's Return, as referred to below, means the amounts described in clauses (A), (B) and (C) above). The net proceeds of any sale or lease of such Collateral will be credited against Lender's Return. The net proceeds of a sale of the Collateral pursuant to this Section 15(b) is defined as the sales price of the Collateral less reasonable selling expenses, including, without limitation, costs of remarketing the Collateral and all refurbishing costs and commissions paid with respect to such remarketing. The net proceeds of a lease of the Collateral pursuant to this Section 15 (b) is defined as the amount equal to the monthly payments due under such lease (discounted at a rate per annum equal to the 3-year Treasury Bill yield as of the date on which Lender notifies Borrower that this Security Agreement is terminated (the "Termination Date") (as such yield is reported in the most recent Federal Reserve Statistical Release H. 15 (519) ("Statistical Release") (the "Discount Rate")) plus the residual value of the Collateral at the end of the basic term of such lease, as reasonably determined by Lender, and discounted at the Discount Rate. Borrower agrees to pay all reasonable internal and out-of-pocket costs of Lender incurred in enforcement of this Security Agreement, the Notes or any instrument or agreement required under this Security Agreement, including, but not limited to attorneys' fees and litigation expenses and fees of collection agencies ("Remedy Expenses"). At Lender's request, Borrower shall assemble the Collateral and make it available to Lender at such time and location as Lender may designate. Declaration that any or all amounts under this Security Agreement and/or the Notes are immediately due and payable and Lender's taking possession of any or all Equipment shall not terminate this Security Agreement or any of the Notes unless Lender so notifies Borrower in writing. None of the above remedies is intended to be exclusive but each is cumulative and may be enforced separately or concurrently. (c) APPLICATION of PROCEEDS. The proceeds of any sale of all or any part of the Collateral and the proceeds of any remedy afforded to Lender by this Security Agreement shall be paid to and applied as follows: 7 FIRST, to the payment of reasonable costs and expenses of suit or foreclosure, if any, and of the sale, if any, including, without limitation, refurbishing costs, costs of remarketing and commissions related to remarketing, all Remedy Expenses, all reasonable expenses, liabilities and advances incurred or made pursuant to this Security Agreement or any Note by Lender in connection with foreclosure, suit, sale or enforcement of this Security Agreement or the Notes, and taxes, assessments or liens superior to Lender's security interest granted by this Security Agreement; SECOND, to the payment of all other amounts not described in item Third below due under this Security Agreement and all Notes; THIRD ,to pay Lender an amount equal to Lender's Return, to the extent not previously paid by Borrower; and Fourth, to the payment of any surplus to Borrower or to whomever may lawfully be entitled to receive it. (d) EFFECT OF DELAY; WAIVER; FORECLOSURE ON COLLATERAL. No delay or omission of Lender, in exercising any right or power arising from any Event of Default shall prevent Lender from exercising that right or power if the Event of Default continues. No waiver of an Event of Default, whether full or partial, by Lender or such holder shall be taken to extend to any subsequent Event of Default, or to impair the rights of Lender in respect of any damages suffered as a result of the Event of Default. The giving, taking or enforcement of any other or additional security, collateral or guaranty for the payment or discharge of the Indebtedness and performance of the Obligations shall in no way operate to prejudice, waive or affect the security interest created by this Security Agreement or any rights, powers or remedies exercised hereunder or thereunder. Lender shall not be required first to foreclose on the Collateral prior to bringing an action against Borrower for sums owed to Lender under this Security Agreement or under any Note. SECTION 17. LATE PAYMENTS. Borrower shall pay Lender a late charge in an amount equal to 10% of each monthly payment and other payments, if any, owed Lender by Borrower which are not paid when due, for every month such payment is not paid when due, but in no event an amount greater than the highest rate permitted by applicable law. If such amounts have not been received by Lender at Lender's place of business or by Lender's designated agent by the date such amounts are due under this Security Agreement or the Notes, Lender shall bill Borrower for such charges. Borrower acknowledges that invoices for amounts due hereunder or under the Notes are sent by Lender for Borrower's convenience only. Borrower's non-receipt of an invoice will not relieve Borrower of its obligation to make payments hereunder or under the Notes. SECTION 18. PAYMENTS BY LENDER If Borrower shall fail to make any payment or perform any act required hereunder (including, but not limited to, maintenance of any insurance required by Section 10, then Lender may, but shall not be required to, after such notice to Borrower as is reasonable under the circumstances, make such payment or perform such act with the same effect as if made or performed by Borrower. Borrower will upon demand reimburse Lender for all sums reasonably paid and all costs and expenses reasonably incurred in connection with the performance of any such act. SECTION 19. FINANCING STATEMENTS. Borrower Will execute all financing statements pursuant to the Uniform Commercial Code and all such other documents reasonably requested by Lender to perfect Lender's security interests hereunder. Borrower authorizes Lender to file financing statements signed only by Lender (where such authorization is permitted by law) at all places where Lender deems necessary. 8 SECTION 20. NATURE OF TRANSACTION. Lender makes no representation whatsoever, express or implied, concerning the legal character of the transaction evidenced hereby, for tax or any other purpose. SECTION 21. SUSPENSION OF LENDER'S OBLIGATIONS. The obligations of Lender hereunder will be suspended to the extent that Lender is hindered or prevented from complying therewith because of labor disturbances, including but not limited to strikes and lockouts, acts of God, fires, floods, storms, accidents, industrial unrest, acts of war, insurrection, riot or civil disorder, any order, decree, law or governmental regulations or interference, failure of the manufacturer to deliver any item of Collateral or any cause whatsoever not within the sole and exclusive control of Lender. SECTION 22. LENDER'S EXPENSE. Borrower shall -pay Lender all costs and expenses including reasonable attorneys' fees and the fees of collection agencies, reasonably incurred by Lender (a) in enforcing any of the terms, conditions or provisions hereof and related to the exercise of its remedies, and (b) in connection with any bankruptcy or post-judgment proceeding, whether or not suit is filed and, in each and every action, suit or proceeding, including any and all appeals and petitions therefrom. SECTION 23. ALTERATIONS; ATTACHMENTS. No alterations or attachments shall be made to the Collateral without Lender's prior written consent, which shall not be given for changes that will affect the reliability and utility of the Collateral or which cannot be removed without damage to the Collateral, or which in any way affect the value of the Collateral for purposes of resale or lease. All attachments and improvements to the Collateral shall be deemed to be "Collateral" for purposes of the Security Agreement, and a first priority security interest therein shall immediately vest in Lessor. SECTION 24. CHATTEL PAPER (a) One executed copy of the Security Agreement will be marked "Original" and all other counterparts will be duplicates. To the extent, if any, that this Security Agreement constitutes chattel paper (as such term is defined in the Uniform Commercial Code as in effect in any applicable jurisdiction) no security interest in the Security Agreement may be created in any documents other than the "Original." (b) There shall be only one original of each Note and it shall be marked "Original," and all other counterparts will be duplicates. To the extent, if any, that any Notes(s) to this Security Agreement constitutes chattel paper (or as such term is defined in the Uniform Commercial Code as in effect in any applicable jurisdiction) no security interest in any Note(s) may be created in any documents other than the "Original." SECTION 25. COMMITMENT FEE. Borrower has paid to Lender a commitment fee ("Fee") of $5,000. The Fee shall be applied by Lender first to reimburse Lender for all out-of-pocket UCC and other search costs, inspections and labeling costs and appraisal fees, if any, incurred by Lender, and then proportionally to the first monthly payment for each Note hereunder in the proportion that the Collateral Value for such Note bears to Lender's entire commitment. However, the portion of the Fee which is not applied to such monthly payments shall be non-refundable except if Lender defaults in its obligation to fund Loans pursuant to Section 3. SECTION 26. NOTICES. All notices hereunder shall be in writing, by registered mail, or reliable messenger or delivery service and shall be directed, as the case may be, to Lender at 2401 Kerner Boulevard, San Rafael, California 94901, Attention: Asset Management and to Borrower at 3220 Tillman Drive, Suite 300, Bensalem, PA 19020, Attention: John Mischak, Jr. SECTION 27. MISCELLANEOUS. (a) Borrower shall provide Lender with such corporate resolutions, financial statements and other documents as Lender shall reasonably request from time to time. (b) Borrower represents that the Collateral hereunder is used solely for business purposes. (c) Time is of the essence with 9 respect to this Security Agreement. (d) Borrower acknowledges that Borrower has read this Security Agreement and the Notes, understands them and agrees to be bound by their terms and further agrees that this Security Agreement and the Notes constitute the entire agreement between Lender and Borrower with respect to the subject matter hereof and supersede all previous agreements, promises, or representations. (e) This Security Agreement and the Notes may not be changed, altered or modified except by an instrument signed by an officer or authorized representative of Lender and Borrower. (f) Any failure of either party to require strict performance by the other or any waiver of any provision herein or in a Note shall not be construed as a consent or waiver of any other breach of the same or any other provision. (g) If any provision of this Security Agreement or any Note is held invalid, such invalidity shall not affect any other provisions hereof or thereof. (h) The obligations of Borrower to pay the Indebtedness and perform the Obligations shall survive the expiration or earlier termination of this Security Agreement and each Note until all Obligations of Borrower to Lender have been met and all liabilities of Borrower to Lender and any assignee have been paid in full. (i) Borrower will, at its expense, promptly execute and deliver to Lender such documents and assurances (including financing statements) and take such further action as Lender may reasonably request in order to carry out the intent of this Security Agreement and Lender's rights and remedies. (j) During the continuance of an Event of default hereunder, Borrower hereby appoints Lender (and each of Lender's officers, employees or agents designated by Lender), with full power of substitution by Lender, as Borrower's attorney, with power to execute and deliver on Borrower's behalf financing statements and other documents necessary to perfect and/or give notice of Lender's security interest in any of the Collateral. (k) Any consents required hereunder shall not be unreasonably withheld or delayed. SECTION 28. JURISDICTION AND WAIVER OF JURY TRIAL. This Security Agreement and the Notes shall be deemed to have been negotiated, entered into and performed in the State of California and it is understood and agreed that the validity of this Security Agreement and of any of the terms and provisions, of the Security Agreement and Notes, as well as the rights and duties of Lender and Borrower, shall be construed pursuant to and in accordance with the laws of the State of California, without giving effect to conflicts of law principles. It is agreed did exclusive jurisdiction and venue for any legal action between the parties arising out of or relating to this Security Agreement and each Note shall be in the Superior Court for Marin County, California, or, in cases where federal diversity jurisdiction is available, in the United States District Court for the Northern District of California situated in San Francisco. BORROWER, TO THE EXTENT IT MAY LAWFULLY DO SO, HEREBY WAIVES ITS RIGHT TO TRIAL BY JURY IN ANY ACTION BROUGHT ON OR WITH RESPECT TO THIS SECURITY AGREEMENT, ANY NOTE, ANY SECURITY DOCUMENTS, OR ANY OTHER AGREEMENTS EXECUTED IN CONNECTION HEREWITH. SECTION 29. ADDITIONAL INTEREST COMPENSATION: (a) GENERAL. If and as the Note provides, Borrower shall be required to choose a final payment or Note extension election ("Additional Interest Compensation") at the expiration of the first Note's Base Term, then that choice shall be an election of Borrower's Additional Interest Compensation election for all, but not less than all, of the Collateral under all Notes under the Security Agreement. Fair market value shall be determined for the Collateral under all Notes prior to the first Note's expiration. Until Borrower fulfills an Additional Interest Compensation election, all Borrower's Obligations, including payment of the Monthly Payment Amount, shall continue in full force and effect, on a month-to-month basis. (b) END OF LOAN POSITION ELECTIONS. ELECTION NO. I - FOR THE TRADE SHOW BOOTH ONLY: Make a final payment equal to 15% of the Trade Show Booth Note's original principal amount. ELECTION NO. I - FOR ALL OTHER COLLATERAL Make a final payment equal to the Collateral's fair market value, in no event less than 10% nor more than 20% of the Note's original principal amount for such Collateral. ELECTION NO. 2 - FOR BOTH THE TRADE SHOW BOOTH AND OTHER COLLATERAL Extend the Note's Base Term for an additional 6 months "Extended Term") for a monthly rate of 3.175% of the Collateral's original purchase price. If Borrower fails to timely make the payment required under (a) above, Borrower shall be deemed to have elected (b). IN WITNESS WHEREOF, Borrower and Lender have caused this Security Agreement to be executed as of the date and year first above written. PHOENIX LEASING INCORPORATED WORLDGATE COMMUNICATIONS, INC. By: /s/ Ronald Demer By: /s/ Randall J. Gort -------------------------------- ----------------------------- Name: Ronald Demer Name: Randall J. Gort ------------------------------ --------------------------- Title: VP Title: VP, Corporate Affairs ----------------------------- -------------------------- HEADQUARTERS LOCATION: 3220 Tillman Drive, Suite 300 Bensalem, PA 19020 County of Bucks EXHIBITS AND SCHEDULES: Exhibit A - Closing Memorandum 10 AMENDMENT NO. 1 TO SENIOR LOAN AND SECURITY AGREEMENT NO. 0098 THIS AMENDMENT NO. 1 TO SENIOR LOAN AND SECURITY AGREEMENT NO. 0098 ("Amendment") is dated as of June 18, 1998, by and between WORLDGATE COMMUNICATIONS, INC. ("Borrower") and PHOENIX LEASING INCORPORATED ("Lender"). RECITALS WHEREAS, Borrower and Lender entered into that certain Senior Loan and Security Agreement No. 0098, dated as of July 15, 1997 (the "Security Agreement"), pursuant to which Borrower is financing equipment with an aggregate purchase price of $1,000,000, (the "Initial Commitment"); WHEREAS, Borrower has requested that Lender increase the dollar limit on the aggregate purchase price of equipment which Lender is willing to finance for Borrower under the Security Agreement by an additional $1,000,000, (such increase hereinafter referred to as the "Additional Commitment"); WHEREAS, Lender is willing to provide the Additional Commitment, on the terms set forth herein and Borrower is willing to agree to such terms; and WHEREAS, Borrower and Lender now desire to amend the Security Agreement to provide for the Additional Commitment, and as otherwise provided in this Agreement; NOW, THEREFORE, IT IS AGREED THAT: 1. DEFINITIONS. Unless otherwise indicated, words and terms which are defined in the Security Agreement shall have the same meaning where used herein. Upon execution of this Amentment, (i) the term "Security Agreement" shall be deemed to include this Amendment, (ii) the term "Collateral" shall be deemed to include the "Additional Commitment Collateral," (iii) the term "Note(s)" shall be deemed to include any "Additional Commitment Note(s)," and (iv) the term "Loan" shall be deemed to include "Additional Commitment Loan," as these terms are defined herein. 2. AMENDMENTS. The Security Agreement is hereby amended as follows: (a) Following Section 3, a new Section 3A is added as follows: 3A. LENDER ADDITIONAL COMMITMENT. (a) GENERAL TERMS. Subject to the terms and conditions of this Security Agreement and so long as no Event of Default or event which with the giving of notice or passage of time, or both, could become an Event of Default has occurred or is continuing, upon full funding of the Initial Commitment, Lender hereby agrees to make one or more additional senior secured Loans "Additional Commitment Loans" to Borrower, subject to the following conditions: (i) each Additional Commitment Loan shall be evidenced by an Additional Commitment Note; (ii) the total principal amount of the Additional Commitment Loans shall not exceed $1,000,000 in the aggregate (the "Additional Commitment"), but in any event the Initial Commitment together with the Additional Commitment shall not exceed $2,000,000 ("Total Commitment"); (iii) no more than $250,000 of the Additional Commitment may be used for the Borrower's trade show booth upgrade; (iv) at the time of each Additional Commitment Loan, no Event of Default or event which with the giving of notice or passage of time, or both, could become an Event of Default shall have occurred and be continuing, as reason- 1 ably determined by Lender, and certified by Borrower, (v) the amount of each Additional Commitment Loan shall be at least $50,000 except for a final Additional Commitment Loan which may be less than $50,000; (vi) Lender shall not be obligated to make any Additional Commitment Loan after March 31, 1999; (vii) for each Additional Commitment Loan, Borrower shall present to Lender a list of proposed Additional Commitment Collateral for approval by Lender in its sole discretion; (viii) for each Additional Commitment Loan, Borrower shall have provided Lender with each of the closing documents described in Exhibit A hereto (which documents shall be in form and substance reasonably acceptable to Lender); (ix) Borrower is performing according to its business plan referred to as "WorldGate Communications, Inc. Projected Balance Sheets, Statement of Cash Flows and Statement of Operations" cover dated April 27, 1998, viable only through December 31, 1999 (the "Additional Commitment Business Plan"), as may be amended from time to time in form and substance acceptable to Lender; (x) there shall be no material adverse change in Borrower's condition, financial or otherwise, that would materially impair the ability of Borrower to meet its payment and other obligations under this Additional Commitment Loan (a "Material Adverse Effect") as reasonably determined by Lender, and Borrower so certifies, from (yy) the date of the most recent financial statements delivered by Borrower to Lender to (zz) the date of the proposed Additional Commitment Loan; (xi) prior to payment in full of all Additional Commitment Notes, Borrower shall not offer any loan secured by any equipment, furniture or fixtures to any other person or entity other than Lender, unless Lender declines to finance such transaction or Borrower and Lender are unable to agree on the terms of such financing; (xii) Borrower shall use the proceeds of all Additional Commitment Loans hereunder to purchase or reimburse the purchase of Additional Commitment Collateral; (xiii) at the time of each Additional Commitment Loan, Borrower has reimbursed Lender for all UCC filing and search costs, inspection and labeling costs, and appraisal fees, if any; (xiv) all Additional Commitment Collateral has been marked and labeled by Lender or Lender's agent; and (xv) Lender has received in form and substance acceptable to Lender: (a) Borrower's interim financial statement signed by a financial officer of Borrower, (b) prior to each funding, hardcopy evidence of Borrower's cash position; and (d) complete copies of the Borrower's audit reports for its most recent fiscal year, which shall include at least Borrower's balance sheet as of the close of such year, and Borrower's statement of income and retained earnings and of changes in financial position for such year, prepared on a consolidated basis and certified by independent public accountants. Such certificate shall not be qualified or limited because of restricted or limited examination by such accountant of any material portion of the company's records. Such reports shall be prepared in accordance with generally accepted accounting principles and practices consistently applied. (b) THE NOTES. Each Additional Commitment Loan shall be evidenced by an Additional Commitment Note which may not be prepaid in whole or in part. Each Additional Commitment Note shall bear interest and be payable at the times and in the manner provided therein. Following payment of the Indebtedness related to each Additional Commitment Note, Lender shall promptly return such Additional Commitment Note, marked "canceled," to Borrower. (c) SPECIFIC TERMS - TRADE SHOW BOOTH ADDITIONAL COMMITMENT COLLATERAL. Borrower and Lender agree that if, upon the expiration of the Additional Commitment Period, the amount funded allocable to Borrower's trade show booth, inclusive of the upgrade, exceeds thirty-five percent (35%) of the Total Commitment utilized as of such expiration date, then, at Lender's option, Borrower shall pay to Lender an amount equal to such excess ("Excess Payment"). Borrower agrees to pay the Excess Payment to Lender within thirty (30) days of Lender's invoice 2 to be held and applied by Lender in accordance with the Additional Security Section below. Such Excess Payment shall not constitute a prepayment of interest or principal and shall be applied first to Borrower's Additional Interest Compensation, as hereinafter defined, with any remaining funds to be applied pro rata to the last monthly payment due under each Additional Commitment Note. (b) Following Section [25], a new Section [25A] is added as follows: 25A. ADDITIONAL COMMITMENT FEE. Borrower has paid to Lender a commitment fee ("Additional Commitment Fee") of Five Thousand Dollars ($5,000) with respect to the Additional Commitment. The Additional Commitment Fee shall be applied by Lender first to reimburse Lender for all out-of-pocket UCC search costs, inspections and appraisal fees incurred by Lender, and then proportionally to the first month's payment under each Additional Commitment Note, in the proportion that the collateral value for such Additional Commitment Note bears to the Additional Commitment. However, the portion of the Additional Commitment Fee which is not applied to such monthly payments shall be non-refundable except if Lender defaults in its obligation to fund Additional Commitment Loans pursuant to Section 3A. 3. REPRESENTATIONS AND WARRANTIES: Borrower hereby reconfirms as of the date hereof, its representations and warranties set forth in Section 5 of the Security Agreement. 4. CONTINUED VALIDITY OF SECURITY AGREEMENT. Except as amended by this Amendment, the Security Agreement shall continue in full force and effect as originally constituted and is ratified and affirmed by the parties hereto. Such Amendment shall not amend or otherwise affect any of the Notes executed and delivered by Borrower prior to the the date hereof. 5. AUTHORIZATION. Each party represents to the other that the individual executing this Amendment on its behalf is the duly appointed signatory of such party to this Amendment and that such individual is authorized to execute this Amendment by or on behalf of such party and to take all action required by the terms of this Amendment. 6. WHEN AMENDMENT IS EFFECTIVE. This Amendment shall be binding and deemed effective when executed by Borrower and accepted and executed by Lender. Upon such effectiveness this Amendment shall be deemed to have amended the Security Agreement as provided herein. 7. Captions. Section headings and numbers have been set forth herein for convenience only. Unless the contrary is compelled by the context, everything contained in each section applies equally to this entire Amendment. 8. NO NOVATION. This Amendment is not intended to be, and shall not be construed to create, a novation or accord and satisfaction, and, except as otherwise provided herein, the Security Agreement shall remain in full force and effect. 9. SEVERABILITY. Each provision of this Amendment shall be severable from every other provision of this Amendment for the purpose of determining the legal enforceability of any specific provision. 10. ENTIRE AGREEMENT. The Security Agreement as amended by this Amendment constitutes the entire agreement between Borrower and Lender with respect to the subject matter hereof and supersedes all prior and contemporaneous negotiations, communications, discussions and agreements concerning such subject matter. 3 Borrower acknowledges and agrees that Lender has not made any representation, warranty or covenant in connection with this Amendment. 11. CONFLICTS. In the event of any conflict between the terms of this Amendment and the terms of the Security Agreement, the terms of this Amendment shall prevail. IN WITNESS WHEREOF, the parties hereto have executed and delivered this Amendment as of the date first set forth above. LENDER: BORROWER: PHOENIX LEASING INCORPORATED WORLDGATE COMMUNICATIONS, INC. By: /s/ Patti Gleisten By: /s/ David A. Dill ------------------------------- ------------------------------ Name: Patti Gleisten Name: David A. Dill ------------------------------- ------------------------------ Title: Contract Administrator Title: CFO ------------------------------- ------------------------------ 4 EX-10.8 6 EXHIBIT 10.8 Exibit 10.8 THE WARRANT REPRESENTED BY THIS CERTIFICATE AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). NEITHER THIS WARRANT NOR SUCH SECURITIES MAY BE TRANSFERRED EXCEPT (A) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR (B) UPON RECEIPT BY THE ISSUER OF AN OPINION OF COUNSEL, WHICH OPINION OF COUNSEL SHALL BE REASONABLY SATISFACTORY TO THE ISSUER, TO THE EFFECT THAT SUCH TRANSFER IS EXEMPT FROM REGISTRATION UNDER THE ACT AND SUCH STATE SECURITIES LAWS. WARRANT AGREEMENT FOR SERIES B CONVERTIBLE PREFERRED STOCK OF WORLDGATE COMMUNICATIONS, INC. WARRANT NO. I THIS CERTIFIES that, for value received, CHARTER COMMUNICATIONS, INC., or its permitted assigns registered on the books of the Company (collectively, the "Holder"), is entitled to purchase from WORLDGATE COMMUNICATIONS, INC., a Delaware corporation (the "Company"), at any time, and from time to time, on or before 5 p.m., New York City time, on June 30, 2002, 394,880 shares (the "Shares") of fully paid and nonassessable shares of Series B Convertible Preferred Stock of the Company (the "Preferred Stock"). The purchase price for each Share (the "Share Price") is seven dollars and ten cents ($7.10) per Share or if shares of Preferred Stock are sold pursuant to the Company's Confidential Private Placement Memorandum dated September 29, 1997 (the "Current Offering") at a lower price, the purchase price will be adjusted to such lower price. The Company will not sell more than $25 million of Preferred Stock in the Current Offering without the consent of the Holder. Securities issuable upon exercise of this Warrant and the price payable therefor are subject to adjustment from time to time as hereinafter set forth. As used herein, the term "Warrant" shall include any warrant or warrants hereafter issued in consequence of the exercise of this Warrant in part. 1 . EXERCISES PAYMENT FOR OWNERSHIP INTEREST . Upon the terms and subject to the conditions set forth herein, this Warrant may be exercised in whole or in part by the Holder hereof at any time, or from time to time, by presentation and surrender of this Warrant to the principal offices of the Company, together with the Purchase Form annexed hereto, duly executed, and accompanied by payment to the Company of an amount equal to the Share Price multiplied by the number of Shares as to which this Warrant is then being exercised. Moreover, any transfer of Shares obtained by Holder in exercise of this Warrant is subject to the requirement that such securities are registered under the Securities Act of 1933, as amended (the "1933 Act"), and applicable state securities laws or are exempt from registration under such laws. The Holder of this Warrant shall be deemed to be a shareholder of the Shares as to which this Warrant is exercised in accordance herewith effective immediately after the close of business on the date on which the Holder shall have delivered to the Company this Warrant in proper form for exercise and payment by certified or official bank check or wire transfer of the cash purchase price for the number of Shares as to which the exercise is being made, or by delivery to the Company of securities of the Company having a fair market value equal to the cash purchase price for such number of Shares determined as of the date of delivery. If this Warrant shall be exercised in part only, the Company shall, upon surrender of this Warrant for cancellation, execute and deliver a new Warrant evidencing the rights of the Holder thereof to purchase the balance of the Shares purchasable hereunder as to which the Warrant has not been exercised. If this Warrant is exercised in part, such exercise shall be for a whole number of Shares. Upon any exercise and surrender of this Warrant, the Company (a) will issue and deliver to: the Holder a certificate or certificates in the name of the Holder for the largest whole number of Shares ID which the Holder shall be entitled and, if this Warrant is exercised in whole, in lieu of any fractional Share to which the Holder otherwise might be entitled, cash in an amount equal to the fair value of such fractional share (determined in such reasonable and equitable manner as the Board of Directors of the Company shall in good faith determine), and (b) will deliver to the Holder such other securities, properties and cash which the Holder may be entitled to receive upon such exercise, or the proportionate part thereof if this Warrant is exercised in part, pursuant to the provisions of this Warrant. 2. AGREEMENT OF HOLDER. The Holder acknowledges that this Warrant is unregistered and that it will not be transferred or sold except that Charter Communications, Inc. may transfer this Warrant to any entity controlled by, under common control with or that controls Charter Communications, Inc. 3. ADJUSTMENTS. -Securities ~ issuable upon exercise of this Warrant and the Share Price shall be subject to adjustment from time to time as follows: 3.1 REORGANIZATION RECLASSIFICATION, CONSOLIDATION, MERGER OR SALE or DISTRIBUTION, (a) If any capital reorganization or reclassification of the Company, or any consolidation or merger of the Company with another person, or the sale, transfer or lease of all or substantially all of its assets to another person shall be effected in such a way that holders of shares of Preferred Stock or common stock of the Company (the "Common Stock") shall be entitled to receive stock, securities or assets with respect to or in exchange for their shares, then provision shall be made, in accordance with this Section 3.1, whereby the Holder hereof shall thereafter have the right to purchase and receive, upon the basis and upon the terms and conditions specified in this Warrant Agreement and in addition to or in exchange for, as applicable, the Shares subject to this Warrant immediately theretofore purchasable and receivable upon the exercise of the rights represented hereby, such securities or assets as would have been issued or 2 payable with respect to or in exchange for the aggregate Shares immediately theretofore purchasable and receivable upon the exercise of the rights represented hereby if (i) exercise of the Warrant or (ii) exercise of the Warrant and conversion of the Shares thereby purchasable had occurred immediately prior to such reorganization, reclassification, consolidation, merger or sale. The Company will not effect any such consolidation, merger, sale, transfer or lease unless prior to the consummation thereof the successor entity (if other than the Company) resulting from such consolidation or merger or the entity purchasing or leasing such assets shall assume by written instrument (i) the obligation to deliver to such Holder such securities or assets as, in accordance with the foregoing provisions, such Holder may be entitled to purchase, and (ii) all other obligations of the Company under this Warrant. The provisions of this Section 3.1(a) shall similarly apply to successive consolidations, mergers, exchanges, sales, transfers or leases. The Company shall not sell or lease any securities or assets of the Company to any holder of securities of the Company for a consideration of less than that believed by the Company, in good faith, to be the fair market value of such securities or assets, or purchase or lease, any securities or assets from any holder of securities of the Company for a consideration of more than that believed by the Company, in good faith, to be the fair market value of such securities or assets, provided, however, that this restriction shall not apply to ordinary course purchases and sales of mortgage loans, provided further that this proviso shall not be used as a device to avoid the purpose of this Section. (b) If, at any time or from time to time after the date of this Warrant, the Company shall distribute to the holders of shares of Preferred Stock or Common Stock (i) securities, (ii) property, other than cash, or (iii) cash (other than cash distributed as a regular quarterly dividend in an aggregate amount in any fiscal quarter not exceeding 1.25% of the value of the Common Stock at the end of such quarterly period based on the public market value of such Common Stock), without fair payment therefor, then, and in each such case, the Holder, upon the exercise of this Warrant, shall be entitled to receive such securities, property and cash (but only to the extent, with respect to cash, such cash is paid in excess of 1.25% of the value of the Common Stock in any fiscal quarter or is paid in a special dividend or distribution) which the Holder would hold on the date of such exercise if, on the date of this Warrant, the Holder had been the holder of record of the shares of Preferred Stock or Common Stock subscribed for upon such exercise and, during the period from the date of this Warrant to and including the date of such exercise, had retained such shares of Preferred Stock or Common Stock and the securities, property and cash receivable by the Holder during such period, subject, however, to the Holder agreeing to any, as applicable, conditions to such distribution as were required of all other Holders of shares of Preferred Stock or Common Stock in connection with such distribution. If the securities to be distributed by the Company involve rights, warrants, options or any other form of convertible securities and the right to exercise or convert such securities would expire in accordance with its terms prior to the exercise of this Warrant, then the terms of such securities shall provide that such exercise or convertibility right shall remain in effect until thirty (30) days after the date the Holder of this Warrant receives such securities pursuant to (i) the exercise hereof or (ii) the exercise hereof and conversion of the underlying Shares. 3 (c) In addition to those adjustments set forth in Sections 3.1(a) and (b), but without duplication of the adjustments to be made under such Sections, if the Company: (i) pays a dividend or makes a distribution on its Preferred Stock or Common Stock in shares of its Preferred Stock or Common Stock; (ii) subdivides its outstanding shares of Preferred Stock or Common Stock into a greater number of shares; (iii) combines its outstanding shares of Preferred Stock or Common Stock into a smaller number of shares; (iv) makes a distribution on its Preferred Stock or Common Stock in shares of its capital stock other than Preferred Stock or Common Stock; and/or (v) issues, by reclassification of its Preferred Stock Common Stock, any shares of its capital stock; then the number and kind of Shares purchasable upon exercise of this Warrant or issuable upon conversion of the Shares shall be adjusted so that the Holder upon exercise hereof shall be entitled to receive the kind and number of Shares or other securities of the Company (such other securities thereafter enjoying the rights of Shares under this Warrant) that the Holder would have owned or have been entitled to receive after the happening of any of the events described above had this Warrant been exercised or exercised and the Shares purchased thereby converted into shares of Common Stock (or other securities, assets and cash) immediately prior to the happening of such event or any record date with respect thereto. An adjustment made pursuant to this Section 3.1(c) shall become effective immediately after the record date in the case of a dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or issuance. If, as a result of an adjustment made pursuant to this Section 3.1(c), the Holder of this Warrant thereafter surrendered for exercise shall become entitled to receive shares of two (2) or more classes of capital stock, shares of Preferred Stock or Common Stock and any other class of capital stock of the Company, the Board of Directors (whose determination shall be conclusive and shall be described in a written notice to all holders of this Warrant promptly after such adjustment) shall determine the allocation of the adjusted Share Price between or among shares of such classes of capital stock or shares of Preferred Stock or Common Stock and such other class of capital stock. The adjustment to the number of Shares purchasable upon the exercise of this Warrant described in this Section 3.1 (c) shall be made each time any event listed in paragraphs (i) through (v) of this Section 3.1 (c) occurs. (d) Simultaneously with all adjustments to the number and/or kind of securities, property and cash to be issued in connection with the exercise of this Warrant, the Share Price will 4 also be appropriately adjusted so that at all times the Holder and all subsequent holders of this Warrant (whether in whole or in part) would not pay more than the aggregate purchase price to exercise this Warrant in full immediately after such adjustment as the Holder and all such subsequent holders had to pay immediately prior to such adjustment. 3.2 OTHER ACTION AFFECTING SHARES. If the Company takes any action affecting its shares of Preferred Stock or Common Stock after the date hereof, that would be covered by Section 3.1 but for the manner in which such action is taken or structured, other than an action described in any of Section 3.1, which would in any way diminish the value of this Warrant hereunder, then this Warrant shall be adjusted as to the Shares purchasable hereunder and the Share Price payable hereunder in such manner as the Board of Directors of the Company shall in good faith determine to be equitable under the circumstances. 3.3 NOTICE OF ADJUSTMENTS. Upon each adjustment or readjustment of the Share Price or in the nature of the securities or other property receivable upon the exercise of this Warrant, the Company at its expense will promptly compute such adjustment or readjustment in accordance with the terms of this Warrant and prepare a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Company will forthwith mail, by first class mail, postage prepaid, a copy of each such certificate addressed to the Holder of this Warrant at the address of such Holder as, shown on the books of the Company. 3.4 SALE OF SECURITIES BELOW SHARE PRICE. (a) If, at any time or from time to time after the date of this Warrant, and other than pursuant to the Current Offering, the Company shall issue or sell any shares of Preferred Stock for a consideration per share less than the Share Price in effect immediately prior to such issuance or sale, the Share Price shall be adjusted as of the date of such issuance or sale so that the same shall equal the price determined by dividing (i) the sum of (A) the number of shares of Preferred Stock outstanding immediately prior to such issuance or sale multiplied by the Share Price plus (B) the consideration received by the Company upon such issuance or sale by (ii) the total number of shares of Preferred Stock outstanding after such issuance or sale. (b) If, at any time or from time to time after the date of this Warrant, and other than pursuant to the Current Offering, the Company shall issue or sell any rights, options, warrants or other securities entitling the holders thereof to purchase Preferred Stock or to convert such securities into Preferred Stock at a price per share (determined by dividing (i) the total amount, if any, received or receivable by the Company in consideration of the issuance or sale of such rights, options, warrants or other securities plus the total amount, if any, payable to the Company upon exercise or conversion thereof (the "Total Consideration") by (ii) the number of additional shares of Preferred Stock issuable upon exercise or conversion of such securities) which is less than the Share Price in effect on the date of such issuance or sale, the Share Price shall be adjusted as of the date of such issuance or sale so that the same shall equal the price determined by dividing (i) the sum of (A) the number of shares of Preferred Stock outstanding on the date of such issuance or sale multiplied by the Share Price in effect immediately prior thereto plus (B) the 5 Total Consideration by (ii) the number of shares of Preferred Stock outstanding on the date of such issuance or sale plus the maximum number of additional shares of Preferred Stock issuable upon exercise or conversion or such securities. 3.5 OTHER NOTICES. If at any time: (a) the Company shall (i) offer for subscription pro rata to the holders of shares of the Preferred Stock or Common Stock any additional equity in the Company or other rights; (ii) pay a dividend in additional shares of the Preferred Stock or Common Stock or distribute securities or other property to the holders of shares of the Preferred Stock or Common Stock (including, without limitation, evidences of indebtedness and equity and debt securities); or (iii) issue securities convertible into, or rights or Warrants to purchase, securities of the Company (OTHER THAN STOCK OPTIONS IN THE ORDINARY COURSE OF BUSINESS TO EMPLOYEES PURSUANT TO AN EMPLOYEE BENEFIT PLAN APPROVED BY THE COMPANY'S STOCKHOLDERS); (b) there shall be any capital reorganization or reclassification or consolidation or merger of the Company with, or sale, transfer or lease of all or substantially all of its assets to another entity; or (c) there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Company; then, in any one or more of said cases, the Company shall give, by first class mail, postage prepaid, addressed to the Holder of this Warrant at the address of such Holder as shown on the books of the Company, (a) at least fifteen (15) days' prior written notice of the date on which the books of the Company shall close or a record shall be taken for such subscription rights, dividend, distribution or issuance, and (b) in the case of any such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up, at least fifteen (15) days' prior written notice of the date when the same shall take place if no stockholder vote is required and at least fifteen (15) days' prior written notice of the record date for stockholders entitled to vote upon such matter if a stockholder vote is required. Such notice in accordance with the foregoing clause (a) shall also specify, in the case of any such subscription rights, the date on which the holders of shares of Preferred Stock or Common Stock shall be entitled to exercise their rights with respect thereto, and such notice in accordance with the foregoing clause (b) shall also specify the date on which the holders of shares of Preferred Stock or Common Stock shall be entitled to exchange their shares of Preferred Stock or Common Stock for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up, as the case may be. 3.6 MODIFICATION OF ANTI-DILUTION PROVISION. Notwithstanding anything to the contrary set forth herein, prior to the time all shares of Preferred Stock shall be deemed automatically converted into shares of Common Stock, the anti-dilution provisions contained herein relating to the adjustments in the shares of Common Stock issuable upon conversion of the Shares, to the extent such provisions are duplicative with the anti-dilution provisions contained in 6 the Certificate of Designations establishing the Preferred Stock and thereby would result in a double adjustment, shall be superceded by the anti-dilution provisions set forth in such Certificate of Designations. Once the Preferred Stock has automatically converted into shares of Common Stock then the anti-dilution provisions contained herein shall no longer be superceded by the anti-dilution provisions set forth in the Certificate of Designations establishing the Preferred Stock. 4. CALL RIGHTS. (a) Concurrently with the Company entering into an underwriting agreement relating to the sale of shares of its Common Stock pursuant to a registration statement that has become effective under the 1933 Act (an "IPO") the Company or its designee shall have the right (which right may be exercised on one (1) occasion only) to repurchase all or any portion of the Warrants or any of the Shares issued as a result of the exercise of this Warrant. The Company may exercise the call by providing the holder of the Warrant or the Shares with notice of the exercise thereof (such notice being referred to as a "Call Notice"). The Company shall, no later than thirty (30) days after the date of such Call Notice, pay to the holder (i) of the Warrant an amount in cash for each Share which could have been purchased pursuant, to the Warrant equal to the Warrant Purchase Price (as defined in Subsection (b) hereof) and/or (ii) of the Shares issued upon the exercise of the Warrant an amount in cash for each such Share equal to the Share Repurchase Price (as defined in Subsection (c) hereof). If the IPO is not consummated once the Company exercises its right of repurchase such repurchase will be deemed canceled and thereafter the Company will once again have the right to repurchase this Warrant and the Shares issuable upon the exercise hereof. The Company's right to repurchase this Warrant and/or the Shares issuable upon the exercise hereof may only be exercised and will only be in effect until June 30, 1999, or such later date as the parties may mutually agree. (b) If the IPO Price (as defined in Subsection (d) hereof) is equal to or less than $20.00 then the "Warrant Repurchase Price" for each Share which could be purchased pursuant to the Warrant shall be $5.40; PROVIDED, HOWEVER, if the IPO Price is greater than $20.00 then the "Warrant Repurchase Price" shall be the sum of (i) $5.40 plus (ii) the product of (x) the IPO Price minus $20.00 and (y) .27; PROVIDED FURTHER, HOWEVER, if an event has occurred which requires an adjustment pursuant to Section 3.1 or 3.2 (an "Adjustment Event") and such adjustment would have the effect, based on the number of Shares then outstanding or the securities, property and cash into which the Shares are convertible, of reducing the aggregate amount of consideration payable by the Company to repurchase the Warrant, then the "Warrant Repurchase Price" shall be automatically adjusted so that the aggregate consideration payable by the Company to redeem the Warrant shall be the same immediately after such Adjustment Event as would have been payable immediately prior to such Adjustment Event. (c) If the IPO Price (as defined in Subsection (d) hereof) is equal to or less than $20.00 then the "Share Repurchase Price" shall be $12.50; PROVIDED, HOWEVER, if the IPO Price is greater than $20.00 then the "Share Repurchase Price" shall be the sum of (i) $12.50 plus (ii) the product of (x) the IPO Price minus $20.00 and (y) .27; PROVIDED FURTHER, HOWEVER, if an Adjustment Event has occurred and such adjustment would have the effect, based on the number of Shares then outstanding or the securities, property and cash into which the Shares are convertible, of reducing the aggregate amount of consideration payable by the Company to repurchase the Shares, then the 7 "Share Repurchase Price" shall be automatically adjusted so that the aggregate consideration payable by the Company to redeem the Shares shall be the same immediately after such Adjustment Event as would have been payable immediately prior to such Adjustment Event. (d) The "IPO Price" shall be the price per share of Common Stock at which such Common Stock is initially offered for sale to the public in the IPO. 5. NO VOTING RIGHTS. Except as otherwise provided herein, this Warrant shall not be deemed to confer upon the Holder any right to vote or to consent to or receive notice as a stockholder of the Company, as such, in respect of any matters whatsoever, or any other rights or liabilities as a stockholder, prior to the exercise hereof. 6. [Intentionally Omitted.] 7. WARRANTS EXCHANGEABLE: LOSS, THEFT, DESTRUCTION. ETC.. This Warrant is exchangeable, upon surrender hereof by the Holder hereof at the principal offices of the Company, for new Warrants of like tenor representing in the aggregate the right to subscribe for and purchase the Shares which may be subscribed for and purchased hereunder, each such new Warrant to represent the right to subscribe for and purchase such Shares (not to exceed the maximum aggregate Shares which may be purchased hereunder) as shall be designated by such Holder hereof at the time of such surrender. Upon receipt of evidence satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of any such loss, theft or destruction, upon delivery of a bond or indemnity satisfactory to the Company, or, in the case of any such mutilation, upon surrender or cancellation of this Warrant, the Company will issue to the Holder hereof a new Warrant of like tenor, in lieu of this Warrant, representing the right to subscribe for and purchase the Shares which may be subscribed for and purchased hereunder. 8. LEGENDS; INVESTMENT REPRESENTATIONS. Any certificate evidencing the securities issued upon exercise of this Warrant shall bear a legend in substantially the following form: THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). SUCH SECURITIES MAY NOT BE TRANSFERRED EXCEPT (A) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR (B) UPON RECEIPT BY THE ISSUER OF AN OPINION OF COUNSEL, WHICH OPINION OF COUNSEL SHALL BEL REASONABLY SATISFACTORY TO THE ISSUER, TO THE EFFECT THAT SUCH TRANSFER.IS EXEMPT FROM REGISTRATION UNDER THE ACT AND SUCH STATE SECURITIES LAWS. 8 9. REGISTRATION RIGHTS. The Holder shall be entitled to participate in the registration rights, including without limitation all demand and piggy-back registration rights and all notification rights, granted to the holders of Preferred Stock pursuant to the Stockholders' Agreement being entered into in connection with the Current Offering, in the form attached hereto as Exhibit A (with no changes thereto that are adverse to the interests of the holders of Preferred Stock from Exhibit A), on the same basis as all other holders of Preferred Stock thereunder. 10. MISCELLANEOUS. The Company and the Holder shall each pay all of its respective expenses and other, charges payable in connection with the preparation, issuance and delivery of this Warrant and all substitute Warrants other than as set forth in this Section 10. The Holder shall pay all taxes (other than any issuance taxes, including, without limitation, documentary stamp taxes, transfer taxes and other governmental charges, which shall be paid by the Company) in connection with such issuance and delivery of the Warrants and the Shares. The Company shall maintain, at the office or agency of the Company maintained by the Company, books for the registration and transfer of the Warrant. 11. RESERVATION OF SHARES. The Company will at all times reserve and keep available, free from preemptive rights, out of the aggregate of its authorized but unissued (a) Common Stock or its authorized and issued Common Stock held in its treasury, and (b) Preferred Stock solely for the purpose of enabling it to satisfy any obligation to issue Shares upon exercise of this Warrant or shares of Common Stock upon the conversion of the Shares, the maximum number of shares of Preferred Stock and Common Stock which may then be deliverable upon the exercise of this Warrant and/or conversion of the Shares. The Company or, if appointed, the transfer agent for the Common Stock (the "Transfer Agent") and every subsequent transfer agent for any shares of the Company's capital stock issuable upon the exercise of any of the rights of purchase aforesaid will be irrevocably authorized and directed at all times to reserve such number of authorized shares as shall be required for such purpose. The Company, will keep a copy of. this Warrant on file with the Transfer Agent and with every subsequent transfer agent for any shares of the Company's capital stock issuable upon the exercise of the rights of purchase represented by this Warrant. The Company will furnish such Transfer Agent a copy of all notices of adjustments and certificates related thereto transmitted to the Holder pursuant to Section 3.5 hereof. The Company covenants that all Shares which may be issued upon exercise of this Warrant and all shares of. Common Stock and other securities issued upon conversion of the Shares will, upon issue, be fully paid, nonassessable, free of preemptive rights and free from all taxes, liens, charges and security interests with respect to the issue thereof. 12. OBTAINING STOCK EXCHANGE LISTINGS. The Company will, from time to time, take all actions which may be necessary so that the Shares, immediately upon their issuance upon the exercise of this Warrant, will be listed on the principal securities exchanges and markets within the United 9 States of America, if any, on which other shares of Preferred Stock (and in the case of the shares of Common Stock, the Common Stock) are then listed; provided, however, that this provision will not be construed to require registration of such Shares or shares of Common Stock except as otherwise provided in this Agreement and no listing will be required to the extent such listing would violate applicable laws, regulations and exchange regulations. 13. ADJUSTMENT OF NUMBER OF SHARES ISSUABLE AND EXERCISE PRICE. The number of Shares issuable upon the exercise of this Warrant (and the shares of Common Stock issued upon conversion of such Shares) and the Share Price are subject to adjustment from time to time upon the occurrence of the events enumerated in Section 3. For purposes of this Warrant, "Preferred Stock" and "Common Stock" means shares now or hereafter authorized of any class of preferred or common stock, respectively, of the Company and any other stock of the Company, however designated, that has the right (subject to any prior rights of any class or series of preferred stock) to participate in any distribution of the assets or earnings of the Company without limit as to per share amount. 14. DESCRIPTIVE HEADINGS AND GOVERNING LAW. The descriptive headings of the several paragraphs of this Warrant are inserted for convenience only and do not constitute a part of this Warrant. This Warrant shall be construed and enforced in accordance with the laws of the State of Delaware, and the rights of the parties shall be governed by, the law of such State. 10 IN WITNESS WHEREOF, this Warrant Agreement has been executed as of the 7th day of November, 1997. WORLDGATE COMMUNICATIONS, INC. By: Its: Vice President CHARTER COMMUNICATIONS, INC. By: Its: Senior Vice President 11 EX-10.14 7 EXHIBIT 10.14 Exhibit 10.14 Page 1 of 11 WORLDGATE COMMUNICATIONS 1996 STOCK OPTION PLAN (AMENDED AND RESTATED AS OF JUNE 12, 1998) The purpose of this 1996 Stock Option Plan (the "Plan") of WorldGate Communications (the "Company") is to advance the interests of the Company by encouraging the acquisition of an equity interest in the Company and providing designated key employees, officers, directors, consultants and advisors to the Company with the opportunity to receive grants of incentive stock options and non qualified stock options. The Company believes that the Plan will serve as an incentive for the participants to contribute materially to the growth of the Company, thereby benefitting the Company's stockholders and will align the economic interests of the participants with those of the stockholders. 1. ADMINISTRATION The Plan shall be administered and interpreted by a committee (the "Committee") appointed by the board of directors of the Company (the "Board") consisting of not less than two persons. On and after the effective date specified in Section 17(b), the Committee shall consist of not less than two persons appointed by the Board, all of whom shall be "independent or disinterested persons" as defined under Rule 16b-3 under the Securities Exchange Act of 1934 (the "Exchange Act") and "outside directors" as defined under section 162(m) of the Code and related Treasury regulations. Subject to the provisions of Section 4, the Committee shall have the sole authority to (i) determine to whom options shall be granted under the Plan (the "Optionee" or "Optionees"), (ii) determine the type, quantity and terms of the options to be granted to each Optionee, (iii) determine when the options will be granted and the duration of the exercise period, including the criteria for vesting and the acceleration of vesting (if any), (iv) select the "Valuation Expert," as defined below and (v) make determinations with respect to any other matters arising under the Plan. Notwithstanding the foregoing, on and after the effective date specified in Section 17(b), the Committee shall not have the authority to make grants to Non-Employee Directors, except pursuant to provisions of the Plan as then in effect that satisfy the requirements for making exempt grants in accordance with Rule 16b-3 of the Exchange Act. The Committee shall have full power and authority to administer and interpret the Plan, to make factual determinations and to adopt or amend such rules, regulations, agreements and instruments for implementing the Plan and for conduct of its business as it deems necessary or advisable, in its sole discretion. The Committee's interpretations of the Plan and all determinations made by the Committee pursuant to the powers vested in it hereunder shall be conclusive and binding on all persons having any interests in the Plan or in any awards granted hereunder. All powers of the Committee shall be executed in its sole discretion, in the best interest of the Company and in keeping with the objectives of the Plan and need not be uniform as to similarly situated individuals. Page 2 of 11 Notwithstanding anything herein to the contrary, the Board may exercise any power or authority of the Committee under the Plan and, in such case, any reference to the Committee hereunder shall be deemed to include the Board as a whole. 2. GRANTS Awards under the Plan shall consist of options intended to qualify as incentive stock options ("Incentive Stock Options") within the meaning of section 422 of the Code or options which are not intended to so qualify ("Non qualified Stock Options") (hereinafter collectively referred to as "Stock Options"). All Stock Options shall be subject to the terms and conditions set forth herein and to those other terms and conditions consistent with this Plan as the Committee deems appropriate and as are specified in writing by the Committee to the Optionees. Grants under a particular section of the Plan need not be uniform as among the Optionees. 3. SHARES SUBJECT TO THE PLAN (a) Subject to the adjustment specified below, the aggregate number of shares of the Class B Common Stock of the Company, par value $0.01 per share (the "Company Stock") that have been or may be issued or transferred under the Plan is one million four hundred thousand shares. Notwithstanding anything in the Plan to the contrary, during the term of the Plan, the maximum aggregate number of shares of Company Stock that shall be subject to options granted under the Plan annually to any one Optionee shall be two hundred thousand shares (representing approximately 14.4% of the aggregate number of shares that have been or may be issued or transferred under the Plan.) The shares may be authorized but unissued shares of Company Stock or reacquired shares of Company Stock, including shares purchased by the Company on the open market or otherwise, for purposes of the Plan. If and to the extent options granted under the Plan terminate, expire, or are canceled, forfeited, exchanged or surrendered without having been exercised, the shares subject to such options shall again be available for purposes of the Plan. (b) If there is any change in the number or kind of shares of Company Stock outstanding by reason of a stock dividend, recapitalization, stock split, combination or exchange of such shares, merger, reorganization or consolidation in which the Company is the surviving corporation, reclassification or change in par value or by reason of any other extraordinary or unusual events affecting the outstanding Company Stock as a class without the Company's receipt of consideration, or if the value of outstanding shares of Company Stock is substantially reduced due to the Company's payment of an extraordinary dividend or distribution, the maximum number of shares of Company Stock available for Stock Options, the maximum number of shares of Company Stock for which any one Optionee participating in the Plan may be granted over the term of the Plan, the number of shares covered by outstanding Stock Options, and the price per share or the applicable market value of such Stock Options, shall be proportionately adjusted by the Committee to reflect any increase or decrease in the number or kind of issued shares of Company Stock to preclude the enlargement or dilution of rights and benefits under such Stock Options; provided, however, that any fractional shares resulting from such adjustment shall be eliminated. The adjustments determined by the Committee shall be final, binding and conclusive. Notwithstanding the foregoing, no adjustment shall be authorized or made pursuant to this Section to the extent that such authority or adjustment would cause any Incentive Stock Option to fail to comply with section 422 of the Code. 4. ELIGIBILITY FOR PARTICIPATION Page 3 of 11 All employees who hold positions of responsibility and whose performance, in the judgment of the Committee, can have a significant effect on the long-term success of the Company ("Employees"), all directors of the Company who are not also employees of the Company ("Non- Employee Directors") and all advisors and consultants ("Consultants") whose services, in the judgement of the Committee, can have a significant effect on the long-term success of the Company shall be eligible to participate in the Plan. Employees as used herein shall include employees of the Company's "parent corporation" or "subsidiary corporations" as those terms are defined in section 424(e) or 424(f) of the Internal Revenue Code of 1986 (the "Code"), as well as directors of the Company who are also employees of the Company. Except as provided in Section 6, the Committee shall select the Employees, Non-Employee Directors and Consultants to receive Stock Options and determine the number of shares of Company Stock subject to a particular Stock Option in such manner as the Committee determines. Nothing contained in this Plan shall be construed to limit the right of the Company to grant options otherwise in connection with the acquisition, by purchase, lease, merger, consolidation or otherwise, of the business or assets of any corporation, firm or association, including options granted to employees thereof who become Employees of the Company, or for any other proper corporate purpose. 5. AGREEMENTS WITH OPTIONEES Each Stock Option made under this Plan shall be evidenced by a letter to the Optionee containing such terms and conditions as the Committee shall approve (the "Grant Letter"). 6. GRANTING OF OPTIONS (a) NUMBER OF SHARES. The Committee, in its sole discretion, shall determine the number of shares of Company Stock that will be subject to each Stock Option grant. (b) TYPE OF OPTION AND PRICE. The Committee may grant Incentive Stock Options, Non qualified Stock Options or any combination of Incentive Stock Options and Non qualified Stock Options, all in accordance with the terms and conditions set forth herein; provided, however, that neither Non-Employee Directors nor Consultants shall be eligible to receive grants of Incentive Stock Options. The purchase price of Company Stock subject to a Stock Option shall be determined by the Committee and may be equal to, greater than, or less than the fair market value of a share of such Stock on the date such Stock Option is granted; provided, however, that the purchase price of Company Stock subject to an Incentive Stock Option shall be equal to, or greater than, the fair market value of a share of such Stock on the date such Stock Option is granted. Prior to the effective date specified in Section 17(b) of the Plan, the Committee shall inform the Optionees as to the fair market value of the Company Stock on a periodic basis, but not less frequently than once per calendar year. During such time that the Company Stock is not listed on an established stock exchange or traded in the over-the-counter-market, including the NASDAQ National Market System published in the WALL STREET JOURNAL, the "fair market value" of Company Stock shall be determined Page 4 of 11 by an independent firm, I.E., a firm not otherwise engaged in consulting work for the Company, unless determined otherwise by the Committee, with expertise in the valuation of business entities and the securities thereof, selected by the Committee (the "Valuation Expert") or as otherwise determined by the Committee in good faith based on the best available facts and circumstances. Such determination of "fair market value" shall be made on a periodic basis, but no less frequently than once a calendar year. If the Company Stock is listed on an established stock exchange or traded in the over-the-counter market, as determined by the Committee, "fair market value" on any date of reference shall be the closing price of a share of Company Stock (on a consolidated basis) on the principal exchange or such other over-the counter market on the last previous day on which a sale is reported. (c) EXERCISE PERIOD. The Committee shall determine the option exercise period of each Stock Option. The exercise period shall not exceed ten years from the date of grant. (d) VESTING AND EXERCISABILITY OF OPTIONS. Stock Options shall become vested and exercisable in accordance with the terms and conditions determined by the Committee, in its sole discretion, and specified the Grant Letter. All outstanding Stock Options shall become immediately exercisable upon a Change in Control (as defined herein), unless the Committee, in its sole discretion, determines otherwise in accordance with Section 9 of the Plan. (e) MANNER OF EXERCISE. An Optionee may exercise a Stock Option which has become exercisable by delivering a notice of exercise to the Committee with accompanying payment of the option price in accordance with Subsection (g) below. Should a Stock Option become exercisable on and after the effective date specified in Section 17(b), such notice may instruct the Company to deliver shares of Company Stock due upon the exercise of the Stock Option to any registered broker or dealer designated by the Company ("Designated Broker") in lieu of delivery to the Optionee. Such instructions must designate the account into which the shares are to be deposited. The Optionee may tender this notice of exercise, which has been properly executed by the Optionee, and the aforementioned delivery instructions to any Designated Broker. (f) TERMINATION OF EMPLOYMENT, DISABILITY OR DEATH. (1) EMPLOYEES AND CONSULTANTS. (i) In the event the Optionee during the Optionee's lifetime ceases to be an Employee or a Consultant for any reason other than death, disability (within the meaning of Section 22(e)(3) of the Code), retirement (as defined below), voluntary termination without the consent of the Company, or termination for cause by the Company (as defined below), any Stock Option which is otherwise exercisable by the Optionee shall terminate unless exercised within ninety (90) days of the date on which the Optionee ceases to be an Employee or Consultant (or within such other period of time as may be specified in the Grant Letter), but in any event no later than the date of expiration of the option exercise period. For purposes of this Section 6(f)(1), if an Optionee ceases to be an Employee or a Consultant for reasons other than voluntary termination without the consent of the Company or termination for cause, but continues to serve as a member of the Board, such Optionee's service as a member of the Board shall be considered as continued employment or service with the Company. In addition, for purposes of this Section 6(f), a leave of absence at the request, or with the approval, of the Company shall not be deemed a termination of employment so long as the period of such leave does not exceed 90 days, or, if longer, so long as the Optionee's Page 5 of 11 right to re-employment with the Company is guaranteed by contract. Any of the Optionee's Stock Options which are not otherwise vested and exercisable as of the date on which the Optionee ceases to be an Employee or Consultant shall terminate as of such date (except as the Committee may otherwise provide in writing). (ii) In the event the Optionee ceases to be an Employee or a Consultant on account of a "termination for cause" by the Company (or the applicable parent or subsidiary corporation), as determined in accordance with the personnel policies of the Company (or such corporation) in effect before any Change in Control of the Company or as determined by a written contract between the Consultant and the Company, or on account of a voluntary separation from the Company (or the applicable parent or subsidiary corporation) without the consent of the Company (or such corporation), any Stock Option held by the Optionee shall terminate as of the date the Optionee ceases to be an Employee or a Consultant (except as the Committee may otherwise provide in writing). (iii) In the event of the death of the Optionee while an Employee or a Consultant of the Company or within ninety (90) days after (A) termination of employment or service due to disability (as defined above) or (B) retirement of an Employee pursuant to a retirement plan maintained by the Company (or the parent or subsidiary companies) on the Optionee's retirement date (or within such other period of time as may be specified in the Grant Letter), any Stock Option which is otherwise exercisable by the Optionee on the date on which the Optionee ceases to be an Employee or Consultant as aforesaid, shall terminate unless exercised by the Optionee or the Optionee's personal representative within one year of the date on which the Optionee ceases to be an Employee or Consultant (or within such other period of time as may be specified in the Grant Letter), but in any event no later than the date of the expiration of the option exercise period. (iv) Notwithstanding the foregoing provisions, failure to exercise an Incentive Stock Option within the periods of time prescribed under sections 421 and 422(a) of the Code shall cause the Incentive Stock Option to cease to be treated as an "incentive stock option" for purposes of sections 421 and 422 of the Code. (2) NON-EMPLOYEE DIRECTORS. Upon cessation of service as a Non- Employee Director for reasons other than retirement or death, only those options exercisable at the date of cessation of service shall be exercisable by the Non-Employee Director. Such options shall be exercisable until the first to occur of: (i) the expiration of the remaining term of the option or (ii) 90 days after cessation of service of the Non-Employee Director. Upon the retirement or death of a Non-Employee Director, options shall be exercisable as follows: (i) RETIREMENT. Upon retirement as a Non-Employee Director, all options shall continue to be exercisable during their terms as if such person had remained a Non-Employee Director. (ii) DEATH. In the event of the death of a Non-Employee Director while a member of the Board, or within the period after termination of service during which the options are exercisable by the Non-Employee Director in accordance with this Plan, the options Page 6 of 11 granted to him shall be exercisable until the first to occur of: (A) the expiration of the remaining term of the option or (B) one year after the date of the Non-Employee Director's death, but only to the extent that the Non-Employee Director would have been entitled to exercise the options had he lived during such period. (g) SATISFACTION OF OPTION PRICE. The Optionee shall pay the option price specified in the Grant Letter in (i) U.S. Dollars by cash, wire transfer of immediately available funds or certified check payable to the order of the Company, or (ii) with the approval of the Committee, by delivering shares of Company Stock owned by the Optionee including Company Stock acquired in connection with the exercise of a particular Stock Option and having a fair market value on the date of exercise equal to the option price. The Company may require the Optionee, in connection with the exercise of a Stock Option, to provide such information (including, without limitation, the Optionee's address and taxpayer identification number) as may be necessary to complete any tax information returns and other tax returns and reports that may be required to reflect such exercise. The Optionee shall pay the option price and the amount of withholding tax due, if any, at the time of exercise. Except as otherwise determined by the Committee, shares of Company Stock shall not be issued or transferred upon exercise of a Stock Option until the option price is fully paid and any required withholding is made. (h) RULE 16b-3 RESTRICTIONS. Unless an Optionee could otherwise transfer Company Stock issued pursuant to a Stock Option granted hereunder without incurring liability under Section 16(b) of the Exchange Act, at least six months must elapse from the date of acquisition of a Stock Option to the date of disposition of the Company Stock issued upon exercise of such option. (i) LIMITS ON INCENTIVE STOCK OPTIONS. Each Incentive Stock Option shall provide that to the extent that the aggregate fair market value of the Company Stock on the date of the grant with respect to which Incentive Stock Options are exercisable for the first time by an Optionee during any calendar year under the Plan or any other stock option plan of the Company or any parent or subsidiary corporation thereof exceeds $100,000, then, if and to the extent required by Section 422(d) of the Code or any successor or related provision, such option as to the excess shall be treated as a Non qualified Stock Option. An Incentive Stock Option shall not be granted to any Employee who, at the time of grant, owns stock possessing more than 10 percent of the total combined voting power of all classes of stock of the Company or parent of the Company, unless the option price per share is not less than 110% of the fair market value of Company Stock on the date of grant and the option exercise period is not more than five years from the date of grant. (j) OPTIONAL PURCHASE BY THE COMPANY. In the sole discretion of the Committee, in lieu of the exercise of a Stock Option, the Optionee may be permitted to transfer the Stock Option to the Company in exchange for a cash payment equal to the excess of (i) the then fair market value of the shares of Company Stock subject to the Optionee's outstanding Stock Options over (ii) the purchase price as specified therein. Notwithstanding the foregoing, if any right granted pursuant to this Subsection would make any corporate transaction ineligible for pooling of interests accounting treatment under APB No. 16 that but for this provision would otherwise be eligible for such accounting treatment, or is determined by the Committee to be otherwise disadvantageous to the Company, the Optionee shall not receive a cash payment in lieu of the exercise of his or her Stock Options. Page 7 of 11 7. TRANSFERABILITY OF OPTIONS AND RESTRICTIONS ON ISSUANCE OF COMMON STOCK UPON EXERCISE OF OPTIONS (a) TRANSFERABILITY OF OPTIONS. Only the Optionee or his or her authorized legal representative may exercise rights under a Stock Option. Such persons may not transfer those rights except by will or by the laws of descent and distribution or, if permitted under Rule 16b-3 of the Exchange Act and if permitted in any specific case by the Committee in its sole discretion, pursuant to a qualified domestic relations order as defined under the Code or Title I of ERISA or the regulations thereunder. When an Optionee dies, the personal representative or other person entitled to succeed to the rights of the Optionee ("Successor Optionee") may exercise such rights. A Successor Optionee must furnish proof satisfactory to the Company of his or her right to receive the Stock Option under the Optionee's will or under the applicable laws of descent and distribution. Notwithstanding the foregoing, the Committee may permit an Optionee to transfer rights under a Non qualified Stock Option to the Optionee's spouse or a lineal descendant or to one or more trusts for the benefit of such family members or to partnerships in which such family members are the only partners (a "Family Transfer") provided that the Optionee receives no consideration for a Family Transfer and that the Optionee and the transferee in the Family Transfer agree to such conditions as the Committee my impose, including, without limitation, (i) provisions to assure the payment of any taxes required to be deducted, withheld and/or paid over in connection with the exercise of a Stock Option, and (ii) acknowledgment that the Stock Options and the exercise thereof will continue to be subject to the same terms and conditions of the Grant Letter and this Plan, and any attempt to transfer a Stock Option other than in accordance with the foregoing shall be void and of no force or effect. (b) RESTRICTIONS ON ISSUANCE OF COMMON STOCK UPON EXERCISE OF STOCK OPTIONS. Class B Common Stock of the Company may only be issued to Optionees and other "permitted transferees," as such terms are defined in the Company's Certificate of Incorporation, as amended. In the event Company shares are to be issued, upon the exercise of a Stock Option, (i) to any person other than said Optionee or other "permitted transferee," or (ii) to any person subsequent to a Mandatory Conversion Election, such shares of the Company shall be shares of Class A Common Stock and not shares of Class B Common Stock notwithstanding the provision in Section 3 to the contrary. 8. CHANGE IN CONTROL OF THE COMPANY As used herein, a "Change in Control" shall be deemed to have occurred if: (a) As a result of any transaction, any one stockholder other than an existing stockholder as of the effective date specified in Section 17(a) of the Plan (or a beneficiary or the estate thereof), becomes a beneficial owner, as defined below, directly or indirectly, of securities of the Company representing more than 50% of the common stock of the Company or the combined voting power of the Company's then outstanding securities; (b) A liquidation or dissolution of or the sale of all or substantially all of the Company's assets occurs; or (c) On or after the effective date specified in Section 17(b): Page 8 of 11 (1) As a result of a tender offer, stock purchase, other stock acquisition, merger, consolidation, recapitalization, reverse split, or sale or transfer of assets, any person or group (as such terms are used in and under Section 13(d) of the Exchange Act) other than an existing stockholder as of the effective date specified in Section 17(a) of the Plan (or a beneficiary of the estate thereof), becomes the beneficial owner (as defined in Rule 13-d under the Exchange Act), directly or indirectly, of securities of the Company representing more than 40% of the common stock of the Company, or the combined voting power of the Company's then outstanding securities; or (2) During any period of two consecutive years, individuals who at the beginning of such period constitute the board of directors cease for any reason to constitute at least a majority thereof unless the election, or the nomination for election by the Company's shareholders, of each new director was approved by a vote of at least 2/3 of the directors then still in office who were directors at the beginning of the period. 9. CONSEQUENCES OF A CHANGE IN CONTROL (a) NOTICE. Unless the Committee otherwise determines: (1) If a Change of Control will occur pursuant to a transaction approved by the stockholders of the Company or by the Board (if stockholder action is not required), then, not later than ten (10) days after the approval by the stockholders of the Company (or the approval by the Board, if stockholder action is not required) of such Change of Control, the Company shall give each Optionee with any outstanding Stock Options written notice of such proposed Change in Control. (2) If a Change of Control occurs without approval by the stockholders or the Board, then, not later than ten (10) days after such Change in Control, the Company shall give each Optionee with any outstanding Stock Options written notice of the Change of Control. (b) EXERCISE RIGHT. In connection with the Change in Control and effective only upon such Change in Control, unless the Committee determines otherwise, each Optionee shall thereupon have the right, within twenty (20) days after such written notice is sent by the Company, (the "Election Period"), to exercise in full any or all of such Optionee's outstanding Stock Options (whether the right to exercise such Stock Option has then accrued or the right to exercise such Stock Options will occur or has occurred upon the Change in Control). (c) TERMINATION OF STOCK OPTION. If an Optionee does not exercise the Optionee's outstanding Stock Options in a timely manner in accordance with Subsection (b) in connection with a Change in Control where the Company is not the surviving corporation(or survives only as a subsidiary of another corporation), the Optionee's Stock Options shall terminate as of the Change of Control. Notwithstanding the foregoing, a Stock Option will not terminate if assumed by the surviving or acquiring corporation, or its parent, upon a merger or consolidation and, with respect to an Incentive Stock Option, the assumption of the Stock Option occurs under circumstances which are not deemed a modification of the option with the meaning of Sections 424(a) and 424(h)(3)(A) of the Code. Page 9 of 11 (d) ACCOUNTING AND TAX LIMITATIONS. Notwithstanding the foregoing, if the termination of the Stock Options described in Subsection (c) would make the applicable Change in Control ineligible for pooling of interest accounting treatment under APB No. 16, and, but for such provision, the Change of Control would otherwise qualify for such treatment, each affection Optionee shall receive a replacement or substitute stock option issued by the surviving or acquiring corporation. 10. AMENDMENT AND TERMINATION OF THE PLAN (a) AMENDMENT. The Board, by written resolution, may amend or terminate the Plan at any time; provided, however, that any amendment that increases the aggregate number (or individual limit for any single Optionee) of shares of Company Stock that may be issued or transferred under the Plan (other than by operation of Section 3(b)), or modifies the requirements as to eligibility for participation in the Plan, shall be subject to approval by the stockholders of the Company, and provided, further, that after the effective date specified in Section 17(b) the Board shall not amend the Plan without stockholder approval if such approval is required by Rule 16b-3 of the Exchange Act or section 162(m) of the Code. (b) TERMINATION OF PLAN. The Plan shall terminate on the day before the tenth anniversary of its effective date unless terminated earlier by the Board or unless extended by the Board with the approval of the stockholders. (c) TERMINATION AND AMENDMENT OF OUTSTANDING STOCK OPTIONS. A termination or amendment of the Plan that occurs after a Stock Option is granted shall not materially impair the rights of an Optionee unless the Optionee consents or unless the Committee acts under Section 18(b) hereof. The termination of the Plan shall not impair the power and authority of the Committee with respect to an outstanding Stock Option. Whether or not the Plan has terminated, an outstanding Stock Option may be terminated or amended under Section 18(b) hereof or may be amended by agreement of the Company and the Optionee consistent with the Plan. (d) GOVERNING DOCUMENT. The Plan shall be the controlling document. No other statements, representations, explanatory materials, or examples, oral or written, may amend the Plan in any manner. The Plan shall be binding upon and enforceable against the Company, its successors and assigns and the Optionees and their assigns. 11. FUNDING OF THE PLAN This Plan shall be unfunded. The Company shall not be required to establish any special or separate fund or to make any other segregation of assets to assure the payment of any Stock Options under this Plan. In no event shall interest be paid or accrued on any Stock Option, including unpaid installments of Stock Options. 12. RIGHTS OF INDIVIDUALS Nothing in this Plan shall entitle any Employee, Non-Employee Director, Consultant or other person to any claim or right to be granted a Stock Option under this Plan. Neither this Plan nor any action taken hereunder shall be construed as giving any Employee, Non-Employee Director, Page 10 of 11 or Consultant any rights to be retained by or in the employ of the Company or any other employment rights. 13. NO FRACTIONAL SHARES No fractional shares of Company Stock shall be issued or delivered pursuant to the Plan or any Stock Option. The Committee shall determine whether cash, other awards or other property shall be issued or paid in lieu of such fractional shares or whether such fractional shares or any rights thereto shall be forfeited or otherwise eliminated. 14. WITHHOLDING OF TAXES The Optionee or other person receiving shares of Company Stock upon the exercise of a Stock Option shall be required to pay to the Company the amount of any federal, state or local taxes which the Company is required to withhold with respect to the exercise of such Stock Options and the Company shall have the right to deduct from other wages paid to the Optionee by the Company (including through the withholding of Company Stock purchased upon the exercise of a Stock Option, if then authorized by the Committee and applicable law) the amount of any tax required to be deducted, withheld or paid over with respect to such Stock Options which is not otherwise paid. The Company's obligation to make any delivery or transfer of any shares shall be conditioned on the Optionee's compliance, to the Company's satisfaction, with any withholding requirements. 15. REQUIREMENTS FOR ISSUANCE OF SHARES No Company Stock shall be issued or transferred upon the exercise of any Stock Option hereunder unless and until all requirements applicable to the issuance or transfer of such Company Stock have been complied with to the satisfaction of the Committee. The Committee shall have the right to condition any Stock Option made to any Optionee hereunder on such Optionee's undertaking in writing to comply with such restrictions on his subsequent disposition of such shares of Company Stock as the Committee shall deem necessary or advisable as a result of any provisions of such grant or any applicable law, regulation or official interpretation thereof, and certificates representing such shares may be legended to reflect any such restrictions. Certificates representing shares of Company Stock issued under the Plan will be subject to such stop-transfer orders and other restrictions as may be applicable under such laws, regulations and other obligations of the Company, including any requirement that a legend or legends be placed thereon. 16. HEADINGS Section headings are for reference only. In the event of a conflict between a title and the content of a Section, the content of the Section shall control. 17. EFFECTIVE DATE (a) EFFECTIVE DATE OF THE PLAN. Subject to the approval of the Company's stockholders, this Plan shall be effective as of December 5, 1996. Page 11 of 11 (b) EFFECTIVENESS OF SECTION 16 AND SECTION 162(m) PROVISIONS. The provisions of the Plan that refer to, or are applicable to persons subject to, section 16 of the Exchange Act or section 162(m) of the Code shall be effective, if at all, upon registration of the Company Stock under section 12(g) of the Exchange Act, and shall remain effective thereafter for so long as such stock is so registered. 18. MISCELLANEOUS (a) SUBSTITUTE GRANTS. The Committee may make a grant to an employee of another corporation who becomes an Employee by reason of a corporate merger, consolidation, acquisition of stock or property, reorganization or liquidation involving the Company or any of its subsidiaries in substitution for a stock option or restricted stock grant granted by such corporation ("Substituted Stock Incentives"). The terms and conditions of the substitute grant may vary from the terms and conditions required by the Plan and from those of the Substituted Stock Incentives. The Committee shall prescribe the provisions of the substitute grants. (b) COMPLIANCE WITH LAW. The Plan, the exercise of Stock Options and the obligations of the Company to issue or transfer shares of Company Stock under Stock Options shall be subject to all applicable laws and to approvals by an governmental or regulatory agency as may be required. With respect to persons subject to section 16 of the Exchange Act, it is the intent of the Company that the Plan and all transactions under the Plan comply with all applicable provisions of Rule 16b-3 or its successors under the Exchange Act. The Committee may revoke any Stock Option if it is contrary to law or modify a Stock Option to bring it into compliance with any valid and mandatory government regulation. The Committee may also adopt rules regarding the withholding of taxes on payments to Optionees. The Committee may, in its sole discretion, agree to limit its authority under this Section. (c) OWNERSHIP OF STOCK. An Optionee or Successor Optionee shall have no rights as a stockholder with respect to any shares of Company Stock covered by a Stock Option until the shares are issued or transferred to the Optionee or Successor Optionee on the stock transfer records of the Company. (d) GOVERNING LAW. The validity, construction, interpretation and effect of the Plan and Grant Letters issued under the Plan shall exclusively be governed by and determined in accordance with the law of the Commonwealth of Pennsylvania. (e) GENDER AND NUMBER. In this Plan (unless the context requires otherwise), the masculine, feminine, and neuter genders and the singular and the plural include one another. (f) NOTICE. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given upon delivery, if delivered in person, or on the third business day after mailing, if mailed by registered or certified mail, return receipt requested, addressed in the case of the Company, to the President, at the last principal address of record for the Company; to the Optionee, at the Optionee's last address as reflected on the books and records of the Company; or in each case, to such other address as may be designated to the Company or the Optionee from time to time as provided above. EX-10.15 8 EXHIBIT 10.15 Exhibit 10.15 June 15, 1998 Thomas Baxter Evercore Partners, Inc. 65 East 55th Street New York, NY 10022 Dear Tom: As we have discussed, I would like to invite you to join the board of directors of WorldGate Communications, Inc., to fill a currently vacant position on the board. Subject to confirmation by the current directors, I would propose that your appointment as a director be effective as of our July 24, 1998, meeting. The proposed director compensation will be as follows: 1. The grant of an option under and subject to the terms and conditions of WorldGate's 1996 Stock Option Plan (a copy of which is attached) to purchase 10,000 shares of WorldGate's Class A common stock at a per share price equivalent to the fair market value of a share of such stock on the date the option is granted (i.e., the date of your appointment.) This option will vest in four equal annual installments commencing with the first anniversary of your appointment as a director. 2. A stipend of U.S. $1,000., plus reimbursement for reasonable travel expenses associated therewith, for your attendance in person of a scheduled meeting of the board of directors (committee meetings which are held on the same day as a meeting of the full board will not be separately compensable.) As previously indicated the next board of directors meeting will be held on July 24, 1998, beginning at 10:00 AM, and your attendance would be appreciated. In order to submit your appointment to the board, I will need written confirmation of your willingness to accept this appointment (for this purpose, please sign a copy of this letter at the place indicated below), as well as a short biography indicating your birth date as well as a summary of your professional experience over at least the last five years. I will also need to know the names of any public companies for which you currently or in the past five years have served as a director. I will look forward to your appointment and working with you as a WorldGate director. Sincerely, Hal Krisbergh CEO, WorldGate Communications, Inc. I hereby indicate my willingness to serve as a director of WorldGate Communications, Inc. /s/ Thomas G. Baxter 7/21/98 -------------------------------- ------------ Thomas G. Baxter Date 2 EX-10.16 9 EXHIBIT 10.16 WORLDGATE COMMUNICATIONS, INC., FIRST AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT FIRST AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT THIS FIRST AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT (this "AGREEMENT") is made and entered into as of the 2nd day of September, 1998, by and among WorldGate Communications, Inc., a Delaware corporation (the "COMPANY"), Hal Krisbergh ("KRISBERGH") and David Wachob ("WACHOB" and, collectively with Krisbergh, the "FOUNDING STOCKHOLDERS"), AMP Incorporated, Motorola, Inc. ("MOTOROLA"), Alan Gerry, Citicorp ("CITICORP"), Adtec Limited Partnership, Advent Crown Fund, C.V., Digital Media & Communications, L.P. and Advent Partners Limited Partnership, Needham Capital SBIC, L.P., Needham Group Investors I, L.L.C., Paul Kagan, Scientific-Atlanta, Inc., and General Instrument Corporation (formerly NextLevel Systems, Inc.) (collectively, the "SERIES A STOCKHOLDERS", and together with the Founding Stockholders, the "INITIAL STOCKHOLDERS"), the holders of Series B Preferred Stock (as hereinafter defined) set forth on Schedule I hereto (the "Series B Stockholders"), the persons or entities who purchase Series C Preferred Stock (as hereinafter defined) and become signatories to this Agreement on or before the First Closing (as hereinafter defined) to be set forth on SCHEDULE II hereto and who purchase Series C Preferred Stock and become signatories hereto on or before Subsequent Closings (as hereinafter defined) to be set forth on SCHEDULE III hereto (together with any other person acquiring Series C Preferred Stock hereunder, the "SERIES C STOCKHOLDERS"), BT Alex. Brown, those Management Stockholders (as defined herein) identified on SCHEDULE IV hereto, those Strategic Partners (as defined herein) receiving Strategic Partner Securities (as defined herein) set forth on SCHEDULE V hereto, and those persons receiving shares under the Employee Stock Purchase Plan (as defined herein) to be set forth on SCHEDULE VI hereto. The Initial Stockholders, the Series B Stockholders, the Series C Stockholders,, the Management Stockholders, and BT Alex. Brown are referred to hereinafter as a "STOCKHOLDER" and collectively as the "STOCKHOLDERS." The Series A Stockholders, the Series B Stockholders and the Series C Stockholders are sometimes referred to hereinafter as a "PREFERRED STOCKHOLDER" and collectively as the "PREFERRED STOCKHOLDERS." RECITALS WHEREAS, the parties hereto other than the Series C Stockholders are parties to a Stockholders' Agreement, dated as of November 24, 1997 (the "Original Stockholders Agreement"); WHEREAS, certain of the Series C Stockholders and the Company are parties to a Stock Purchase Agreement (the "STOCK PURCHASE AGREEMENT") dated as of the date hereof, whereby the Series C Stockholders' obligation to purchase the Series C Preferred Stock is conditioned upon the amendment and restatement of the Original Stockholders Agreement to include Series C Stockholders as provided herein; NOW, THEREFORE, in consideration of the mutual promises and covenants set forth herein, and, intending to be legally bound, the parties hereto agree as follows: ARTICLE I CERTAIN DEFINITIONS; TERMINATION OF AGREEMENTS; RESTRICTIONS ON TRANSFER SECTION 1.1 CERTAIN DEFINITIONS. In addition to those terms defined elsewhere in this Agreement, as used in this Agreement, the following terms shall have the respective meanings set forth below: (a) "ALEX. BROWN" shall mean BT Alex. Brown. (b) "ALEX. BROWN WARRANTS" shall mean the five year noncancelable warrants to purchase up to 72,849 shares of the Series B Preferred Stock issued to Alex. Brown by the Company. (c) "BYLAWS" shall mean the bylaws of the Company, as amended from time to time. (d) "CERTIFICATE OF INCORPORATION" shall mean the Company's Restated Certificate of Incorporation as filed with the Secretary of State of the State of Delaware on June 12, 1998, as amended on September 2, 1998 and as further amended from time to time. (e) "COMMISSION" shall mean the Securities and Exchange Commission or any other federal agency at the time administering the Securities Act. (f) "COMMON STOCK" refers to the Company's Class A Common Stock, par value $.01 per share, and Class B Common Stock, par value $.01 per share. (g) "CO-SALE SECURITIES" shall mean (i) shares of Common Stock issued pursuant to the conversion of the Preferred Shares including the conversion of the Series B Warrant Shares and the Strategic Partner Shares, and (ii) any Common Stock issued as a dividend or other distribution with respect to or in exchange for or in replacement of the shares referenced in clause (i) above. (h) "EMPLOYEE STOCK PURCHASE PLAN" shall have the meaning set forth in SECTION 4.2. (i) "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended, or any similar successor federal statute and the rules and regulations thereunder, all as the same shall be in effect from time to time. (j) "FIRST CLOSING" shall mean the first closing of the sale of shares of the Series C Preferred Stock pursuant to the Series C Offering. (k) "HOLDERS" shall mean, collectively, the Agent, any Strategic Partner, and any Preferred Stockholder who holds Registrable Securities and any holder of Registrable Securities to whom the registration rights conferred by this Agreement have been transferred in compliance with SECTION 7.10. 2 (l) "INITIAL PUBLIC OFFERING" shall mean the initial firm commitment underwritten public offering of the Company's Common Stock pursuant to a registration statement under the Securities Act. (m) "MANAGEMENT STOCKHOLDER" means any person (other than the Company) that is a party to the Management Stockholders' Agreement. (n) "MANAGEMENT STOCKHOLDERS' AGREEMENT" means the Management Shareholders' Agreement, dated as of December 4, 1996, by and among the Company, the Founding Stockholders and the other Management Stockholders, as amended and in effect on the date hereof. (o) "ORIGINAL CONVERSION STOCK" shall mean that number of Preferred Shares convertible into the total number of shares of Common Stock issuable upon conversion of the Preferred Shares issued as of the final Subsequent Closing. (p) "ORIGINAL SERIES A PURCHASE PRICE" means $4.395 per share of Series A Preferred Stock. (q) "ORIGINAL SERIES B PURCHASE PRICE" means $7.10 per share of Series B Preferred Stock. (r) "ORIGINAL SERIES C PURCHASE PRICE" means the lowest average cash consideration per share of Series C Preferred Stock paid to the Company by any of the purchasers thereof upon original issuance thereof, as adjusted from time to reflect the issuance of any additional shares of Series C Preferred Stock for cash consideration per share less than the prevailing Original Series C Purchase Price. (s) "PREFERRED SHARES" shall mean the Series A Preferred Stock, the Series B Preferred Stock and the Series C Preferred Stock.. (t) "REGISTRATION EXPENSES" shall mean all expenses incurred by the Company in complying with ARTICLE VII (other than the underwriting discounts and commissions), including, without limitation: (i) all registration and filing fees (including all expenses incident to filing with the National Association of Securities Dealers, Inc.); (ii) the fees and expenses of complying with securities and blue sky laws; (iii) expense allowances of the underwriters; (iv) printing expenses; (v) fees and disbursements of Company counsel; and (vi) the fees and expenses of the Company's independent public accountants. (u) "REGISTRABLE SECURITIES" shall mean, on any date: (i) shares of Common Stock issued or issuable pursuant to the conversion of the Preferred Shares; (ii) shares of Common Stock issued or issuable pursuant to the conversion of the Series B Warrant Shares and Strategic Partner Shares; (iii) shares of Common Stock owned by the Management Stockholders; and (iv) any Common Stock or other security exchangeable or convertible into Common Stock issued as a dividend or other distribution with respect to or in exchange for or in replacement of the shares referenced in clauses (i) through (iv) above; PROVIDED, HOWEVER, that Registrable Securities shall not include any shares of Common Stock (x) which are then already registered, (y) which have been sold to the public either pursuant to a registration under the Securities Act or 3 Rule 144 or (z) so long as the Common Stock is listed on the New York Stock Exchange, the American Stock Exchange or the NASDAQ National Market, which can be sold pursuant to Rule 144 under the Securities Act without restrictions as a result of volume limitations. (v) The terms "REGISTER," "REGISTERED" and "REGISTRATION" shall refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act, and the declaration or ordering of the effectiveness of such registration statement. (w) "RULE 144" shall mean Rule 144 as promulgated by the Commission under the Securities Act, as such Rule may be amended from time to time, or any similar successor rule that may be promulgated by the Commission. (x) "RULE 145" shall mean Rule 145 as promulgated by the Commission under the Securities Act, as such Rule may be amended from time to time, or any similar successor rule that may be promulgated by the Commission. (y) "SECURITIES ACT" shall mean the Securities Act of 1933, as amended, or any similar successor federal statute and the rules and regulations thereunder, all as the same shall be in effect from time to time. (z) "SELLING EXPENSES" shall mean all underwriting discounts and commissions applicable to the sale of Registrable Securities and fees and disbursements of counsel for any holder of Registrable Securities. (aa) "SERIES A CONVERSION STOCK" shall mean the Common Stock issuable upon conversion of the outstanding Series A Preferred Stock. (ab) "SERIES A PREFERRED STOCK" shall mean the Series A Convertible Preferred Stock, par value $.01 per share, of the Company. (ac) "SERIES B CONVERSION STOCK" shall mean the Common Stock issuable upon conversion of the outstanding Series B Preferred Stock. (ad) "SERIES B PREFERRED STOCK" shall mean the Series B Convertible Preferred Stock, par value $.01 per share, of the Company, including the Series B Warrant Shares and Strategic Partner Shares. (ae) "SERIES B WARRANT SHARES" shall mean the shares of Series B Preferred Stock issued or issuable upon exercise of the Alex. Brown Warrants." (af) "SERIES C OFFERING" shall mean the Company's offering of Series C Preferred Stock pursuant to its Private Placement Memorandum dated July 13, 1998, as amended or supplemented from time to time. (ag) "SERIES C CONVERSION STOCK" shall mean the Common Stock issuable upon conversion of the outstanding Series C Preferred Stock. (ah) "SERIES C PREFERRED STOCK" shall mean the Series C Convertible 4 Preferred Stock, par value $.01 per share, of the Company. (ai) "SPECIAL REGISTRATION STATEMENT" means a registration statement on Forms S-8 or S-4 or any successor form or other registration statement relating to an offering to the Company's employees, or to its security holders in connection with a business combination. (aj) "STRATEGIC PARTNER" shall have the meaning set forth in Section 4.2. (ak) "STRATEGIC PARTNER SECURITIES" shall mean the Charter Warrant and the options or warrants to purchase Series B Preferred Stock issued to the Company's Strategic Partners pursuant to Section 4.2. (al) "STRATEGIC PARTNER SHARES" shall mean the shares of Series B Preferred Stock issued or issuable upon exercise of the Strategic Partner Securities. (am) "SUBSEQUENT CLOSINGS" shall mean any one or more closings of the Series C Offering held after the First Closing. SECTION 1.2 TERMINATION. The parties hereto who are parties to the Original Stockholders' Agreement hereby covenant and agree that the Original Stockholders' Agreement is hereby superseded and replaced in their entirety by this Agreement. SECTION 1.3 RESTRICTIONS ON TRANSFER. (a) Each Holder agrees not to make any disposition of all or any portion of the Preferred Shares or Registrable Securities unless and until the transferee has agreed in writing for the benefit of the Company to be bound by this SECTION 1.3, provided and to the extent such Section is then applicable, and: (i) there is then in effect a registration statement under the Securities Act covering such proposed disposition and such disposition is made in accordance with such registration statement; or (ii) such Holder shall have notified the Company of the proposed disposition and shall have furnished the Company with a detailed statement of the circumstances surrounding the proposed disposition and, if reasonably requested by the Company, such Holder shall have furnished the Company with an opinion of counsel, reasonably satisfactory to the Company, that such disposition will not require registration of such shares under the Securities Act. It is agreed that the Company will not require opinions of counsel or prior notice for transactions made pursuant to Rule 144. (iii) notwithstanding the provisions of paragraphs (i) and (ii) above, at any time after 6 months from the date Holder acquired the Preferred Shares or Registrable Securities proposed to be transferred, no such registration statement or opinion of counsel shall be necessary for a transfer of such securities by a Holder (A) which is (X) a partnership to its partners or retired partners in accordance with partnership interests, (Y) a corporation to its shareholders in accordance with their interest in the corporation, (Z) a limited liability company 5 to its members or former members in accordance with their interest in the limited liability company, or (B) by gift to a family member of such Holder or trust for the benefit of such individual Holder or any of such Holder's family members, provided the transferee will be subject to the terms of this SECTION 1.3 to the same extent as if such transferee were an original Holder hereunder. Notwithstanding anything to the contrary contained in this SECTION 1.3, a Founding Stockholder may transfer his securities provided he complies with ARTICLE III. (b) Each certificate representing Preferred Shares and Registrable Securities shall (unless otherwise permitted by the provisions of this Agreement), in addition to any other legends required pursuant this Agreement, be stamped or otherwise imprinted with legends substantially similar to the following (in addition to any legend required under applicable state securities laws): THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") OR ANY APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED, AND THE COMPANY IS NOT REQUIRED TO GIVE EFFECT TO ANY ATTEMPTED SALE, TRANSFER OR ASSIGNMENT, EXCEPT (i) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT COVERING SUCH SECURITIES UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS, (ii) IN A TRANSACTION PERMITTED BY RULE 144 PROMULGATED UNDER THE ACT AND AS TO WHICH THE COMPANY HAS RECEIVED REASONABLY SATISFACTORY EVIDENCE OF COMPLIANCE WITH THE PROVISIONS OF RULE 144, (iii) TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A PROMULGATED UNDER THE ACT PURCHASING FOR ITS OWN ACCOUNT OF FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER THAT IS AWARE THAT THE RESALE, PLEDGE OR OTHER TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A PROMULGATED UNDER THE ACT, (iv) PURSUANT TO OFFERS AND SALES TO NON-U.S. PERSONS THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S, PURSUANT TO RULE 904 OF REGULATION S, OR (v) UPON RECEIPT OF A LEGAL OPINION RENDERED BY COUNSEL (WHO MAY BE AN EMPLOYEE OF THE PARTY FOR WHOM OR ON WHOSE BEHALF THE OPINION IS BEING RENDERED) REASONABLY SATISFACTORY TO THE COMPANY TO THE EFFECT THAT THE TRANSACTION DOES NOT REQUIRE REGISTRATION UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS. THE PRESENTATION OF THIS CERTIFICATE TO THE TRANSFER AGENT MORE THAN TWO YEARS AFTER THE DATE OF ISSUANCE SHALL BE DEEMED A REPRESENTATION BY THE HOLDER THAT THE HOLDER HAS BEEN THE BENEFICIAL OWNER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE FOR AT LEAST TWO YEARS AND IS FREE TO SELL THE SECURITIES UNDER RULE 144(k) AND ANY APPLICABLE STATE SECURITIES LAWS. 6 THE VOTING, SALE, TRANSFER, ASSIGNMENT, PLEDGE OR ENCUMBRANCE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE ALSO SUBJECT TO THE TERMS AND CONDITIONS OF A STOCKHOLDERS' AGREEMENT AMONG THE COMPANY AND CERTAIN HOLDERS OF OUTSTANDING CAPITAL STOCK OF THE COMPANY. COPIES OF SUCH AGREEMENT MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF THIS CERTIFICATE TO THE SECRETARY OF THE COMPANY. (c) The Company shall be obligated to reissue promptly unlegended certificates at the request of any Holder thereof if the Holder shall have obtained an opinion of counsel at such Holder's expense (which counsel may be counsel to the Company) reasonably acceptable to the Company to the effect that the securities proposed to be disposed of may lawfully be so disposed of without registration, qualification or legend. (d) Any legend endorsed on an instrument pursuant to applicable state securities laws and the stop-transfer instructions with respect to such securities shall be removed upon receipt by the Company of an order of the appropriate blue sky authority authorizing such removal. ARTICLE II ELECTION OF DIRECTORS SECTION 2.1 ELECTION OF DIRECTORS. (a) Each Stockholder and Holder shall use his or its best efforts to cause the Company's Board of Directors (the "BOARD OF DIRECTORS") to consist of seven (7) members, and shall vote all shares of capital stock presently owned or hereafter acquired by him or it at any meeting of the stockholders of the Company called and held for such purpose, and shall sign any consent of stockholders presented for such purpose. In addition, each Stockholder and Holder shall vote all shares of capital stock of the Company presently owned or hereafter acquired by such Stockholder or Holder in the election of directors as follows: (i) to cause and maintain the election to the Board of Directors of two (2) designated representatives of Krisbergh (the "FOUNDING DIRECTORS"), one of whom shall be Krisbergh and the other of whom shall be Wachob or such other person as is designated by Krisbergh; provided, that if at any time Krisbergh beneficially owns less than 20% (as such number may have been adjusted in accordance with the Certificate of Incorporation) of the shares of Common Stock originally issued to him, then Krisbergh shall no longer have the right to appoint the Founding Directors he would otherwise be entitled to appoint and both such Founding Directors shall thereafter be elected by the holders of the Company's voting capital stock in accordance with law and the Certificate of Incorporation and Bylaws; and (ii) to cause and maintain the election to the Board of Directors of two (2) designated representatives of the Series A Stockholders (the "SERIES A 7 DIRECTORS") one (1) of whom shall be a representative of Motorola, and the remaining one (1) of whom shall be designated by the Series A Stockholders other than Motorola holding a majority of the outstanding shares of Series A Preferred Stock (excluding for purposes of such vote the "EXCESS CITICORP STOCK" (as defined in Section 2.1(e)) and the Series A Preferred Stock held by Motorola); PROVIDED, that if at any time Motorola holds less than 50% (as such number may have been adjusted in accordance with the Certificate of Incorporation) of the shares of Series A Preferred Stock originally issued to it, then Motorola shall no longer have the right to designate one (1) Series A Director, and such director shall thereafter be elected by the Series A Stockholders holding a majority of the outstanding shares of Series A Preferred Stock (excluding for purposes of such vote the Excess Citicorp Stock); and FURTHER PROVIDED, that (A) if at any time the Series A Stockholders in the aggregate hold less than 50% (as such number may have been adjusted in accordance with the Certificate of Incorporation) of the shares of Series A Preferred Stock originally issued to them and Motorola holds less than 50% (as such number may have been adjusted in accordance with the Certificate of Incorporation) of the shares of Series A Preferred Stock originally issued to it, then the Series A Stockholders shall no longer have the right to appoint one (1) of the Series A Directors, and such director shall thereafter be elected by the holders of the Company's voting capital stock in accordance with law and the Certificate of Incorporation and Bylaws, and (B) if at any time the Series A Stockholders hold in the aggregate less than 25% (as such number may have been adjusted in accordance with the Certificate of Incorporation) of the shares of Series A Preferred Stock originally issued to them, then the Series A Stockholders shall no longer have the right to appoint the second Series A Director, and such director shall thereafter be elected by the holders of the Company's voting capital stock in accordance with law and the Certificate of Incorporation and Bylaws; (iii) to cause and maintain the election to the Board of Directors of one (1) representative (the "SERIES B DIRECTOR") designated by the Series B Stockholders holding a majority of the outstanding shares of Series B Preferred Stock; PROVIDED, that if at any time the Series B Preferred Stock outstanding represents less than 25% (as such number may have been adjusted in accordance with the Certificate of Incorporation) of the Series B Preferred Stock issued and outstanding as of December 31, 1997, then the Series B Stockholders shall no longer have the right to designate the Series B Director, and such director shall thereafter be elected by the holders of the Company's voting capital stock in accordance with law and the Certificate of Incorporation and Bylaws; and (iv) to cause and maintain the election to the Board of Directors of two (2) persons who shall be independent business persons of recognized standing in the telecommunications/media/consumer technology industry designated by Krisbergh (unless and until Krisbergh beneficially owns less than 20%) (as such number may have been adjusted in accordance with the Certificate of Incorporation) of the shares of Common Stock originally issued to him, at which time the Company's Chief Executive Officer shall thereafter designate such 8 persons) with the concurrence (which shall not be unreasonably delayed or withheld) of the holders of a majority of the shares of Series A Conversion Stock and Series B Conversion Stock voting together as a class (the "INDEPENDENT DIRECTORS") (excluding for the purposes of such vote the Excess Citicorp Stock); PROVIDED, that if at any time the total shares of Series A Conversion Stock and Series B Conversion Stock represent less than 50% (as such number may have been adjusted in accordance with the Certificate of Incorporation) of the shares of Series A Conversion Stock and Series B Conversion Stock outstanding as of the final Subsequent Closing, then the concurrence of such holders shall no longer be required with respect to the designation of the Independent Directors. (b) The Company shall use its best efforts to cause the nomination for election to the Board of Directors of the individuals set forth in SECTION 2.1(a) and, each Stockholder, in addition to the above requirements, shall take all other action necessary from time to time (including, without limitation, the calling of special meetings, the removal of directors, the filling of vacancies on the Board of Directors, the waiving of notice and attendance at meetings) to maintain the membership of the Board of Directors as provided in SECTION 2.1(a). The Series B Director and at least one (1) Series A Director shall also each serve as a member of any nominating, compensation, stock option or audit committee of the Board of Directors. (c) Motorola may, at any time upon prior notice to the Company, appoint an alternate person to attend any meeting of the Board of Directors to act as an observer on its behalf if its designated representative is unavailable. (d) In addition to the above, any Series B Stockholder owning more than 20% of the aggregate number of shares of Series B Preferred Stock, and any Series A Stockholder holding at least 113,765 shares of Series A Preferred Stock (as such number may have been adjusted in accordance with the Certificate of Incorporation)(each, an "OBSERVING INVESTOR") shall be entitled to have one (1) observer attend each meeting of the Board of Directors (subject to the ability of the Board of Directors to meet in closed session in instances of potential conflicts of interest), and each such observer shall be given notice of each meeting by the Company in accordance with the Company's Bylaws and Certificate of Incorporation and shall be provided with copies of all materials distributed to the Board of Directors in connection with such meeting as if such observer were a member of the Board of Directors. (e) The term "EXCESS CITICORP STOCK" as used herein means that number of shares of Series A Preferred Stock held by Citicorp that constitutes "EXCESS CITICORP VOTING SECURITIES," as such term is defined in that certain letter agreement between the Company and Citicorp dated December 11, 1996. The Company shall, upon the written request of any Stockholder, advise such Stockholder as to the number of Excess Citicorp Voting Securities. SECTION 2.2 VACANCIES AND REMOVAL. Each of the directors designated in Section 2.1(a) shall be elected at any annual or special meeting of stockholders (or by written consent in lieu of a meeting of stockholders) and shall serve until such director's successor is elected and qualified or until such director's earlier death, resignation or removal. The persons entitled to name a director pursuant to SECTION 2.1(a) above are referred to in this SECTION 2.1 as the "PRINCIPALS" with respect to that director. If a Principal gives notice at any time to the Company and the other Stockholders and Holders that an individual then serving as a director of 9 the Company at the designation of such Principal is no longer its designee, then the Company and the other Stockholders and Holders shall take all action necessary to remove the director so designated. If an individual designated under SECTION 2.1(a) and then serving as a director of the Company dies, resigns or is removed as a director of the Company, then the Company and the Stockholders and Holders shall take all action in accordance with SECTION 2.1 necessary to elect as a director of the Company any individual newly designated by the applicable Principals, if any, with respect to the director who died, resigned or was removed. ARTICLE III FOUNDING STOCKHOLDERS; STOCK RESTRICTION PROVISIONS; CO-SALE RIGHTS SECTION 3.1 RESTRICTIONS ON TRANSFER OF SHARES. (a) Each of the Founding Stockholders agrees that he shall not sell, assign, transfer, give, donate, pledge or otherwise encumber or dispose of any shares of Common Stock (a "TRANSFER") now held or hereafter acquired by him, except by operation of law or as permitted by this Agreement or the Management Stockholders' Agreement. If any shares of Common Stock are transferred by operation of law (E.G., in the event of the bankruptcy or death or incapacity of a Founding Stockholder or of attachment or garnishment of any shares held by a Founding Stockholder), the transferee shall receive such shares subject to the provisions of this Agreement and shall be bound by this Agreement to the same extent as if such transferee were a Founding Stockholder. (b) Any purported Transfer of shares of Common Stock by a Founding Stockholder not in accordance with the provisions of this Agreement shall be void and ineffectual and shall not operate to Transfer any interest or title to the purported transferee. (c) The Company shall not cause or permit any Transfer of any of the shares of Common Stock of a Founding Stockholder to be registered on the Company's books if such Transfer is prohibited by the terms of this Agreement. The Company shall be protected in relying on the record of stockholders maintained by it or on its behalf for all purposes, notwithstanding any notice of any purported Transfer to the contrary. The Company shall require any transferee of a Founding Stockholder to become a party to this Agreement by an instrument satisfactory to it in form and substance as a condition to any Transfer to the extent required by SECTION 3.2(d). SECTION 3.2 RIGHT TO PARTICIPATE IN SALES. (a) CO-SALE RIGHT. If, at any time prior to the consummation of the Initial Public Offering, either of the Founding Stockholders (as applicable, the "TRANSFERRING STOCKHOLDER") desires to sell for cash or any other form of consideration (including a promissory note or other deferred consideration) to any person or entity other than those persons or entities described in SECTION 3.2(d) (a "PROPOSED TRANSFEREE") in excess of an aggregate of 5% (as such number may have been adjusted in accordance with the Certificate of Incorporation) of the shares of Common Stock originally issued to him, the Transferring Stockholder shall so notify the Holders, specifying the proposed purchaser, proposed closing date, price and other terms of such sale, and shall make effective arrangements (which shall be a condition to any sale by such 10 Transferring Stockholder) so that the Holders shall have the right to sell to the Proposed Transferee, at the same price per share and other terms and conditions as involved in such sale by the Transferring Stockholder, such number of shares of Co-Sale Securities then owned by each Holder equal to the number of shares being sold by the Transferring Stockholder multiplied by the percentage of the then total outstanding shares of the Common Stock then held by each Holder, calculated on a fully diluted basis to give effect to the conversion of all outstanding convertible securities (including the Preferred Shares) and the exercise of all outstanding options and warrants (a "FULLY DILUTED BASIS"). (b) NOTICE OF INTENT TO PARTICIPATE. If any Holder wishes to participate in any sale under this SECTION 3.2, it shall notify the Transferring Stockholder thereof as soon as practicable after such Holder's receipt of the notice of the Transferring Stockholder's proposed sale of his shares of Common Stock, and in any event not later than thirty (30) days after the date of receipt by such Holder of the notice described in SECTION 3.2(a). (c) SALE TO PROPOSED TRANSFEREE. The Transferring Stockholder and each Holder exercising its co-sale rights pursuant to SECTION 3.2(a) shall sell to the Transferee all of the shares proposed to be sold by him or them at the price and upon the other terms and conditions specified in the notice described in SECTION 3.2(a). The closing of such sales shall occur at the offices of the Company on such date as may be agreed by the Transferring Stockholder, the Proposed Transferee and the transferring Holders, but in no event later than the 60th day following the date of receipt by the Holders of the notice described in SECTION 3.2(a) (or if such 60th day is not a business day, then on the next succeeding business day). Notwithstanding anything in this SECTION 3.2 to the contrary, there shall be no liability on the part of any Transferring Stockholder to any Holder if any sale of Co-Sale Securities pursuant to this SECTION 3.2 is not consummated for whatever reason. It is understood that each Transferring Stockholder, in his sole discretion, shall determine whether to effect a sale of shares of Common Stock pursuant to this SECTION 3.2. (d) TRANSFERS NOT SUBJECT TO CO-SALE RIGHT. This SECTION 3.2 shall not be applicable to any Transfers made by a Transferring Stockholder: (i) to a Holder; (ii) of up to an aggregate of 10% of the shares of Common Stock originally issued to him to any Management Stockholder; (iii) of up to an aggregate of 5% of the shares of Common Stock originally issued to him in one or more transactions; or (iv) to such Transferring Stockholder's spouse, parents, brothers, sisters, children (natural or adopted), stepchildren, grandchildren, nephews or nieces (collectively, "FAMILY MEMBERS"), to a trust for the benefit of any Family Member, to a family limited partnership (the partners of which shall consist entirely of the Transferring Stockholder, any Family Members or trusts for the benefit of Family Members), or to a corporation wholly owned by any Family Members; PROVIDED, in the case of clauses (ii) and (iv), that any such transferee agrees to be bound by the provisions of ARTICLE II, ARTICLE III and SECTION 5.2 to the same extent as the Founding Stockholders, and in the case of clause (iii) that any transferee of such shares agrees to be bound by the provisions of ARTICLE II and SECTION 5.2 to the same extent as the Founding Stockholders. Upon the sale of any shares of Common Stock to a Proposed Transferee pursuant to SECTION 3.2(c), such shares shall no longer be subject to this SECTION 3.2. SECTION 3.3 LEGEND. Each certificate representing shares of Common Stock beneficially owned by a Founding Stockholder shall bear a legend in substantially the following 11 form, until such time as the shares of Common Stock represented thereby are no longer subject to the provisions hereof: "The sale, transfer or assignment of the securities represented by this certificate are subject to the terms and conditions of a certain Amended and Restated Stockholders' Agreement dated as of September 2, 1998 as amended from time to time, among the Company and certain holders of its outstanding capital stock. Copies of such Agreement may be obtained at no cost by written request made by the holder of record of this certificate to the Secretary of the Company." ARTICLE IV RIGHT OF FIRST REFUSAL SECTION 4.1 RIGHT OF FIRST REFUSAL. (a) COMPANY SALES. If at any time after the date hereof and prior to the consummation of the Initial Public Offering, the Company proposes to issue any equity security, other than in a transaction described in SECTION 4.2, the Company shall first offer in writing to sell to each Holder, his or its PRO RATA share of the proposed issue of such equity security, at the same price and on the same terms at which the Company proposes to sell such issue to others. For purposes hereof, each Holder's PRO RATA share of an issue of equity securities shall be that percentage of such issue that is equal to that percentage of such Holder's ownership of Common Stock computed on a fully diluted basis. The term "EQUITY SECURITY," when used in this ARTICLE IV, shall mean any stock of the Company, or any security convertible, with or without consideration, into stock, or any security carrying any warrant, option, or right to subscribe to, or to purchase any stock, or any such warrant, option, or right. (b) NOTICE OF OFFERING. The Company's offer described in SECTION 4.1(a) shall describe the equity security proposed to be issued by the Company, specifying the quantity, the price and payment terms. Each Holder shall have thirty (30) days from receipt of such offer to accept the offer in writing, which acceptance may be as to all or any part of such Holder's PRO RATA share of such issue. The sale of the portion of the equity securities subscribed for by any Holder pursuant to this SECTION 4.1(b) shall be held on a date acceptable to the Company and each subscribing Holder, but in no case more than ninety (90) days after the date of the Company's offer to the Holders. (c) SALE TO THIRD PARTIES. In the event the Holders do not subscribe for all of the issue of the equity securities offered to them pursuant to this ARTICLE IV, the Company may sell the portion of the securities not subscribed for, together with the portion of such issue of securities not subject to rights of first refusal under this ARTICLE IV, at a price no less favorable to the Company than that specified in such offer and on payment terms no less favorable to the Company than those specified in such offer. However, if such sale is not consummated within one hundred and twenty (120) days after the date the offer pursuant to SECTION 4.1(a) was made, the Company shall not sell such securities without again complying with SECTION 4.1(a). SECTION 4.2 ISSUANCES NOT SUBJECT TO PREEMPTIVE RIGHT. The rights of first refusal granted in SECTION 4.1 shall not apply to the issuance of the Series C Preferred Stock 12 pursuant to the Stock Purchase Agreement, or any shares of Common Stock upon the conversion of any Preferred Stock, or to any of the following issuances of equity securities by the Company: (a) upon the exercise of any right which was not itself issued in violation of the terms of this ARTICLE IV, including the warrants issued to Alex. Brown or to Charter Communications, Inc.; (b) upon the issuance of shares of Common Stock as dividends; (c) upon the grant or issuance to directors, officers or employees of, or consultants or advisors to, the Company, of up to 1,400,000 shares of Common Stock (as such number may be adjusted by the Board of Directors and approved by the holders of a majority of the Series A Conversion Stock and Series B Conversion Stock, voting together as a class (such aggregate number of option shares, as the same may be adjusted, is hereinafter referred to as the "Maximum Option Shares") pursuant to the grant of options under any stock option plan, stock grant plan or stock purchase plan approved by the Board of Directors; (d) upon the issuance of shares of Common Stock in connection with the establishment of an entity with which the Company has a partnership, joint venture or other business relationship; (e) upon the issuance of shares of Common Stock pursuant to the acquisition of another entity whereby the Company will own or control more than 50% of the voting power of such entity; or (f) in connection with, or after consummation of, the Initial Public Offering. ARTICLE V DEFAULT SECTION 5.1 PREFERRED STOCK DEFAULT. A "PREFERRED STOCK DEFAULT" shall be deemed to have occurred hereunder upon notice to the Company by Holders of a majority of the aggregate shares of Series A Conversion Stock, Series B Conversion Stock, and Series C Conversion Stock voting together as a class, of any of the following events, which event shall have continued unremedied for a period of sixty (60) days following the Company's receipt of such notice: (a) the failure of the Company to redeem the Series A Preferred Stock, Series B Preferred Stock or Series C Preferred Stock in accordance with the provisions set forth in the Company's Certificate of Designation for each such series (including a failure to redeem attributable to the Company having insufficient funds legally available therefor); (b) the adjudication of the Company as bankrupt or insolvent under federal bankruptcy or state insolvency laws; or (c) the reasonable judgment of an independent third party, upon the concurrence of Holders holding a majority of the aggregate shares of Series A Conversion Stock, Series B Conversion Stock and Series C conversion Stock, that the Company shall be adjudged 13 to be bankrupt or insolvent under federal bankruptcy or state insolvency laws within sixty (60) days. Notwithstanding the above, the Holders of a majority of the aggregate shares of Series A Conversion Stock and Series B Conversion Stock shall have the right at any time to waive any Preferred Stock Default upon notice to the Company. SECTION 5.2 RIGHTS UPON DEFAULT. Upon the occurrence of a Preferred Stock Default, and after thirty (30) days' prior notice delivered to the Company by the Holders of a majority of the aggregate shares of Series A Conversion Stock, Series B Conversion Stock and Series C Conversion Stock, the Stockholders and Holders shall vote their respective shares at the direction of the Holders of a majority of the aggregate shares of Series A Conversion Stock, Series B Conversion Stock and Series C Conversion Stock at any meeting of the Company's stockholders called for the purpose of: (i) determining whether and on what terms a sale of the Company may occur, and (ii) determining whether and on what terms to replace the existing directors of the Company (including the election as directors of any nominees designated by such Holders), and shall sign any consent of stockholders presented by them thereafter for such purposes. For purposes of this Agreement, a "SALE" shall include a merger, sale of assets and sale of stock. Upon the occurrence of a Preferred Stock Default, SECTIONS 2.1(a)(i) and (iv) shall be void and of no further force or effect. ARTICLE VI COVENANTS OF THE COMPANY SECTION 6.1 RULE 144. The Company covenants that: (a) at all times after the Company first becomes subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company shall use its best efforts to comply with the then current public information requirements of Rule 144(c)(1); (b) if prior to becoming subject to such reporting requirements an over-the-counter market develops for the capital stock of the Company, the Company shall use its best efforts to make publicly available the information required by Rule 144(c)(2); and (c) at all such times as Rule 144 is available for use by the holders of any of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series A Conversion Stock and Series B Conversion Stock and Series C Conversion Stock, the Company shall furnish each such holder upon request with all information within the possession of the Company required for the preparation and filing of Form 144. SECTION 6.2 FINANCIAL STATEMENTS. The Company shall furnish to the Holders, (a) within ninety (90) days of the end of each fiscal year of the Company an audited balance sheet, and related audited statements of income and cash flow of the Company as at the end of and for such fiscal year prepared in accordance with GAAP, together with a management's discussion and analysis, and (b) within forty-five (45) days after the end of each of the first three fiscal quarters of each fiscal year of the Company, a balance sheet and statement of income and cash flow of the Company as at the end of and for such quarter, together with a management's discussion and analysis. All statements described in this SECTION 6.2 (other than in CLAUSE (a) above) shall be unaudited, but prepared in accordance with GAAP, subject only to normal year-end audit adjustments. 14 SECTION 6.3 RESTRICTIVE AGREEMENTS PROHIBITED. Neither the Company nor any Founding Stockholder shall become a party to any agreement which by its terms restricts its or their performance of this Agreement. SECTION 6.4 KEY-MAN LIFE INSURANCE. The Company shall maintain in effect, for as long as 50% of the aggregate shares of Original Conversion Stock remain outstanding, key-man life insurance on the life of Krisbergh in the amount of $3 million and on the life of Wachob in the amount of $1 million. Such policies shall name the Company as the beneficiary. The Company shall at all times retain all the incidents of ownership of such insurance and shall not borrow upon or otherwise impair its right to receive the proceeds of such insurance. Any proceeds received by the Company under such key-man life insurance policies shall be applied first to the redemption of the Preferred Shares in accordance with their respective Certificates of Designation. Any proceeds which remain after the Company has complied with its redemption obligation under the applicable Certificate of Designation shall be retained by the Company and used for whatever purpose the Company determines. SECTION 6.5 RESERVATION OF SHARES. From and after the Closing, the Company shall at all times reserve and keep available, free from preemptive rights, out of its authorized but unissued capital stock, a sufficient number of shares of Common Stock for issuance upon the conversion of the Preferred Shares. SECTION 6.6 NEGATIVE COVENANTS. (a) The Company covenants that, for so long as 50% or more of the shares of Original Conversion Stock remain outstanding, the Company shall not, without the consent of Holders of at least a majority of the aggregate shares of Series A Conversion Stock, Series B Conversion Stock and Series C Conversion Stock voting together as a class: (i) sell, convey or otherwise dispose of or encumber its property or business, except for (A) sales or dispositions in the ordinary course of business and (B) encumbrances securing borrowings of less than $2,000,000, PROVIDED, HOWEVER, that this restriction shall not apply to any capital lease transaction or purchase money security interest incurred in connection with the acquisition of a capital asset; (ii) borrow in excess of $2,000,000, PROVIDED, HOWEVER, that this restriction shall not apply to any capital lease transaction or purchase money security interest incurred in connection with the acquisition of a capital asset; (iii) materially change the Company's existing business model or focus; (iv) create any subsidiary; (v) approve the Company's annual operating budget prior to December 11, 1998; 15 (vi) transact business with any affiliate of the Company on terms less favorable than those the Company could obtain from an unrelated third party; or (vii) amend or modify the Bylaws. (b) The Company covenants that, for so long as 50% or more of the shares of Original Conversion Stock remain outstanding, the Company shall not, without the consent of the Holders of at least a majority of the outstanding shares of each of the Series A Preferred Stock, the Series B Preferred Stock and the Series C Preferred Stock voting as a separate series: (i) merge into or consolidate with another corporation, or effect any transaction or series of related transactions pursuant to which 50% or more of the voting power of the Company is transferred to one or more unaffiliated third parties; (ii) enter into any agreement that would restrict the Company's ability to perform its obligations under this Agreement); or (iii) issue additional shares of Common Stock other than (A) up to the Maximum Option Shares, (B) pursuant to a transaction or series of related transactions involving the issuance of up to 20% of the shares of Common Stock outstanding as of the First Closing (including, for purposes of such calculation, the Maximum Option Shares) or (C) pursuant to the conversion of the Preferred Shares (including, without limitation, those Preferred Shares issued pursuant to the Employee Stock Purchase Plan or upon exercise of the Alex. Brown Warrants and the Strategic Partner Securities); PROVIDED, HOWEVER, that this restriction shall not apply to any issuance in connection with an Initial Public Offering. ARTICLE VII REGISTRATION RIGHTS SECTION 7.1 PIGGYBACK REGISTRATION. (a) If the Company at any time proposes to register any of its securities under the Securities Act, other than pursuant to a Special Registration Statement or, with respect to holders of Series C Preferred Stock or Series C Conversion Stock only, in connection with an Initial Public Offering, it shall each such time promptly give notice to the holders of the Registrable Securities of its intention to do so, and, upon the written request, given within thirty (30) days after receipt of any such notice, of any such holder to register any of its Registrable Securities, the Company shall (subject to SECTION 7.1(b)) use its best efforts to cause all Registrable Securities with respect to which holders shall have so requested registration to be registered under the Securities Act, promptly upon receipt of the written request of such holders for such registration, all to the extent required to permit the sale or other disposition by the holders of the Registrable Securities so registered in the manner contemplated by such registration statement. 16 (b) If any registration pursuant to this SECTION 7.1 is an underwritten registration, and the managing underwriters advise the Company in writing that in their opinion the number of Registrable Securities requested to be included in such registration by the Holders and the Management Stockholders exceeds the number which can be sold in such offering without adversely affecting the offering of securities by the Company for its own account, the Company shall include in such registration Registrable Securities in the following order of priority (assuming any such securities are included), unless the Holders holding a majority of the Series A Conversion Stock, Series B Conversion Stock and Series C Conversion Stock voting together as a class otherwise agree: (i) first, the Registrable Securities requested to be included therein by each Holder, PRO RATA among such Holders on the basis of the number of Registrable Securities held by each such Holder, up to the number of Registrable Securities that will result in aggregate net proceeds to such Holder equal to (A) the Original Series A Purchase Price for any Holder who is a Series A Stockholder, (B) the Original Series B Purchase Price for any Holder who is a Series B Stockholder and (C) the Original Series C Purchase Price for any Holder who is a Series C Stockholder; (ii) second, the Registrable Securities requested to be included therein by each Management Stockholder, PRO RATA among such Management Stockholders on the basis of the number of Registrable Securities held by each such Management Stockholder, up to such number of Registrable Securities that will result in aggregate net proceeds to such Management Stockholder from all offerings equal to his proportionate share of the $2,000,000 valuation for all Management Stockholders' securities; PROVIDED, that in no event shall the number of Registrable Securities included in the offering by the Holders and Management Stockholders exceed the number of securities, if any, that the underwriters determine would not adversely affect the orderly sale and distribution of the securities being sold by the Company for its own account. Any Registrable Securities that are available for registration after the allocations under clauses (i) and (ii) of this SECTION 7.1(b) shall be allocated among the Holders and Management Stockholders requesting registration on a PRO RATA basis. If the Holders elect not to register the maximum number of Registrable Securities allocated to them under clause (i) of this SECTION 7.1(b), then excess Registrable Securities not registered by them shall be allocated to the Management Stockholders on a PRO RATA basis. Similarly, if the Management Stockholders elect not to register the maximum number of Registrable Securities allocated to them under clause (ii) of this SECTION 7.1(b), then the excess Registrable Securities not registered by them shall be allocated to the Holders on a PRO RATA basis. (c) Notwithstanding the foregoing provisions, the Company may withdraw any registration statement referred to in this SECTION 7.1 without thereby incurring any liability to the holders of the Registrable Securities. SECTION 7.2 DEMAND REGISTRATION. (a) At any time after the earlier of (i) one year after the consummation of the Initial Public Offering, or (ii) December 11, 1999, Holders of at least 30% of the Registrable Securities then held by Holders may at any time request in writing that the Company cause a registration statement to be filed under the Securities Act (other than on Form S-3 as provided under SECTION 7.3) with respect to at least 20% of the Registrable Securities held by Holders. The Company shall promptly give notice of such request to the other Holders of Registrable Securities and afford them the opportunity to include in the requested registration statement such of their Registrable Securities as they shall specify in a notice given to the Company within thirty 17 (30) days after their receipt of the Company's notice of the request for the filing of a registration statement. Following receipt of such notices, the Company shall promptly use its best efforts to cause all Registrable Securities with respect to which Holders shall have so requested registration to be registered under the Securities Act, all to the extent required to permit the sale or other disposition by the Holders of the Registrable Securities so registered in the manner specified by such holders in their notices and pursuant to this SECTION 7.2. (b) The Company shall not be required to file and cause to become effective more than two (2) registration statements at the demand of the Holders made under this SECTION 7.2. (c) If within fifteen (15) days of the exercise of a demand registration right granted under this SECTION 7.2, the Company or any Management Stockholder notifies the Holders making such demand that the Company or such Management Stockholder wishes to register Registrable Securities of the same class for their respective accounts on the registration statement being filed pursuant to the demand, then the Company and such Management Stockholder may include its Registrable Securities in such registration; PROVIDED, HOWEVER, that if the managing underwriter determines and advises in writing that the inclusion of any or all of such Registrable Securities for the Company's or such Management Stockholder's account in the registration statement covered by the requests for registration made under this SECTION 7.2 would adversely affect the offering of the Registrable Securities to be sold in such registration by the Holders, then the requisite number of Registrable Securities for the Company's and/or such Management Stockholder's account shall be excluded from registration hereunder. (d) If the Holders making such demand propose to sell their Registrable Securities in a firm commitment underwriting and the managing underwriter advises such Holders that not all of their Registrable Securities can be included in such offering, then the requisite number of Registrable Securities shall be excluded from registration on a basis PRO RATA (as provided in Section 7.1(b)) among the Holders of the Registrable Securities requesting such registration. (e) Provided the Company has honored its obligations under SECTION 7.1, no demand registration right granted in this SECTION 7.2 may be exercised during any period of time beginning on the date the Company files a registration statement with the Commission registering any of its securities for sale to the public and ending on the earlier to occur of (i) 120 days after the date on which the registration statement is declared effective by the Commission or otherwise becomes effective, and (ii) the 180th day after the date of such filing. SECTION 7.3 FORM S-3 REGISTRATIONS. In addition to the rights provided the Holders in SECTIONS 7.1 and 7.2, if the registration of Registrable Securities under the Securities Act can be effected on Form S-3 (or any similar form promulgated by the Commission), then upon the written request of one or more Holders owning Registrable Securities constituting at least 1% of the Company's outstanding capital stock, the Company will so notify each Holder, and then will, as expeditiously as possible, use its best efforts to effect qualification and registration under the Securities Act on Form S-3 of all or such portion of the Registrable Securities as the Holder or Holders shall specify pursuant to this SECTION 7.2, PROVIDED, that the Company shall have no obligation to file a registration statement under this SECTION 7.2 if: (i) the gross proceeds from the offering will be or are reasonably expected to be less than $1,000,000; 18 (ii) the Company has already effected a registration for the Holders pursuant to this SECTION 7.3 during the prior twelve (12) months; (iii) the Registrable Securities with respect to which registration is requested may be sold by the Holders thereof within one three month period without compliance with the registration requirements of the Securities Act pursuant to Rule 144 and such Registrable Securities are listed on the New York Stock Exchange, the American Stock Exchange or the NASDAQ National Market; or (iv) the Company has already effected a total of two (2) registrations for the Holders pursuant to this SECTION 7.3. SECTION 7.4 REGISTRATION PROCEDURES. If and whenever the Company is under an obligation pursuant to the provisions of ARTICLE VII of this Agreement to use its best efforts to effect the registration of any Registrable Securities the Company shall, as expeditiously as practicable: (a) prepare and file with the Commission a registration statement with respect to such Registrable Securities and use its best efforts to cause such registration statement to become effective; (b) prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective for at least 120 days and to comply with the provisions of the Securities Act with respect to the sale or other disposition of all Registrable Securities covered by such registration statement for such period; (c) furnish to each selling holder such numbers of copies of each prospectus (including each preliminary prospectus) in conformity with the requirements of the Securities Act, and such other documents as such seller may reasonably request in order to facilitate the public sale or other disposition of such Registrable Securities; (d) use its best efforts to register or qualify the Registrable Securities covered by such registration statement under the securities or blue sky laws of such jurisdictions as the managing underwriter, if any, or if there is no managing underwriter, the holders of a majority of the Registrable Securities, shall request (PROVIDED, that the Company shall not be required to consent to general service of process for all purposes in any jurisdiction where it is not then qualified), and do any and all other acts or things which may be reasonably necessary or advisable to enable such seller to consummate the public sale or other disposition in such jurisdictions of such Registrable Securities; (e) notify each seller of the Registrable Securities covered by such registration statement, at any time when a prospectus relating thereto is required to be delivered under the Securities Act within the appropriate period mentioned in CLAUSE (b) of this SECTION 7.4, 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, and at the request of any such seller prepare and furnish to such seller a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such Registrable Securities, such prospectus shall not include an untrue statement 19 of a material fact or omit 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; and (f) furnish on the date that such Registrable Securities are delivered to the underwriters for sale pursuant to such registration or, if such Registrable Securities are not being sold through underwriters, on the date that the registration statement with respect to such Registrable Securities becomes effective: (i) an opinion, dated such date, of the independent counsel representing the Company for the purposes of such registration, addressed to the underwriters, if any, and at the request of any holder or holders of Registrable Securities requesting registration pursuant to this ARTICLE VII, to the holder or holders making such request, stating that such registration statement has become effective under the Securities Act and that (1) to the best knowledge of such counsel, no stop order suspending the effectiveness thereof has been issued and no proceedings for that purpose have been instituted or are pending or contemplated under the Securities Act; (2) the registration statement, the related prospectus, and each amendment or supplement thereto, comply as to form in all material respects with the requirements of the Securities Act and the applicable rules and regulations of the Commission thereunder (except that such counsel need express no opinion as to financial statements contained therein); (3) such counsel has no reason to believe that either the registration statement or the prospectus, or any amendment or supplement thereto, contains any 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 (except that such counsel need express no opinion as to financial statements contained therein); (4) the description in the registration statement or the prospectus, or any amendment or supplement thereto, of all legal and governmental matters and all contracts and other legal documents or instruments are accurate and fairly present the information required to be shown; (5) such counsel does not know of any legal or governmental proceedings, pending or contemplated, required to be described in the registration statement or prospectus, or any amendment or supplement thereto, which are not described as required, nor of any contracts or documents or instruments of a character required to be described in the registration statement or prospectus, or any amendment or supplement thereto, or to be filed as exhibits to the registration statement which are not described and filed as required; and (6) such other legal matters with respect to such registration as the underwriters, if any, and any such holder or holders requesting such opinion may reasonably request; and (ii) in the case of an underwritten offering a comfort letter, dated such date, from the independent certified public accountants of the Company, addressed to the underwriters and the Board of Directors in the customary form. SECTION 7.5 DELAY IN REGISTRATION. Notwithstanding anything contained in this Agreement to the contrary, the Company reserves the right to delay any such registration pursuant to this ARTICLE VII, or to withhold efforts to cause such registration statement to become effective in each case for a period of not more than 120 days, if the Company determines in good faith that such registration might (a) interfere with or affect the negotiation or completion of any material transaction that is being contemplated by the Company, or (b) involve initial or continuing disclosure obligations materially adverse to the best interests of the Company's stockholders. If, after a registration statement becomes effective, the Company advises the holders of the Registrable Securities covered by such registration statement pursuant to SECTION 7.4(e) that the Company considers it appropriate for the registration statement to be amended, the 20 holders shall suspend any further sales of their registered securities until the Company advises them that the registration statement has been amended. SECTION 7.6 INFORMATION TO BE FURNISHED BY HOLDERS OF REGISTRABLE SECURITIES Each prospective seller of Registrable Securities registered or to be registered under any registration statement shall furnish to the Company such information and execute such documents regarding the Registrable Securities held by such seller and the intended method of disposition thereof as the Company shall reasonably request in connection with the action to be taken by the Company. SECTION 7.7 EXPENSES OF REGISTRATION. The Company shall pay all Registration Expenses in connection with each registration pursuant to this ARTICLE VII. All Selling Expenses in connection with each registration pursuant to ARTICLE VII shall be borne by the seller or sellers therein in proportion to the number of Registrable Securities included by each in such registration, or in such other proportions as they may agree upon. SECTION 7.8 INDEMNIFICATION. (a) The Company shall indemnify and hold harmless each holder of Registrable Securities, its executive officers, directors and controlling persons (within the meaning of the Securities Act) and each person who participates as an underwriter or controlling person of an underwriter (within the meaning of the Securities Act) with respect to a registration statement pursuant to this ARTICLE VII against any loss, claims, damages or liabilities to which any of them may become subject under the Securities Act or otherwise insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement of any material fact contained in a registration statement including Registrable Securities owned by such holder, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereto, or arise out of or are based upon the omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and shall reimburse any of them for any legal or other expenses reasonably incurred by any of them in connection with investigating or defending any such loss, claim, damage, liability or action; PROVIDED, HOWEVER, that the Company shall not be liable hereunder in any such case if any such loss, claim, damage, or liability arises out of or is based upon any untrue statement or omission made in such registration statement, prospectus or amendment or supplement thereto in reliance upon and in conformity with written information furnished to the Company for such purpose by such holder or by its representative or by any underwriter on behalf of such holder or if the untrue statement or omission is corrected in a supplement or amendment to the prospectus provided by or on behalf of the Company to such holder in a timely fashion which is not used by such holder. (b) Each holder of Registrable Securities joining in any registration statement of the Company pursuant to this ARTICLE VII of this Agreement shall, severally, but not jointly, indemnify and hold harmless the Company, its executive officers, directors, and controlling persons (within the meaning of the Securities Act) and each person who participates as an underwriter or controlling person of an underwriter (within the meaning of the Securities Act) with respect to a registration statement pursuant to this ARTICLE VII against any losses, claims, damages, or liabilities to which any of them may become subject under the Securities Act or otherwise, but only to the extent that as such losses, claims, damages, or liabilities (or actions in 21 respect thereof) arise out of or are based upon any untrue statement of any material fact contained in such registration statement, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereto, or arise out of or are based upon the omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, made in reliance upon and in conformity with written information furnished to the Company by such holder or by its representative or by any underwriter on behalf of such holder for such purpose, and shall reimburse any of them for any legal or other expenses reasonably incurred by them in connection with investigating or defending, any such loss, claim, damage, liability or action; PROVIDED, that such holder's liability hereunder shall not exceed the net proceeds realized by such holder from the Registrable Securities sold by it in the offering made pursuant to the registration statement. (c) Promptly after receipt by an indemnified party under this SECTION 7.8 of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against an indemnifying party, notify the indemnifying party of the commencement thereof and the indemnifying party shall have the right to assume the defense thereof with counsel mutually satisfactory to the parties. The failure to notify an indemnifying party promptly of the commencement of any such action, if prejudicial to the ability to defend such action, shall, to the extent prejudicial, relieve such indemnifying party of any liability to the indemnified party under this SECTION 7.8, but the omission so to notify the indemnifying party will not relieve such party of any liability that such party may have to any indemnified party other than under this SECTION 7.8. (d) If the indemnification provided for in this SECTION 7.8 is unavailable to or insufficient to hold harmless an indemnified party under SECTION 7.8(a) or (b) in respect of any losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) in such proportion as is appropriate to reflect not only the relative benefits received by the Company on the one hand and the holders of Registrable Securities on the other, but also the relative fault of the Company on the one hand and the holders of Registrable Securities on the other, in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions or proceedings in respect thereof), as well as any other relevant equitable considerations. The relative fault 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 or on behalf of the Company on the one hand or the holders of Registrable Securities on the other, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. (e) The Company and the holders of Registrable Securities agree that it would not be just and equitable if contributions pursuant to SECTION 7.8(d) were determined by PRO RATA allocation or by any other method of allocation which does not take account of the equitable considerations referred to above in SECTION 7.8(d). The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to above in SECTION 7.8(d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with 22 investigating or defending any such action or claim. Notwithstanding the provisions of SECTION 7.8(d): (i) no person or entity guilty of fraudulent misrepresentation (within the meaning of SECTION 11(f) of the Securities Act) shall be entitled to contribution from any person or entity who was not guilty of such fraudulent misrepresentation, and (ii) no holder of Registrable Securities shall be required to contribute any amount in excess of the proceeds received by such holder in the offering. SECTION 7.9 UNDERWRITING AGREEMENT. If Registrable Securities are sold pursuant to a registration statement in an underwritten offering pursuant to this ARTICLE VII, the Company and the holders of Registrable Securities if participating therein agree to enter into an underwriting agreement containing customary representations and warranties with respect to the business and operations of an issuer of, or, as the case may be, the seller of the securities being registered and customary covenants and agreements to be performed by such issuer or seller including, without limiting the generality of the foregoing, customary provisions with respect to indemnification by the Company of the underwriters of such offering. SECTION 7.10 TRANSFER OF REGISTRATION RIGHTS. The registration rights conferred hereunder shall inure to the benefit of the holders of Registrable Securities to whom Series A Preferred Stock, Series B Preferred Stock or Series C Preferred Stock was issued to and any person or entity who acquires at least 20% of any such holder's Registrable Securities; PROVIDED, such holder gives the Company at least fifteen (15) days' prior notice of such transfer. SECTION 7.11 MARKET-STAND-OFF AGREEMENT. (a) If requested by the Company and an underwriter of Common Stock (or other securities of the Company), a holder of Registrable Securities shall not sell or otherwise transfer or dispose of any Common Stock (or other securities of the Company) held by such holder (other than those included in the registration) during the one hundred eighty (180) day period following the effective date of a registration statement of the Company filed under the Securities Act, PROVIDED, that: (i) such agreement shall only apply to the first such registration statement of the Company, including securities to be sold on its behalf to the public in an underwritten offering; and (ii) those officers, directors and employees of the Company that the underwriter has reasonably requested be bound by a similar agreement have done so. (b) The obligations described in this SECTION 7.11 shall not apply to any Special Registration Statement. The Company may impose stop-transfer instructions with respect to the shares of Common Stock (or other securities of the Company) subject to the foregoing restriction until the end of said one hundred eighty (180) day period. ARTICLE VIII MISCELLANEOUS 23 SECTION 8.1 DURATION OF AGREEMENT. Except for the provisions of ARTICLE VII, the rights and obligations of the parties under this Agreement shall terminate, on the earlier to occur of the following: (a) immediately prior to the consummation of the Initial Public Offering; (b) immediately prior to the consummation of the sale of all, or substantially all, of the Company's assets or all of the Common Stock either through a direct sale, merger, reorganization, consolidation or other form of business combination in which control of the Company is transferred in a transaction approved by the requisite percentage of Series A Stockholders, Series B Stockholders and Series C Stockholders pursuant to ARTICLE VI. SECTION 8.2 SEVERABILITY; GOVERNING LAW. If any provisions of this Agreement shall be determined to be illegal or unenforceable by any court of law, the remaining provisions shall be severable and enforceable to the maximum extent possible in accordance with their terms. This Agreement is made pursuant to, and shall be construed and enforced in accordance with, the laws of the State of Delaware (and United States federal law, to the extent applicable), irrespective of the principal place of business, residence or domicile of the parties hereto, and without giving effect to otherwise applicable principles of conflicts of law. Any legal action, suit or proceeding arising out of or relating to this Agreement may be instituted in any federal court in the Eastern District of Pennsylvania or in any state court in Delaware County, Pennsylvania, and each party waives any objection which such party may now or hereafter have to the laying of the venue of any such action, suit or proceeding, and irrevocably submits to the jurisdiction of any such court. Any and all service of process and any other notice in any such action, suit or proceeding shall be effective against any party if given as provided herein. Nothing herein contained shall be deemed to affect the right of any party to serve process in any other manner permitted by law or to commence legal proceedings or otherwise proceed against any other party in any jurisdiction other than Pennsylvania. SECTION 8.3 INJUNCTIVE RELIEF . It is acknowledged that it will be impossible to measure the damages that would be suffered by the parties if any party fails to comply with the provisions of this Agreement, and that in the event of any such failure there will not be an adequate remedy at law. The parties shall, therefore, be entitled to obtain specific performance of the non-complying party's obligations hereunder and to obtain immediate injunctive relief. The non-complying party shall not argue, as a defense to any proceeding for such specific performance or injunctive relief, that there is an adequate remedy at law. SECTION 8.4 BINDING EFFECT. This Agreement shall be binding upon and, except as provided herein, shall inure to the benefit of the parties hereto and their respective successors, personal representatives, heirs and permitted assigns. SECTION 8.5 MODIFICATION OR AMENDMENT. Neither this Agreement nor any provision hereof can be modified, amended, waived, changed, discharged or terminated except by an instrument in writing, signed by the Founding Stockholders, Series A Stockholders holding more than 50% of the outstanding shares of Series A Preferred Stock, Holders holding more than 50% of the Series B Conversion Stock, and Holders holding more than 50% of the Series C Common Stock and any such amendment, waiver, discharge or termination shall be binding on all Stockholders and Holders, but in no event shall the obligation of any Stockholder or Holder hereunder be materially increased, except upon written consent of such Stockholder or Holder. 24 SECTION 8.6 COUNTERPARTS. This Agreement may be executed in one or more counterparts each of which shall be deemed to be an original, but all of which taken together shall constitute one and the same instrument. SECTION 8.7 NOTICES. Notices and other communications required or permitted hereunder shall be in writing and shall be mailed by United States first-class mail, postage prepaid, sent by facsimile or delivered personally by hand or nationally recognized courier addressed (a) if to a Stockholder or Holder or their transferees, as indicated on the list of Stockholders and Holders attached hereto as SCHEDULES I, II, III, IV AND V, or at such other address as such holder or permitted assignee shall have furnished to the Company in writing, or (b) if to the Company, at its principal place of business, or at such other address or facsimile number as the Company shall have furnished to each Stockholder or Holder in writing. All such notices and other written communications shall be effective on the date of mailing, facsimile transfer or delivery. Notwithstanding anything to the contrary contained herein, to the extent the Holders of Series B Preferred Stock or Series C Preferred Stock have designated a representative to act on their behalf, then notice by the Company to such designated representatives shall be deemed sufficient notice to each holder of Series B Preferred Stock or Series C Preferred Stock, respectively, and such representatives shall undertake to provide such notice to all Holders of Series B Preferred Stock. SECTION 8.8 MERGER PROVISION. This Agreement along with all exhibits and schedules hereto, constitute the entire agreement among the parties hereto pertaining to the subject matter hereof and supersede all prior agreements and understandings, whether oral or written, of any of the parties hereto concerning the subject matter hereof (other than the Management Stockholders' Agreement). SECTION 8.9 FURTHER ASSURANCES. From and after the date of this Agreement, the parties hereto upon the request of any other party shall execute and deliver such instruments, documents and 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. SECTION 8.10 AUTHORIZATION. Each Founding Stockholder represents and warrants that (i) this Agreement has been duly executed and delivered by him, (ii) he is not a party to any similar agreement which could interfere with his rights and obligations hereunder, and (iii) his entering into or compliance with this Agreement will not breach the provisions of any contract or agreement to which he is a party. SECTION 8.11 DELAYS OR OMISSIONS. No delay or omission to exercise any right, power or remedy accruing to any Stockholder, upon any breach or default of the Company under this Agreement shall impair any such right, power or remedy of such Stockholder nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default therefore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of any Stockholder of any breach or default under this Agreement or any waiver on the part of any Stockholder of any provisions or conditions of this Agreement must be made in writing and shall be effective only to 25 the extent specifically set forth in such writing. All remedies, either under this Agreement or by law or otherwise afforded to any Stockholder, shall be cumulative and not alternative. SECTION 8.12 RIGHTS; SEPARABILITY. Unless otherwise expressly provided herein, a Stockholder's rights hereunder are several rights, not rights jointly held with any of the other Stockholders. SECTION 8.13 INFORMATION CONFIDENTIAL. Each Stockholder and Holder acknowledges that the information received by it pursuant hereto may be confidential and for its use only, and it shall not use such confidential information in violation of the Exchange Act or reproduce, disclose or disseminate such information to any other person or entity (other than its employees or agents having a need to know the contents of such information, and its attorneys), except in connection with the exercise of rights under this Agreement, unless the Company has made such information available to the public generally or such Stockholder and Holder is required to disclose such information by a governmental body. SECTION 8.14 TITLES AND SUBTITLES. The titles of the Articles and Sections of this Agreement are for convenience by reference only and are not to be considered in construing or interpreting this Agreement. SECTION 8.15 ADDITIONAL PARTIES. The Board of Directors of the Company may, without the consent of the Preferred Stockholders or any other party hereto, join any person who holds or becomes a holder of the Company's capital stock as an additional party hereto. Any such joinder shall be reflected on an appropriate Schedule hereto. [SIGNATURE PAGES TO FOLLOW] 26 IN WITNESS WHEREOF, the undersigned has executed this First Amended and Restated Stockholders' Agreement effective as of the day and year first above written. WORLDGATE COMMUNICATIONS, INC. By /s/ Randall Gort ----------------------------------- 27 SIGNATURE PAGE TO WORLDGATE COMMUNICATIONS, INC. FIRST AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT /s/ Stockholders Named in Schedules hereto ------------------------------------------ Subscriber's Name By: --------------------------------------- Name: Title: 28 EX-23.1 10 EXHIBIT 23.1 Exhhibit 23.1 Consent Of Independent Accountants We consent to the inclusion in this Registration Statement on Form S-1 of our report, which will be issued upon the effectiveness of the stock split as described in Note 10 to the financial statements, dated February 8, 1999 except as to the information in Note 10,for which the date is , 1999, on our audits of the financial statements of Worldgate Communications, Inc. We also consent to the references to our firm under the captions "Selected Financial Data" and" Experts." PricewaterhouseCoopers LLP Philadelphia,Pennsylvania February 8,1999 EX-27 11 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STATEMENT OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 AND THE BALANCE SHEET AT DECEMBER 31, 1996, 1997 AND 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATMENTS. 1,000 YEAR YEAR YEAR DEC-31-1996 DEC-31-1997 DEC-31-1998 JAN-01-1996 JAN-01-1997 JAN-01-1998 DEC-31-1996 DEC-31-1997 DEC-31-1998 1,693 4,880 368 5,881 12,438 0 0 106 572 0 0 0 0 620 2,737 7,583 18,120 3,848 0 271 780 0 22 137 7,583 18,412 5,621 463 1,938 7,097 0 591 1,127 8,571 34,366 49,276 0 0 0 91 91 91 1,530 779 426 7,583 18,412 5,621 0 141 1,022 0 141 1,022 0 0 0 2,929 14,588 28,365 0 0 0 0 0 0 2 17 101 (2,923) (14,041) (27,020) 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 (2,923) (14,041) (27,020) (0.33) (1.81) (3.64) (0.33) (1.81) (3.64)
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