<PAGE>
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, For Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
SOURCE MEDIA, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
_______________________________________________________________
(2) Aggregate number of securities to which transaction applies:
_______________________________________________________________
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:
______________________________________________________________
<PAGE>
(4) Proposed maximum aggregate value of transaction:
_______________________________________________________________
(5) Total fee paid:
_______________________________________________________________
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously.
(1) Amount previously paid:
_______________________________________________________________
(2) Form, Schedule or Registration Statement No.:
_______________________________________________________________
(3) Filing party:
_______________________________________________________________
(4) Date Filed:
_______________________________________________________________
Copies of all communications to:
Robert L. Winikoff, Esq.
Cooperman Levitt Winikoff Lester & Newman, P.C.
800 Third Avenue
New York, New York 10022
(212) 688-7000
<PAGE>
SOURCE MEDIA, INC.
5400 LBJ Freeway, Suite 680
Dallas, Texas 75240
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD NOVEMBER 17, 1999
To the Stockholders of Source Media, Inc.:
NOTICE IS GIVEN that the annual meeting of stockholders of Source Media,
Inc., a Delaware corporation, will be held on November 17, 1999, beginning at
9:00 a.m., local time, at Cliffbreakers River Suites and Conference Center, 700
West Riverside Boulevard, Rockford, Illinois 61103, for the following purposes:
1. To elect four directors to serve until the next annual meeting of
stockholders;
2. To consider and vote upon a proposal to amend our 1995 Performance
Equity Plan which would increase the number of shares available for
purchase upon the exercise of stock options from 1,975,000 shares to
2,957,589 shares;
3. To consider and vote upon a proposal to approve our 1999 Stock Option
Plan;
4. To consider and vote upon a proposal to approve a transaction with a
wholly-owned subsidiary of Insight Communications Company, Inc. and in
connection with such approval to approve, as a single proposal, the
following matters:
. the issuance of 842,105 shares of our common stock and the issuance
of warrants to purchase up to an additional 4,596,786 shares of our
common stock;
. the amendment of our Certificate of Incorporation to authorize
additional preferred stock; and
. the amendment of our Certificate of Incorporation to create a class
of non-voting common stock;
5. To consider and vote upon a proposal to ratify the appointment of Ernst
& Young LLP as our independent auditors for 1999; and
6. To transact such other business as may properly come before the meeting
or any adjournment thereof.
The board of directors has fixed September 23, 1999 as the record date for
determining the stockholders entitled to notice of, and to vote at, the meeting
or any adjournment of the meeting.
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You are cordially invited to attend this meeting in person. If you do not
expect to be present in person, please sign and date the enclosed proxy, and
return it in the enclosed envelope, which requires no postage if mailed in the
United States. If you attend the meeting, you may vote in person if you wish,
whether or not you have returned your proxy. In any event, a proxy may be
revoked at any time before it is exercised.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ Stephen W. Palley
Stephen W. Palley, President
Dallas, Texas
September 24, 1999
<PAGE>
SOURCE MEDIA, INC.
5400 LBJ FREEWAY
SUITE 680
DALLAS, TEXAS 75240
PROXY STATEMENT
FOR
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD NOVEMBER 17, 1999
INTRODUCTION
This proxy statement is being mailed on or about September 24, 1999 to all
of our stockholders of record at the close of business on September 23, 1999 in
connection with the solicitation by our board of directors of proxies for the
annual meeting of stockholders to be held at Cliffbreakers River Suites and
Conference Center, 700 West Riverside Boulevard, Rockford, Illinois 61103 on
November 17, 1999.
Solicitation of Proxies
Proxies will be solicited by mail, and all expenses of preparing and
soliciting such proxies will be paid by us. We have arranged for reimbursement,
at the rate suggested by The Nasdaq Stock Market, Inc., of brokerage houses,
nominees, custodians and fiduciaries for the forwarding of proxy materials to
the beneficial owners of shares held of record. Proxies may also be solicited by
our directors, officers and employees, but such persons will not be compensated
specifically for such services.
All proxies properly executed and received by the persons designated as
proxy will be voted on all matters presented at the meeting in accordance with
the specific instructions of the person executing such proxy or, in the absence
of specified instructions, will be voted for the named nominees to the board and
in favor of the proposals as set forth in the Notice accompanying this proxy
statement.
The board does not know of any other matter that may be brought before the
annual meeting but, in the event that any other matter should come before the
meeting, or any nominee should not be available for election, the persons named
as proxy will have authority to vote all proxies not marked to the contrary in
their discretion as they deem advisable.
<PAGE>
Manner of Voting
Stockholders may vote their proxies by mail. Stockholders who hold their
shares through a bank or broker can also vote via telephone or the Internet if
any of these options are offered by the bank or broker. Any stockholder may
revoke his proxy, whether he votes by mail, telephone or the Internet, at any
time before the meeting by written notice to such effect received by us at the
address set forth above, attn: secretary, by delivery of a subsequently dated
proxy or by attending the meeting and voting in person.
Vote Required
The total number of shares of our common stock outstanding as of September
16, 1999 was 13,534,565. The common stock is the only class of securities
entitled to vote, each share being entitled to one non-cumulative vote. Only
stockholders of record as of the close of business on the record date will be
entitled to vote. A majority of the shares of common stock outstanding and
entitled to vote must be present at the meeting in person or by proxy in order
to constitute a quorum for the transaction of business. Abstentions and broker
nonvotes will be counted for purposes of determining the presence or absence of
a quorum for the transaction of business. Assuming the presence of a quorum,
directors will be elected by a plurality of the votes cast at the meeting. An
affirmative vote of a majority of the shares of common stock present and voting,
in person or by proxy, at the meeting is required to pass upon each of the other
matters presented other than Proposal 4, which requires the affirmative vote of
a majority of the outstanding shares of common stock. As a result, any shares
not voted in favor of Proposal 4 (whether by abstention, broker nonvote or
otherwise) will have the same effect as a vote against the proposal.
Abstentions and Nonvotes
Abstentions will be counted in tabulations of the votes cast on each of the
proposals presented at the meeting, whereas broker nonvotes will not be counted
for purposes of determining whether a proposal has been approved. "Broker
nonvotes" are proxies received from brokers who, in the absence of specific
voting instructions from beneficial owners of shares held in brokerage name,
have declined to vote such shares in those instances where discretionary voting
by brokers is permitted.
List of Stockholders
A list of stockholders entitled to vote at the meeting will be available at
our offices, 5400 LBJ Freeway, Suite 680, Dallas, Texas, during ordinary
business hours for a period of ten days prior to the meeting and at the meeting
itself for examination by any stockholder.
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth as of September 16, 1999 certain information
regarding the ownership of our common stock as of the record date by (i) each
director and each nominee for director, including proposed nominees of Insight
to be appointed after closing of the transaction with Insight, (ii) each person
known by us to own beneficially 5% or more of our common stock, (iii) each
current executive officer named in the summary compensation table elsewhere in
this proxy statement and (iv) all current directors and executive officers as a
group. Except as otherwise indicated, the address of each beneficial holder of
5% or more of our common stock is 5400 LBJ Freeway, Suite 680, Dallas, Texas
75240.
Shares
Beneficially Percent
Name Of Beneficial Owner Owned (1) Of Class
- ------------------------ ------------- ---------
James L. Greenwald(2)......................... 9,000 *
Michael J. Marocco(3)......................... 968,726 6.7%
Stephen W. Palley (2)......................... 125,000 *
Barry Rubenstein(4)........................... 1,082,627 7.4%
Kim D. Kelly.................................. 0 *
c/o Insight Communications Company, Inc.
126 East 56/th/ Street
New York, New York 10022
Sidney R. Knafel.............................. 40,000 *
c/o Insight Communications Company, Inc.
126 East 56/th/ Street
New York, New York 10022
Michael S. Willner(5)......................... 43,000 *
c/o Insight Communications Company, Inc.
126 East 56/th/ Street
New York, New York 10022
Timothy P. Peters(6).......................... 870,063 6.3%
3832 Whiffletree
Plano, Texas 75023
Robert H. Alter(2)............................ 6,000 *
10 Old Jackson Avenue, No. 80
Hastings-On-Hudson, New York 10706-3203
E B Investor (Jersey) Limited (7)............. 720,000 5.3%
c/o A&A Early Bird AG
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Innere Guterstrasse 4
6304 Zug
Switzerland
Paul Tudor Jones, II (8) 1,496,700 11.1%
c/o Tudor Investment Corporation
600 Steamboat Road
Greenwich, CT 06830
W. Thomas Oliver (2) 261,750 1.9%
All current directors and executive
officers as a group (10 persons) 1,706,322 11.3%
____________________
* Less than 1%
(1) Includes shares underlying currently exercisable options and warrants as
well as those options and warrants which will become exercisable within 60
days of the record date. Except as otherwise indicated, the named persons
herein have sole voting and dispositive power with respect to beneficially
owned shares.
(2) Represents shares of common stock issuable upon exercise of options.
(3) Includes (i) 9,675 shares of common stock issuable upon exercise of warrants
and (ii) 9,000 shares of common stock issuable upon exercise of options. Mr.
Marocco is a general partner of Sandler Capital Management, which through an
affiliate is managing general partner of 21st Century Communications
Partners, L.P., 21st Century Communications T-E Partners, L.P. and 21st
Century Communications Foreign Partners, L.P. Accordingly, also includes (a)
635,949 shares of common stock issuable upon exercise of warrants held by
21st Century Communications Partners, L.P., (b) 216,374 shares of common
stock issuable upon exercise of warrants held by 21st Century Communications
T-E Partners, L.P. and (c) 85,615 shares of common stock issuable upon
exercise of warrants held by 21st Century Communications Foreign Partners,
L.P. Mr. Marocco disclaims beneficial ownership to all of the shares
referenced in the prior sentence except to the extent of his pecuniary
interest.
(4) Includes (i) 16,125 shares of common stock issuable upon exercise of
warrants and (ii) 3,000 shares of common stock issuable upon exercise of
options. Mr. Rubenstein is a general partner of Woodland Partners, L.P.
Accordingly, also includes 101,875 shares of common stock issuable upon
exercise of warrants held by Woodland Partners, L.P. as to which he
disclaims beneficial ownership except to the extent of his pecuniary
interest. Mr. Rubenstein is an officer and shareholder of Infomedia
Associates, Ltd. which is one of the general partners of 21st Century
Communications Partners, L.P., 21st Century Communications T-E Partners,
L.P. and 21st Century Communications Foreign Partners, L.P. Accordingly,
also includes (a) 635,949 shares of common stock issuable upon exercise of
warrants held by 21st Century Communications Partners, L.P., (b) 216,374
shares of common stock issuable upon exercise of warrants held by 21st
Century Communications T-E Partners, L.P. and (c) 85,615 shares of common
stock issuable upon exercise of warrants held by 21st Century Communications
Foreign Partners, L.P.
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(5) Includes 18,000 shares of common stock issuable upon exercise of options.
(6) Includes 326,236 shares of common stock issuable upon exercise of options.
(7) Based on a report on Schedule 13G dated January 5, 1999.
(8) Based on a report on Schedule 13G dated April 16, 1999, which was jointly
filed by Tudor Investment Corporation, Paul Tudor Jones, II, The Raptor
Global Fund Ltd., The Raptor Global Fund L.P., Tudor Proprietary Trading,
L.L.C., Tudor BVI Futures, Ltd. and The Upper Mill Capital Appreciation Fund
Ltd. Tudor Investment Corporation reported beneficial ownership of and
shared dispositive power with respect to 927,700 shares. Paul Tudor Jones,
II reported beneficial ownership of and shared dispositive power with
respect to 989,500 shares. Tudor BVI Futures, Ltd. reported beneficial
ownership of and shared dispositive power with respect to 249,300 shares.
Tudor Proprietary Trading, L.L.C. reported beneficial ownership of and
shared dispositive power with respect to 61,800 shares. The Raptor Global
Fund L.P. reported beneficial ownership of and shared dispositive power with
respect to 130,800 shares. The Raptor Global Fund Ltd. reported beneficial
ownership of and shared dispositive power with respect to 489,100 shares.
The Upper Mill Capital Appreciation Fund Ltd. reported beneficial ownership
of and shared dispositive power with respect to 58,500 shares. Tudor
Investment Corporation and Mr. Jones expressly disclaim such beneficial
ownership.
5
<PAGE>
PROPOSAL 1
ELECTION OF DIRECTORS
Four directors are to be elected at the meeting to serve until the next
annual meeting of stockholders. Each of the nominees has consented to serve as a
director if elected.
The board of directors' nominees for the office of director are as follows:
James L. Greenwald, age 72, has served as our director since May 1996. Mr.
Greenwald has served as chairman emeritus of Katz Media Corporation, a
communications representative firm, since August 1995. Mr. Greenwald joined Katz
Media in 1956 and has held various positions, including President of the radio
division from 1965 through 1970, Executive Vice President from 1970 through
1975, President from 1975 through 1982 and Chairman of the board of directors
and Chief Executive Officer from 1975 through 1994. Mr. Greenwald is a director
of Granite Broadcasting Company and the Young Adult Institute, an honorary
trustee of the Foundation of American Women in Radio and Television and past
president of the International Radio and Television Foundation and the Station
Representatives Association.
Michael J. Marocco, age 40, has served as our director since May 1996. Mr.
Marocco is a Managing Director of Sandler Capital Management and has been
associated with Sandler since April 1989. Prior to that, Mr. Marocco was a vice
president at Morgan Stanley & Co., Incorporated where he was involved in raising
capital and merger and acquisition transactions. Mr. Marocco serves as a
director of Mentus Media Corp. and numerous private companies involved in cable
television, advertising and cellular telephone industries.
Stephen W. Palley, age 54, has served as our director since June 1999 and
joined us in April 1999 as our Chief Executive Officer. Mr. Palley was Chief
Operating Officer of King World Productions, Inc. from 1986 to 1996. Mr.
Palley's background includes entertainment, music and television and securities
law. He is a member of the New York State Bar and the Museum of Radio and
Television Council.
Barry Rubenstein, age 55, has served as our director since September 1997.
In 1994, Mr. Rubenstein co-founded the 21st Century Partnerships, of which he is
presently a principal. In 1992, Mr. Rubenstein co-founded Applewood Associates,
L.P., of which he is presently a principal. Prior to 1992, Mr. Rubenstein was a
founder of or founding consultant to Applied Digital Data Systems, Inc., Novell,
Inc., and Cheyenne Software, Inc. From 1983 to 1987, Mr. Rubenstein held
various positions with Cheyenne Software, Inc., including President, Chief
Executive Officer, Director and Chairman of the Board. Mr. Rubenstein is a
director of or advisor to Infonautics Corporation, Millwood Press and several
private technology companies.
We currently have six members on our board of directors including Messrs.
Greenwald, Marocco, Palley and Rubenstein. Our board also presently includes
Robert H. Alter and Michael S. Willner, who are not nominees for election at the
meeting. Upon consummation of the
6
<PAGE>
transaction with Insight, the size of the board would be increased to seven and
Insight would be entitled to elect three directors. See Proposal 4 for a
description of the rights regarding board representation that Insight would have
upon consummation of the Insight transaction. Insight has informed us that it
intends to designate Kim D. Kelly, Sidney R. Knafel and Michael S. Willner as
its board representatives to be appointed upon the closing of the transaction.
Set forth below is certain biographical information for each of these
individuals.
Kim D. Kelly, age 43, has been Executive Vice President and Chief Financial
Officer of Insight since 1990. Ms. Kelly has also been Chief Operating Officer
of Insight since January 1998. Prior thereto, she served from 1982 to 1990 with
Marine Midland Bank, becoming its Senior Vice President in 1988, with primary
responsibility for media lending activities. Ms. Kelly serves as a member of the
National Cable Television Association Subcommittee for Telecommunications
Policy, as well as the National Cable Television Association Subcommittees for
Accounting. She also serves on the boards of Insight, Community Antenna
Television Association, Cable in the Classroom and Cable Advertising Bureau. Ms.
Kelly is a graduate of George Washington University.
Sidney R. Knafel, age 68, has been Chairman of the Board of Insight since
1985. He is a director of NTL, Inc., one of the three largest cable and
telecommunications operators in the United Kingdom. He was the founder, Chairman
and an equity holder of Vision Cable Communications, Inc. from 1971 until its
sale in 1981. Mr. Knafel is presently the managing partner of SRK Management
Company, a private investment company, and also serves as Chairman of
BioReliance Corporation, a biological testing company. He is a director of
Cellular Communications of Puerto Rico, Inc., CoreComm Limited, General American
Investors Company, Inc. and IGENE Biotechnology, Inc. as well as several private
companies. Mr. Knafel is a graduate of Harvard College and the Harvard Business
School.
Michael S. Willner, age 47, has served as our director since April 1998.
Mr. Willner co-founded and has served as President of Insight since 1985.
Previously, Mr. Willner served as Executive Vice President and Chief Operating
Officer of Vision Cable from 1979 through 1985, Vice President of Marketing for
Vision Cable from 1977 to 1979 and General Manager of Vision Cable's Bergen
County, New Jersey cable television system from 1975 to 1977. Currently, Mr.
Willner is a director of NTL, Inc. He serves on the boards of Insight, C-SPAN
and the National Cable Television Association where he is a member of the
Executive Committee and serves as Treasurer. Mr. Willner is a graduate of Boston
University's College of Communication and serves on the school's Executive
Committee.
7
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Additional Information Regarding the Board of Directors
Board Meetings and Committees
Our board of directors held twelve meetings during 1998. Each director
attended 75% or more of the board meetings and the meetings of the committees on
which they serve.
The audit committee of the board recommends independent auditors to the
board and reviews the scope and results of audits conducted and our internal
control procedures. The audit committee is currently composed of Messrs. Alter,
Greenwald and Palley. The audit committee held one meeting during 1998.
The compensation committee of the board establishes the level of
compensation of our executive officers and administers our 1995 stock option
plan. The compensation committee is currently composed of Messrs. Greenwald,
Morocco and Palley. The compensation committee held one meeting during 1998.
Compensation of Directors
Directors who are not full-time employees are paid a retainer of $2,500 per
fiscal quarter and $1,000 for each meeting of the board of directors and of any
committee of the board that they attend (so long as the committee meeting is not
on the same day as a board of directors meeting), and $500 for each telephonic
meeting in which they participate, and they are reimbursed for travel and
related expenses incurred in connection with attendance at board and committee
meetings. Pursuant to the 1995 Nonqualified Stock Option Plan for Non-Employee
Directors, during 1998 each non-employee director was granted an option to
purchase 3,000 shares of common stock, with an exercise price of $22.84, the
fair market value of a share of common stock on the date of grant (based on a
trailing five-day average).
In certain instances, directors who are not full-time employees may be
engaged by the board of directors to participate in projects for our benefit. In
such instances, the board of directors has authorized payment to those directors
at a rate of $125 per hour, up to a maximum of $1,000 per day, in addition to
reimbursement of expenses incurred in the performance of services.
Recommendation
The board of directors recommends a vote FOR the election of the nominees.
8
<PAGE>
PROPOSAL 2
AMENDMENT TO THE 1995 PERFORMANCE EQUITY PLAN
The 1995 Performance Equity Plan was amended by our board of directors on
August 25, 1999 to increase the number of shares of common stock available under
the 1995 Plan from 1,975,000 to 2,957,589 and to provide that any shares subject
to options granted under the 1995 plan which expire or terminate prior to being
exercised may be used for subsequent grants of options or stock appreciation
rights under our 1999 Stock Option Plan, subject to the approval of our
stockholders. We believe that we have been successful in the past in attracting
and retaining qualified employees, officers and consultants in part because of
our ability to offer such persons options to purchase our common stock. We
believe that the increase in the number of shares reserved for issuance pursuant
to the 1995 Plan is necessary for us to continue to attract and retain qualified
employees, officers and consultants.
The 1995 Plan provides for its administration by our board of directors or
by a committee appointed by the our board. The 1995 Plan is currently
administered by our Compensation Committee. The Compensation Committee has
discretionary authority (subject to certain restrictions) to determine, among
other things, the individuals to whom and the times at which awards under the
1995 Plan will be granted and the number of shares subject to such awards. Such
awards include:
. stock options;
. stock appreciation rights;
. restricted stock;
. deferred stock;
. stock reload options; and
. other stock-based awards.
The Compensation Committee may interpret the provisions of the 1995 Plan
and may prescribe, amend and rescind rules and regulations relating thereto.
Currently, any shares subject to options which expire or terminate prior to
being exercised may again be used for an option under the 1995 Plan. Assuming
approval of the proposed amendment to the 1995 Plan, such expired or terminated
shares would become available for subsequent grants of options or stock
appreciation rights under our proposed 1999 Stock Option Plan rather than under
our 1995 Plan.
The per share exercise price of incentive stock options granted under the
1995 Plan may not be less than the fair market value of a share of our common
stock on the date upon which such option is granted. In the case of an optionee
who owns more than 10% of our common stock, the per share exercise price of
incentive stock options may not be less than 110% of the fair market value of a
share of our common stock on the date upon which such option is granted.
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The per share exercise price of non-qualified options granted under the 1995
Plan is determined by the Compensation Committee in its absolute discretion at
the time of grant.
The 1995 Plan is open to participation by our employees, officers and
consultants as well as employees, officers and consultants of our subsidiaries.
As of September 16, 1999, we and our subsidiaries had approximately sixty-seven
employees (including five officers) and one consultant eligible to participate
in the 1995 Plan.
In anticipation of this proposed amendment to the 1995 Plan, the
Compensation Committee granted options to purchase shares of common stock in
excess of the number of shares currently available for purchase under the 1995
Plan. Therefore, the approval of the proposed amendment to the 1995 Plan would
be an approval of these options to purchase shares in excess of the number of
shares currently available for purchase under the 1995 Plan. The terms of these
options and the persons to whom they were granted are as follows:
Number of Shares
Name of Optionee Underlying Options Exercise Price Expiration Date
---------------- ------------------ -------------- ---------------
Stephen W. Palley 500,000 $15.3125 3/29/09
Timothy P. Peters 16,666 $15.3125 3/29/06
John J. Reed 16,666 $15.3125 3/29/06
Daniel D. Maitland 25,000 $ 16.625 1/4/08
W. Thomas Oliver 35,000 $ 16.625 1/4/08
6,750 $ 6.625 6/14/05
Other Officers 76,666 $15.3125 3/29/06
(as a group) 74,167 $ 16.625 1/4/08
4,750 $ 6.625 6/14/05
Senior Managers and 238,200 $ 16.625 1/4/08
Other Employees 7,500 $ 6.625 6/14/05
(as a group)
Assuming approval of the proposed amendment to the 1995 Plan and after
giving effect to all options granted or available for grant under the plan,
there would be 2,957,589 shares of common stock available for issuance under the
1995 Plan, of which, as of September 16, 1999, 2,509,186 shares would be
reserved for then issued and outstanding awards.
Recommendation
Our board of directors recommends a vote FOR the proposal to amend the 1995
Plan.
10
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PROPOSAL 3
APPROVAL OF 1999 STOCK OPTION PLAN
On August 25, 1999, our board of directors adopted, subject to stockholder
approval, the Source Media, Inc. 1999 Stock Option Plan. The purpose of the 1999
Plan is to promote our interests and the interests of our stockholders by
strengthening our ability to attract and retain competent employees, to make
service on the board of directors more attractive to present and prospective
non-employee directors and to provide a means to encourage stock ownership and
proprietary interest by officers, non-employee directors and valued employees
and other individuals upon whose judgment, initiative and efforts our financial
success and growth largely depend.
Description of the 1999 Plan
The following summary description of the 1999 Plan is qualified in its
entirety by reference to the full text of the 1999 Plan, which is attached to
this proxy statement as Exhibit A.
Administration. The 1999 Plan will be administered by either the entire
board of directors or a committee consisting of two or more members of the board
of directors, each of whom is a "non-employee director" within the meaning of
Rule 16b-3 promulgated under the Securities Exchange Act of 1934. The board of
directors or committee, as the case may be, is to determine, among other things,
the recipients of grants, whether a grant will consist of incentive stock
options, nonqualified stock options or stock appreciation rights or a
combination thereof and the number of shares to be subject to such options and
rights.
Eligibility. Incentive stock options may be granted only to our officers
and key employees and to the officers and key employees of our subsidiaries.
Nonqualified stock options and stock appreciation rights may be granted to such
officers and employees as well as to our agents, directors and consultants,
whether or not such persons are our employees. As of September 16, 1999, there
were 58 persons eligible to participate in the 1999 Plan.
Shares Subject to the 1999 Plan. The total number of shares with respect to
which options and stock appreciation rights may be granted under the 1999 Plan
is 1,600,000, subject to adjustment for changes in our capitalization or in
connection with corporate transactions as provided in the 1999 Plan. Any shares
subject to options which expire or terminate prior to being exercised may again
be used for an option under the 1999 Plan. In addition, any shares subject to
options granted under the 1995 Plan which expire or terminate prior to being
exercised will also become available for subsequent grants of options or stock
appreciation rights under the 1999 Plan, thereby increasing the maximum number
of shares available for grants of options or stock appreciation rights under the
1999 Plan.
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Our subsidiary, IT Network, entered into an employment agreement dated as
of June 17, 1999 with its President and Chief Operating Officer, Howard Gross.
In connection with Mr. Gross's agreement, he was granted options to purchase
125,000 shares of our stock vesting over a four-year period. These options were
granted pursuant to and subject to the 1999 Plan. Thus, the grant of these
options is effectively subject to shareholder approval of the proposal to adopt
the 1999 Plan. No other options have been granted under the 1999 Plan.
Exercise Price. The per share exercise price of incentive stock options
granted under the 1999 Plan may not be less than the fair market value of a
share of our common stock on the date upon which such option is granted. In the
case of an optionee who owns more than 10% of our common stock, the per share
exercise price of incentive stock options may not be less than 110% of the fair
market value of a share of our common stock on the date upon which such option
is granted. The per share exercise price of non-qualified options granted under
the 1999 Plan is determined by the board of directors or a committee of the
board of directors, as the case may be, in its absolute discretion at the time
of grant.
Stock appreciation rights granted in tandem with an option have a value
upon exercise equal to the difference obtained by subtracting the purchase price
of a share of common stock specified in the related option from the fair market
value of a share of common stock on the exercise date. Stock appreciation rights
granted without relationship to an option have a value upon exercise equal to
the difference obtained by subtracting the fair market value of a share of
common stock on the date the stock appreciation right was granted from the fair
market value of a share of common stock on the exercise date.
Manner of Payment. Upon the exercise of an option, the holder must make
payment of the full exercise price. Such payment may be made in cash, check or,
under certain circumstances, in shares of any class of our common stock, or any
combination thereof.
Term. The term of options and stock appreciation rights granted under the
1999 Plan cannot exceed ten years. In the case of an optionee who owns more than
10% of our common stock, the term of incentive stock options cannot exceed five
years. No option or stock appreciation right may be granted under the 1999 Plan
after August 25, 2009, and no option or stock appreciation right may be
outstanding for more than ten years after its grant.
Transferability. Options granted under the 1999 Plan are not transferable
by the optionee otherwise than by will or the laws of descent and distribution
and are exercisable during the lifetime of the optionee only by the optionee or
the optionee's guardian or legal representative.
Termination and Amendment. The 1999 Plan may be terminated at any time by
the board of directors, which may also amend the 1999 Plan, except that without
stockholder approval, it may not increase the maximum number of shares for which
options and stock appreciation rights may be granted or change the designation
of the class of persons eligible to receive options and stock appreciation
rights under the 1999 Plan.
12
<PAGE>
Stockholder Status. Recipients of options or stock appreciation rights
under the 1999 Plan do not have any rights as stockholders.
United States Federal Income Tax Consequences
The following is a brief summary of the United States federal income tax
consequences to us and individuals receiving options and stock appreciation
rights under the 1999 Plan. The following summary is based upon an analysis of
the Internal Revenue Code of 1986, as amended (the "tax code"), existing laws,
judicial decisions, administrative rulings, regulations and proposed
regulations, all of which are subject to change. Moreover, the following is only
a summary of United States federal income tax consequences, and the tax
consequences to individuals participating in the 1999 Plan may be either more or
less favorable than those described below depending on their particular
circumstances.
Incentive Stock Options
No income will be recognized by an optionee for federal income tax purposes
upon the grant or exercise of an incentive stock option. If the optionee holds
the shares received from the exercise of an option for a period (the "Qualified
Holding Period") equal to at least one year after exercise and at least two
years after grant of the option, the optionee will recognize capital gain or
loss upon the sale of such shares equal to the difference between the amount
realized on the sale and the exercise price. Generally, if the shares are not
held for the Qualified Holding Period, the optionee will recognize ordinary
income upon disposition in an amount equal to the excess of the fair market
value of the shares on the date of exercise over the exercise price. Any
additional gain realized by the optionee upon such disposition will be a capital
gain. If instead of a gain on disposition, the disposition would result in a
loss to the optionee by reason of the optionee's failure to hold the shares for
the Qualified Holding Period, the amount of ordinary income to the optionee
would be the excess, if any, of the amount realized by the optionee from the
disposition of the shares over the optionee's basis in the shares.
We are not entitled to a tax deduction upon the exercise of an incentive
stock option by an optionee. If the optionee disposes of shares received
pursuant to such exercise prior to the expiration of the Qualified Holding
Period, however, we may, subject to the deduction limitation described below,
deduct an amount equal to the amount of ordinary income recognized by the
optionee upon disposition of the shares at the time such income is recognized by
the optionee.
An optionee may use shares of our common stock already owned by the
optionee to pay the exercise price for shares under an incentive stock option.
The resulting tax consequences will depend upon whether the already owned shares
of common stock are "statutory option stock", and, if so, whether such statutory
option stock has been held by the optionee for the Qualified Holding Period. In
general, "statutory option stock" (as defined in Section 424(c)(3)(B) of the tax
13
<PAGE>
code) is any stock acquired through the exercise of an incentive stock option or
of an option granted pursuant to an employee stock purchase plan.
If the already owned stock is statutory option stock with respect to which
the Qualified Holding Period has been satisfied, no income will be recognized by
the optionee upon the transfer of such stock in payment of the exercise price of
an incentive stock option. If the already owned stock is not statutory option
stock, no income will be recognized by the optionee upon the transfer of the
stock. If the stock used to pay the exercise price of an incentive stock option
is statutory option stock with respect to which the Qualified Holding Period has
not been satisfied, the transfer of such stock will result in the recognition of
ordinary income by the optionee in an amount equal to the excess of the fair
market value of the statutory option stock at the time the incentive stock
option covering such stock was exercised over the option price of such stock.
Nonqualified Stock Options
No income will be recognized by an optionee for federal income tax purposes
upon the grant of a nonqualified stock option. Upon exercise of a nonqualified
stock option (if the optionee acquires shares of common stock upon exercise),
the optionee will recognize ordinary income in an amount equal to the excess of
the fair market value of the shares on the date of exercise over the option
price of such shares. If such an optionee acquires deferred stock upon exercise
of a nonqualified stock option, the optionee will recognize ordinary income on
the date shares of common stock related to such deferred stock are received (or,
if earlier, the date such shares are made available to the optionee) in an
amount equal to the excess of the fair market value of the shares on such date
over the option price of the shares. If a nonqualified stock option is
transferred to a permitted transferee pursuant to the 1999 Plan, the optionee
(not the transferee) will recognize ordinary income upon exercise of the option
(or later receipt of common stock related to an option exercisable for deferred
stock) by the transferee, as if the option had not been transferred.
Nonqualified stock options are designed to provide us with a tax deduction,
subject to the deduction limitation described below, at the time the optionee
recognizes ordinary income. The amount of our deduction will be equal to the
amount of ordinary income recognized by the optionee. If an optionee sells
shares acquired from the exercise of a nonqualified stock option, the difference
between the amount realized and the basis of the shares will constitute capital
gain or loss to the optionee for federal income tax purposes. We will not be
entitled to any further tax deduction with respect to such gain or loss.
An optionee may use already owned shares of our common stock to pay the
exercise price for shares under a nonqualified stock option. In such a case, the
number of shares received pursuant to the option which is equal to the number of
shares delivered in payment of the exercise price will be considered received in
a nontaxable exchange, and the fair market value of the remaining shares
received by the optionee upon such exercise will be taxable to the optionee as
ordinary income and will be deductible to us.
14
<PAGE>
Stock Appreciation Rights
A recipient of stock appreciation rights will not recognize income for
federal income tax purposes upon the grant of stock appreciation rights. When
stock appreciation rights are exercised, the recipient will recognize ordinary
income on the date of exercise in an amount equal to the cash (if any) and the
fair market value of the shares transferred to the recipient. We will be
entitled to a tax deduction, subject to the deduction limitation described
below, equal to the amount of ordinary income recognized by the recipient due to
the exercise of stock appreciation rights at the time of such recognition by the
recipient.
If a recipient sells shares acquired from the exercise of stock
appreciation rights, the difference between the amount realized from such sale
and the basis of such shares will constitute capital gain or loss to the
recipient. We will not be entitled to any further tax deduction with respect to
such gain or loss.
Tax Withholding
Income recognized by our employee with respect to an award under the 1999
Equity Plan will be considered compensation subject to withholding at the time
the income is recognized, and, therefore, we must make the necessary
arrangements with the employee to ensure that the amount of the tax required to
be withheld is available for payment.
Limitations on Our Compensation Deduction
Section 162(m) of the tax code limits the deduction which we may take for
otherwise deductible compensation payable to certain of our executive officers
to the extent that compensation paid to such officers for such year exceeds $1
million, unless such compensation is performance-based, is approved by our
stockholders and meets certain other criteria. There is no assurance that awards
made to employees under the 1999 Equity Plan will satisfy the performance-based
compensation requirements and, accordingly, we may be limited by Section 162(m)
of the tax code in the amount of deductions we would otherwise be entitled to
take (as described in the foregoing summary).
Section 280G of the tax code limits the deductibility of certain "parachute
payments" to disqualified individuals by us. Generally, "parachute payments"
consist of payments in the nature of compensation made in connection with a
change in control of us. It is possible that any accelerated vesting of options
that occurs upon a change in control of us could be a "parachute payment"
subject to the deduction limitations of Section 280G of the tax code. In
addition, Section 4999 of the tax code imposes a 20% nondeductible excise tax
upon the disqualified individual receiving certain "parachute payments."
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<PAGE>
Recommendation
The board of directors recommends a vote FOR approval of the 1999 Stock
Option Plan.
PROPOSAL 4
APPROVAL OF THE INSIGHT TRANSACTION
Description of the Insight Transaction
The following summary description of the Contribution Agreement and the
Common Stock and Warrants Purchase Agreement is qualified in its entirety by
reference to the full text of such agreements, which are attached to this proxy
statement as Exhibit B and Exhibit C.
On July 29, 1999, we entered into a Contribution Agreement with a wholly-
owned subsidiary of Insight Communications Company, Inc. to form a joint venture
("Newco") to conduct all of our lines of business relating to our VirtualModem
and Interactive Channel products and businesses (the "Transferred Businesses").
On the same date, we entered into a Common Stock and Warrants Purchase Agreement
(the "Purchase Agreement") with Insight pursuant to which Insight will acquire
842,105 shares of our common stock and five-year warrants (the "Insight
Warrants") to acquire up to an additional 4,596,786 shares of our common stock
at an exercise price of $20.00 per share.
Under the terms of the Contribution Agreement, Newco, a Delaware limited
liability company, would be capitalized initially with a $13 million equity
infusion by Insight and our contribution of the Transferred Businesses as
described below. Both we and Insight will receive a 50% equity ownership in
Newco in consideration for our respective contributions. We will assign all our
right, title and interest in and to the intellectual property that has
application in the VirtualModem and Interactive Channel businesses to Newco, to
the extent assignable, and will grant to Newco an exclusive, perpetual, royalty
free, irrevocable, worldwide license (the "Newco License"), with the right to
sublicense, to all of the intellectual property not freely assignable by us, to
the extent such intellectual property permits the grant of licenses, except that
in each case the intellectual property covered by such assignment or license
will specifically exclude any television programming content that is developed
in the future by us or any of our other subsidiaries. Newco will grant back to
us a non-exclusive perpetual, royalty free, irrevocable, worldwide license of
the intellectual property used in our businesses other than the Transferred
Businesses. In addition, we will transfer to Newco all the equipment, intangible
property and data, contract rights, inventory and accounts receivable which have
use in the Transferred Businesses.
The Purchase Agreement contains provisions to protect Insight's interest in
our company, including preemptive rights and board representation. Initially,
our board of directors would consist of seven members, three of whom would be
designated by Insight.
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<PAGE>
We will serve as the manager of Newco and will manage the day-to-day
operations of Newco. However, certain special actions by Newco would require
approval of a four-member management committee. We and Insight would have equal
representation on the management committee. Such special actions would include
material deviations from Newco's business plan and budget, issuance of
additional equity, distributions to equity holders, asset sales and other
significant matters.
A management agreement to be entered into between us and Insight on the
closing date will set forth the terms under which the business of Newco will be
conducted. Pursuant to the management agreement, unless agreed to otherwise, we
will continue to provide all necessary services and business functions for Newco
and will be reimbursed for the related costs and expenses without any mark-up.
The management agreement will also contain provisions granting Newco the sole
and exclusive ownership of any inventions, improvements or modifications,
including any related intellectual property rights, which are developed by our
employees, officers or other parties associated with us in the performance of
the management agreement.
The limited liability company agreement of Newco to be entered into on
closing by us and Insight contemplates a "buy-sell" arrangement whereby either
party, following the fifth anniversary of the closing, may send to the other
party a notice specifying the value that the notifying party assigns to 100% of
the equity ownership of Newco. The notified party is then required to either
purchase the entire equity ownership from the notifying party or sell its entire
equity ownership to the notifying party, in each case using the valuation set
forth in the notice. The limited liability company agreement also provides for
certain transfer restrictions relating to Newco interests, drag-along and tag-
along rights with respect to such interests and rights upon a change in control
of us.
The agreements contemplate that, on the closing date of the transaction
with Insight, Newco and Insight will enter into an affiliation agreement
relating to the carriage of the Interactive Channel over Insight's cable
television systems, as well as a license agreement granting Insight a license to
use Newco's intellectual property in connection with such cable television
systems.
The agreements include registration rights provisions for the shares issued
and the shares underlying the warrants. The warrants contain provisions
protecting the holder from future dilution in certain instances.
The consummation of the Insight transaction is subject to certain
conditions, including approval by you as holders of our common stock, approval
by the holders of our long-term debt and our preferred stock. Each of the
components of the transaction with Insight is conditioned upon the consummation
of all other components of the transaction. The Insight transaction may be
terminated by either party in the event the closing has not occurred by January
31, 2000.
17
<PAGE>
Reasons for the Insight Transaction
Liquidity. The transaction with Insight will provide us with $12 million
in cash to be used for general corporate purposes. These funds will provide us
with the cash necessary to finance our current operations. Unless we consummate
the transaction with Insight or another transaction or transactions to provide
us with the cash necessary to finance our operations, we anticipate difficulties
in funding our operations and satisfying our obligations as they become due
after December 31, 1999. We would be required to seek alternative financing
sources, and there can be no assurance that alternative financing will be
available, and, if available, on acceptable terms.
Development of Technology. The contribution of $13 million to Newco will
enable us to continue to develop the VirtualModem and Interactive Channel
products and businesses through Newco.
Distribution. Insight has agreed to use its commercially reasonable
efforts to facilitate distribution of any products offered by Newco by marketing
such products to other cable television system operators and by providing
carriage of Newco's services on its own cable television systems subject to an
affiliation agreement to be entered into between Newco and Insight on or prior
to the closing date of the proposed transaction.
Description of Insight
Insight is the 8th largest cable television system operator in the United
States based on customers served after giving effect to its proposed acquisition
of several Kentucky cable television systems and other recently announced
industry acquisitions. Insight has a tightly grouped cluster of cable television
systems with approximately 98% of its customers concentrated in the four
contiguous states of Indiana, Kentucky, Ohio and Illinois. Upon completion of
Insight's rebuild efforts, which is expected to occur in 2000, over 96% of its
customers will be served from nine headends allowing it to more economically
deliver an array of entertainment, information and telecommunication services,
including interactive digital video, high-speed data access and telephone
service products.
Insight began offering new and enhanced products and services, such as
interactive digital video and high-speed data access, during the second quarter
of 1999. To facilitate the deployment of its enhanced products and services,
Insight is in the process of rebuilding almost all of its network to allow it to
deliver more information and entertainment services through its cable television
systems and to provide for two-way communications capability. The implementation
of interactive digital technology would significantly enhance and expand the
video and service offerings Insight provides to its customers.
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<PAGE>
In most of Insight's digital launches, Insight is providing a package of
digital services, known as "Digital Gateway." For $6.95 per month, Insight's
customers can purchase Digital Gateway and receive the following services:
a) A digital converter box;
b) An interactive navigational program guide for all analog and digital
channels;
c) A local, interactive Internet-style service;
d) A significant multiplexing of premium channels for customers who
separately subscribe to premium channels, such as HBO and Showtime;
e) Pay-per-view video-on-demand; and
f) A digital 40-channel audio music service.
Insight has informed us of its intentions to provide the Interactive
Channel's program guide and the LocalSource suite of products in its Digital
Gateway as it is launched in its cable television systems. Insight recently
launched LocalSource as part of its Digital Gateway service in Rockford,
Illinois and Columbus, Ohio. Insight has informed us of its intention to launch
the Digital Gateway service in all of its markets as rebuilds are completed.
Why We Are Requesting Approval of the Insight Transaction
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<PAGE>
The issuance of 842,105 shares of our common stock and the issuance of
warrants to purchase up to an additional 4,596,786 shares of our common
stock may be subject to the corporate governance rules of Nasdaq
It is the policy of The Nasdaq Stock Market, which lists our outstanding
common stock, to require stockholder approval of the issuance of common stock or
securities convertible into common stock in certain instances where such common
stock has or would have upon issuance voting power equal to or in excess of 20%
of the voting power outstanding before such issuance for less than the greater
of book or market value of the stock. Pursuant to the terms of the Purchase
Agreement, Insight will acquire, upon the formation of Newco, 842,105 shares of
our common stock at a purchase price of $14.25 per share, representing
approximately 6% of our outstanding stock, for a purchase price of $12 million
in cash. We will also issue to Insight five-year warrants to acquire up to an
additional 4,596,786 shares of our common stock at an exercise price of $20.00
per share. We may also issue warrants as compensation to financial advisors, if
required, in connection with the transaction. The issuance of the common stock
and warrants (on an as-exercised basis) to Insight would represent approximately
29% of the voting power as of September 16, 1999. Therefore, the Nasdaq rule may
require us to obtain stockholder approval prior to the issuance of the common
stock and warrants to Insight depending on our stock price at closing.
To amend our certificate of incorporation to authorize additional preferred
stock
The Purchase Agreement contains provisions to protect Insight's interest in
our company, including preemptive rights and board representation. In order to
provide Insight with these rights, the Purchase Agreement requires us to issue
Insight a special series of preferred stock.
Our certificate of incorporation authorizes us to issue 1,712,000 shares of
"blank check" preferred stock. Our board of directors is authorized, without
further stockholder approval, to issue preferred stock in one or more series and
to fix the rights, preferences, privileges and restrictions thereof, including
dividend rights, conversion rights, voting rights, redemption terms and
liquidation preferences, and to fix the number of shares constituting any series
and the designations of these series. Since all of the 1,712,000 shares of
preferred stock have been designated by the board of directors as 13 1/2% Senior
PIK Preferred Stock due 2007, additional preferred stock must be authorized in
order for us to be able to issue preferred stock to Insight. Approval by you as
holders of our common stock is required to authorize this additional preferred
stock.
20
<PAGE>
On August 25, 1999, the board of directors adopted, subject to stockholder
approval, an amendment to our Certificate of Incorporation increasing the
authorized number of shares of preferred stock from 1,712,000 shares to
1,712,001. Upon closing of the Insight transaction, the new share of preferred
stock designated by the board of directors as Non-Participating Preferred Stock
will be issued to Insight. The following summary description of the designations
and rights of the Non-Participating Preferred Stock is qualified in its entirety
by reference to the full text of the Certificate of Designations of the Non-
Participating Preferred Stock, which is attached to this proxy statement as
Exhibit D.
The Non-Participating Preferred Stock will entitle Insight to designate a
certain number of the members of the board of directors based on Insight's
ownership percentage of our common stock on a fully diluted basis as set forth
below. The terms of the Non-Participating Preferred Stock require that the
board be comprised of either 7 or 10 members. Upon the closing of the Insight
transaction, the board of directors will consist of seven members, three of whom
will be designated by Insight.
<TABLE>
<CAPTION>
Number of Board Seats to be Designated by Insight
-------------------------------------------------
Percentage of Voting Stock Owned by
Based on 7 Person Board Based on 10 Person Board Insight on a Fully Diluted Basis
----------------------- ------------------------ --------------------------------
<S> <C> <C>
3 4 15% or greater
2 3 7.5% or more but less than 15%
1 2 5% or more but less than 7.5%
1 1 2.5% or more but less than 5%
0 0 less than 2.5%
</TABLE>
In addition to the board representation described above, Insight will be
entitled to have at least one voting representative on each committee of the
board of directors, including but not limited to, the executive committee, if
any, the audit committee and the compensation committee.
The Non-Participating Preferred Stock will give Insight the preemptive
right to purchase such number of "New Securities" that we may sell or issue
after the closing date that would enable Insight to maintain its ownership
percentage of the then outstanding common stock. The Purchase Agreement defines
"New Securities" as any of our equity securities (excluding certain specified
issuances of common stock), whether presently authorized or authorized in the
future, including common stock, preferred stock and all rights, options or
warrants to purchase any such securities, and any securities and indebtedness
that are or may become convertible into or exchangeable for our capital stock.
Insight's right to appoint members to the board of directors (and
committees of the board) and the preemptive right granted with respect to the
sale and issuance of New Securities will
21
<PAGE>
lapse in the event that Insight's ownership of our voting stock on a fully
diluted basis falls below 2.5%.
To amend our certificate of incorporation to create a class of non-voting
common stock
As discussed above, Insight will be issued five-year warrants to acquire up
to an additional 4,596,786 shares of our common stock at $20.00 per share. In
connection with the exercise, including a partial exercise, of the warrants, we
and Insight may be required to obtain clearance under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976 from the Federal Trade Commission and the
Department of Justice prior to the issuance of our common stock. In the event
such clearance is not obtained, we will issue to Insight the maximum number of
shares of our common stock which is permissible without such clearance and for
the remainder, we will issue to Insight non-voting common stock. The non-voting
common stock will be identical in all respects to the common stock except that
the non-voting common stock will not have the right to vote on any matters
presented to our stockholders, unless otherwise required by law. The non-voting
common stock will automatically convert into voting common stock upon their
transfer. Approval by you as holders of our common stock is required to create a
class of non-voting common stock.
Potential Disadvantages of Approval
Dilution
If stockholders approve the Insight transaction, the aggregate number of
shares of common stock that will be issued to Insight at closing and that may be
issued to Insight upon the exercise of the warrants will dilute your equity
interest in our company.
Increased Number of Shares Available for Public Sale
If stockholders approve the Insight transaction, a greater number of shares
of common stock will become eligible for sale in the public market. Such sales,
or anticipation of the possibility of such sales, represents an overhang on the
market and could depress the market price of the common stock. We have agreed to
certain registration rights with respect to the shares and the warrant shares.
Potential for Discouraging Certain Changes of Control
The potential for the issuance of a large number of shares of common stock
following approval of the Insight transaction might tend to have the effect of
delaying, deferring or preventing a change in control of our company or
discouraging tender offers for our company.
Potential Effects on Our Ability to Obtain Future Equity Capital
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Approval of the Insight transaction may impede our ability to obtain
additional equity capital in the future because of the first two factors cited
above.
Pro Forma Consolidated Selected Financial Data
The following unaudited pro forma consolidated selected financial data for
Source Media, Inc. for the three fiscal years ended December 31, 1998 and the
six months ended June 30, 1999 were derived from the unaudited pro forma
consolidated statements of operations and the unaudited pro forma consolidated
balance sheet included elsewhere in this proxy statement. This pro forma
consolidated selected financial data should be read in conjunction with the
description of the proposed transaction with Insight and the pro forma financial
data appearing elsewhere in this proxy statement and our consolidated financial
statements included in our annual report on Form 10-K for the fiscal year ended
December 31, 1998 and our quarterly report on Form 10-Q for the six months ended
June 30, 1999.
<TABLE>
<CAPTION>
(unaudited)
Year Ended December 31, Six Months
PRO FORMA STATEMENT OF OPERATIONS DATA: ------------------------------------- Ended
(In thousands, except per share data) 1996 1997 1998 June 30, 1999
-------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
Monetary revenues $ 7,542 $ 12,082 $ 24,244 $ 9,307
Net loss attributable to common stockholders (10,056) (22,542)(1) (57,387)(2) (19,601)
Basic and diluted loss per common share (0.93) (1.85) (4.46) (1.41)
Pro forma weighted average common
shares outstanding 10,777 12,196 12,854 13,935
</TABLE>
(1) Includes $1.7 million of expense related to the early extinguishment of
debt.
(2) Includes $25.9 million for the write off of impaired intangible assets. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Notes 2 and 5 of the Notes to Consolidated Financial
Statements in our annual report on Form 10-K for the fiscal year ended
December 31, 1998.
<TABLE>
<CAPTION>
As of June 30, 1999
--------------------
PRO FORMA BALANCE SHEET DATA:
(In thousands, except per share data)
<S> <C>
Total assets $ 61,682
Long-term debt, excluding current maturities 100,000
Stockholders' equity (capital deficiency) (69,991)
Book value per share:
Historical $ (6.79)
Pro forma $ (5.02)
</TABLE>
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Comparative Per Share Data
The following table reflects the historical net loss per share from
continuing operations in comparison with the pro forma net loss per share from
continuing operations after giving effect to the proposed transaction with
Insight. The information presented in this table should be read in conjunction
with the description of the proposed transaction and the pro forma financial
data appearing elsewhere in this proxy statement and in our consolidated
financial statements included in our annual report on Form 10-K for the fiscal
year ended December 31, 1998, and in our quarterly report on Form 10-Q for the
six months ended June 30, 1999.
(unaudited)
<TABLE>
<CAPTION>
Year Ended December 31, Six Months
------------------------- Ended
1996 1997 1998 June 30, 1999
------- ------- ---- -------------
<S> <C> <C> <C> <C>
Net loss per share:
Pro Forma - basic and diluted $(0.93) $(1.85) $(4.46) $(1.41)
Historical - basic and diluted (1.39) (2.89) (5.21) (1.74)
</TABLE>
Recommendation
The board of directors recommends a vote FOR approval of the Insight
transaction.
PROPOSAL 5
RATIFICATION OF THE SELECTION OF INDEPENDENT AUDITORS
Based on the recommendation of our Audit Committee, Ernst & Young LLP,
which has served as our independent public accountants since 1989, has been
appointed by the board of directors to audit our financial statements for the
year ending December 31, 1999. Although stockholder ratification for this
appointment is not required, the board of directors considers it desirable for
stockholders to pass on such appointment. If the stockholders do not ratify the
appointment of Ernst & Young LLP, the engagement of independent auditors will be
reevaluated by the board of directors. Representatives of Ernst & Young LLP are
expected to be present at the annual meeting to respond to appropriate questions
from the stockholders and will be given the opportunity to make a statement
should they desire to do so.
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<PAGE>
Recommendation
The board of directors recommends a vote FOR the ratification of the
appointment of Ernst & Young LLP.
EXECUTIVE COMPENSATION
Compensation of our Executive Officers
The following summary compensation table sets forth the annual compensation
paid or accrued, together with the number of shares covered by options granted,
to our Chief Executive Officer and our four other highest paid executive
officers in 1998 (the "named executive officers") for the years indicated:
<TABLE>
<CAPTION>
Long-Term
Compensation
------------
Annual Compensation Common Stock
----------------------------- Underlying
Options
Name and Principal Position Year Salary Bonus -------------
- ---------------------------- ---- ------ -----
<S> <C> <C> <C> <C>
Timothy P. Peters (1) 1998 $225,000 $ 0 212,500
Chairman of the Board and 1997 225,000 132,656 12,500
Chief Executive Officer 1996 200,580 27,323 75,000
John J. Reed (2) 1998 $210,000 $ 2,363 70,000
President 1997 210,000 44,012 38,000
1996 189,330 21,210 70,000
W. Scott Bedford (3) 1998 $210,000 $ 1,181 110,000
Chief Financial Officer 1997 210,000 107,120 10,000
and Treasurer 1996 189,330 23,607 70,000
Daniel D. Maitland (4) 1998 $170,000 $ 3,974 100,000
Executive Vice President 1997 170,000 105,002 5,000
1996 -- -- 60,000 (5)
W. Thomas Oliver (6) 1998 $250,000 $ 1,910 60,000
Executive Vice President 1997 250,000 37,856 25,000
1996 140,224 12,375 225,000
</TABLE>
_________________
(9) Mr. Peters entered into a Separation Agreement with us on March 29, 1999
pursuant to which he resigned as an officer and a director and agreed to be
retained as a consultant through December 31, 1999.
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<PAGE>
(10) Mr. Reed entered into a Separation Agreement with us on March 29, 1999
pursuant to which he resigned as an officer and a director and agreed to be
retained as a consultant through December 31, 1999.
(11) Mr. Bedford resigned effective January 6, 1999.
(12) Mr. Maitland resigned effective June 9, 1999. Mr. Maitland was appointed
Executive Vice President in September 1997. Mr. Maitland became President
of our telephone division in January 1997. During 1996, Mr. Maitland served
as our consultant, for which he was paid $88,125 in compensation.
(13) Mr. Maitland was awarded these options in November 1996 in connection with
his acceptance of full-time employment with us.
(14) Mr. Oliver was appointed Executive Vice President in September 1997. Mr.
Oliver became President of our interactive television division in June
1996.
Option Grants in Last Fiscal Year
The following table sets forth information with respect to all options
granted during our 1998 fiscal year to each of our named executive officers.
<TABLE>
<CAPTION>
Potential Realizable
Percent of Value at Assumed
Total Annual Rates of
Number of Options Stock Price
Shares Granted to Appreciation for
Underlying Employees Exercise Option Term (2)
Option in 1998 Price Expiration ------------------------------
Name Granted Fiscal Year Per Share (1) Date 5% 10%
- -------------------- ----------- ----------- --------- ----------- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Timothy P. Peters 12,500 1.2% $9.30 01/01/08 60,689 165,495
200,000 18.7% $8.69 01/02/08 1,093,519 2,770,424
John J. Reed 10,000 0.9% $9.30 01/01/08 48,551 132,396
60,000 5.6% $8.69 01/02/08 328,056 831,127
W. Scott Bedford 10,000 0.9% $9.30 01/01/08 48,551 132,396
100,000 9.4% $8.69 01/02/08 546,759 1,385,212
Daniel D. Maitland 100,000 9.4% $8.69 01/02/08 546,759 1,385,212
W. Thomas Oliver 60,000 5.6% $8.69 01/02/08 328,056 831,127
</TABLE>
(1) All options were granted at or above fair market value on the date of grant.
26
<PAGE>
(2) The assumed 5% and 10% rates of stock price appreciation are specified by
the proxy rules and do not reflect expected appreciation. The amount shown
represents the assumed value of the stock options (less exercise price) at
the end of the ten-year period beginning on the date of grant and ending on
the option expiration date. For a ten-year period beginning January 2, 1998,
based on the closing price on The Nasdaq National Market System of the
common stock of $8.69 on such date, a share of the common stock would have a
value on January 2, 2008 of approximately $14.16 at an assumed appreciation
rate of 5% and approximately $22.54 at an assumed appreciation rate of 10%.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
The following table sets forth for each of our named executive officers
information concerning exercised and unexercised options.
<TABLE>
<CAPTION>
Number of Shares
Underlying Unexercised Value of Unexercised
Number of Options at In-the-Money Options
Shares December 31, 1998 at December 31, 1998 ($)
Acquired Value -------------------------- --------------------------
Name on Exercise Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- -------------------- ----------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Timothy P. Peters --- --- 69,403 240,167 $ 664,769 $2,276,469
John J. Reed --- --- 56,447 127,666 549,037 1,211,834
W. Scott Bedford --- --- 41,447 157,666 397,467 1,493,099
Daniel D. Maitland --- --- 70,999 94,001 678,526 877,119
W. Thomas Oliver --- --- 190,000 120,000 1,520,408 989,123
</TABLE>
Employment Contracts
We have entered into an employment agreement with Stephen W. Palley dated
March 29, 1999 pursuant to which Mr. Palley is employed for three years as Chief
Executive Officer at a base salary of $200,000 per year plus a bonus, the timing
and amount of such bonus to be determined in the discretion of the board. In
addition, Mr. Palley is entitled to benefits generally available to our other
senior management employees. At the time Mr. Palley entered into his employment
agreement, we granted him a stock option to purchase 500,000 shares, vesting in
equal amounts (125,000 per year) on March 29, 1999, 2000, 2001 and 2002. If we
terminate Mr. Palley's employment, other than for cause, death or disability, or
if Mr. Palley resigns within a 60-day period beginning six months after a
"change of control" (as defined in the agreement), we have agreed to continue
making monthly base salary payments for the remainder of the agreement's term or
until Mr. Palley obtains other employment, whichever comes first, and to
continue to provide insurance coverage until Mr. Palley obtains other
employment.
Our subsidiary, IT Network, Inc., has entered into a two-year employment
agreement with Howard Gross dated as of June 17, 1999 pursuant to which Mr.
Gross is employed as President and Chief Operating Officer of IT Network at a
base salary of $180,000 per year plus a bonus, the timing and amount of such
bonus to be determined in the discretion of the board of
27
<PAGE>
directors of IT Network. In addition, Mr. Gross is entitled to benefits
generally available to other senior management employees of IT Network. At the
time Mr. Gross entered into his employment agreement, we granted him a stock
option to purchase 125,000 shares, vesting over four years. If IT Network
terminates Mr. Gross's employment, other than for cause, death or disability, IT
Network has agreed to continue making monthly base salary payments and to
continue to provide insurance coverage for the remainder of the agreement's term
or until Mr. Gross obtains other employment, whichever comes first.
Report of Compensation Committee on Executive Compensation
To the Stockholders of Source Media, Inc.:
The Compensation Committee establishes the level of compensation of the
executive officers of Source, and administers Source's stock option plans. The
Compensation Committee held one meeting during 1998.
General
The goal of Source's executive compensation policy is to ensure that an
appropriate relationship exists between executive pay and the creation of
stockholder value, while at the same time motivating and retaining key
employees. To achieve this goal, Source's executive compensation policy
integrates competitive levels of annual base compensation with bonuses based
upon corporate performance and individual goals and initiatives. This annual
cash compensation, together with the payment of equity-based incentive
compensation, is designed to attract and retain qualified executives and to
ensure that such executives have a continuing stake in the long-term success of
Source. All executive officers and managers participate in Source's incentive
compensation plans.
In establishing executive compensation, the Compensation Committee neither
bases its decisions entirely on quantitative relative weights of various
factors, nor does it follow a mathematical formula. Rather, the Compensation
Committee exercises discretion and makes judgments after considering all factors
that it considers relevant, including industry compensation information,
individual performance, level of responsibility, and the achievement of certain
objective targets relating to Source's operating and financial performance. In
making its decisions about 1998 compensation, the Compensation Committee also
considered a comparative study prepared for Source by Coopers & Lybrand LLP in
1996. Coopers & Lybrand provided data extrapolated from its survey of executive
compensation at approximately 27 telecommunications and 11 cable companies.
Companies chosen for comparison purposes in the compensation survey did not
include all the companies in the peer group indices in the performance graphs
included in this proxy statement. The Compensation Committee believes that the
pool of executive talent for Source comes from a broader group of companies than
those comprising the peer groups established for comparing stockholder returns.
28
<PAGE>
Cash Compensation
Base Salary. The base salaries of executive officers of Source are reviewed
periodically by the Compensation Committee. Salaries are based generally on
consideration of factors such as Source's performance and financial condition,
competitive conditions, general economic conditions and cost of living
increases. The Compensation Committee's evaluation of these factors is
subjective, with no particular weight being assigned to any one factor. In March
1996, the Compensation Committee adjusted base salaries for each of the
executive officers on an individual basis. Effective April 1, 1996, the base
salary of Mr. Peters, former chief executive officer of Source, was increased to
$225,000 per year, and the salaries of Source's other executive officers were
increased by an average of 60%. These compensation adjustments were made to
align the cash compensation of Source's executive officers more closely with
executive officers in other companies in the Coopers & Lybrand study. Base
salaries for each of the executive officers, including the chief executive
officer, were not adjusted during 1997 and 1998.
Bonuses. Bonuses to executive officers are determined in the discretion of
the Compensation Committee based on a variety of factors. Some of the factors
considered by the Committee include our overall financial performance, the
individual performance of the executive officer and the anticipated contribution
of an officer's services to the long-term benefit and growth of our company.
Stock Options
The executive officers are also granted stock options under Source's stock
option plans. The timing of such grants is determined by the Compensation
Committee based upon market conditions affecting the price of Source's common
stock and other factors. The size of the overall option pool to be awarded in
any year is determined by the Compensation Committee based on such factors as
company performance and the dilutive impact of such grants. Grants to individual
executive officers are based on the Compensation Committee's evaluation of their
performance and their contribution to the long-term performance of Source. The
Compensation Committee's evaluation of these factors is subjective with no
particular weight being assigned to any one factor. In January 1999, a total of
284,168 shares of common stock were awarded to Mr. Peters and other executive
officers, vesting over a three-year period. In addition, options for the
purchase of 500,000 shares were awarded to Stephen Palley, Source's new Chief
Executive Officer, vesting over a three-year period. There are not enough shares
remaining under Source's option plan to cover all of Source's most recent option
grants. Source will seek the approval of its stockholders at the 1999 annual
meeting of an amendment to the 1995 Performance Equity Plan that would, among
other things, increase the number of shares authorized for issuance under such
plan to an amount sufficient to allow such options. As a result, the grant of
such options are, in effect, subject to stockholder approval.
29
<PAGE>
COMPENSATION COMMITTEE
James L. Greenwald
Michael J. Marocco
Stephen W. Palley
Comparison of Stock Price Performance
On June 23, 1995, SMI Holdings, Inc., a Texas corporation, merged into our
wholly-owned subsidiary which at that time was named HB Communications
Acquisition Corp. ("HBAC"). HBAC was formed as a Delaware corporation in January
1993 for the purpose of acquiring a company in the communications industry. In
connection with the merger, HBAC changed its name to Source Media, Inc. Because
HBAC was engaged in an activity substantially different from the activities of
Source Media, Inc., two stock price performance comparisons follow. In addition,
in December 1995, in connection with its public offering of common stock, the
common stock was included in The Nasdaq National Market System.
Post-Merger Performance Graph
The following graph and table compare the cumulative total return of our
common stock (listed in the graph and table under the symbol "SRCM") with the
cumulative total return of (i) the Total Return Index for The Nasdaq Stock
Market ("Nasdaq Index") and (ii) the Total Return Index for The Nasdaq
Telecommunication Stocks ("Telecom Index"). The graph and table assume that $100
was invested on June 23, 1995 (the date of the merger) in each of our common
stock, the Nasdaq Index and the Telecom Index, and that dividends were
reinvested. The stockholder return shown is not necessarily indicative of future
stock performance.
[GRAPH TO BE ADDED]
30
<PAGE>
12/31/95 12/31/97 12/31/98 12/31/97 12/31/98
-------- -------- -------- -------- --------
SRCM 100.00 86.90 65.48 83.33 172.03
Telecom Index 100.00 115.74 118.35 175.25 286.19
Nasdaq Index 100.00 112.74 138.64 170.09 239.10
Pre-Merger Performance Graph
The following graph and table compare the cumulative total return of HBAC's
common stock (listed in the graph and table under the symbol "HBAC") with the
cumulative total return of (i) the Standard & Poor's Midcap 400 Index ("S&P
Index") and (ii) an industry peer group index consisting of four publicly held
Special Purpose Acquisition Corporation's (SPAC(sm)) ("SPAC Index"). The graph
and table assume that $100 was invested on June 30, 1993 (the day HBAC's common
stock was first traded on the OTC Bulletin Board) in each of HBAC common stock,
the S&P Index and the SPAC Index, and that dividends were reinvested, through
June 23, 1995, the date of the merger.
[GRAPH TO BE ADDED]
31
<PAGE>
12/31/95 12/31/95 12/31/96 12/31/97 12/31/98
-------- -------- -------- -------- --------
HBAC 100.00 100.00 96.05 100.00 110.53
SPAC Index 100.00 96.80 95.60 98.20 98.00
S&P Index 100.00 106.76 97.98 100.85 118.74
Compensation Committee Interlocks and Insider Participation
The members of the Compensation Committee of the board of directors are
currently James L. Greenwald, Michael J. Marocco and Stephen W. Palley. Mr.
Greenwald became a member of the Compensation Committee on May 21, 1997. Mr.
Marocco joined the Compensation Committee on July 28, 1998 and Mr. Palley joined
the Compensation Committee on June 7, 1999. Neither Mr. Greenwald nor Mr.
Marocco is or has been our officer, nor has either of them been involved in
related transactions with us.
CERTAIN TRANSACTIONS
In June 1993, John Reed, our then President and a director, exercised an
option he had received in 1989 to purchase an aggregate of 70,546 shares of
common stock at an aggregate price of $50,000, or approximately $0.71 per share.
Mr. Reed paid for the shares by delivering to us a nonrecourse promissory note
in the original principal amount of $50,000, bearing interest at a rate of 10%
per annum with all principal and interest payable in May 1995. This note was
cancelled and replaced by a similar note dated December 1, 1993 in the principal
amount of $52,083, and the shares of common stock were reissued as of such date.
As of May 1995, the repayment date was extended to May 31, 1997. Effective May
15, 1997, the repayment date was extended to May 31, 1999. On February 20, 1998,
the note was amended to prohibit prepayment and to prevent further extensions.
On May 31, 1999 the aggregate principal and accrued interest outstanding of
$79,595 was paid in full.
On July 29, 1998, our subsidiary, Interactive Channel, Inc., entered into a
letter of intent with Insight Communications Company, Inc., for the distribution
and marketing of Interactive Channel's interactive programming services of
LocalSource to customers of Insight's systems. Pursuant to the letter of intent,
Insight would pay Interactive Channel a monthly license fee for the right to
distribute LocalSource in an amount that is based on the number of digital
customers as adjusted for penetration. Insight would share 50% of all revenues,
other than advertising revenues, generated by LocalSource. The Insight
transaction is conditioned upon the entering into of an affiliation agreement
between Insight and Newco, which would replace the letter of intent. There can
be no assurance that an affiliation agreement will be on the terms described
above. Michael S. Willner, the President, Chief Executive Officer and a
director of Insight, is a director of Source Media.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
32
<PAGE>
Section 16(a) of the Securities Exchange Act requires our directors,
officers and persons who beneficially own more than 10% of our common stock, to
file reports of ownership of, and transactions in, our securities with the SEC.
Such directors, officers and greater than 10% stockholders are also required to
furnish us with copies of all Section 16(a) forms they file.
Based solely on a review of the copies of such forms received by it, and on
written representations from certain reporting persons that no such forms were
required for those persons, we believe that during the fiscal year ended
December 31, 1998, all directors, officers and greater than 10% beneficial
owners were in compliance with all applicable Section 16(a) filing requirements.
STOCKHOLDER PROPOSALS
Stockholders are entitled to submit proposals on matters appropriate for
stockholder action consistent with regulations of the SEC. In order for
stockholder proposals to be eligible for inclusion in our proxy materials for
the 2000 annual meeting of stockholders, they must be received by our Secretary
at our offices in Dallas, Texas, not later than May 27, 2000.
OTHER MATTERS
Our board of directors does not know of any other matter that may be
brought before the annual meeting but, in the event that any other matter should
come before the meeting, or any nominee should not be available for election,
the persons named as proxy will have authority to vote all proxies not marked to
the contrary in their discretion as they deem advisable.
ACCOMPANYING INFORMATION
Accompanying this proxy statement is a copy of our annual report on Form
10-K for the fiscal year ended December 31, 1998. No part of our annual report
shall be regarded as proxy-soliciting material or as a communication by means of
which any solicitation is being or is to be made. Such annual report includes
our audited financial statements for the three fiscal years ended December 31,
1998. Additional copies of this annual report and a copy of the exhibits to such
report will be furnished without charge to any stockholder upon written request
to us at 5400 LBJ Freeway, Suite 680, Dallas, TX 75240, attention: Secretary.
Accompanying this proxy statement is a copy of our quarterly report on Form
10-Q for the six months ended June 30, 1999. Such quarterly report contains our
unaudited financial statements for the dates and periods covered thereby and is
incorporated by reference.
33
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
INTERACTIVE TV
<TABLE>
<S> <C>
Consolidated Financial Statements of Interactive TV (unaudited)....................F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998
and June 30, 1999 (unaudited)......................................................F-3
Consolidated Statements of Operations for the Years Ended December 31,
1996, 1997 and 1998 and the Six Months Ended June 30, 1998 and 1999 (unaudited)....F-4
Consolidated Statement of Cash Flows for the Years Ended December 31,
1996, 1997 and 1998 and the Six Months Ended June 30, 1998 and 1999 (unaudited)....F-5
Statement of Divisional Intercompany for the Years Ended December 31,
1996, 1997 and 1998 and the Six Months Ended June 30, 1999 (unaudited).............F-6
Notes to Consolidated Financial Statements (unaudited).............................F-7
</TABLE>
F-1
<PAGE>
Consolidated Financial Statements of Interactive TV
(Amounts in Thousands, Except Per Share Data)
(Unaudited)
The following unaudited consolidated financial statements for Interactive
TV (a segment of Source Media, Inc.) at December 31, 1996, 1997, 1998 and June
30, 1999 and for each of the years in the three-year period ended December 31,
1998 and the six months ended June 30, 1998 and 1999 have been prepared by
management. In the opinion of management, all adjustments consisting only of
normal recurring adjustments, necessary for a fair presentation of the financial
position and results of operations, have been included in such unaudited
consolidated financial statements. The consolidated financial statements of
Interactive TV should be read in conjunction with our consolidated financial
statements, together with the Notes to Consolidated Financial Statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", included in our annual report on Form 10-K for the fiscal year
ended December 31, 1998 and our quarterly report on Form 10-Q for the six months
ended June 30, 1999.
<PAGE>
Interactive TV
(A Segment of Source Media, Inc.)
Consolidated Balance Sheets
Unaudited
<TABLE>
<CAPTION>
------December 31,------ June 30,
ASSETS 1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Current Assets:
Prepaid expenses and other current assets 206 308 157
-------------- -------------- ------------
Total current assets 206 308 157
Property and equipment:
Computer equipment 789 969 957
Other equipment 817 953 1,425
Furniture and fixtures 346 347 347
-------------- -------------- ------------
1,952 2,269 2,729
Accumulated depreciation 298 983 1,333
-------------- -------------- ------------
Net property and equipment 1,654 1,286 1,396
Intangible assets:
Patents 14,945 14,945 14,945
Goodwill 3,010 3,010 3,010
-------------- -------------- ------------
17,955 17,955 17,955
Accumulated amortization 8,866 11,148 12,295
-------------- -------------- ------------
Net intangible assets 9,089 6,807 5,660
-------------- -------------- ------------
Total assets 10,949 8,401 7,213
============== ============== ============
============== ============== ============
LIABILITIES
Current Liabilities:
Trade accounts payable 818 836 205
Accrued payroll 45 139 258
Other accrued liabilities 711 465 434
-------------- -------------- ------------
Total current liabilities 1,574 1,440 897
Long-term debt 22 2 -
Minority interests in consolidated subsidiaries 3,840 3,840 3,840
Divisional intercompany 5,513 3,119 2,476
-------------- -------------- ------------
Total liabilities and divisional intercompany 10,949 8,401 7,213
============== ============== ============
============== ============== ============
</TABLE>
See accompanying notes.
F-3
<PAGE>
Interactive TV
(A Segment of Source Media, Inc.)
Consolidated Statements of Operations
Unaudited
<TABLE>
<CAPTION>
Six Months Six Months
------Year Ended December 31,------ Ended Ended
1996 1997 1998 June 30,1998 June 30,1999
---- ---- ---- ------------ ------------
<S> <C> <C> <C> <C> <C>
Monetary revenues 1,033 305 107 87 42
Monetary cost of sales 148 4,325 1,145 740 519
-------------- ----------- --------------- ------------------ ------------
Gross profit 885 (4,020) (1,038) (653) (477)
Selling, general and administrative expenses 3,872 8,878 6,535 3,473 4,618
Corporate overhead allocation 1,320 1,777 2,295 925 1,711
Amortization of intangible assets 1,031 3,297 2,285 1,140 1,144
Research and development expenses 6,331 3,680 3,410 1,448 1,519
-------------- ----------- --------------- ------------------ ------------
12,554 17,632 14,525 6,986 8,992
-------------- ----------- --------------- ------------------ ------------
Operating loss (11,669) (21,652) (15,563) (7,639) (9,469)
Interest expense 307 2,617 4,881 2,439 2,440
Interest (income) (394) (369) (966) (571) (268)
Other (income) (18) (25) (14) (20) (1)
Minority interest in earnings (losses) of
consolidated subsidiaries 23 (5) - - -
-------------- ----------- --------------- ------------------ ------------
Net loss before extraordinary item (11,587) (23,870) (19,464) (9,488) (11,640)
Extraordinary loss - Early extinguishment of debt - 1,728 - - -
-------------- ----------- --------------- ------------------ ------------
Net loss (11,587) (25,598) (19,464) (9,488) (11,640)
Preferred stock dividends - 208 1,140 602 543
============== =========== =============== ================== ============
Net loss attributable to common stockholders (11,587) (25,806) (20,604) (10,089) (12,183)
============== =========== =============== ================== ============
</TABLE>
See accompanying notes.
F-4
<PAGE>
Interactive TV
(A Segment of Source Media, Inc.)
Consolidated Statement of Cash Flows
Unaudited
<TABLE>
<CAPTION>
----Year Ended December 31,---- Q1
1996 1997 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss (11,587) (25,598) (19,464) (4,707)
Adjustments to reconcile net loss to net cash used in
Operating activities:
Depreciation 121 1,122 685 143
Amortization of intangible assets 1,031 3,297 2,285 573
Write-off of analog set-top boxes - 1,999 - -
Minority interest in subsidiary 47 174 - -
Changes in operating assets and liabilities:
Prepaid expenses and other current assets 242 (144) (102) (83)
Trade accounts payable and accrued liabilities (348) 80 (134) (204)
Other 2 8 (3)
------------- ------------- --------------------------
Net cash used in operating activities (10,492) (19,062) (16,733) (4,277)
INVESTING ACTIVITIES
Capital expenditures (2,015) (2,372) (317) (24)
Interactive Channel Technologies acquisition costs - (10,701) - -
Other (646) - -
------------- ------------- --------------------------
Net cash used in investing activities (2,661) (13,073) (317) (24)
FINANCING ACTIVITIES
Net proceeds received from affiliates 13,164 32,159 17,070 4,303
Payments on capital leases (11) (24) (20) (2)
------------- ------------- --------------------------
Net cash provided by financing activities 13,153 32,135 17,050 4,301
------------- ------------- --------------------------
Net increase (decrease) in cash and cash equivalents - - - -
Cash and cash equivalents at beginning of period - - - -
------------- ------------- --------------------------
Cash and cash equivalents at end of period - - - -
============= ============= ==========================
<CAPTION>
Six Months Six Months
Ended Ended
June 30, June 30,
1998 1999
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net loss (9,488) (11,640)
Adjustments to reconcile net loss to net cash used in
Operating activities:
Depreciation 378 350
Amortization of intangible assets 1,136 1,143
Write-off of analog set-top boxes - -
Minority interest in subsidiary - -
Changes in operating assets and liabilities:
Prepaid expenses and other current assets (97) 151
Trade accounts payable and accrued liabilities (505) (543)
Other 3 4
--------------- ---------------
Net cash used in operating activities (8,573) (10,535)
INVESTING ACTIVITIES
Capital expenditures (152) (460)
Interactive Channel Technologies acquisition costs - -
Other - -
--------------- ---------------
Net cash used in investing activities (152) (460)
FINANCING ACTIVITIES
Net proceeds received from affiliates 8,735 10,997
Payments on capital leases (10) (2)
--------------- ---------------
Net cash provided by financing activities 8,725 10,995
--------------- ---------------
Net increase (decrease) in cash and cash equivalents - -
Cash and cash equivalents at beginning of period - -
--------------- ---------------
Cash and cash equivalents at end of period - -
=============== ===============
</TABLE>
See accompanying notes.
F-5
<PAGE>
Interactive Channel
(A Segment of Source Media, Inc.)
Statement of Divisional Intercompany
Unaudited
<TABLE>
<CAPTION>
Divisional Intercompany
(In thousands)
--------------
<S> <C>
Balance at December 31, 1995 ($2,625)
Net Loss (11,587)
Cash transfers from Corporate, net 13,164
------------
Balance at December 31, 1996 (1,048)
Net Loss (25,598)
Cash transfers from Corporate, net 32,159
------------
Balance at December 31, 1997 5,513
Net Loss (19,464)
Cash transfers from Corporate, net 17,070
------------
Balance at December 31, 1998 3,119
Net Loss (11,640)
Cash transfers from Corporate, net 10,997
============
Balance at June 30, 1999 2,476
============
</TABLE>
See accompanying notes.
F-6
<PAGE>
Interactive TV
(A Segment of Source Media, Inc.)
Notes to Consolidated Financial Statements
(Unaudited)
June 30, 1999
1. Organization
The Interactive TV business consists of the combined efforts of the
Interactive Channel, Inc. ("Interactive Channel") and Interactive Channel
Technologies Inc. ("ICTI") subsidiaries. Interactive TV has designed and
is developing proprietary software and interactive programming services
that can enable digital, two-way television systems equipped with digital
(or advanced analog) set-top boxes to deliver two-way, interactive
programming with the touch of a set-top remote or the use of a wireless
keyboard.
2. Basis of Presentation
The consolidated financial statements include the accounts of Interactive
Channel and ICTI, both subsidiaries of Source Media, Inc. prepared in
accordance with generally accepted accounting principles, and in the
opinion of management, all adjustments considered necessary for a fair
presentation have been included.
3. Certain corporate expenses such as legal expense, accounting fees and
variable stock based compensation expense are specifically identifiable as
Interactive TV expenses and are included in the Selling, general and
administrative expenses ("SG&A") of Interactive TV. Remaining corporate
overhead expenses other than interest expense are allocated 50% to
Interactive TV based on management's best estimate of time and dollars
spent on divisional matters. Interest expense is allocated based on actual
use of loan proceeds by segments with the remainder allocated based on
actual expenses by segment. In the opinion of management, the method of
allocation of corporate overhead charges and interest expense is
reasonable.
Management believes that the accompanying financial statements include all
the necessary costs of conducting business. However, such costs are not
necessarily indicative of, and it is not practicable for management to
estimate, the nature and level of costs which might have been incurred had
Interactive TV operated as a stand alone company.
4. Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions
<PAGE>
that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
5. Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets.
Computer equipment is depreciated over a three-year period. Production and
other equipment are depreciated over a five-year period. Furniture and
fixtures are depreciated over a seven-year period.
We continually evaluate the propriety of the carrying value of property and
equipment to determine whether current events and circumstances warrant
adjustment to the carrying value of the assets. As a result of this
periodic evaluation and in light of our decision to discontinue our analog
set-top box strategy in favor of a digital set-top box strategy, in 1997,
we recorded a write-down of the remaining net book value of our analog set-
top boxes in the amount of $2.0 million which was charged to monetary cost
of sales.
6. Intangible Assets
Intangible assets are amortized using the straight-line method over the
following estimated useful lives: patents - five years and goodwill - five
years.
The carrying value of intangible assets is reviewed for impairment whenever
events or changes in circumstances indicate that there may be an
impairment. If the review indicates that any of the intangibles will not be
recoverable, as determined by an analysis of undiscounted cash flows, the
intangible asset will be reduced to its estimated fair value.
7. Translation of Foreign Currencies
The financial positions and results of operations of ICTI and related
Canadian subsidiaries are measured using local currency (Canadian dollar)
as the functional currency. Assets and liabilities of these subsidiaries
are translated at the exchange rate in effect at each balance sheet date.
Statement of operations accounts are translated at the average rate of
exchange prevailing during the year. Translation adjustments and foreign
currency gains and losses have not been significant and accordingly, have
not been separately presented.
8. Stock Based Compensation
We have granted stock options to employees in excess of shares authorized
by the shareholders at the date of grant. The portion of unauthorized
options are treated as a variable compensation plan through the date the
shares are authorized by shareholders. We recognize stock compensation
expense over the vesting period of the related options. Total non-cash
stock based compensation for the year ended December 31, 1998 and the
<PAGE>
six months ended June 30, 1999 amounted to $0.7 million and $0.1 million,
respectively, and is included in SG&A.
9. Leases
We lease office space and various office equipment under operating leases.
Rent expense was $0.1 million, $0.4 million, $0.4 million and $0.6 million
for the years ended December 31, 1996, 1997, 1998, and the six months ended
June 30, 1999 respectively.
At December 31, 1998, aggregate amounts of future minimum payments under
lease commitments are as follows:
<TABLE>
<CAPTION>
Operating Leases
(In thousands)
-----------------------------
<S> <C>
1999 $273
2000 273
2001 205
2002 -
2003 -
----
Total future minimum lease payments $751
====
</TABLE>
10. Reconciliation to Form 10-K Loss and Pro Forma Adjustments.
The net loss for Interactive TV differs from the operating loss of the
Interactive TV segment as presented in Note 14 of the Notes to Consolidated
Financial Statements in our annual report on Form 10-K for the fiscal year ended
December 31, 1998 and Note 9 in our quarterly report on Form 10-Q for the six
months ended June 30, 1999.
The reconciling items between the net loss and operating loss areas follows:
<TABLE>
<CAPTION>
Six Six
Months Months
Year Ended December 31, Ended Ended
1996 1997 1998 June 30, 1998 June 30, 1999
- ------------------------------------------------ --------- --------- -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
(In thousands)
Interactive TV net loss attributable to
common stockholders $(11,587) $(25,806) $(20,604) $(10,089) $(12,183)
Net interest expense (income) (87) 2,456 5,055 2,470 2,716
Allocated corporate charges 38 155 1,949 746 2,303
Allocated corporate overhead charges 1,320 3,325 2,289 925 1,711
Other income (expense) 5 (22) (14) (20) (2)
-------- -------- -------- -------- --------
Operating loss per respective 10-K or 10-Q $(10,311) $(19,892) $(11,325) $ (5,968) $ (5,455)
======== ======== ======== ======== ========
</TABLE>
<PAGE>
Net loss for Interactive TV differs from the net amount of the pro forma
adjustments in the pro forma financial information.
The reconciling items are as follows:
<TABLE>
<CAPTION>
Six
Months
Year Ended December 31, Ended
1996 1997 1998 June 30, 1999
--------- --------- ------------- --------------
<S> <C> <C> <C> <C>
(In thousands)
Interactive TV loss attributable to $(11,587) $(25,806) $(20,604) $(12,183)
common stockholders
Equity interest in losses of
joint venture 5,175 9,938 6,634 3,879
Corporate overhead charges
not included in pro forma adjustments 1,320 1,777 2,295 1,710
Amortization of intangible asset 1,380 1,380 1,380 690
Corporate interest expense allocation (87) 2,458 5,055 2,716
-------- -------- -------- --------
Net pro forma adjustments $ (3,799) $(10,253) $ (5,240) $ (3,188)
======== ======== ======== ========
</TABLE>
<PAGE>
INDEX TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
SOURCE MEDIA, INC.
Pro Forma Consolidated Financial Data.......................................P-2
Pro Forma Consolidated Balance Sheet as of June 30, 1999 (unaudited)........P-3
Pro Forma Consolidated Statements of Operations for the Six Months Ended
June 30, 1999 (unaudited)...................................................P-5
Pro Forma Consolidated Statements of Operations for the Year Ended
December 31, 1998 (unaudited)...............................................P-6
Pro Forma Consolidated Statements of Operations for the Year Ended
December 31, 1997 (unaudited)...............................................P-7
Pro Forma Consolidated Statements of Operations for the Year Ended
December 31, 1996 (unaudited)...............................................P-8
Footnotes to Unaudited Pro Forma Consolidated Balance Sheet and
Footnotes to Unaudited Pro Forma Consolidated Statements of Operations......P-9
P-1
<PAGE>
Pro Forma Financial Data
(Amounts in Thousands, Except Per Share Data)
The following unaudited pro forma consolidated statements of operations for
the three fiscal years ended December 31, 1998 and the six months ended June 30,
1999 reflect our historical accounts for those periods, adjusted to give pro
forma effect to the proposed transaction with Insight as if the transaction had
occurred as of January 1, 1996.
The following unaudited pro forma consolidated balance sheet as of June 30,
1999 reflects our historical accounts as of that date adjusted to give pro forma
effect to the proposed transaction with Insight as if the transaction had
occurred as of June 30, 1999.
The pro forma financial data and accompanying notes should be read in
conjunction with the description of the proposed transaction with Insight
contained in this proxy statement and the Consolidated Financial Statements and
related notes included in our 1998 Annual Report on Form 10-K and the Form 10-Q
for the six months ended June 30, 1999 previously filed with the Commission.We
believe that the assumptions used in the following statements provide a
reasonable basis on which to present the pro forma financial data. The pro
forma financial data is provided for informational purposes only and should not
be construed to be indicative of our financial condition or results of
operations had the proposed transaction with Insight been consummated on the
dates assumed and are not intended to project our financial condition on any
future date or results of operations for any future period.
<PAGE>
Source Media, Inc.
Pro Forma Consolidated Balance Sheets
Unaudited
<TABLE>
<CAPTION>
As of June 30, 1999
Pro Forma
Historical Adjustments Pro Forma
---------- ----------- ---------
ASSETS
<S> <C> <C> <C>
Current Assets:
Cash and cash equivalents 7,939 12,000 (2) 19,939
Restricted investments 5,961 - 5,961
Trade accounts receivable, less allowance
for doubtful accounts of $647 2,716 - 2,716
Deferred expenses 439 - 439
Prepaid expenses and other current assets 955 - 955
--------------- ---------------- --------------
Total current assets 18,010 12,000 30,010
Property and equipment:
Production equipment 6,719 (1,634) (1) 5,085
Computer equipment 3,484 - 3,484
Other equipment 1,062 - 1,062
Furniture and fixtures 656 - 656
--------------- ---------------- --------------
11,921 (1,634) 10,287
Accumulated depreciation 8,095 (1,200) (1) 6,895
--------------- ---------------- --------------
Net property and equipment 3,826 (434) 3,392
Intangible assets:
Patents 14,945 (14,945) (1) -
Goodwill 6,698 3,890 (3) 10,588
Contract rights 11,933 - 11,933
--------------- ---------------- --------------
33,576 (11,055) 22,521
Accumulated amortization 17,030 (12,295) (1) 4,735
--------------- ---------------- --------------
Net intangible assets 16,546 1,240 17,786
Investment in joint venture - 6,094 (1) 6,094
Other non-current assets 4,400 - 4,400
--------------- ---------------- --------------
Total assets 42,782 18,900 61,682
=============== ================ ==============
</TABLE>
See accompanying Notes to Pro Forma Consolidated Balance Sheet.
P-3
<PAGE>
Source Media, Inc.
Pro Forma Consolidated Balance Sheets
Unaudited
<TABLE>
<CAPTION>
As of June 30, 1999
Pro Forma
LIABILITIES Historical Adjustments Pro Forma
---------- ----------- ---------
<S> <C> <C> <C>
Current Liabilities:
Trade accounts payable 1,027 - 1,027
Accrued interest 2,000 - 2,000
Accrued payroll 1,359 - 1,359
Other accrued liabilities 3,777 - 3,777
Unearned income 2,421 - 2,421
--------------- ---------------- --------------
Total current liabilities 10,584 - 10,584
Long-term debt 100,000 - 100,000
Minority interests in consolidated subsidiaries 3,840 - 3,840
Note receivable and accrued interest from minority
stockholder, net of discount of $32 (808) - (808)
--------------- ---------------- --------------
3,032 - 3,032
Senior redeemable payment-in-kind (PIK) preferred
stock, $25 liquidation preference, $.001 par value,
net of discount
Authorized shares - 1,712
in 1997and 1998, respectively 18,057 - 18,057
Stockholders' equity (capital deficiency): Common stock, $.001 par value:
authorized shares - 50,000 and
13,748 shares issued 14 1 (2) 15
Less treasury stock, at cost - 275 shares (2,716) - (2,716)
Capital in excess of par value 84,114 18,899 (2)(3) 103,013
Accumulated deficit (170,303) - (170,303)
--------------- ---------------- --------------
Total stockholders' equity (capital deficiency) (88,891) 18,900 (69,991)
--------------- ---------------- --------------
Total liabilities and stockholders' equity (capital deficiency) 42,782 18,900 61,682
=============== ================ ==============
</TABLE>
See accompanying Notes to Pro Forma Consolidated Balance Sheet.
P-4
<PAGE>
Source Media, Inc.
Pro Forma Consolidated Statements of Operations
Unaudited
<TABLE>
<CAPTION>
As of June 30, 1999
Pro Forma
Historical Adjustments Pro Forma
---------- ----------- ---------
<S> <C> <C> <C>
Monetary revenues 9,349 (42) (1) 9,307
Nonmonetary revenues 882 - 882
------------ ---------------- --------------
Total revenues 10,231 (42) 10,189
Monetary cost of sales 6,741 (519) (1) 6,222
Nonmonetary cost of sales 882 - 882
------------ ---------------- --------------
Total cost of sales 7,623 (519) 7,104
------------ ---------------- --------------
Gross profit 2,608 477 3,085
Selling, general and administrative expenses 14,101 (4,618) (1) 9,483
Amortization of intangible assets 2,473 (454) (1)(3) 2,019
Research and development expenses 1,519 (1,519) (1) -
------------ ---------------- --------------
18,093 (6,591) 11,502
------------ ---------------- --------------
Operating loss (15,485) 7,068 (8,417)
Interest expense 6,413 - 6,413
Interest income (536) - (536)
Other (income) expense (2) 1 (1) (1)
Equity interest in losses of the joint venture - 3,879 (2) 3,879
------------ ---------------- --------------
Net loss (21,360) 3,188 (18,172)
Preferred stock dividends 1,429 - 1,429
------------ ---------------- --------------
Net loss attributable to common stockholders (22,789) 3,188 (19,601)
============ ================ ==============
Basic and dilutive net loss per common share (1.74) n/a (1.41)
------------ ---------------- --------------
Weighted average common shares outstanding 13,093 842 (4) 13,935
============ ================ ==============
</TABLE>
See accompanying Notes to Pro Forma Consolidated Income Statement.
P-5
<PAGE>
Source Media, Inc.
Pro Forma Consolidated Statements of Operations
Unaudited
<TABLE>
<CAPTION>
As of December 31, 1998
Pro Forma
Historical Adjustments Pro Forma
---------- ----------- ---------
<S> <C> <C> <C>
Monetary revenues 24,351 (107) (1) 24,244
Nonmonetary revenues 1,756 - 1,756
----------------- ----------------- -----------------
Total revenues 26,107 (107) 26,000
Monetary cost of sales 12,674 (1,145) (1) 11,529
Nonmonetary cost of sales 1,756 - 1,756
----------------- ----------------- -----------------
Total cost of sales 14,430 (1,145) 13,285
----------------- ----------------- -----------------
Gross profit 11,677 1,038 12,715
Selling, general and administrative expenses 50,708 (6,535) (1) 44,173
Amortization of intangible assets 6,320 (905) (1)(3) 5,415
Research and development expenses 3,410 (3,410) (1) -
----------------- ----------------- -----------------
60,438 (10,850) 49,588
----------------- ----------------- -----------------
Operating loss (48,761) 11,888 (36,873)
Interest expense 12,830 - 12,830
Interest income (1,933) - (1,933)
Other (income) expense (27) 14 (1) (13)
Equity interest in losses of the joint venture - 6,634 (2) 6,634
----------------- ----------------- -----------------
Net loss (59,631) 5,240 (54,391)
Preferred stock dividends 2,996 - 2,996
----------------- ----------------- -----------------
Net loss attributable to common stockholders (62,627) 5,240 (57,387)
================= ================= =================
Basic and dilutive net loss per common share (5.21) n/a (4.46)
================= ================= =================
Weighted average common shares outstanding 12,012 842 (4) 12,854
================= ================= =================
</TABLE>
See accompanying Notes to Pro Forma Consolidated Income Statement.
P-6
<PAGE>
Source Media, Inc.
Pro Forma Consolidated Statements of Operations
Unaudited
<TABLE>
<CAPTION>
As of December 31, 1997
Pro Forma
Historical Adjustments Pro Forma
---------- ----------- ---------
<S> <C> <C> <C>
Monetary revenues 12,387 (305) (1) 12,082
Nonmonetary revenues 6,044 - 6,044
------------------ ----------------- -----------------
Total revenues 18,431 (305) 18,126
Monetary cost of sales 8,611 (4,325) (1) 4,286
Nonmonetary cost of sales 6,044 - 6,044
------------------ ----------------- -----------------
Total cost of sales 14,655 (4,325) 10,330
------------------ ----------------- -----------------
Gross profit 3,776 4,020 7,796
Selling, general and administrative expenses 19,599 (8,878) (1) 10,721
Amortization of intangible assets 4,987 (1,917) (1)(3) 3,070
Research and development expenses 3,680 (3,680) (1) -
------------------ ----------------- -----------------
28,266 (14,475) 13,791
------------------ ----------------- -----------------
Operating loss (24,490) 18,495 (5,995)
Interest expense 5,234 - 5,234
Interest income (737) - (737)
Other (income) expense (53) 27 (1) (26)
Equity interest in losses of the joint venture - 9,938 (2) 9,938
Minority interest in earnings(losses) of
consolidated subsidiaries (9) 5 (6)
------------------ ----------------- -----------------
Net loss before extraordinary item (28,925) 8,525 (20,398)
Extraordinary loss - early extinguishment of debt 3,456 (1,728) 1,728
------------------ ----------------- -----------------
Net loss (32,381) 10,255 (22,126)
Preferred stock dividends 416 - 416
------------------ ----------------- -----------------
Net loss attributable to common stockholders (32,797) 10,255 (22,542)
================== ================= =================
Basic and dilutive net loss per common share:
Net loss attributable to common stockholders
before extraordinary item (2.59) n/a (1.71)
Extraordinary item (0.30) n/a (0.14)
------------------ ----------------- -----------------
Net Loss attributable to common stockholders (2.89) n/a (1.85)
================== ================= =================
Weighted average common shares outstanding 11,354 842 (4) 12,196
================== ================= =================
</TABLE>
See accompanying Notes to Pro Forma Consolidated Income Statement.
P-7
<PAGE>
Source Media, Inc.
Pro Forma Consolidated Statements of Operations
Unaudited
<TABLE>
<CAPTION>
As of December 31, 1996
Pro Forma
Historical Adjustments Pro Forma
---------- ----------- ---------
<S> <C> <C> <C>
Monetary revenues 8,575 (1,033) (1) 7,542
Nonmonetary revenues 9,944 - 9,944
----------------- ----------------- -----------------
Total revenues 18,519 (1,033) 17,486
Monetary cost of sales 3,485 (148) (1) 3,337
Nonmonetary cost of sales 9,944 - 9,944
----------------- ----------------- -----------------
Total cost of sales 13,429 (148) 13,281
----------------- ----------------- -----------------
Gross profit 5,090 (885) 4,205
Selling, general and administrative expenses 11,747 (3,872) (1) 7,875
Amortization of intangible assets 1,031 349 (1)(3) 1,380
Research and development expenses 6,331 (6,331) (1) -
----------------- ----------------- -----------------
19,109 (9,854) 9,255
----------------- ----------------- -----------------
Operating loss (14,019) 8,969 (5,050)
Interest expense 614 - 614
Interest income (788) - (788)
Other (income) expense (36) 18 (1) (18)
Equity interest in losses of the joint venture - 5,175 (2) 5,175
Minority interest in earnings(losses) of
consolidated subsidiaries 46 (23) (1) 23
----------------- ----------------- -----------------
Net loss attributable to common stockholders (13,855) 3,799 (10,056)
================= ================= =================
Basic and dilutive net loss per common share (1.39) n/a (0.93)
================= ================= =================
----------------- ----------------- -----------------
Weighted average common shares outstanding 9,935 842 (4) 10,777
================= ================= =================
</TABLE>
See accompanying Notes to Pro Forma Consolidated Income Statement.
P-8
<PAGE>
Footnotes to Unaudited Pro Forma Consolidated Balance Sheet
(In thousands of dollars)
(1) To reflect the elimination of assets and liabilities relating to and
resulting from the operations of the Interactive TV business to be
contributed in the proposed transaction with Insight.
(2) To reflect the net proceeds resulting from and related to the cash received
upon closing the proposed transaction with Insight.
(3) To reflect the net effect of (a) the transfer of patents to Newco, and (b)
the intangible asset created by the issuance of warrants (the valuation of
which is based on the Black-Sholes model), upon closing of the proposed
transaction with Insight.
Footnotes to Unaudited Pro Forma Consolidated Statements of Operations
(In thousands of dollars)
(1) To reflect the elimination of net sales, cost of sales, SG&A and other
income or expense of the Interactive TV segment.
(2) To reflect our 50% interest in the operating losses of Newco.
(3) To reflect amortization of the intangible asset related to the issuance of
warrants to purchase our common stock issued to Insight upon closing the
proposed transaction with Insight.
(4) To reflect the issuance of additional shares of common stock upon closing
of the proposed transaction with Insight.
<PAGE>
Exhibit A
---------
SOURCE MEDIA, INC.
1999 STOCK OPTION PLAN
1. Purpose of the Plan.
The purpose of the Source Media, Inc. 1999 Stock Option Plan (the "Plan")
is to promote the interests of Source Media, Inc., a Delaware corporation (the
"Company"), and its stockholders by strengthening the Company's ability to
attract and retain competent employees, to make service on the Board of
Directors of the Company (the "Board") more attractive to present and
prospective non-employee directors of the Company and to provide a means to
encourage stock ownership and proprietary interest in the Company by officers,
non-employee directors and valued employees and other individuals upon whose
judgment, initiative and efforts the financial success and growth of the Company
largely depend. The Plan became effective on August 25, 1999, by resolution of
the Board, subject to ratification of the Plan by a majority vote of the
stockholders of the Company at its 1999 Annual Meeting of Stockholders.
2. Stock Subject to the Plan.
(a) The total number of shares of the authorized but unissued or treasury
shares of Common Stock, $0.001 par value per share, of the Company ("Common
Stock") for which options and stock appreciation rights ("SARs") may be granted
under the Plan shall be 1,600,000 subject to adjustment as provided in
subsection (d) below or in Section 14 hereof, which shares may be of any class
of Common Stock; provided, however, that such number of shares may from time to
time be reduced to the extent that a corresponding number of issued and
outstanding shares of Common Stock are purchased by the Company and set aside
for issue upon the exercise of options.
(b) If an option granted or assumed hereunder shall expire or terminate
for any reason without having been exercised in full, the unpurchased shares
subject thereto shall again be available for subsequent option grants under the
Plan; provided, however, that shares as to which an option has been surrendered
in connection with the exercise of a related SAR will not again be available for
subsequent option or SAR grants under the Plan.
(c) Stock issuable upon exercise of an option or SAR granted under the
Plan may be subject to such restrictions on transfer, repurchase rights or other
restrictions as shall be determined by the Board.
(d) If an option granted under the Company's 1995 Performance Equity Plan
shall expire or terminate for any reason without having been exercised in full,
the unpurchased shares subject thereto shall be available for subsequent option
or SAR grants under the Plan.
1
<PAGE>
3. Administration of the Plan.
The Plan shall be administered by the Board. No member of the Board shall
act upon any matter exclusively affecting an option or SAR granted or to be
granted to himself or herself under the Plan. A majority of the members of the
Board shall constitute a quorum, and any action may be taken by a majority of
those present and voting at any meeting. The decision of the Board as to all
questions of interpretation and application of the Plan shall be final, binding
and conclusive on all persons. The Board may, in its sole discretion, grant
options to purchase shares of Common Stock, grant SARs and issue shares upon
exercise of such options and SARs, as provided in the Plan. The Board shall have
authority, subject to the express provisions of the Plan, to construe the
respective option and SAR agreements and the Plan, to prescribe, amend and
rescind rules and regulations relating to the Plan, to determine the terms and
provisions of the respective option and SAR agreements, which may but need not
be identical, and to make all other determinations in the judgment of the Board
necessary or desirable for the administration of the Plan. The Board may correct
any defect or supply any omission or reconcile any inconsistency in the Plan or
in any option or SAR agreement in the manner and to the extent it shall deem
expedient to carry the Plan into effect and shall be the sole and final judge of
such expediency. No director shall be liable for any action or determination
made in good faith. The Board may, in its discretion, delegate its power, duties
and responsibilities to a committee, consisting of two or more members of the
Board, all of whom are "Non-Employee Directors" (as hereinafter defined). If a
committee is so appointed, all references to the Board herein shall mean and
relate to such committee, unless the context otherwise requires. For the
purposes of the Plan, a director or member of such committee shall be deemed to
be a "Non-Employee Director" only if such person qualified as a "Non-Employee
Director" within the meaning of paragraph (b)(3)(i) of Rule 16b-3 promulgated
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as
such term is interpreted from time to time.
4. Type of Options.
Options granted pursuant to the Plan shall be authorized by action of the
Board (or a committee designated by the Board) and may be designated as either
incentive stock options meeting the requirements of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), or non-qualified options which
are not intended to meet the requirements of Section 422 of the Code, the
designation to be in the sole discretion of the Board. Options designated as
incentive stock options that fail to continue to meet the requirements of
Section 422 of the Code shall be redesignated as non-qualified options
automatically on the date of such failure to continue to meet the requirements
of Section 422 of the Code without further action by the Board.
5. Eligibility.
Options designated as incentive stock options may be granted only to
officers and key employees of the Company or of any subsidiary corporation
(herein called "subsidiary" or "subsidiaries"), as defined in Section 424 of the
Code and the Treasury Regulations promulgated thereunder (the "Regulations").
Directors who are not otherwise employees of the Company or a subsidiary shall
not be eligible to be granted incentive stock options pursuant to the Plan. SARs
and options designated as non-qualified options may be granted to (i) officers
and key employees of the
2
<PAGE>
Company or of any of its subsidiaries, or (ii) agents and directors of and
consultants to the Company, whether or not otherwise employees of the Company.
In determining the eligibility of an individual to be granted an option or
SAR, as well as in determining the number of shares to be optioned to any
individual, the Board shall take into account the recommendation of the
Company's President, the position and responsibilities of the individual being
considered, the nature and value to the Company or its subsidiaries of his or
her service and accomplishments, his or her present and potential contribution
to the success of the Company or its subsidiaries, and such other factors as the
Board may deem relevant.
6. Restrictions on Incentive Stock Options.
Incentive stock options (but not non-qualified options) granted under this
Plan shall be subject to the following restrictions:
(a) Limitation on Number of Shares. The aggregate fair market value of
the shares of Common Stock with respect to which incentive stock options are
granted, determined as of the date the incentive stock options are granted,
exercisable for the first time by an individual during any calendar year shall
not exceed $100,000. If an incentive stock option is granted pursuant to which
the aggregate fair market value of shares with respect to which it first becomes
exercisable in any calendar year by an individual exceeds such $100,000
limitation, the portion of such option which is in excess of the $100,000
limitation, and any such options issued subsequently in the same calendar year,
shall be treated as a non-qualified option pursuant to section 422(d)(1) of the
Code. In the event that an individual is eligible to participate in any other
stock option plan of the Company or any parent or subsidiary of the Company
which is also intended to comply with the provisions of Section 422 of the Code,
such $100,000 limitation shall apply to the aggregate number of shares for which
incentive stock options may be granted under this Plan and all such other plans.
(b) Ten Percent (10%) Stockholder. If any employee to whom an incentive
stock option is granted pursuant to the provisions of this Plan is on the date
of grant the owner of stock (as determined under Section 424(d) of the Code)
possessing more than 10% of the total combined voting power of all classes of
stock of the Company or any parent or subsidiary of the Company, then the
following special provisions shall be applicable to the incentive stock options
granted to such individual:
(i) The option price per share subject to such incentive stock
options shall be not less than 110% of the fair market value of the stock
determined at the time such option was granted. In determining the fair market
value under this clause (i), the provisions of Section 8 hereof shall apply.
(ii) The incentive stock option shall have a term expiring not more
than five (5) years from the date of the granting thereof.
3
<PAGE>
7. Option Agreement.
Each option and SAR shall be evidenced by an agreement (the "Agreement")
duly executed on behalf of the Company and by the grantee to whom such option or
SAR is granted, which Agreement shall comply with and be subject to the terms
and conditions of the Plan. The Agreement may contain such other terms,
provisions and conditions which are not inconsistent with the Plan as may be
determined by the Board, provided that options designated as incentive stock
options shall meet all of the conditions for incentive stock options as defined
in Section 422 of the Code. No option or SAR shall be granted within the meaning
of the Plan and no purported grant of any option or SAR shall be effective until
the Agreement shall have been duly executed on behalf of the Company and the
optionee. More than one option and SAR may be granted to an individual.
8. Option Price.
(a) The option price or prices of shares of Common Stock for options
designated as non-qualified stock options shall be as determined by the Board.
(b) Subject to the conditions set forth in Section 6(b) hereof, the option
price or prices of shares of Common Stock for options designated as incentive
stock options shall be at least the fair market value of such Common Stock at
the time the option is granted as determined by the Board in accordance with
clause (c) below.
(c) If the Common Stock is then listed on any national securities
exchange, the fair market value shall be the mean between the high and low sales
prices, if any, on the largest such exchange on the date of the grant of the
option or, if none, shall be determined by taking a weighted average of the
means between the highest and lowest sales on the nearest date before and the
nearest date after the date of grant in accordance with Regulations Section
25.2512-2. If the Common Stock is not then listed on any such exchange, the fair
market value shall be the mean between the closing "Bid" and the closing "Ask"
prices, if any, as reported in the National Association of Securities Dealers
Automated Quotation System ("NASDAQ") for the date of the grant of the option,
or, if none, shall be determined by taking a weighted average of the means
between the highest and lowest sales on the nearest date before and the nearest
date after the date of grant in accordance with Regulations Section 25.2512-2.
If the Common Stock is not then either listed on any such exchange or quoted in
NASDAQ, the fair market value shall be the mean between the average of the "Bid"
prices, if any, as reported in the National Daily Quotation Service for the date
of the grant of the option, or, if none, shall be determined by taking a
weighted average of the means between the highest and lowest sales on the
nearest date before and the nearest date after the date of grant in accordance
with Regulations Section 25.2512-2. If the fair market value of the Common Stock
cannot be determined under the preceding three sentences, it shall be determined
in good faith by the Board in accordance with the Regulations promulgated under
Section 422 of the Code.
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9. Manner of Payment; Manner of Exercise.
(a) Options granted under the Plan may provide for the payment of the
exercise price by delivery of (i) cash or a check payable to the order of the
Company in an amount equal to the exercise price of such options, (ii) shares of
Common Stock owned by the optionee having a fair market value equal in amount to
the exercise price of such options, or (iii) any combination of (i) and (ii);
provided, however, that payment of the exercise price by delivery of shares of
Common Stock owned by such optionee may be made only upon the condition that
such payment does not result in a charge to earnings for financial accounting
purposes as determined by the Board, unless such condition is waived by the
Board. The fair market value of any shares of Common Stock which may be
delivered upon exercise of an option shall be determined by the Board in
accordance with Section 8 hereof.
(b) To the extent that the right to purchase shares under an option has
accrued and is in effect, options may be exercised in full at one time or in
part from time to time, by giving written notice, signed by the person or
persons exercising the option, to the Company, stating the number of shares with
respect to which the option is being exercised, accompanied by payment in full
for such shares as provided in subparagraph (a) above. Upon such exercise,
delivery of a certificate for paid-up non-assessable shares shall be made at the
principal office of the Company to the person or persons exercising the option
at such time, during ordinary business hours, after three (3) days but not more
than ninety (90) days from the date of receipt of the notice by the Company, as
shall be designated in such notice, or at such time, place and manner as may be
agreed upon by the Company and the person or persons exercising the option.
10. Exercise of Options and SARs.
Each option and SAR granted under the Plan shall, subject to Section 11(b)
and Section 13 hereof, be exercisable at such time or times and during such
period as shall be set forth in the Agreement; provided, however, that no option
or SAR granted under the Plan shall have a term in excess of ten (10) years from
the date of grant. To the extent that an option or SAR is not exercised when it
becomes initially exercisable, it shall not expire but shall be carried forward
and shall be exercisable, on a cumulative basis, until the expiration of the
exercise period. No partial exercise may be made for less than one hundred (100)
full shares of Common Stock. The exercise of an option shall result in the
cancellation of the SAR to which it relates with respect to the same number of
shares of Common Stock as to which the option was exercised.
11. Term of Options and SARs; Exercisability.
(a) Term.
(i) Each option shall expire not more than ten (10) years from the
date of the granting thereof, except as (a) otherwise provided pursuant to the
provisions of Section 6(b) hereof, and (b) earlier termination as herein
provided.
(ii) Except as otherwise provided in this Section 11, an option or SAR
granted to any grantee who ceases to perform services for the Company or one of
its subsidiaries shall terminate
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<PAGE>
three months after the date such grantee ceases to perform services for the
Company or one of its subsidiaries, or on the date on which the option or SAR
expires by its terms, whichever occurs first.
(iii) If the grantee ceases to perform services for the Company because
of dismissal for cause or because the grantee is in breach of any employment
agreement, such option or SAR will terminate on the date the grantee ceases to
perform services for the Company or one of its subsidiaries.
(iv) If the grantee ceases to perform services for the Company because
the grantee has become permanently disabled (within the meaning of Section
22(e)(3) of the Code), such option or SAR shall terminate twelve months after
the date such grantee ceases to perform services for the Company, or on the date
on which the option or SAR expires by its terms, whichever occurs first.
(v) In the event of the death of any grantee, any option or SAR
granted to such grantee shall terminate twelve months after the date of death,
or on the date on which the option or SAR expires by its terms, whichever occurs
first.
(b) Exercisability.
(i) Except as provided below, an option or SAR granted to a grantee
who ceases to perform services for the Company or one of its subsidiaries shall
be exercisable only to the extent that such option or SAR has accrued and is in
effect on the date such grantee ceases to perform services for the Company or
one of its subsidiaries.
(ii) An option or SAR granted to a grantee who ceases to perform
services for the Company or one of its subsidiaries because he or she has become
permanently disabled (as defined above) shall be exercisable with respect to the
full number of shares covered thereby, whether or not under the provisions of
Section 10 hereof the grantee was entitled to do so at the date he or she became
permanently disabled, and may be exercised by a legal representative on behalf
of the grantee.
(iii) In the event of the death of any grantee, the option or SAR
granted to such grantee may be exercised with respect to the full number of
shares covered thereby, whether or not under the provisions of Section 10 hereof
the grantee was entitled to do so at the date of his or her death, by the estate
of such grantee, or by any person or persons who acquired the right to exercise
such option or SAR by bequest or inheritance or by reason of the death of such
grantee.
12. Options Not Transferable.
The right of any grantee to exercise any option or SAR granted to him or
her shall not be assignable or transferable by such grantee other than by will
or the laws of descent, and any such option or SAR shall be exercisable during
the lifetime of such grantee only by him; provided, that the Board may permit a
grantee, by expressly so providing in the related Agreement, to assign or
transfer, without consideration (and only without consideration), the right to
exercise any option or
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SAR granted to him or her to his or her children, grandchildren or spouse, to
trusts for the benefit of such family members and to partnerships in which such
family members are the only partners. Any option or SAR granted under the Plan
shall be null and void and without effect upon the bankruptcy of the grantee to
whom the option is granted, or upon any attempted assignment or transfer except
as herein provided, including without limitation, any purported assignment,
whether voluntary or by operation of law, pledge, hypothecation or other
disposition, attachment, trustee process or similar process, whether legal or
equitable, upon such option or SAR.
13. Terms and Conditions of SARs.
(a) An SAR may be granted separately or in connection with an option
(either at the time of grant or at any time during the term of the option).
(b) The exercise of an SAR granted in connection with an option shall
result in the cancellation of the option to which it relates with respect to the
same number of shares of Common Stock as to which the SAR was exercised.
(c) An SAR granted in connection with an option shall be exercisable or
transferable only to the extent that such related option is exercisable or
transferable.
(d) Upon the exercise of an SAR related to an option, the holder will be
entitled to receive payment of an amount determined by multiplying:
(i) the difference obtained by subtracting the purchase price of a
share of Common Stock specified in the related option from the fair market value
of a share of Common Stock on the date of exercise of such SAR (as determined by
the Board in accordance with Section 8 hereof), by
(ii) the number of shares as to which such SAR is exercised.
(e) An SAR granted without relationship to an option shall be exercisable
as determined by the Board, but in no event after ten years from the date of
grant.
(f) An SAR granted without relationship to an option will entitle the
holder, upon exercise of the SAR, to receive payment of an amount determined by
multiplying:
(i) the difference obtained by subtracting the fair market value of a
share of Common Stock on the date the SAR was granted from the fair market value
of a share of Common Stock on the date of exercise of such SAR (as determined by
the Board in accordance with Section 8 hereof), by
(ii) the number of shares as to which such SAR is exercised.
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(g) Notwithstanding subsections (d) and (f) above, the Board may limit the
amount payable upon exercise of an SAR. Any such limitation shall be determined
as of the date of grant and noted on the instrument evidencing the SAR granted.
(h) At the discretion of the Board, payment of the amount determined under
subsections (d) and (f) above may be made either in whole shares of Common Stock
valued at their fair market value on the date of exercise of the SAR (as
determined by the Board in accordance with Section 8 hereof), or solely in cash,
or in a combination of cash and shares. If the Board decides to make full
payment in shares of Common Stock and the amount payable results in a fractional
share, payment for the fractional share shall be made in cash.
(i) Neither an SAR nor an option granted in connection with an SAR granted
to a person subject to Section 16(b) of the Exchange Act may be exercised before
six months after the date of grant.
14. Recapitalization, Reorganization and the Like.
In the event that the outstanding shares of Common Stock are changed into
or exchanged for a different number or kind of shares or other securities of the
Company or of another corporation by reason of any reorganization, merger,
consolidation, recapitalization, reclassification, stock split-up, combination
of shares, or dividends payable in capital stock, appropriate adjustment shall
be made in accordance with Section 424(a) of the Code in the number and kind of
shares as to which options and SARs may be granted under the Plan and as to
which outstanding options and SARs or portions thereof then unexercised shall be
exercisable, to the end that the proportionate interest of the grantee shall be
maintained as before the occurrence of such event; such adjustment in
outstanding options and SARs shall be made without change in the total price
applicable to the unexercised portion of such options and SARs and with a
corresponding adjustment in the exercise price per share.
In addition, unless otherwise determined by the Board in its sole
discretion, in the case of any (i) sale or conveyance to another entity of all
or substantially all of the property and assets of the Company or (ii) Change in
Control (as hereinafter defined) of the Company, the purchaser(s) of the
Company's assets or stock may, in his, her or its discretion, deliver to the
optionee the same kind of consideration that is delivered to the stockholders of
the Company as a result of such sale, conveyance or Change in Control, or the
Board may cancel all outstanding options and SARs in exchange for consideration
in cash or in kind which consideration in both cases shall be equal in value to
the value of those shares of stock or other securities the optionee would have
received had the option been exercised (to the extent then exercisable) and no
disposition of the shares acquired upon such exercise been made prior to such
sale, conveyance or Change in Control, less the exercise price therefor. Upon
receipt of such consideration, the options and SARs shall immediately terminate
and be of no further force and effect. The value of the stock or other
securities the grantee would have received if the option had been exercised
shall be determined in good faith by the Board, and in the case of shares of
Common Stock, in accordance with the provisions of Section 8 hereof.
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<PAGE>
The Board shall also have the power and right to accelerate the
exercisability of any options or SARs, notwithstanding any limitations in this
Plan or in the Agreement upon such a sale, conveyance or Change in Control. Upon
such acceleration, any options or portion thereof originally designated as
incentive stock options that no longer qualify as incentive stock options under
Section 422 of the Code as a result of such acceleration shall be redesignated
as non-qualified stock options.
A "Change in Control" shall be deemed to have occurred if any person, or
any two or more persons acting as a group, and all affiliates of such person or
persons, who prior to such time owned less than fifty percent (50%) of the then
outstanding Common Stock, shall acquire such additional shares of Common Stock
in one or more transactions, or series of transactions, such that following such
transaction or transactions, such person or group and affiliates beneficially
own fifty percent (50%) or more of the Common Stock outstanding.
If by reason of a corporate merger, consolidation, acquisition of property
or stock, separation, reorganization, or liquidation, the Board shall authorize
the issuance or assumption of a stock option or stock options in a transaction
to which Section 424(a) of the Code applies, then, notwithstanding any other
provision of the Plan, the Board may grant an option or options upon such terms
and conditions as it may deem appropriate for the purpose of assumption of the
old option, or substitution of a new option for the old option, in conformity
with the provisions of such Section 424(a) of the Code and the Regulations
thereunder, and any such option shall not reduce the number of shares otherwise
available for issuance under the Plan.
No fraction of a share shall be purchasable or deliverable upon the
exercise of any option or SAR, but in the event any adjustment hereunder in the
number of shares covered by the option or SAR shall cause such number to include
a fraction of a share, such fraction shall be adjusted to the nearest smaller
whole number of shares.
15. No Special Employment Rights.
Nothing contained in the Plan or in any option or SAR granted under the
Plan shall confer upon any grantee any right with respect to the continuation of
his or her employment by the Company (or any subsidiary) or interfere in any way
with the right of the Company (or any subsidiary), subject to the terms of any
separate employment agreement to the contrary, at any time to terminate such
employment or to increase or decrease the compensation of the grantee from the
rate in existence at the time of the grant of an option or SAR. Whether an
authorized leave of absence, or absence in military or government service, shall
constitute termination of employment shall be determined in accordance with
Regulations Section 1.421-7(h)(2).
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<PAGE>
16. Withholding.
The Company's obligation to deliver shares upon the exercise of any non-
qualified option or SAR granted under the Plan shall be subject to the option
holder's satisfaction of all applicable Federal, state and local income and
employment tax withholding requirements. The Company and optionee may agree to
withhold shares of Common Stock purchased upon exercise of an option or SAR to
satisfy the above-mentioned withholding requirements; provided, however, that no
such agreement may be made by a grantee who is an "officer" or "director" within
the meaning of Section 16 of the Exchange Act, except pursuant to a standing
election to so withhold shares of Common Stock purchased upon exercise of an
option, such election to be made not less than six months prior to such exercise
and which election may be revoked only upon six months prior written notice.
17. Restrictions on Issuance of Shares.
(a) Notwithstanding the provisions of Section 9 hereof, the Company may
delay the issuance of shares covered by the exercise of an option or SAR and the
delivery of a certificate for such shares until one of the following conditions
shall be satisfied:
(i) The shares with respect to which such option or SAR has been
exercised are at the time of the issue of such shares effectively registered or
qualified under applicable Federal and state securities acts now in force or as
hereafter amended; or
(ii) Counsel for the Company shall have given an opinion, which
opinion shall not be unreasonably conditioned or withheld, that such shares are
exempt from registration and qualification under applicable Federal and state
securities acts now in force or as hereafter amended.
(b) It is intended that all exercises of options and SARs shall be
effective, and the Company shall use its best efforts to bring about compliance
with the above conditions, within a reasonable time, except that the Company
shall be under no obligation to qualify shares or to cause a registration
statement or a post-effective amendment to any registration statement to be
prepared for the purpose of covering the issue of shares in respect of which any
option may be exercised, except as otherwise agreed to by the Company in
writing.
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18. Purchase for Investment; Rights of Holder on Subsequent Registration.
Unless the shares to be issued upon exercise of an option or SAR granted
under the Plan have been effectively registered under the Securities Act of
1933, as amended (the "1933 Act"), the Company shall be under no obligation to
issue any shares covered by any option or SAR unless the person who exercises
such option, in whole or in part, shall give a written representation and
undertaking to the Company which is satisfactory in form and scope to counsel
for the Company and upon which, in the opinion of such counsel, the Company may
reasonably rely, that he or she is acquiring the shares issued pursuant to such
exercise of the option or SAR for his or her own account as an investment and
not with a view to, or for sale in connection with, the distribution of any such
shares, and that he or she will make no transfer of the same except in
compliance with any rules and regulations in force at the time of such transfer
under the 1933 Act, or any other applicable law, and that if shares are issued
without such registration, a legend to this effect may be endorsed upon the
securities so issued.
In the event that the Company shall, nevertheless, deem it necessary or
desirable to register under the 1933 Act or other applicable statutes any shares
with respect to which an option or SAR shall have been exercised, or to qualify
any such shares for exemption from the 1933 Act or other applicable statutes,
then the Company may take such action and may require from each grantee such
information in writing for use in any registration statement, supplementary
registration statement, prospectus, preliminary prospectus or offering circular
as is reasonably necessary for such purpose and may require reasonable indemnity
to the Company and its officers and directors from such holder against all
losses, claims, damages and liabilities arising from such use of the information
so furnished and caused by any untrue statement of any material fact therein or
caused by the omission 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 under which they were made.
19. Loans.
At the discretion of the Board, the Company may loan to the optionee some
or all of the purchase price of the shares acquired upon exercise of an option
granted under the Plan.
20. Modification of Outstanding Options and SARs.
Subject to limitations contained herein, the Board may authorize the
amendment of any outstanding option or SAR with the consent of the grantee when
and subject to such conditions as are deemed to be in the best interests of the
Company and in accordance with the purposes of the Plan.
21. Approval of Stockholders.
The Plan shall be subject to approval by a majority vote of the
stockholders of the Company voting in person or by proxy at the Company's 1999
Annual Meeting of Stockholders. The Plan became effective on August 25, 1999 by
resolution of the Board. The Board may grant options and SARs under the Plan
prior to such stockholder approval, but any such option shall become effective
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as of the date of grant only upon such approval and, accordingly, no such option
may be exercisable prior to such approval.
22. Termination and Amendment of Plan.
Unless sooner terminated as herein provided, the Plan shall terminate on
August 25, 2009. The Board may at any time terminate the Plan or make such
modification or amendment thereof as it deems advisable; provided, however, that
(i) the Board may not, without approval by a majority vote of the stockholders
of the Company, increase the maximum number of shares for which options and SARs
may be granted or change the designation of the class of persons eligible to
receive options and SARs under the Plan, and (ii) any such modification or
amendment of the Plan shall be approved by a majority vote of the stockholders
of the Company to the extent that such stockholder approval is necessary to
comply with applicable provisions of the Code, rules promulgated pursuant to
Section 16 of the Exchange Act, applicable state law, or applicable National
Association of Securities Dealers, Inc. or exchange listing requirements.
Termination or any modification or amendment of the Plan shall not, without the
consent of an optionee, affect his or her rights under an option or SAR
theretofore granted to him or her.
23. Limitation of Rights in the Underlying Shares.
A holder of an option or SAR shall not be deemed for any purpose to be a
stockholder of the Company with respect to such option or SAR except to the
extent that such option or SAR shall have been exercised with respect thereto
and, in addition, a stock certificate shall have been issued theretofore and
delivered to the holder.
24. Notices.
Any communication or notice required or permitted to be given under the
Plan shall be in writing, and mailed by registered or certified mail or
delivered by hand, if to the Company, to its principal place of business,
attention: Chairman, and, if to the holder of an option or SAR, to the address
as appearing on the records of the Company.
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Exhibit B
---------
CONTRIBUTION AGREEMENT
by and among
INSIGHT INTERACTIVE, LLC
SOURCE MEDIA, INC.
and
NEWCO, L.L.C.
Dated as of
July 29, 1999
<PAGE>
CONTRIBUTION AGREEMENT
Table of Contents
Page
ARTICLE I
Definitions.................................................. 1
ARTICLE II
Contribution of Assets; Consideration........................ 4
ARTICLE III
Closing...................................................... 6
ARTICLE IV
Representations and Warranties of Source..................... 9
ARTICLE V
Representations and Warranties of Insight....................14
ARTICLE VI
Covenants....................................................15
ARTICLE VII
Conditions Precedent to the Closing Obligation of Insight....20
ARTICLE VIII
Conditions Precedent to the Closing Obligation of Source.....22
ARTICLE IX
Ad Valorem and Transfer Taxes................................23
ARTICLE X
Indemnification..............................................24
ARTICLE XI
Disputes.....................................................27
ARTICLE XII
Cooperation in Various Matters...............................28
ARTICLE XIII
Expenses.....................................................29
ARTICLE XIV
Notices......................................................29
ARTICLE XV
General......................................................30
<PAGE>
ARTICLE XVI
Insight Communications Guaranty of Obligations....31
Schedule List..........................................34
Exhibit List...........................................35
<PAGE>
CONTRIBUTION AGREEMENT
This Contribution Agreement (the "Agreement"), dated as of July 29,
1999, is entered into by and among INSIGHT INTERACTIVE, LLC, a Delaware limited
liability company ("Insight"), and SOURCE MEDIA, INC., a Delaware corporation
("Source"), and for the limited purposes set forth herein, INSIGHT
COMMUNICATIONS COMPANY, INC., a Delaware corporation ("Insight Communications").
NEWCO, L.L.C. ("NewCo"), a Delaware limited liability company, shall be formed
in accordance with the terms hereof and shall execute and enter into this
Agreement at the Closing described in Section 3.1 hereof.
RECITALS
--------
A. Insight and Source desire to combine certain business resources and
assets owned by each by contributing such assets more specifically identified
herein to NewCo, a new Delaware limited liability company formed for the
purposes to thereafter further develop such assets and businesses. Specifically,
Insight desires to contribute funds to the capital of NewCo, and Source desires
to contribute or cause its Affiliates to contribute all of their respective
right, title and interests in and to the Source Assets (as defined herein), in
accordance with the terms and conditions contained herein. Upon Closing (as
defined herein), NewCo shall be managed and operated pursuant to the terms of
the Operating Agreement attached hereto as Exhibit A.
B. Insight and Source have executed a Common Stock and Warrants
Purchase Agreement (the "Stock Purchase Agreement") of even date, which contains
numerous provisions in addition to those relating to the formation and
capitalization of NewCo. Among such additional provisions of the Stock Purchase
Agreement (all of which are related to the transactions contemplated hereby) are
terms relating to the investment by Insight directly in Source through the
purchase of certain common stock of Source, the issuance by Source to Insight of
certain warrants to acquire additional common stock, and the granting to Insight
of certain shareholder rights.
NOW, THEREFORE, in consideration of the premises, and the agreements and
covenants contained herein, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, and in reliance upon
the mutual representations and warranties contained herein, Source, Insight and
NewCo agree as follows:
ARTICLE I
Definitions
-----------
As used in this Agreement, the following terms have the meanings set
forth in this Article I. Other terms that are defined elsewhere in this
Agreement shall have the meaning as therein set forth, and such terms are listed
in this Article I for the convenient reference of the parties.
Section I.1. "Accounts Receivable" shall mean all invoices issued and
outstanding as of the Closing Date (or to be issued in the case of services
previously rendered before the Closing Date for which invoices have not yet been
issued) from Source with respect to the Transferred Businesses, for which
payment is (or will be in case of invoices not yet issued) legally due but not
yet received. "Accounts Receivable" shall not include (i) any items of revenue
resulting from invoices issued and outstanding (whether or not collected) from
Source that do not reflect services actually performed and/or that arose as a
result of billing errors; or (ii) any customer prepayments.
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Section I.2. "ADR" shall have the meaning ascribed thereto in Section
11.3.
Section I.3. "Affiliate" shall mean, when used with respect to a
Person, any other Person, which directly or indirectly (through one or more
intermediaries) controls, or is controlled by, or is under common control with,
such first mentioned Person. The term "control" (including the terms "controlled
by" and "under common control with") means the possession, directly or
indirectly, of the actual power to direct or cause the direction of the
management policies of a Person, whether through the ownership of stock, by
contract, credit arrangement or otherwise. Notwithstanding the above, neither
Insight nor Source (nor their Affiliates) shall be deemed an "Affiliate" of the
other as used herein by reason of their common ownership of NewCo.
Section I.4. "Arbitrator" shall have the meaning ascribed to such term
in Section 11.4.
Section I.5. "Assets" shall mean the Source Assets and the cash
capital contribution made by Insight, collectively.
Section I.6. "Authorized Individuals" shall have the meaning ascribed
to such term in Section 11.2.
Section I.7. "Confidential Information" shall have the meaning
ascribed there to in Section 6.5.
Section I.8. "Closing" and "Closing Date" shall have the meaning
ascribed to such terms in Section 3.1.
Section I.9. "DOJ" shall have the meaning ascribed to such term in
Section 4.11.
Section I.10. "Dispute" shall have the meaning ascribed to such term in
Section 11.1.
Section I.11. "Definitive Documents" shall have the meaning ascribed to
such term in Article XVI.
Section I.12. "Final Closing Date" shall have the meaning ascribed to
such term in Section 3.1.
Section I.13. "Finally Determined" shall have the meaning ascribed
thereto in Section 10.1.C.
Section I.14. "FTC" shall have the meaning ascribed to such term in
Section 4.11.
Section I.15. "Governmental Authority" shall have the meaning ascribed
to such term in Section 4.7.
Section I.16. "HSR Act" shall mean the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended.
Section I.17. "Indemnified Party" and "Indemnifying Party" shall have
the meanings ascribed to such terms in Section 10.4.
Section I.18. "Initiating Party" shall have the meaning ascribed to
such term in Section 11.2.
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Section I.19. "Losses" shall mean any and all losses, liabilities,
claims, demands, actions, or causes of action, judgments, orders, deficiencies,
fines, penalties, costs, damages, or expenses whatsoever, including, without
limitation, Taxes and environmental claims, whether foreseeable or
unforeseeable, and further including, without limitation legal, accounting and
other professional fees, disbursements and expenses incurred in the
investigation, collection, prosecution and defense of claims and amounts paid in
settlement thereof.
Section I.20. "Management Agreement" shall have the meaning ascribed to
such term in Section 6.6A.
Section I.21. "Operating Agreement" shall refer to the Limited
Liability Company Agreement for NewCo attached hereto as Exhibit A.
Section I.22. "Permitted Liens" means any of the following: (a)
purchase money liens and liens securing rental payments under capital lease
arrangements, (b) in the case of interests in real property that are leaseholds,
the rights of any lessor and any liens encumbering any lessor's interest in the
underlying real property; and (c) liens, liabilities, or encumbrances that
secure liabilities to be assumed by NewCo pursuant to this Agreement.
Section I.23. "Person" shall mean a domestic or foreign natural person,
partnership, limited liability partnership, limited liability company, trust,
estate, association or corporation.
Section I.24. "Procedure" shall have the meaning ascribed to such term
in Section 11.1.
Section I.25. "Responding Party" shall have the meaning ascribed to
such term in Section 11.2.
Section I.26. "Retained Assets" shall have the meaning ascribed to such
term in Section 2.3.
Section I.27. "SEC" shall have the meaning ascribed to such term in
Section 4.10.
Section I.28. "Source Assets" shall have the meaning ascribed to such
term in Section 2.1.
Section I.29. "Source Material Adverse Effect" shall have the meaning
ascribed to such term in Section 4.1.
Section I.30. "Source Contracts" shall have the meaning ascribed to
such term in Section 2.1D.
Section I.31. "Source Equipment" shall have the meaning ascribed to
such term in Section 2.1A.
Section I.32. "Source Intangible Property and Data" shall have the
meaning ascribed to such term in Section 2.1C.
Section I.33. "Source Intellectual Property" shall have the meaning
ascribed to such term in Section 2.1B.
Section I.34. "Source Inventory" shall have the meaning ascribed to
such term in Section 2.1E.
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Section I.35. "Source Litigation" shall have the meaning ascribed to
such term in Section 4.6.
Section I.36. "Source Returns" shall have the meaning ascribed to such
term in Section 4.9.
Section I.37. "Source Subsidiaries" shall mean those entities that are
directly or indirectly owned by Source.
Section I.38. "Source Subsidiaries Stock" means all of the issued and
outstanding capital stock of the Source Subsidiaries.
Section I.39. "Stock Purchase Agreement" shall have the meaning
ascribed to such term in Recital B.
Section I.40. "Submission Date" shall have the meaning ascribed to such
term in Section 11.3.
Section I.41. "Taxes" shall mean any tax based upon, or measured by,
income or gross receipts, and any sales, use, ad valorem, transfer, franchise,
payroll, employment, excise, occupation, premium, property or other taxes
(including any interest or any penalties or additional amounts imposed by any
taxing authority).
Section I.42. "Transferred Businesses" means all of the lines of
business currently conducted by Source relating to Source's "VirtualModem" and
the "Interactive Channel" products and businesses. VirtualModem is a server-
based software platform that is designed to enable cable and satellite signal
transmitted television viewers, among others, to enjoy interactive connectivity
using a VirtualModem-enabled digital set top box, allowing viewers to browse the
Internet, send and receive e-mail, facilitate e-commerce and access a wide
variety of interactive television applications. Interactive Channel is the
assets, technology and know-how developed to create Local Source, a programming
channel focused on programming for and from the community perspective offered to
MSO's.
ARTICLE II
Contribution of Assets; Consideration
-------------------------------------
Section II.1. Assets to be Contributed by Source - Agreed Value.
-------------------------------------------------
Upon the terms and subject to the conditions of this Agreement, at Closing
Source shall, and shall cause the Source Subsidiaries to, transfer, assign and
convey to NewCo, by executing and delivering the conveyance instruments
described in Section 3.2, and NewCo shall acquire from Source and the Source
Subsidiaries, the assets described below:
A. The tangible personal property and equipment described on
Schedule 2.1A (the "Source Equipment").
B. The intellectual property rights described on Schedule 2.1B
and which are granted pursuant to the terms of the Assignment and License
Agreement in the form of Exhibit B-1 hereto and pursuant to the terms of the
Assignment Agreement in the form of Exhibit B-2 hereto (collectively, the
"Source Intellectual Property").
4
<PAGE>
C. All customer lists, files, records, data and all other
information possessed or maintained by Source to the extent related to the
Transferred Business (the "Source Intangible Property and Data").
D. The rights, interests, and obligations of Source and/or
Source Subsidiaries in and under those contracts, leases, licenses, permits and
agreements described on Schedule 2.1D (the "Source Contracts").
E. The inventory of items described on Schedule 2.1E (the
"Source Inventory").
F. The Accounts Receivable which are listed on Schedule 2.1F
(the "Source Accounts Receivable"). The Source Equipment, Source Intellectual
Property, Source Intangible Property and Data, Source Contracts, Source
Inventory, and the Source Accounts Receivable are collectively referred to as
the "Source Assets".
Section II.2. Contribution by Insight. Upon the terms and subject
-----------------------
to the conditions of this Agreement, at Closing Insight shall transfer to NewCo,
Thirteen Million Dollars ($13,000,000) in cash by wire transfer to an account or
accounts of NewCo.
Section II.3. Retained Assets. Source will retain any asset owned
---------------
by it and not identified in Section 2.1 (the "Retained Assets"), it being the
intent of the parties that the Retained Assets shall constitute all assets owned
by Source which are not used in the operation of the Transferred Businesses,
with it being understood and acknowledged by the parties that all assets related
to the research and development activities conducted in Canada related to
VirtualModem shall be transferred to NewCo. In the event that, by reason of
Source retaining a Retained Asset, an asset necessary for NewCo to operate the
Transferred Business is retained by Source, Source shall either pay the cost of
such item to NewCo or acquire a replacement and thereafter contribute such asset
to NewCo (and such contribution shall not impact the respective ownership
percentages of Source and Insight in NewCo).
Section II.4. Agreed Value of Assets -- Capital Contributions.
-----------------------------------------------
Insight and Source agree that the net fair market value of the Source Assets
(including the Source Intellectual Property) for purposes of this Agreement and
the Operating Agreement (subject to adjustment as provided in Section 10.1C
hereof) shall equal $13,000,000 and in return for the contribution of the Source
Assets to NewCo, Source shall receive 500,000 Units (as described in the
Operating Agreement) in NewCo, representing a fifty percent (50%) ownership
interest in NewCo, and entitling Source to such rights as are set forth in the
Operating Agreement. For purposes of this Agreement, the agreed net fair market
value of the cash capital contribution is $13,000,000 and in return for the cash
contribution described above, Insight shall receive 500,000 Units (as described
in the Operating Agreement) in NewCo, representing a fifty percent (50%)
ownership interest. Such ownership interests shall be registered on the books
and records of NewCo.
Section II.5. Assumption of Liabilities. NewCo shall not assume
-------------------------
any debt, expense, liability or obligation of Source or its Affiliates of any
kind or description, whether direct or indirect, liquidated or unliquidated,
fixed or contingent; provided, that as of the Closing Date NewCo shall assume
and agree to pay, discharge and perform when due all of Source's obligations
arising or accruing from and after the Closing Date and relating to the period
after the Closing Date pursuant to the Source Contracts and all other
obligations arising or accruing from and after the Closing Date and relating to
the period after the Closing Date in connection with NewCo's ownership and
operation of the Source Assets and the Transferred
5
<PAGE>
Businesses and, subject to indemnification by Source and each Source Subsidiary
as set forth in Section 10.1, the Source Litigation being transferred to NewCo
as set forth in Section 4.6.
ARTICLE III
Closing
-------
Section III.1. Time and Place of Closing. The closing of the
--------------------------
transactions contemplated hereby (the "Closing") shall be held at the offices of
Cooperman Levitt Winikoff Lester & Newman, P.C., counsel to Source, in New York,
New York, at 10:00 a.m., local time, on the sixth business day following the
satisfaction or waiver of the conditions set forth in Articles VII and VIII
hereto (other than those that are closing deliveries), but in no event later
than January 31, 2000 (the "Final Closing Date"), unless another time, date and
place is agreed to in writing by Insight and Source. The effective time of the
transactions contemplated by this Agreement shall be 11:59 p.m. on the date of
Closing (the "Closing Date").
Section III.2. Deliveries by Source. At Closing, Source shall
--------------------
deliver to Insight and/or NewCo, as applicable, the following:
A. An executed General Assignment, Bill of Sale and Conveyance
in the form of Exhibit C, conveying title to the Source Equipment, Source
Inventory, Source Accounts Receivable, Source Intangible Property and Data, and
Source Contracts, free and clear of any liens, claims or encumbrances except for
Permitted Liens;
B. Copies of the Operating Agreement executed by Source
pursuant to which NewCo shall be managed, in the form of Exhibit A hereto;
C. Executed copies of the Assignment and License Agreement in
the form of Exhibit B-1;
D. Executed copies of the Assignment Agreement in the form of
Exhibit B-2;
E. Executed copies of the Management Agreement;
F. Copies of Source's board and other necessary resolutions as
represented under Section 4.3;
G. The certificates as described in Section 7.4;
H. All other documents, instruments, and writings required to
be delivered by Source at Closing pursuant to the terms of this Agreement; and
I. Opinion of Counsel for Source in a form and substance
reasonably acceptable to Insight.
Section III.3. Deliveries by Insight. At Closing, Insight shall
---------------------
deliver to Source and/or NewCo, as applicable, the following:
6
<PAGE>
A. The cash contribution of $13,000,000 to an account or
accounts designated by NewCo;
B. Copies of the Operating Agreement executed by Insight
pursuant to which NewCo shall be managed, in the form of Exhibit A hereto;
C. Copies of board and other necessary resolutions represented
under Section 5.2;
D. The certificates as described in Section 8.4;
E. All other documents, instruments and writings required to be
delivered by Insight at Closing pursuant to the terms of this Agreement; and
F. Opinion of Counsel for Insight in a form and substance
reasonably acceptable to Source.
Section III.4. Deliveries by NewCo. At Closing, Source shall cause
-------------------
NewCo to deliver to Source and/or Insight, as applicable, the following;
A. Executed copies of the Assignment and License Agreement in
the form of Exhibit B-1;
B. Executed copies of the Assignment Agreement in the form of
Exhibit B-2;
C. An executed copy of the General Assignment, Bill of Sale and
Conveyance in the form of Exhibit C;
D. Executed copies of this Agreement;
E. Executed copies of the Management Agreement; and
F. All other documents, instruments and writings required to be
delivered by NewCo at Closing pursuant to the terms of this Agreement.
Section III.5. Termination. This Agreement may be terminated at
-----------
any time prior to the Closing by mutual written agreement of the parties, or in
accordance with the following:
A. By Insight, if (i) the Closing has not occurred on or before
the Final Closing Date other than as a result of a breach by Insight of its
representations, warranties and/or covenants as set forth herein; or (ii) Source
breaches any of its representations, warranties or covenants contained herein in
any material respect and fails to cure such breach within thirty (30) days after
its receipt of written notice thereof from Insight.
B. By Source, if (i) the Closing has not occurred on or before
the Final Closing Date other than as a result of a breach by Source of its
representations, warranties and/or covenants as set forth herein; or (ii)
Insight breaches any of its representations, warranties or covenants contained
herein in any material respect and fails to cure such breach within thirty (30)
days after its receipt of written notice thereof from Source.
7
<PAGE>
Section III.6. Effect of Termination. If this Agreement is
---------------------
terminated as provided in Section 3.5, then this Agreement will forthwith become
null and void and there will be no liability on the part of any party to any
other party or any other Person in respect thereof, provided that:
A. Withdrawal of Applications. All filings, applications
--------------------------
and other submissions relating to the consummation of the transaction
contemplated hereby shall, to the extent practicable, be withdrawn from the
agency or other Person to whom made.
B. Breach by Insight. No such termination will relieve
-----------------
Insight from liability for a breach of representations, warranties or covenants
by Insight of this Agreement, and in such event the Company shall have the right
to sue Insight for monetary damages.
C. Breach by the Company. No such termination will relieve
---------------------
the Company from liability for a breach of representations, warranties or
covenants by the Company of this Agreement, and in such event Insight shall have
all rights and remedies available at law and equity, including the remedy of
specific performance. Insight shall have the right to sue for specific
performance of this Agreement without termination of this Agreement in the event
of a breach of this Agreement by Source. The parties recognize that if the
Company breaches this Agreement and refuses to perform under the provisions of
this Agreement, monetary damages alone would not be adequate to compensate
Insight for its injury, and the Company hereby waives the defense that there is
an adequate remedy at law.
D. Mutual Breach. Without limiting the generality of the
-------------
foregoing, or any applicable law, (i) Insight may not rely on the failure of any
condition precedent set forth in Article VII of this Agreement and (ii) Source
may not rely on the failure of any condition precedent set forth in Article VIII
of this Agreement, in the case of (i) or (ii) above to be satisfied as a ground
for termination of this Agreement by such party if such failure was caused by
such party's (or parties') failure to act in good faith, or a breach of or
failure to perform its representations, warranties, covenants or other
obligations in accordance with the terms hereof.
Section III.7. Risk of Loss. The risk of loss or destruction of or
------------
damage to the Source Assets from any cause whatsoever at all times on or
subsequent to the execution of this Agreement, but prior to the Closing Date,
shall be borne by Source. Subsequent to the Closing Date, the risk of loss or
destruction of or damage to the Assets shall be borne by NewCo.
ARTICLE IV
Representations and Warranties of Source
----------------------------------------
Source hereby represents and warrants to Insight and NewCo as follows:
Section 4.1. Corporate Existence and Qualification. Source is a
-------------------------------------
corporation duly incorporated, validly existing and in good standing under the
laws of the State of Delaware. Source is duly qualified to do business and in
good standing in each jurisdiction in which the Source Assets owned or leased by
it, or the nature of its activities with respect to the Source Assets makes such
qualification necessary, except in such jurisdictions where the failure to be so
qualified or in good standing would not have a material adverse effect on the
Source Assets, on NewCo or the transactions contemplated under this Agreement
("Source Material Adverse Effect"). Each of the Source Subsidiaries is a
corporation duly incorporated, validly
8
<PAGE>
existing and in good standing under the laws of the jurisdiction of its
incorporation. Each Source Subsidiary is duly qualified to do business and in
good standing in each jurisdiction in which the assets owned or leased by it, or
the nature of its activities makes such qualification necessary, except in such
jurisdictions where the failure to be so qualified or in good standing would not
have a Source Material Adverse Effect. No Source Subsidiary has any subsidiaries
other than a Source Subsidiary.
Section 4.2. Capitalization. As of the date hereof, the capitalization
--------------
of Source is as set forth on Schedule 4.2 hereof. Other than pursuant to this
Agreement, there are no outstanding or authorized options, warrants, purchase
rights, subscription rights, conversion rights, exchange rights, or other
contracts or commitments that could require NewCo to issue, sell, or otherwise
cause to become outstanding any of NewCo's capital stock.
Section 4.3 Corporate Authority, Approval and Enforceability. A. Source
------------------------------------------------
has all requisite corporate power and corporate authority to execute and deliver
this Agreement and, subject to the consents and approvals referenced in Article
VI hereof, to perform its obligations under this Agreement. The execution and
delivery of this Agreement by Source in accordance with the terms hereof, and
the performance of the transactions contemplated hereunder by Source, have been
duly and validly approved by its Board of Directors. This Agreement is, and all
such other documents and agreements required to be executed and delivered
hereunder, when so executed and delivered by Source will be, subject to the
consents and approvals referenced in Article VI hereof, valid, legal and binding
obligations of Source, enforceable against it in accordance with their terms,
except as limited by bankruptcy and insolvency laws and other laws affecting the
rights of creditors generally and the application of general equitable
principles.
B. The execution and delivery of this Agreement and such other documents
and agreements as may be required hereby and thereby, and the consummation of
the transactions contemplated hereby by Source will not, subject to the consents
and approvals referenced in Article VI hereof : (i) violate any law, regulation,
order or decree, or (ii) conflict with or result in any breach of, or constitute
a default under, Source's corporate charter or bylaws, or any agreement or
contract to which Source is a party, including without limitation, the letter of
intent with Prevue Ventures, Inc. dated February 10, 1999 (the "Prevue Letter"),
or by which it or the Source Assets are bound or affected, except that certain
agreements identified on Schedule 2.1D may require the consent of the other
party to the assignment of such agreement or agreements and Source covenants to
obtain these consents in Section 6.2.C. or to indemnify Insight and NewCo in the
event such consents are not obtained. The exclusivity period under the Prevue
Letter has expired and Source has no further obligations pursuant to the Prevue
Letter.
Section 4.4. Assets. Except as set forth on Schedule 4.4, Source has
------
good and valid title to all of the Source Assets to be contributed to NewCo
hereunder, free and clear of any liens, claims, security interests or
encumbrances of any nature except for Permitted Liens. The Source Equipment and
other tangible assets are in good operating condition and repair, ordinary wear
and tear excepted. There are no options, rights, warrants or other agreements
to acquire, or other right to, any equity interest in the Source Subsidiaries
held by any Person, other than as evidenced by the Source Subsidiaries Stock.
The Source Assets constitute all assets owned by Source which are currently used
in the Transferred Businesses and all assets owned by Source which have use in
the conduct of the Transferred Businesses as the businesses are contemplated to
be conducted.
Section 4.5. Contracts. Except for the Source Contracts, neither Source
---------
nor any Source Subsidiary is a party to or bound by any written or oral lease,
license, agreement or other contract or legally binding contractual rights,
obligations or commitments necessary to the operation or ownership of the Source
9
<PAGE>
Assets. Schedule 2.1D contains a list of each of the Source Contracts (all as
amended) necessary to ownership, use, operation or which otherwise relates to
the Source Assets and the Transferred Business. Each Source Contract is in full
force and effect, and no event has occurred which would give rise to rights in
any party thereto to declare an event of default thereunder or breach thereof,
except where the failure to so be in full force and effect or such default or
breach would not result in a Source Material Adverse Effect. As of the date
hereof, no material customer or supplier has advised either Source or the Source
Subsidiaries in writing that it will stop or materially decrease the rate of
business done with such party pursuant to any Source Contract. Except as set
forth in Schedule 2.1D or except as would not result in a Source Material
Adverse Effect, the execution, delivery and performance of this Agreement and
the consummation of the transactions contemplated hereby will not result in or
give any Person additional rights or entitlement under, or any right of
termination, cancellation, acceleration or modification with respect to, the
Source Contracts. Insight has been provided with a true copy of all written
contracts and agreements comprising the Source Contracts, together with all
written amendments, waivers or other modifications thereto. Other than the
Source Contracts to be transferred to NewCo, Source has no other contracts,
agreements or understandings or entered into any other transactions that grant
or otherwise provide any special status, preferences or rights to a third party
which could in turn precipitate, activate or otherwise create any "most favored
nations" or similar status, preferences or rights in any party with whom Source
or its Subsidiaries has any contract, agreement or understanding which is
assigned to NewCo or related to the Transferred Business, or with whom NewCo may
hereafter have any contract, agreement or understanding related to the
Transferred Business.
Section 4.6. Litigation. Schedule 4.6 contains a true, correct and
----------
complete list of all actions, suits, demands, proceedings or governmental
investigations (collectively "Source Litigation") which is pending against
Source or the Source Assets and identifies the Source Litigation being
transferred to NewCo. Schedule 4.6 also identifies and contains a true, correct
and complete list of the Source Litigation being retained by Source which is
pending against Source or the Source Assets with respect to which demand has
been made for $10,000 or more. Except as set forth on Schedule 4.6, there are
no pending or outstanding actions, suits, proceedings, orders, judgments,
injunctions, awards, or decrees of or before any governmental body, commission,
tribunal, arbitrator, board, court, agency or instrumentality, which would have
a Source Material Adverse Effect. To the best of Source's knowledge after due
inquiry of all officers who in the normal course of their duties would have a
reasonable basis for being informed of such matters, except as set forth on
Schedule 4.6: (a) no claims or causes of action have been asserted that would
result in such an action, suit, proceeding, order, judgment, injunction, award,
or decree of or before any governmental body, commission, tribunal, arbitrator,
board, court, agency or instrumentality, which would have a Source Material
Adverse Effect; and (b) there are no such claims or causes of action in
existence which would have a Source Material Adverse Effect.
Section 4.7. Compliance with Laws. Each of Source and the Source
--------------------
Subsidiaries are in material compliance with all applicable statutes, laws,
ordinances, regulations, rules and orders of any federal, state or local
government, or any governmental department or agency ("Governmental Authority")
or any judgment, decree or order of any court applicable to them and/or the
Source Assets or applicable to their employees, benefits, compensation and/or
working conditions and/or hiring, nondiscrimination and promotion practices
except where the failure to so comply would not result in a Source Material
Adverse Effect. Source is in compliance, in all material respects, with all
permits, licenses or other authorizations of Governmental Authorities which are
required for the operation of the Source Assets and all of such permits,
licenses and authorizations that are necessary for the operation of the
Transferred Business are fully transferrable to NewCo. Neither Source nor any
Source Subsidiary has received any written notice, report or information
regarding any corrective, investigatory or remedial obligations, arising under
applicable laws,
10
<PAGE>
ordinances, regulations, rules, or orders with respect to past or present
operations of Source, the Source Subsidiaries or the Source Assets from any
Governmental Authority that would have a Source Material Adverse Effect.
Section 4.8 Licensed Intellectual Property and Intangible Property and
----------------------------------------------------------
Data.
----
A. To the best of Source's knowledge, except as set forth on Schedule
4.8, Source and/or the Source Subsidiaries own or have the exclusive right to
use pursuant to license, sublicense, agreement, or permission all Source
Intellectual Property necessary for the operation of the businesses of Source
and the Source Subsidiaries as presently conducted without any further licenses
or grants of rights. Each item of Source Intellectual Property owned or used by
Source or the Source Subsidiaries immediately prior to the Closing hereunder
will be owned or available for use by NewCo on identical terms and conditions
immediately subsequent to the Closing hereunder. Each of Source and the Source
Subsidiaries has taken all necessary action in accordance with prudent business
practices to maintain and protect each item of Source Intellectual Property that
it owns or uses. Source has acquired any and all rights that its employees and
independent contractors have, had or may have had to the Source Intellectual
Property. To the best of Source's knowledge, any and all consents or approvals
necessary to be obtained in connection with the sale, transfer, licensing, or
other disposal of any of the Source Intellectual Property, or in connection with
the granting of any other rights thereunder, both prior to the date hereof and
through and including the transactions contemplated at Closing, have been
properly provided or obtained.
B. Except as set forth in the Financial Statements referenced in Section
4.10, none of Source, the Source Subsidiaries and the directors and officers
(and employees with responsibility for intellectual property matters) of Source
or the Source Subsidiaries has received in writing any charge, complaint, claim,
demand, or notice from third parties alleging that the Source Intellectual
Property interferes with, infringes upon, misappropriates or is otherwise
conflicting with or in violation of the intellectual property rights of such
third parties (including any claim that any of Source and the Source
Subsidiaries must license or refrain from using either the Source Intellectual
Property or any intellectual property rights of such third parties).
C. Schedule 2.1B identifies each patent or registration which has been
issued to either Source or the Source Subsidiaries with respect to any of the
Source Intellectual Property, and identifies each pending patent application or
application for registration which either Source or the Source Subsidiaries has
made with respect to any of the Source Intellectual Property. Source has
delivered to Insight correct and complete copies of all such patents,
registrations, applications, licenses, agreements, and permissions (as amended
to date), and will transfer to NewCo correct and complete copies of all other
written documentation evidencing ownership and prosecution (if applicable) of
each such item. Schedule 2.1B also identifies each trade name or unregistered
trademark used by either Source or the Source Subsidiaries in connection with
any of the Transferred Businesses. Except as set forth on Schedule 4.8, with
respect to each patent included in the Source Intellectual Property:
(i) Source or the Source Subsidiaries possess all right, title,
and interest in and to the item, free and clear of any security interest,
license, or other restriction;
11
<PAGE>
(ii) the item is not subject to any outstanding injunction,
judgment, order, decree, ruling, or charge;
(iii) no action, suit, proceeding, hearing, investigation,
charge, complaint, claim, or demand is pending or, to the knowledge of
Source, is threatened which challenges the legality, validity,
enforceability, use, or ownership of the item; and
(iv) there is no outstanding agreement by Source nor any Source
Subsidiary to indemnify any Person for or against any interference,
infringement, misappropriation, or other conflict with respect to the item.
Further, Schedule 4.8 identifies each license, agreement, or other
permission pursuant to which either of Source or any Source Subsidiary has
granted rights of ownership or use to, or under which rights of ownership or use
are created for the benefit of, any third party with respect to the Source
Intellectual Property.
D. Schedule 2.1B also identifies each item of Source Intellectual
Property that is material to the Transferred Business and that is owned by any
third party and that either Source or any Source Subsidiary uses pursuant to
license, sublicense, agreement, or permission and Schedule 2.1B also indicates
whether such item is assignable or transferable without the consent of the third
party. Source has delivered to Insight correct and complete copies of all such
licenses, sublicenses, agreements, and permissions (as amended to date). With
respect to each such item of Source Intellectual Property:
(i) the license, sublicense, agreement, or permission covering
the item is legal, valid, binding, enforceable, and in full force and
effect;
(ii) unless otherwise indicated on Schedule 2.1B, the license,
sublicense, agreement, or permission is freely transferrable and/or
assignable and the transferee thereof will obtain all rights, privileges of
ownership or use or benefits inuring to the transferor thereunder;
(iii) no party to the license, sublicense, agreement, or
permission is in breach or default, and no event has occurred which with
notice or lapse of time would constitute a breach or default or permit
termination, modification, or acceleration thereunder;
(iv) no party to the license, sublicense, agreement, or
permission has repudiated any provision thereof;
(v) to the best of Source's knowledge, with respect to each
sublicense, the representations and warranties set forth in subsections (i)
through (iv) above are true and correct with respect to the underlying
license;
12
<PAGE>
(vi) to the best of Source's knowledge, the underlying item of
intellectual property is not subject to any outstanding injunction,
judgment, order, decree, ruling, or charge; and
(vii) to the best of Source's knowledge, no action, suit,
proceeding, hearing, investigation, charge, complaint, claim, or demand is
pending or, to the knowledge of Source, is threatened which challenges the
legality, validity, or enforceability of the underlying item of
intellectual property.
Section 4.9. Taxes. Except as set forth on Schedule 4.9, Source and
-----
the Source Subsidiaries (with respect to returns filed either on a separate or
consolidated or combined basis) have timely filed and accurately prepared, or
will timely and accurately prepare and file, all federal, state, local, and
territorial returns, declarations and reports, information returns and
statements required to be filed by or with respect to Source and/or the Source
Subsidiaries on or before the Closing Date, in respect of any Taxes for each
period ending on or before the Closing Date ("Source Returns"). All Taxes shown
as due on the Source Returns, together with applicable interest and penalties,
have been or will be timely paid in full, and no notice of audit or adjustment
has been received from the Internal Revenue Service or any other taxing
authority in connection with any of the Source Returns, and except as set forth
in Schedule 4.9, no waivers of statutes of limitations have been given or
requested. Source or the Source Subsidiaries have duly withheld and paid all
Taxes required to be withheld or paid with respect to amounts paid to employees,
independent contractors or other third parties. Except for Permitted Liens,
there are currently no liens for Taxes upon the Source Assets.
Section 4.10. Financial Statements. Source has filed with the Securities
--------------------
and Exchange Commission ("SEC") on Form 10-K, its audited consolidated financial
statements as of and for the twelve months ended December 31, 1998, and its
unaudited consolidated financial statements on Form 10-Q for the three month
period ended March 31, 1999 (collectively, the "Source Financial Statements").
The Source Financial Statements (a) fairly present, in all material respects,
the financial position of Source and the Source Subsidiaries as of the date
thereof and the results of operations for the periods covered thereby; and (b)
have been prepared in accordance with generally accepted accounting principles,
applied on a consistent basis.
Section 4.11. Governmental Consents and Approvals. Except for required
-----------------------------------
filings with the SEC, the National Association of Securities Dealers and with
the Department of Justice ("DOJ") and Federal Trade Commission ("FTC") pursuant
to the HSR Act, the execution, delivery and performance by Source of this
Agreement and the consummation of the transactions contemplated hereby require
no action by or in respect of, or filing with or notice to, any United States
Governmental Authority.
Section 4.12. Brokers. Except as described on Schedule 4.12, no broker,
-------
finder or investment banker is entitled to any brokerage, finder's fee or other
fee or commission in connection with the transactions contemplated by this
Agreement based upon any arrangements made by or on behalf of Source.
Section 4.13. Transactions with Interested Persons; Customers. To the
-----------------------------------------------
best of Source's knowledge, except as disclosed in Schedule 4.13, no officer,
director, supervisory employee or owner of more than 3% of the stock of Source
owns, directly or indirectly, greater than a 3% interest in, or serves as an
officer or director of, any competitor, customer or unrelated third party
supplier of Source or any Source Subsidiary, or any Person who is a party to a
Source Contract or other arrangement with Source or any Source Subsidiary with
respect to the Transferred Businesses.
13
<PAGE>
Section 4.14. Acquisition for Investment. Source is acquiring its
--------------------------
ownership interest in NewCo for its own account, for investment purposes only,
and not with a view to, or for sale in connection with, a distribution, as that
term is used in Section 2(11) of the 1933 Act, in a manner which would require
registration under the 1933 Act or any state securities laws. Source
acknowledges the ownership interests in NewCo have not been registered under the
1933 Act or the securities laws of any state and are being offered and sold
pursuant to applicable exemptions from such registration and will be issued as
"restricted securities" as defined by Rule 144 promulgated pursuant to the 1933
Act.
Section 4.15. Disclosures. Neither this Agreement, nor any schedule or
-----------
exhibit hereto, contains any untrue statement by the Company of a material fact
or omits a material fact necessary to make the Company's statements contained
herein or therein, in light of the circumstances in which they were made, not
misleading.
ARTICLE V
Representations and Warranties of Insight
-----------------------------------------
Insight represents and warrants to Source and NewCo as follows:
Section 5.1. Existence and Qualification. Insight is a limited
---------------------------
liability company organized, validly existing and in good standing under the
laws of the State of Delaware. Insight is duly qualified to do business and in
good standing in each jurisdiction in which the assets owned or leased by it, or
the nature of its activities makes such qualification necessary, except in such
jurisdictions where the failure to be so qualified or in good standing would not
have a material adverse effect on the transactions contemplated hereunder or on
NewCo.
Section 5.2. Authority, Approval and Enforceability. A. Insight has all
--------------------------------------
requisite limited liability company power and authority to execute and deliver
this Agreement and, subject to the consents and approvals referenced in Article
VI hereof, to perform its obligations under this Agreement. The execution and
delivery of this Agreement by Insight in accordance with the terms hereof, and
the performance of the transactions contemplated hereunder by Insight, will have
been duly and validly approved by its member prior to the Closing Date. This
Agreement is, and all such other documents and agreements required to be
executed and delivered hereunder, when so executed and delivered by Insight will
be, subject to the consents and approvals referenced in Article VI hereof,
valid, legal and binding obligations of Insight, enforceable against it in
accordance with their terms, except as limited by bankruptcy and insolvency laws
and other laws affecting the rights of creditors generally and the application
of general equitable principles.
B. The execution and delivery of this Agreement and such other
documents and agreements as may be required hereby and thereby, and the
consummation of the transactions contemplated hereby by Insight will not,
subject to the consents and approvals referenced in Article VI hereof: (i)
violate any law, regulation, order or decree; or (ii) conflict with or result in
any breach of, or constitute a default under, Insight's Certificate of
Formation, limited liability company agreement, if any, or any agreement or
contract to which it is a party or by which it or its assets are bound or
affected.
Section 5.3. Governmental Consents and Approvals. Except for required
-----------------------------------
filings by Insight's parent with the SEC and with the Department of Justice and
Federal Trade Commission under the HSR Act, the execution, delivery and
performance by Insight of this Agreement and the consummation of the
transactions contemplated hereby require no action by or in respect of, or
filing with or notice to, any governmental or regulatory body, agency or
official
14
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Section 5.4. Further Assurances. At any time and from time to time after
------------------
the Closing, Insight shall, at the reasonable request and expense of Source or
NewCo (but without any further consideration from Source or NewCo), execute,
acknowledge and deliver or cause to be executed, acknowledged and delivered,
such further instruments as may be necessary to otherwise fulfill the terms and
conditions contained in this Agreement.
Section 5.5. Brokers. No broker, finder or investment banker is entitled
-------
to any brokerage, finder's fee or other fee or commission in connection with the
transactions contemplated by this Agreement based upon any arrangements made by
or on behalf of Insight or its Affiliates.
Section 5.6. Acquisition for Investment. Insight is acquiring its
--------------------------
ownership interest in NewCo for its own account, for investment purposes only,
and not with a view to, or for sale in connection with, a distribution, as that
term is used in Section 2(11) of the 1933 Act, in a manner which would require
registration under the 1933 Act or any state securities laws. Insight
acknowledges the ownership interests in NewCo have not been registered under the
1933 Act or the securities laws of any state and are being offered and sold
pursuant to applicable exemptions from such registration and will be issued as
"restricted securities" as defined by Rule 144 promulgated pursuant to the 1933
Act.
ARTICLE VI
Covenants
---------
Section 6.1. Operation of the Assets. Between the date hereof and the
-----------------------
Closing Date, each of Source and Insight shall take all such actions within its
power to cause NewCo to carry out any agreements and obligations contemplated
herein. Between the date hereof and the Closing, except as contemplated by this
Agreement or otherwise consented to in writing by the other party, each of
Source and the Source Subsidiaries: (a) shall keep in full force and effect its
respective corporate existence, and neither will combine, merge or consolidate
or agree to combine, merge or consolidate with any other entity in any manner;
and (b) will maintain the Source Assets in the ordinary course of business,
shall not grant any license or rights with respect to the Source Intellectual
Property, and will generally conduct its business associated with the Source
Assets in the ordinary course in accordance with past practices, and, as
relating to the Source Assets, use commercially reasonable efforts to maintain
relationships with contract parties, suppliers, trade creditors, customers and
employees, and preserve the goodwill of advertisers, suppliers, customers and
others having business relations with Source or the Source Subsidiaries.
Without limiting the generality of the foregoing, between the date hereof and
the Closing, except as contemplated by this Agreement or otherwise previously
consented to in writing by the other party: (i) neither Insight nor Source
shall become a party to any agreement which, by its terms, restricts Insight or
Source from performance of the terms hereof; and (ii) Source shall not enter
into any contract related to or affecting the Source Assets in an amount
exceeding $20,000, (iii) except in the ordinary course of business, enter into
any affiliation contracts, or (iv) incur any capital expenditure to be
transferred to NewCo in excess of $20,000 without the consent of Insight, which
consent shall not be unreasonably withheld. Each of Insight and Source shall
promptly notify the other by written notice in the event of a breach of any
covenant contained in this Section 6.1 or upon the occurrence of any event,
fact, circumstance or occurrence which make any representation, warranty or
disclosure made by such party untrue, incorrect or incomplete as of the date of
occurrence of such event, fact, circumstance or occurrence. Source and Insight
agree that the transactions described on Schedule 6.1 hereof have been approved
by Insight and shall not constitute a violation of the covenants set forth in
this Section 6.1.
15
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Section 6.2. Source Filings and Consents.
---------------------------
A. Governmental Consents and Approvals. Source shall file
-----------------------------------
preliminary proxy materials with the SEC within twenty (20)
business days following the execution of this Agreement, and will
thereafter as promptly as possible file definitive proxy
materials with the SEC, using good faith commercially reasonable
efforts in responding to any comments of the SEC staff regarding
the preliminary proxy materials. Within thirty (30) days from
the date of this Agreement, if required, Source will file with
the FTC and DOJ the notification form, together with all
necessary materials and information, to attempt to secure the
expiration or termination of all applicable waiting period(s)
relating to any or all of the transactions contemplated hereunder
as required on its part under the HSR Act, and will use good
faith commercially reasonable efforts in promptly responding,
after consultation with Insight, and in cooperation with Insight,
to any additional requests for information that may be issued by
the FTC or DOJ in response thereto.
B. Other Consents and Approvals. Upon filing its definitive proxy
----------------------------
material, Source agrees: (i) that it shall use its best
efforts to provide third parties with approval rights all
relevant information pertaining to the transactions for which
approval is sought, to initiate communications with such parties
in order to obtain their consents and to encourage such parties
to render their consents; and (ii) that it will utilize good
faith commercially reasonable efforts in taking other actions to
secure all approvals which are necessary for the consummation of
the transactions contemplated hereunder. These efforts shall be
made by Source to secure the vote or consent of its stockholders
(both common and preferred) as is necessary to approve the
transactions contemplated hereby and by the Stock Purchase
Agreement and to secure the consents and approvals necessary from
holders of its Senior Secured Notes, or any other party who may,
by law or contractual right, have the right to consent to and
approve the transactions contemplated hereby by Source and by the
Stock Purchase Agreement by Source.
C. Consents to Transfer of Certain Source Assets. In addition,
---------------------------------------------
Source shall (i) obtain the necessary consents from third parties
with regard to each license, sublicense, agreement, or permission
scheduled on Schedule 2.1D which is indicated as being only
transferrable or assignable with the consent of the third party
and (ii) use its commercially reasonable efforts, both before and
after Closing, to obtain any necessary consents (which shall not
include any obligation to pay for such consent or assume any
liabilities in connection therewith) to the assignment of the
Source Contracts to NewCo; provided that in each case, unless
reasonably acceptable to Insight, such consent shall not require
NewCo or Insight to agree to make any material payments or incur
any additional material obligation as a condition to obtaining
such consent or accept, agree or accede to any modification or
amendment to the licence, sublicense, agreement, permission or
Source Contract for which consent is being sought.
Section 6.3. Further Assurances. At any time and from time to time after
------------------
the Closing, Source shall, at the reasonable request and expense of NewCo (but
without any further consideration from NewCo),
16
<PAGE>
execute, acknowledge and deliver or cause to be executed, acknowledged and
delivered, such further instruments of conveyance, assignment and transfer, and
to take all such actions as Insight or NewCo shall reasonably request in order
to more fully and effectively vest in NewCo, or confirm NewCo's title or rights
to the Source Assets (including but not limited to the Source Intellectual
Property which will be transferred to NewCo by Source) and to otherwise fulfill
the terms and conditions contained in this Agreement.
Section 6.4. Insight Filings and Consents.
----------------------------
A. Governmental Consents and Approvals. Within thirty (30) days
-----------------------------------
from the date of this Agreement, if required, Insight will file
with (or will have filed by its ultimate parent) the FTC and DOJ
the notification form, together with all necessary materials and
information, to attempt to secure the expiration or termination
of all applicable waiting period(s) relating to any or all of the
transactions contemplated hereunder as required on its part under
the HSR Act, and will use good faith commercially reasonable
efforts in promptly responding, after consultation with and in
cooperation with Source, to any additional requests for
information that may be issued by the FTC or DOJ in response
thereto.
B. Other Consents. Insight will use its commercially reasonable
--------------
efforts to secure the consents and approvals necessary from any
party who may, by law or contractual right, have the right to
consent to and approve the transactions contemplated hereby by
Insight and by the Stock Purchase Agreement by Insight. In
addition, Insight agrees to reasonably cooperate with Source in
its efforts to obtain any necessary consents and approvals in
order to fulfill Source's covenants under Section 6.2 above,
provided that, unless reasonably acceptable to Insight, such
cooperation shall not require Insight to agree to make any
material payments or incur any additional material obligation as
a condition to obtaining such consent or accept, agree or accede
to any modification or amendment to the licence, sublicense,
agreement, permission or Source Contract for which consent is
being sought.
Section 6.5. Access to Information. From the date hereof to Closing,
---------------------
Source shall cause its officers, directors, employees and agents to afford the
directors, officers, employees, agents, representatives and advisors of Insight
access upon reasonable notice at all reasonable time to its officers, employees,
agents, properties, books, records, and contracts, as Insight may reasonably
request for purposes of conducting review, inspection and evaluation of the
Source Assets (including, but not limited to the Source Intellectual Property);
provided, however, Source shall not be required to provide such access or
information to the extent that it has been advised by counsel that the provision
of such access or information could be violative of antitrust laws or existing
confidentiality agreements to which it is subject. Each of Insight and Source
shall continue to maintain in confidence and will not use or disclose to others,
or permit its representatives to use or disclose to others, other than for the
purpose of confirming the information obtained in its due diligence,
information, data or procedures (including information related to costs, sales,
contracts, employees, customers, suppliers, financial condition or prospects)
which may be of a confidential nature which they have received from the other
party ("Confidential Information"), all in accordance with the terms of the Non-
Disclosure Agreement dated July 29, 1999. In the event the transactions
contemplated by this Agreement are not consummated for any reason (including,
without limitation, the failure to obtain the consents and approvals referenced
in Article VI hereof), each of Insight and Source shall promptly return to the
other all documents and records containing or referring to the Confidential
Information, including without limitation, any records contained on computer
hard disk, back-up drive or e-mail. All documents
17
<PAGE>
and other writings, in any such form, prepared based on the Confidential
Information shall be destroyed, and such destruction shall be confirmed in
writing to Source by an authorized officer who supervised such destruction.
Section 6.6. Management Agreement. A. Source and Insight covenant and
--------------------
agree to each use commercially reasonable efforts to finalize the terms of a
management agreement (the "Management Agreement") to be executed upon the
Closing in accordance with this Section 6.6.
B. The Management Agreement shall provide, subject to the limitations
and approval rights set forth in this Agreement and the Operating Agreement,
that the Manager shall have power and authority, on behalf of NewCo itself and
on behalf of its Subsidiaries, among other things, to (i) purchase, lease or
otherwise acquire, or sell, lease or otherwise dispose of, any property, (ii)
form Subsidiaries, (iii) open bank accounts and otherwise invest funds, (iv)
incur or guarantee indebtedness, (v) authorize a Member to guarantee
indebtedness of NewCo or any of its Subsidiaries, (vi) issue additional Units,
(vii) purchase insurance on the business and assets of NewCo, (viii) commence
lawsuits and other proceedings, (ix) enter into any agreement, instrument or
other writing, (x) retain accountants, attorneys or other agents, and (xi) take
any other lawful action that the Manager considers necessary, convenient or
advisable in connection with the business of NewCo. Subject to the limitations
and approval rights set forth in this Agreement, the Operating Agreement and the
Management Agreement, the Manager shall have the power to cause NewCo to enter
into contracts with Affiliates of NewCo or the Manager in respect of property,
services, or credit in the ordinary course of business, but only if the monetary
or business consideration arising therefrom would be comparable and
substantially as advantageous to NewCo as in a comparable transaction with a
Person not an Affiliate.
C. The Management Agreement will set forth the terms under which the
business of NewCo will be conducted, including without limitation, the
employees, if any, to be hired by NewCo and adequate arrangements for other
necessary services and business functions of NewCo, such as accounting,
administrative, technical, sales and marketing, access, distribution and/or
other services. Except to the extent mutually agreed to otherwise by Insight and
Source, Source shall continue to provide all necessary services and/or all
business functions for NewCo and shall be reimbursed for the costs and expenses
related to providing these necessary services and/or business functions by NewCo
without any markup. Upon the date which is ninety (90) days after Closing, in
the event and to the extent that Insight and Source have not agreed as to the
terms of the Management Agreement, then either Source or Insight may elect to
initiate arbitration and shall have fifteen (15) days from the expiration of
such ninety (90)-day period within which to mutually agree on an arbitrator. In
the event that Source and Insight do not agree on an arbitrator within the
fifteen day period, by request of either Insight or Source, the American
Arbitration Association shall appoint an arbitrator. The cost of such arbitrator
shall be borne equally by Source and Insight. Both Insight and Source shall
submit a proposed Management Agreement to the arbitrator, and the arbitrator
shall select either the proposed Management Agreement of Insight or the proposed
Management Agreement of Source. Such selected proposal shall constitute the
terms of the Management Agreement.
D. The Management Agreement shall contain, in addition to the
customary terms and conditions of a management arrangement as contemplated
herein and other terms as mutually agreed to by the parties, the following
provisions:
(i) "Developments" means any and all materials, developments,
inventions, improvements or modifications (including computer software and
computer software documentation), whether patentable or unpatentable,
copyrightable or uncoyrightable, which
18
<PAGE>
are developed by employees, officers, agents, subcontractors, or authorized
assigns of Source in the performance of the Management Agreement.
(ii) "Intellectual Property Rights" means rights given by law in
intellectual information, including, but not limited to, Patents,
copyrights, trade secrets, and know-how.
(iii) "Patents" means patent application(s) and patent(s),
including any and all continuations, continuations-in-part, divisions,
reissues, reexaminations, and extensions thereof.
(iv) NewCo shall have the sole and exclusive ownership of the
Developments, including, without limitation, the Intellectual Property
Rights (hereinafter referred to as "NewCo Intellectual Property Rights") in
the Developments. Copyrightable aspects of the Developments shall be works
made for hire, vesting sole and exclusive ownership in such Developments to
NewCo. To the extent such copyrightable aspects of the Developments are
deemed not to be works made for hire, all right, title and interest in and
to the Developments shall be deemed automatically assigned to NewCo. Source
shall, upon written request by NewCo, execute and deliver to NewCo any
documents necessary to vest in NewCo the sole and exclusive ownership of
the Developments, including, without limitation, those documents necessary
to vest in NewCo sole and exclusive ownership of the NewCo Intellectual
Property Rights.
(v) At its option and expense, NewCo may prepare, file,
prosecute and/or maintain copyright registrations or Patents (hereinafter
referred to as "NewCo Copyrights and Patents") in any country of the world
based on the Developments. Source and its employees, officers, agents,
subcontractors, or authorized assigns shall reasonably assist NewCo in the
preparation, filing, prosecution and/or maintenance of the NewCo Copyrights
and Patents and shall, upon written request by NewCo, execute and deliver
to NewCo such documents as may be necessary or advisable to permit NewCo to
prepare, file, prosecute and/or maintain the NewCo Copyrights and Patents.
NewCo shall be the sole owner of the NewCo Copyrights and Patents.
(vi) The contributions by Source relating to future developments
shall not affect Source's ownership interest, Percentage Interest or Units
in NewCo.
Section 6.7. Affiliation, License and Escrow Agreements. Source and
------------------------------------------
Insight covenant and agree to use commercially reasonable efforts to finalize
prior to the Closing Date the terms and provisions of (a) an Affiliation
Agreement relating to the carriage of the Interactive Channel over Insight's
cable television systems; (b) a License Agreement granting Insight a license,
for the same length of time as the term stated in the Affiliation Agreement
(notwithstanding the termination of the Affiliation Agreement as a result of
NewCo's filing for bankruptcy), to use NewCo's intellectual property in
connection with Insight's cable television systems; and (c) an Escrow Agreement
that would provide Insight with access to and the
19
<PAGE>
right to use the source code and any other information necessary for Insight to
continue using NewCo's intellectual property pursuant to the License Agreement
in the event NewCo breached the License Agreement, became insolvent, or filed
for protection of the bankruptcy laws. In the event definitive Affiliation,
License and Escrow Agreements are entered into between Source and Insight prior
to the Closing Date, Source and Insight covenant and agree that Source shall
assign such agreements to NewCo, and NewCo shall assume such agreements, in
their entirety on the Closing Date and such contribution by Source shall not
affect Source's ownership interest, Percentage Interest or Units in NewCo.
Section 6.8. Public Announcements. Source and Insight covenant and agree
--------------------
with each other that subject to applicable securities law or stock exchange
requirements, each of Source and Insight shall promptly advise and consult with
the other before issuing, or permitting any of their respective directors,
officers, employees, agents or Affiliates to make any public disclosure or issue
any press release with respect to this Agreement or the transactions
contemplated hereby, but the parties acknowledge that Source will disclose
necessary information in its solicitation of proxies, approvals and consents as
required for the approval of the transactions contemplated hereunder.
Section 6.9. Preservation of Books and Records; Access. Except as
-----------------------------------------
otherwise required by Section 9.4, for a period of five (5) years after the
Closing Date, Insight and Source shall cause NewCo to (i) preserve and retain
the records relating to the ownership and operation of the Source Assets
transferred to NewCo; and (ii) permit Source and Insight and their authorized
representatives to have reasonable access thereto and to meet with employees of
NewCo, on a mutually convenient basis, to obtain additional information and
explanations or conduct an audit with respect to such books and records.
ARTICLE VII
Conditions Precedent to the
Closing Obligation of Insight
-----------------------------
Insight's obligation to consummate the transaction contemplated by this
Agreement is subject to the fulfillment prior to or at the Closing, of each of
the following conditions, each of which may be waived at the sole discretion of
Insight:
Section 7.1. Accuracy of Representations and Warranties. Each and every
------------------------------------------
representation, warranty and covenant of Source under this Agreement shall be
true and accurate in all material respects as of the date when made and as of
the Closing, except to the extent a representation, warranty or covenant
specifically is stated to relate only to a precise date. Not later than the
second business day prior to the anticipated day of Closing, Source will deliver
to Insight any revisions to any Source Schedule prepared and delivered hereunder
necessary to make such Source Schedule and the representations, warranties, and
covenants hereunder true and correct as of the Closing Date; the fact that such
different, changed or revised items are disclosed on the revised Source
Schedules does not constitute a waiver of Section 7.6, if applicable under the
terms thereof.
Section 7.2. Performance of Covenants and Agreements. Source shall have
---------------------------------------
performed in all material respects at or prior to the Closing all of the
covenants and agreements required to be performed by it at or prior to the
Closing in accordance with this Agreement.
Section 7.3. Litigation. No action, suit, proceeding, investigation,
----------
inquiry or request for information by any third person (including, but not
limited to, any Governmental Authority) shall have been
20
<PAGE>
instituted or threatened against Source, Insight, NewCo or any of their
respective Affiliates that questions the validity or legality of this Agreement,
or the transactions contemplated hereby which, if successful, would prevent
Insight from consummating the transactions contemplated hereby or which would
create or cause NewCo or Insight or their respective Affiliates to suffer or
incur a material liability.
Section 7.4. Certificates of Source. Source shall have delivered to
----------------------
Insight a certificate signed by its President, certifying that (i) each and
every representation and warranty of Source under this Agreement is true and
accurate in all material respects as of the Closing; and (ii) Source has
performed in all material respects at or prior to the Closing all of the
covenants and agreements required to be performed by it at or prior to the
Closing in accordance with this Agreement.
Section 7.5. Stock Purchase Agreement. The transactions contemplated by
------------------------
the Stock Purchase Agreement shall have closed simultaneously with the Closing
of the transactions contemplated hereby.
Section 7.6. Adverse Change. Between December 31, 1998, and the Closing
--------------
Date there shall have been no material adverse change in the Source Assets
(including, but not limited to the Source Intellectual Property) or in the
financial condition or operations of Source and its Subsidiaries taken as a
whole, other than changes affecting the interactive advertising and interactive
media programming industries in general, changes as a result of general economic
conditions, or negative financial operating results for any financial period.
Section 7.7. Consents and Approvals. All consents and approvals
----------------------
necessary to be obtained by Source, Insight and Insight Inc., including without
limitation, (i) consents or expiration of waiting periods under the HSR Act,
(ii) bondholder and shareholder consents, and (iii) consents of third parties to
the transfer or assignment of Source Contracts or Source Intellectual Property
shall have been obtained to the reasonable satisfaction of Insight, with the
exception to this clause (iii) that, as conditions to Closing and only with
regard to each license, sublicense, agreement, or permission scheduled on
Schedule 2.1D which is indicated as being only transferrable or assignable with
the consent of the third party, Source shall only be required to obtain the
consents from third parties with regard to such license, sublicense, agreement,
or permission identified on Schedule 2.1D by "*". The fact that not all
consents are conditions to Closing shall not in any way relieve Source of its
covenant and agreement to obtain such consents under Section 6.2 or otherwise or
its indemnification obligations under Article X hereof if it fails to obtain
such consents.
Section 7.8. Deliveries. All deliveries required from Source and NewCo
----------
under Sections 3.2, 3.4 and 6.7 hereof shall be tendered at Closing, provided
that delivery of executed copies of the Management Agreement shall not be a
condition to Closing, but shall be governed by Section 6.6 of this Agreement.
Section 7.9. Effect of Closing. Notwithstanding anything stated in this
-----------------
Agreement to the contrary, to the extent the Closing is consummated, all
conditions to Closing set forth in this Article VII shall be deemed waived for
purposes of Closing.
ARTICLE VIII
Conditions Precedent to the
Closing Obligation of Source
----------------------------
21
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Source's obligation to consummate the transaction contemplated by this
Agreement is subject to the fulfillment prior to or at the Closing, of each of
the following conditions, each of which may be waived at the sole discretion of
Source:
Section 8.1. Accuracy of Representations and Warranties. Each and every
------------------------------------------
representation, warranty and covenant of Insight under this Agreement shall be
true and accurate in all material respects as of the date when made and as of
the Closing, except to the extent a representation, warranty or covenant
specifically is stated to relate only to a precise date. Not later than the
second business day prior to the anticipated day of Closing, Insight will
deliver to Source any revisions to any Insight Schedule prepared and delivered
hereunder necessary to make such Insight Schedule and the representations,
warranties, and covenants hereunder true and correct as of the Closing Date; the
fact that such different, changed or revised items are disclosed on the revised
Insight Schedules does not constitute a waiver of any rights by Source.
Section 8.2. Performance of Covenants and Agreements. Insight shall have
---------------------------------------
performed at or prior to the Closing all of the covenants and agreements
required to be performed by it at or prior to the Closing in accordance with
this Agreement.
Section 8.3. Litigation. No action, suit, proceeding, investigation,
----------
inquiry or request for information by any third person (including, but not
limited to, any Governmental Authority) shall have been instituted or threatened
against Insight, Source, NewCo or any of their respective Affiliates that
questions the validity or legality of this Agreement, or the transactions
contemplated hereby which, if successful, would prevent Source from
consummating the transactions contemplated hereby.
Section 8.4. Certificates of Insight. Insight shall have delivered to
-----------------------
Source a certificate of Insight signed by its President certifying that (i) each
and every representation and warranty of Insight under this Agreement is true
and accurate in all material respects as of the Closing; and (ii) Insight has
performed in all material respects at or prior to the Closing all of the
covenants and agreements required to be performed by it at or prior to the
Closing in accordance with this Agreement.
Section 8.5. Stock Purchase Agreement. The transactions contemplated by
------------------------
the Stock Purchase Agreement shall have closed simultaneously with the Closing
of the transactions contemplated hereby.
Section 8.6. Consents and Approvals. All consents and approvals necessary
----------------------
to be obtained by Source, Insight and Insight Inc., including without
limitation, (i) consents or expiration of waiting periods under the HSR Act,
(ii) bondholder and shareholder consents, and (iii) consents of third parties to
the transfer or assignment of Source Contracts or Source Intellectual Property
shall have been obtained to the reasonable satisfaction of Source, with the
exception to this clause (iii) that, as conditions to Closing and only with
regard to each license, sublicense, agreement, or permission scheduled on
Schedule 2.1D which is indicated as being only transferrable or assignable with
the consent of the third party, Source shall only be required to obtain the
consents from third parties with regard to such license, sublicense, agreement,
or permission identified on Schedule 2.1D by "*". The fact that not all
consents are conditions to Closing shall not in any way relieve Source of its
covenant and agreement to obtain such consents under Section 6.2 or otherwise or
its indemnification obligations under Article X hereof if it fails to obtain
such consents.
Section 8.7. Deliveries. All deliveries required from Insight and NewCo
----------
under Sections 3.3 and 3.4 hereof shall be tendered at Closing, provided that
delivery of executed copies of the Management Agreement shall not be a condition
to Closing, but shall be governed by Section 6.6 of this Agreement.
22
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Section 8.8. Effect of Closing. Notwithstanding anything stated in this
-----------------
Agreement to the contrary, to the extent the Closing is consummated, all
conditions to Closing set forth in this Article VIII shall be deemed waived for
purposes of Closing.
ARTICLE IX
Ad Valorem and Transfer Taxes
-----------------------------
Section 9.1. Ad Valorem Taxes. All ad valorem taxes attributable to the
----------------
Source Assets for the years prior to 1999, and for the current tax period up to
the date of Closing (pro rated on a daily basis) shall be the responsibility of
Source. All ad valorem taxes for the current tax period from the date of
Closing and thereafter (pro rated on a daily basis) shall be the responsibility
of NewCo. NewCo shall promptly after Closing notify all appropriate tax-
assessors/collectors of the rights and interests contributed to it pursuant to
this Agreement.
Section 9.2. Transfer and Similar Taxes. Notwithstanding anything in
--------------------------
this Agreement to the contrary, NewCo shall, to the extent allowed under
applicable law, pay (or reimburse a transferring party for) all sales, use,
transfer, mortgage stamps, documentary stamp, recording, and other similar taxes
and fees ("Transfer Taxes") arising out of or imposed in connection with the
transactions effected pursuant to this Agreement. NewCo shall file all
necessary documentation and tax returns with respect to such Transfer Taxes.
Section 9.3. Retention of Tax Records. Subject to the provisions of the
------------------------
Operating Agreement, Source and Insight shall, and shall cause their respective
Affiliates to, cooperate in the preparation of all tax returns by NewCo and
shall provide, or cause to be provided to the requesting party any records and
other information requested by such party (limited, however, to information
pertaining to the Assets) in connection therewith, as well as access to, and the
cooperation of, the auditors of Source and Insight. Subject to the provisions
of the Operating Agreement, each party shall cooperate with the other in
connection with any tax investigation, audit or other proceeding.
Section 9.4. Statute of Limitations. Source and Insight shall preserve
----------------------
all information, returns, books, records and documents relating to any
liabilities for ad valorem taxes or Transfer Taxes with respect to a taxable
period until the later of the expiration of all applicable statutes of
limitation and extensions thereof, or the conclusion of any litigation with
respect to such taxes for such period.
ARTICLE X
Indemnification
---------------
Section 10.1. Indemnification by Source. From and after the Closing,
-------------------------
Source and each Source Subsidiary, jointly and severally, agrees to indemnify,
defend and hold NewCo, Insight and their Affiliates harmless from and against
and will reimburse NewCo, Insight and their Affiliates for:
A. Source's Breach. Any and all Losses resulting from any
---------------
misrepresentation, breach of warranty or nonfulfillment of any covenant or
agreement by or on the part of Source or any Source Subsidiary under this
Agreement or in any certificate or other document delivered by Source pursuant
to this Agreement or Losses resulting from or arising out of or in connection
with any litigation, proceeding or claim by any third party relating to Source
or the Source Assets arising out of or relating to the period prior
23
<PAGE>
to the Closing Date, including without limitation, those matters listed on
Schedule 4.6. In addition, to the extent that any disclosure, representation or
warranty of Source or a Source Subsidiary set forth in Sections 4.6 and 4.8 of
this Agreement is qualified, limited or subject to a materiality or other
standard or threshold, such as "to the knowledge of", "the best of the knowledge
of" or by the condition that "such disclosure, representation, warranty,
covenant or agreement would not, or is not or are not expected to, have a Source
Material Adverse Effect" or by any other qualification or limitation (whether
such qualification, limitation, standard or threshold is set forth herein or
under applicable law pertaining to another document to which reference is made
herein), then for all purposes of this Article X and the indemnification
obligations imposed hereunder, such disclosure, representation or warranty shall
be deemed to have been made without such limitation, qualification, material
adverse effect standard or other standard or threshold, with it being the intent
of the parties that the Indemnified Party be fully indemnified hereunder for any
Losses incurred by such party without regard to the qualification, limitation,
standard or threshold set forth in the disclosure, representation or warranty.
Further, to the extent that rights, potential rights, claims, or potential
claims of third parties have been disclosed by Source on Schedules 4.6 or 4.8
hereof or in other documents to which reference is made herein, such items are
still fully subject to indemnification under this Article X to the extent that
Insight and/or NewCo and/or their respective Affiliates incurs a Loss as a
result of such rights, potential rights, claims, or potential claims of third
parties.
B. Third Party Claims. Any and all Losses relating to claims by
------------------
third parties based on any theory of tort, negligence, personal injury, products
liability, strict liability, violation of statute or governmental regulation,
statutory or regulatory liability, breach of contract, Taxes of Source or any of
its Affiliates, or for any other loss or occurrence in each case related to or
associated with Source's ownership prior to the Closing Date of the Source
Assets (including, but not limited to, the Source Intellectual Property) and/or
Source's ownership or operation of the Transferred Business prior to the Closing
Date, howsoever arising (other than with respect to a liability assumed pursuant
to Section 2.5 and which does not otherwise involve a breach of a
representation, warranty or covenant hereof), whether or not any litigation or
claim with respect thereto is now pending or threatened.
C. Certain Adjustments. Source may directly compensate Insight
-------------------
and/or NewCo and/or their respective Affiliates, as applicable, in cash for any
Losses for which Source is obligated to indemnify Insight, NewCo or their
respective Affiliates hereunder, or in its sole discretion Source may elect to
invoke the provisions of this Section 10.1 C., in which event NewCo, Source and
Insight have agreed that the sole and exclusive remedy of NewCo, Insight and
their respective Affiliates available to NewCo and/or Insight and/or their
respective Affiliates as a result of Source's indemnification obligations and/or
as a result of a misrepresentation, breach of warranty or breach of a covenant
by Source hereunder is for Source's ownership interest, Percentage Interest and
Units in NewCo to be reduced as a result of the amount of the Loss incurred or
suffered by NewCo (and indirectly by Insight). Accordingly, upon the
determination of the amount of the Loss incurred by NewCo for which Source is
obligated to indemnify NewCo and/or Insight and/or their respective Affiliates
hereunder, then Source's ownership interest, Percentage Interest and Units will
be reduced by subtracting the amount of the Loss incurred or suffered by NewCo
from the Fair Market Value of Source's ownership interest, Percentage Interest
and Units in NewCo as determined on the date on which the Loss is "Finally
Determined". For these purposes, the Fair Market Value of Source's ownership
interest, Percentage Interest and Units shall be determined as if Source was a
Selling Member under Section 8.8(a) of the Operating Agreement and "Finally
Determined" shall mean the date on which a final decision of the arbitrator is
issued, on the date on which an order of a court is no longer subject to appeal
or when the appeal to the highest court with jurisdiction is denied, whichever
is applicable. When the amount of the Loss is Finally Determined, Source shall
surrender or be deemed to have surrendered the appropriate number of Units back
to NewCo with a Fair Market Value equal to the amount of the Loss in
satisfaction of its
24
<PAGE>
indemnification obligations hereunder. Thus, if the value of the Source's
ownership interest, Percentage Interest and Units in NewCo is $25,000,000 on the
date that a Loss of $10,000,000 is Finally Determined, then Source shall
surrender 40% of the Units which it then owns in satisfaction of its
indemnification obligation hereunder and Source's Percentage Interest shall be
reduced accordingly. The indemnification provided under this Article X and the
adjustment provided for in this paragraph C (if invoked by Source) shall
constitute the sole and exclusive remedy of NewCo, Insight and their Affiliates
for any indemnification by Source for claims in respect of Losses suffered by
NewCo, Insight and their Affiliates attributable to claims arising under the
terms and conditions of this Agreement, but shall not affect in any way the
rights and remedies available to Insight and its Affiliates under the Stock
Purchase Agreement. NewCo, Insight and their Affiliates shall in no event be
entitled to setoff against any future payments to be made by NewCo, Insight or
their Affiliates to Source, with it being understood that the distributions to
which Source is entitled under the Operating Agreement will be affected by the
surrender of Units contemplated hereunder and such distribution shall be made in
accordance with the terms and conditions of the Operating Agreement. NewCo or
Insight or their respective Affiliates shall be entitled to institute the
Dispute resolution procedures set forth in Article XI hereof in order to
determine the amount of any Loss subject to indemnification hereunder and
Source, NewCo and Insight each agree and covenant to resolve the amount of any
Loss which creates or may create an adjustment under this Section 10.1.C. as
expeditiously as possible.
D. Survival. The representations and warranties of Source set forth
--------
in this Agreement will survive the Closing for a period of three years from the
date of the Closing and shall thereafter terminate except that (i) the liability
of Source will extend beyond such three-year period with respect to any claim
which has been asserted in a written notice before the expiration of such three
year period and (ii) the representation and warranties of Source (a) set forth
in Section 4.3B, (b) related to third party claims and consents, including all
matters set forth on Schedule 4.6 and any other third party claims now existing
or hereafter arising for which Source has indemnified or agreed to indemnify
Insight and/or NewCo and/or their respective affiliates and (c) the Intellectual
Property, including all matters set forth on Schedule 4.8 hereof and the
indemnity obligations of Source related thereto, will survive the Closing and
will continue in full force and effect without limitation. The covenants and
agreements of Source in this Agreement and the indemnity obligations of Source
related thereto will survive the Closing and will continue in full force and
effect until fully performed or discharged.
Section 10.2. Indemnification by Insight. From and after the Closing,
--------------------------
Insight agrees to indemnify, defend and hold NewCo and Source harmless from and
against and in respect of, and shall reimburse NewCo and Source for:
A. Insight's Breach. Any and all Losses resulting from any
----------------
misrepresentation, breach of warranty or nonfulfillment of any covenant or
agreement by or on the part of Insight under this Agreement or in any
certificate or other document delivered by Insight to Source pursuant to this
Agreement including any and all actions, claims, suits, proceedings, demands,
assessments, judgments and costs, including, reasonable attorneys' fees, court
costs and interest incurred as a result of such Losses.
B. Survival. The representations and warranties and Insight's
--------
indemnity obligations set forth in this Agreement, shall survive the Closing.
Section 10.3. Indemnification by NewCo. From and after the Closing,
------------------------
NewCo agrees to indemnify, defend and hold Source and its Affiliates harmless
from and against and in respect of, and shall reimburse Source for any Losses
suffered related to NewCo's failure to pay any liabilities assumed by NewCo
under Section 2.5 hereof.
25
<PAGE>
Section 10.4. Indemnity Procedure.
-------------------
A. Third Party Claims. In the event any party receives written
------------------
notice of the commencement of any action or proceeding, the assertion of any
claim by a third party or the threatened imposition of any Loss for which
indemnity may be sought pursuant to this Article X ("Claim"), and such party
(the "Indemnified Party") intends to seek indemnification from the other party
(the "Indemnifying Party") pursuant to this Article X, the Indemnified Party
shall provide the Indemnifying Party with prompt written notice of such Claim
and the Indemnifying Party shall have the right to assume control of the defense
(with counsel selected by it), appeal or settlement of such Claim with respect
to which such indemnity has been invoked, and the Indemnified Party will fully
cooperate with the Indemnifying Party in connection therewith. The Indemnifying
Party shall bear the entire cost of defending such Claim and the Indemnifying
Party shall not be liable for any further legal or other expenses subsequently
incurred by the Indemnified Party in connection with such defense unless
otherwise agreed to in writing by the parties or as herein provided; provided,
however, the Indemnified Party shall have the right to participate in such
defense, at its own cost and expense, and the Indemnified Party shall have the
obligation to cooperate with such defense. If the Indemnifying Party does not
timely assume the entire defense of such Claim, the Indemnified Party may assume
such defense and the Indemnifying Party shall bear the entire cost of defending
such Claim. The Indemnifying Party shall not have the right to settle any such
Claim without the written consent of the Indemnified Party unless settlement
contemplates only a general release for money damages to be paid solely by the
Indemnifying Party. Failure of a party to give prompt notice of a Claim for
which indemnification is sought hereunder shall not affect such party's right to
indemnification hereunder except to the extent that the Indemnifying Party shall
have been prejudiced as a result of such failure, and except that the
Indemnifying Party shall not be liable for any expenses incurred during the
period in which the Indemnified Party failed to give notice.
B. Other Claims. A party shall be entitled to recover from the
------------
other party for all Losses or matters in this Article X which are suffered,
incurred or borne by such party, even though the Losses or matter is not related
to or the result of a claim brought by a third party.
C. Benefit of NewCo. The provisions of this Article X and the
----------------
obligations to provide indemnity to NewCo by each of the parties hereto in
accordance with the terms hereof, is hereby expressly declared to be for the
benefit of NewCo as a third party beneficiary, and NewCo will be entitled to
independently enforce any rights it may have under this Article X as if and to
the same extent as if it was a party hereto.
ARTICLE XI
Disputes
--------
Section 11.1. Procedure. In the event of a dispute between the parties
---------
arising out of or related to this Agreement (the "Dispute"), the parties agree
to utilize the procedures specified in this Article XI (the "Procedure"), unless
otherwise modified by written agreement of the parties at the time the Dispute
arises.
Section 11.2. Initiation of Procedure. A party seeking to initiate the
-----------------------
Procedure (the "Initiating Party") shall give written notice to the other party,
describing briefly the nature of the Dispute and its claim and identifying an
individual with authority to settle the Dispute on its behalf. The party
receiving such notice (the "Responding Party") shall have five (5) business days
within which to designate, in a written notice given to the Initiating Party, an
individual with authority to settle the Dispute on its behalf. The
26
<PAGE>
individuals so designated shall be known as the "Authorized Individuals." Absent
agreement by the parties, neither of the Authorized Individuals shall have had
direct substantive involvement in the matters involved in the Dispute.
Section 11.3. Unassisted Settlement. Within thirty (30) days from the
---------------------
date of the Initiating Party's notice, the Authorized Individuals shall make
such investigation as they deem appropriate and shall conclude discussions
concerning resolution of the Dispute. If the Dispute has not been resolved
within such thirty (30) day period, it shall at that time be submitted
("Submission Date") to binding alternative dispute resolution ("ADR"), in
accordance with the following provisions.
Section 11.4. Selection of Arbitrator. The parties shall have ten (10)
-----------------------
days from the Submission Date to agree upon a mutually acceptable neutral person
not affiliated with either of the parties (the "Arbitrator"). If the Arbitrator
has not been selected within such time, the parties agree jointly to request the
American Arbitration Association to supply within ten (10) days a list of
potential neutrals with qualifications as specified by the parties in the joint
request. Within five (5) days of receipt of the list, the parties shall
independently rank the proposed candidates, shall simultaneously exchange
rankings, and shall select as the Arbitrator the individual receiving the
highest combined ranking who is available to serve.
Section 11.5. Time and Place for ADR. In consultation with the
----------------------
Arbitrator, the parties shall promptly designate a mutually convenient time and
place for ADR to be held not later than thirty (30) days after selection of the
Arbitrator.
Section 11.6. Exchange of Information. In the event either of the
-----------------------
parties has substantial need for information in the possession of the other
party to prepare for the ADR, the parties shall attempt in good faith to agree
upon procedures for the expeditious exchange of such information, with the help
of the Arbitrator if required.
Section 11.7. Summary of Views. One (1) week prior to the first
----------------
scheduled session of the ADR, each party shall deliver to the Arbitrator and to
the other party a concise written summary of its views on the matter in Dispute.
Section 11.8. Staffing the ADR. During the ADR, each party shall be
----------------
represented by the Authorized Individual and by counsel. In addition, each
party may bring such additional persons as needed to respond to questions,
contribute information and participate in the negotiations; the number of such
additional persons to be agreed upon by the parties in advance, with the
assistance of the Arbitrator, if necessary.
Section 11.9. Conduct of ADR. The parties, in consultation with the
--------------
Arbitrator, will agree upon a format for the meetings, designed to assure that
both the Arbitrator and the Authorized Individuals have an opportunity to hear
an oral presentation of each party's views of the matter in Dispute, and that
the Authorized Individuals attempt to negotiate a resolution of the matter in
Dispute, with or without the assistance of counsel or others, but with the
assistance of the Arbitrator. To this end, the Arbitrator is authorized to
conduct both joint meetings and separate private caucuses with the parties. The
Arbitrator will keep confidential all information learned in private caucus with
either party unless specifically authorized by such party to make disclosure of
the information to the other party.
Section 11.10. Decision of Arbitrator. The decision of the Arbitrator
----------------------
shall be final and non-appealable, and judgment may be entered thereon in any
court of competent jurisdiction.
27
<PAGE>
Section 11.11. Fees of Arbitrator; Disqualification. The fees of the
------------------------------------
Arbitrator shall be shared equally by the parties, unless the Arbitrator makes a
specific finding to the contrary. The Arbitrator shall be disqualified as a
witness, consultant, expert or counsel for either party with respect to the
matters in Dispute and any related matters.
Section 11.12. Court Order. Nothing in this Article XI shall limit the
-----------
right of any party hereto to obtain an order directing the appointment of an
Arbitrator, a temporary restraining order, injunction or similar court action
concerning any claim or dispute until the subject arbitration can be heard and
an award rendered.
ARTICLE XII
Cooperation in Various Matters
Section 12.1. Mutual Cooperation. Every party to this Agreement shall
------------------
cooperate with the other parties, which cooperation shall include the furnishing
of testimony and other evidence, permitting access to employees and providing
information regarding the whereabouts of former employees, as reasonably
requested by such other party in connection with the prosecution or defense of
any claims or other matters relating to the subject matter hereof.
Section 12.2. Preparation of Reports, Etc. Each of Insight and Source
---------------------------
shall cooperate and cause its employees to cooperate with the other party and
with NewCo in the preparation of financial and other reports and statements
relating to the operations of NewCo and the transfer of the Source Assets,
consistent with the prior practices of Insight and Source for periods ending on
or prior to the Closing Date.
ARTICLE XIII
Expenses
--------
Except as expressly set forth herein, each party to this Agreement shall
pay all expenses incurred by it or on its behalf in connection with the
preparation, authorization, execution and performance of this Agreement,
including, but not limited to, all fees and expenses of agents, representatives,
brokers, counsel and accountants engaged by it.
ARTICLE XIV
Notices
-------
Section 14.1. Procedure and Addresses. All notices, requests, demands and
-----------------------
other communications required or permitted to be given hereunder shall be deemed
to have been duly given if in writing and delivered personally, or on the third
business day following deposit in the U.S. mail, if mailed by registered or
certified mail, postage prepaid, return receipt requested, or by facsimile
transmission (with a confirmation of receipt) or on the next business day if by
a nationally recognized courier service, at the following addresses:
If to Source:
Source Media, Inc.
Attention: Stephen W. Palley, Chief Executive Officer
28
<PAGE>
5400 LBJ Freeway, Suite 680
Dallas, Texas 75240
Fax: (972)701-5454
With a copy to:
Cooperman Levitt Winikoff Lester & Newman, P.C.
800 Third Avenue
New York, New York 10022
Attention: Robert L. Winikoff, Esq.
Fax: (212) 755-2839
If to Insight:
c/o Insight Communications Company, Inc.
Attention: Michael S. Willner
126 East 56th Street
New York, New York 10022
Fax: (212) 371-1549
with copies to:
Dow, Lohnes & Albertson
1200 New Hampshire Avenue, N.W.
Suite 800
Washington, D.C. 20036
Attention: Leonard Baxt, Esq.
Fax: (202) 776-2222
Section 14.2. Change of Notice Address. Any party may change the address
------------------------
to which such communications are to be directed to it by giving written notice
to the other party in the manner provided in Section 14.1.
ARTICLE XV
General
-------
Section 15.1. Entire Agreement. This Agreement, together with the
----------------
Schedules and Exhibits hereto, and the other agreements, documents and
instruments being delivered at the Closing, set forth the entire agreement and
understanding of the parties with respect to the transactions contemplated
hereby and supersede all prior agreements, arrangements and understandings
relating to the subject matter hereof, whether written or oral. No
representation, promise, inducement or statement of intention relating to the
transactions contemplated by this Agreement has been made by or on behalf of any
party hereto which is not set forth in this Agreement.
Section 15.2. Headings. The Article and Section headings contained in
--------
this Agreement are for convenient reference only, and shall not in any way
affect the meaning or interpretation of this Agreement.
29
<PAGE>
Section 15.3. Governing Law; Jurisdiction and Venue. This Agreement
-------------------------------------
shall be governed by, construed and enforced in accordance with the internal
laws of the State of Delaware, excluding the conflict of laws provisions
thereof that would otherwise require the application of the law of any other
jurisdiction. The parties hereto acknowledge and agree that the state and
federal courts sitting in the State of Delaware shall have jurisdiction in any
matter arising out of this Agreement, and the parties hereby consent to such
jurisdiction and agree that the venue of any such matter shall also be proper in
such state and federal courts sitting in the State of Delaware.
Section 15.4. Counterparts. This Agreement may be executed in multiple
------------
counterparts (including counterparts executed by one party), each of which shall
be an original, but all of which shall constitute a single agreement.
Section 15.5. Binding Agreement; Assignment. This Agreement shall be
-----------------------------
binding upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns, but this Agreement shall not be assignable by
either party without the prior written consent of the other party.
Section 15.6. Amendment. This Agreement may be amended only in a writing
---------
executed by the parties hereto which specifically states that it amends this
Agreement.
Section 15.7. No Waiver. Failure of any party to insist upon strict
---------
observance of or compliance with any term of this Agreement in one or more
instances shall not be deemed to be a waiver of its rights to insist upon such
observance or compliance with the other terms hereof, or in the future.
Section 15.8. Severability. If any term, covenant or condition of this
------------
Agreement or the application thereof to any person or circumstance (other than a
term, covenant, condition or application which affects the essence of this
Agreement) shall, to any extent, be invalid or unenforceable, such
unenforceability shall not affect any other provision hereof. If any provision
of this Agreement is held invalid or unenforceable because the fulfillment of
such provision would involve exceeding the limit of validity prescribed by law,
then upon the occurrence of such a determination, the obligation to be fulfilled
shall be reduced to the limit of validity prescribed by law. If the provision
of the Agreement which is found to be invalid or unenforceable cannot be
modified so as to be enforceable under existing laws, unless such provision
affects the essence of this Agreement, this Agreement shall be construed and
enforced as if such provision had not been included herein.
ARTICLE XVI
Insight Communications Guaranty of Obligations
----------------------------------------------
Insight Communications hereby guarantees the prompt and punctual
performance of all obligations of Insight under this Agreement, the other
agreements and documents contemplated hereby, and by the Stock Purchase
Agreement and the other agreements and documents contemplated thereby
(collectively, the "Definitive Documents"). In the event of a default of any
such obligations by Insight, NewCo or Source shall, after having made written
demand on Insight which demand has gone unsatisfied for a period of thirty (30)
days, have the right to demand (without any further attempt at collection) that
Insight Communications satisfy the unfulfilled obligation by providing written
notice detailing the failure of performance by Insight, and Insight
Communications shall fulfill such obligation within fifteen (15) days
thereafter. Insight Communications shall have the right to substitute an
Affiliate in its place as guarantor hereunder, with the prior written consent of
Source, which consent shall not be unreasonably withheld based upon the
financial strength of such substitute.
30
<PAGE>
Insight Communications has all requisite corporate power and corporate
authority to execute and deliver this Agreement and to perform its obligation
under this Article XVI. The execution and delivery of this Agreement by Insight
Communications in accordance with the terms hereof, and the performance of the
transactions contemplated hereunder by Insight Communications in the
circumstances set forth above, have been duly and validly approved by its Board
of Directors and by all other corporate action, if any, necessary on behalf of
Insight Communications. The obligations imposed on Insight Communications under
this Agreement are valid, legal and binding obligations of Insight
Communications enforceable against it in accordance with their terms, except as
limited by bankruptcy and insolvency laws and other laws affecting the rights of
creditors generally and the application of general equitable principles. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby by Insight Communications will not (a) violate
any law, regulation, order or decree, or (b) subject to the receipt of any
necessary consents, conflict with or result in any breach of, or constitute a
default under, Insight Communications' corporate charter or bylaws, or any
agreement or contract to which it is a party or by which it or its assets are
bound or affected.
Insight Communications hereby waives notice of acceptance of this guaranty.
Source and Insight may at any time, and from time to time, without notice to or
consent of Insight Communications and without impairing or releasing the
obligations of Insight Communications hereunder: (i) modify, release, exchange,
extend or renew any obligation or liability of Insight under this Agreement and
the other Definitive Documents, (ii) exercise or refrain from exercising any
rights under the Definitive Documents and (iii) compromise or subordinate any
obligation or liability of Insight. Any other suretyship defenses are hereby
waived by Insight Communications. This Article XVI is not intended and shall
not be construed to create any rights in any Person other than Source and NewCo,
and no other Person (including without limitation, any creditor or shareholder
of Source or NewCo) shall have or may assert any rights as a third party
beneficiary of any of the provisions of this Article XVI.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
31
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
date first above written.
SOURCE MEDIA, INC.
By: /s/ Stephen W. Palley
-------------------------------------
Stephen W. Palley
Chief Executive Officer
INSIGHT INTERACTIVE, LLC
By: Insight Communications Company, Inc.
Its sole member
By: /s/ Michael S. Willner
-------------------------------------
Name: Michael S. Willner
Title: President
NEWCO, L.L.C.
By:
-------------------------------------
Name:
Title:
For the limited purposes set forth in Article XVI above:
INSIGHT COMMUNICATIONS COMPANY, INC.
By: /s/ Michael S. Willner
-------------------------------------
Name: Michael S. Willner
Title: President
32
<PAGE>
SCHEDULE LIST
Schedule Description
-------- -----------
2.1 A Source Equipment
2.1 B Source Intellectual Property
2.1 D Source Contracts
2.1 E Source Inventory
2.1 F Source Accounts Receivable
4.2 Capitalization Table of Source
4.4 Source Assets Ownership Exceptions
4.6 Source Litigation
4.8 Source Intellectual Property Ownership Exceptions
4.9 Source Tax Exceptions
4.12 Brokers
4.13 Source Transactions with Interested Persons
6.1 Approved Transactions
33
<PAGE>
EXHIBIT LIST
Exhibit Description
- ------- -----------
A Form of Limited Liability Company Agreement of NewCo, L.L.C.
B-1 Form of Assignment and License Agreement
B-2 Form of Assignment Agreement
C Form of General Assignment, Bill of Sale and Conveyance
34
<PAGE>
Exhibit C
---------
COMMON STOCK AND WARRANTS
PURCHASE AGREEMENT
by and between
SOURCE MEDIA, INC.
and
INSIGHT INTERACTIVE, LLC
Dated as of
July 29, 1999
<PAGE>
COMMON STOCK AND WARRANTS PURCHASE AGREEMENT
Table of Contents
<TABLE>
<CAPTION>
Page
<S> <C> <C>
ARTICLE I Covenants Regarding Consents and Approvals; Due Diligence.......... 1
Section 1.1 Consents and Approvals Sought by the Company....................... 1
Section 1.2 Consents and Approvals Sought by Insight........................... 2
Section 1.3 Exclusivity........................................................ 2
ARTICLE II Purchase of Common Stock and Warrants.............................. 3
Section 2.1 Sale of Common Stock............................................... 3
Section 2.2 Purchase Price..................................................... 3
Section 2.3 Sale of Warrants................................................... 3
Section 2.4 Closing............................................................ 3
ARTICLE III Company Covenants Regarding Shareholder Rights Granted Insight..... 3
Section 3.1 Board of Directors................................................. 3
Section 3.2 Board Committees................................................... 4
Section 3.3 Grant of Preemptive Rights......................................... 4
Section 3.4 Organic Changes.................................................... 5
ARTICLE IV Representations, Warranties and Covenants of the Company........... 6
Section 4.1 Corporate Existence and Qualification.............................. 6
Section 4.2 Subsidiaries....................................................... 6
Section 4.3 Capitalization..................................................... 7
Section 4.4 Corporate Authority, Approval and Enforceability................... 7
Section 4.5 Noncontravention................................................... 8
Section 4.6 Shares Validly Issued/Registration................................. 8
Section 4.7 Litigation......................................................... 10
Section 4.8 Contracts.......................................................... 11
Section 4.9 Licensed Intellectual Property and Intangible Property and Data.... 12
Section 4.10 Compliance with Laws............................................... 14
Section 4.11 Taxes.............................................................. 14
Section 4.12 Financial Statements............................................... 14
Section 4.13 Subsequent Events.................................................. 15
Section 4.14 Governmental Consents and Approvals................................ 15
Section 4.15 Other Consents and Approvals....................................... 15
Section 4.16 Loan Obligations and Commitments................................... 16
Section 4.17 Filing Under the Securities Exchange Act of 1934................... 16
Section 4.18 Registration Rights................................................ 16
Section 4.19 Disclosures........................................................ 16
Section 4.20 Further Assurances................................................. 16
ARTICLE V Representations and Warranties of Insight.......................... 16
Section 5.1 Existence and Qualification........................................ 16
Section 5.2 Authority, Approval and Enforceability............................. 17
Section 5.3 Information Provided by Insight with Respect to Share Registration. 17
Section 5.4 Governmental Consents and Approvals................................ 17
Section 5.5 Acquisition for Investment......................................... 17
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
ARTICLE VI Closing Deliveries............................................... 18
Section 6.1 Deliveries by the Company........................................ 18
Section 6.2 Deliveries by Insight............................................ 19
ARTICLE VII Conditions Precedent to the Closing Obligation of Insight........ 19
Section 7.1 Accuracy of Representations and Warranties....................... 19
Section 7.2 Performance of Covenants and Agreements.......................... 20
Section 7.3 Litigation....................................................... 20
Section 7.4 Closing Deliveries............................................... 20
Section 7.5 Contribution Agreement and Operating Agreement................... 20
Section 7.6 Adverse Change................................................... 20
Section 7.7 Consents and Approvals........................................... 20
Section 7.8 Effect of Closing................................................ 20
ARTICLE VIII Conditions Precedent to the Closing Obligation of the Company.... 20
Section 8.1 Accuracy of Representations and Warranties....................... 20
Section 8.2 Performance of Covenants and Agreements.......................... 21
Section 8.3 Litigation....................................................... 21
Section 8.4 Closing Deliveries............................................... 21
Section 8.5 Contribution Agreement and Operating Agreement................... 21
Section 8.6 Consents and Approvals........................................... 21
Section 8.7 Effect of Closing................................................ 21
ARTICLE IX Indemnification.................................................. 21
Section 9.1 Indemnification by the Company................................... 21
Section 9.2 Indemnification by Insight....................................... 22
Section 9.3 Indemnity Procedure.............................................. 22
Section 9.4 Definition of Losses............................................. 23
Section 9.5 Limitation on Source Indemnification............................. 23
ARTICLE X Disputes......................................................... 24
Section 10.1 Procedure........................................................ 24
Section 10.2 Initiation of Procedure.......................................... 24
Section 10.3 Unassisted Settlement............................................ 24
Section 10.4 Selection of Arbitrator.......................................... 24
Section 10.5 Time and Place for ADR........................................... 24
Section 10.6 Exchange of Information.......................................... 24
Section 10.7 Summary of Views................................................. 25
Section 10.8 Staffing the ADR................................................. 25
Section 10.9 Conduct of ADR................................................... 25
Section 10.10 Decision of Arbitrator........................................... 25
Section 10.11 Fees of Arbitrator; Disqualification............................. 25
Section 10.12 Court Order...................................................... 25
ARTICLE XI Termination...................................................... 25
Section 11.1 Termination...................................................... 25
Section 11.2 Effect of Termination............................................ 26
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
ARTICLE XII Notices.......................................................... 26
Section 12.1 Procedure and Addresses.......................................... 26
Section 12.2 Change of Notice Address......................................... 27
ARTICLE XIII General.......................................................... 27
Section 13.1 Entire Agreement................................................. 27
Section 13.2 Headings......................................................... 28
Section 13.3 Governing Law; Jurisdiction and Venue............................ 28
Section 13.4 Counterparts..................................................... 28
Section 13.5 Binding Agreement; Assignment.................................... 28
Section 13.6 Amendment........................................................ 28
Section 13.7 No Waiver........................................................ 28
Section 13.8 Severability..................................................... 28
Section 13.9 Certain Definitions.............................................. 28
SCHEDULE LIST..................................................................... 32
EXHIBIT LIST...................................................................... 33
</TABLE>
<PAGE>
COMMON STOCK AND WARRANTS PURCHASE AGREEMENT
THIS COMMON STOCK AND WARRANTS PURCHASE AGREEMENT (the "Agreement") is made
as of this 29th day of July, 1999, by and between Source Media, Inc., a Delaware
corporation ("Source Media" or the "Company") and Insight Interactive, LLC, a
Delaware limited liability company ("Insight").
Recitals
A. The Company and Insight have executed a Contribution Agreement
("Contribution Agreement") of even date, pursuant to which such parties have
agreed to form NewCo, L.L.C., a Delaware limited liability company ("NewCo")
into which each party shall contribute or license certain assets and thereafter
certain business operations shall be conducted on a joint basis.
B. In consideration of the transactions contemplated in the Contribution
Agreement, Insight has agreed to acquire 842,105 shares of the Company's $.001
par value per share common stock ("Common Stock") in exchange for Twelve
Million Dollars ($12,000,000).
C. The Company has also agreed to issue to Insight warrants ("Warrants")
upon the terms more specifically described herein, pursuant to which Insight
will have the right to acquire up to an additional 4,596,786 shares of Common
Stock (subject to adjustment for cashless exercises of warrants as set forth on
Schedule 4.3).
D. In connection with such investment in the Company by Insight, the
Company has also agreed to provide Insight with certain additional rights and
preferences as a shareholder of the Company, which rights and preferences are
more fully set forth herein.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants,
promises, agreements, representations and warranties contained in this
Agreement, the parties do hereby covenant, promise, agree, represent and warrant
as follows.
ARTICLE I
Covenants Regarding Consents and Approvals; Due Diligence
---------------------------------------------------------
Section 1.1 Consents and Approvals Sought by the Company. Insight has
--------------------------------------------
been informed by the Company that it is necessary for the Company to obtain
certain approvals to consummate the transactions contemplated hereby and the
transactions necessary for the formation of NewCo pursuant to the Contribution
Agreement. The Company has informed Insight that it believes it can secure all
such approvals. Further, the Company hereby agrees and covenants: (a) that it
shall use its best efforts to provide to third parties with approval rights all
relevant information pertaining to the transactions for which approval is
sought, to initiate communications with such parties in order to obtain their
consents and to encourage such parties to render their consents; and (b) that it
will utilize good faith commercially reasonable efforts in taking other actions
to secure all approvals which are necessary for the consummation of the
transactions contemplated hereunder. Due to the necessity of securing such
approvals, except as provided in Section 4.5, the transactions contemplated
hereunder shall be consummated only when all such approvals have been obtained.
1
<PAGE>
Specifically, the Company agrees and covenants that: (x) Within twenty
(20) business days after the execution of this Agreement, the Company will file
its preliminary proxy materials with the Securities and Exchange Commission
("SEC") (which materials will be utilized to solicit the necessary consents and
approvals of the transactions contemplated hereunder and under the Contribution
Agreement from the Company's common stockholders) and thereafter will as
promptly as possible file definitive proxy materials with the SEC, using good
faith commercially reasonable efforts in responding to any comments of the SEC
staff regarding the preliminary proxy material; (y) Also within the twenty (20)
business day period after the execution of this Agreement, the Company will
prepare and have ready for distribution all materials which it will utilize in
soliciting any other consents or approvals required to be obtained by it (other
than the submission of forms and materials which may be necessary under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 ("HSR")), so that said
materials can be distributed concurrently with the distribution of the Company's
definitive proxy materials; and (z) Within thirty (30) days after the execution
of this Agreement, if required, the Company shall file with the Federal Trade
Commission and the Department of Justice the notification form, together with
all necessary materials and information, to attempt to secure the expiration or
termination of all applicable waiting period(s) relating to any or all of the
transactions contemplated hereunder and under the Contribution Agreement as
required on its part under HSR ("HSR Consent"). The Company agrees and
covenants that it shall inform Insight of all material developments in its
efforts to obtain necessary consents and approvals and that simultaneously with
the transmittal to third parties or to governmental agencies, it shall provide
Insight with copies of all correspondence, filings or other written
documentation related to efforts to obtain these consents.
Section 1.2 Consents and Approvals Sought by Insight. The Company
----------------------------------------
has been informed by Insight that it is necessary for Insight to obtain certain
approvals to consummate the transactions contemplated hereby and the
transactions necessary for the formation of NewCo pursuant to the Contribution
Agreement. Insight has informed the Company that it believes it can secure all
such approvals. Further, Insight hereby agrees and covenants: (a) that it
shall use its best efforts to provide to third parties with approval rights all
relevant information pertaining to the transactions for which approval is
sought, to initiate communications with such parties in order to obtain their
consents and to encourage such parties to render their consents; and (b) that it
will utilize good faith commercially reasonable efforts in taking other actions
to secure all approvals which are necessary for the consummation of the
transactions contemplated hereunder. Due to the necessity of securing such
approvals, the transactions contemplated hereunder shall be consummated only
when all such approvals have been obtained. Specifically, Insight agrees and
covenants that within thirty (30) days after the execution of this Agreement,
if required, Insight shall file with the Federal Trade Commission and the
Department of Justice the notification form, together with all necessary
materials and information, to attempt to secure the expiration or termination of
all applicable waiting period(s) relating to any or all of the transactions
contemplated hereunder and under the Contribution Agreement as required on its
part under the HSR Consent. Insight agrees and covenants that it shall inform
the Company of all material developments in its efforts to obtain necessary
consents and approvals and that simultaneously with the transmittal to third
parties or to governmental agencies, it shall provide Source with copies of all
correspondence, filings or other written documentation related to efforts to
obtain these consents.
Section 1.3 Exclusivity. During the period starting with the date of
-----------
execution hereof and ending with the Closing (the "Exclusivity Period"), neither
the Company nor its direct or indirect subsidiaries nor their respective
directors or executive officers shall, directly or indirectly through their
respective employees, representatives or agents, participate in any substantive
negotiations regarding a competing or conflicting transaction with any person or
entity (or with any representative or agent of any person or entity) other than
Insight or its Affiliates concerning (a) a merger, consolidation or other
business
2
<PAGE>
combination involving another person or entity, (b) the license, sublicense, or
grants of rights to use, or the sale, assignment, transfer, conveyance or other
disposition of any material asset of the Company or (c) the issuance by the
Company of any of its securities (including convertible debt) for cash or other
property except in compliance with Section 4.3.
ARTICLE II
Purchase of Common Stock and Warrants
-------------------------------------
Section 2.1 Sale of Common Stock. Subject to the terms and conditions
--------------------
herein stated, the Company agrees to sell, assign, transfer and deliver to
Insight, and Insight agrees to purchase from the Company, 842,105 shares of
Common Stock (the "Shares").
Section 2.2 Purchase Price. In full consideration for the sale to
--------------
Insight of the Shares, Insight will pay to the Company at Closing an amount in
cash equal to approximately $14.25 per share, for a total of $12,000,000
("Purchase Price"), which amount shall be delivered by wire transfer of
immediately available federal funds into an account or accounts designated by
the Company (with wire transfer instructions provided to Insight in writing at
least three (3) days prior to Closing).
Section 2.3 Sale of Warrants. Subject to the terms and conditions
----------------
herein stated, in consideration of the covenants and agreements of Insight made
herein and in the Contribution Agreement and the Operating Agreement, the
Company further agrees to sell, assign, transfer and deliver to Insight, and
Insight agrees to purchase from the Company, Warrants entitling the holder
thereof for a period of five (5) years from Closing to acquire 4,596,786 shares
of Common Stock (subject to adjustment for cashless exercises of warrants as set
forth on Schedule 4.3), at an initial exercise price of $20.00 per share, and
containing the other terms and conditions as set forth in the form of Stock
Purchase Warrant attached hereto as Exhibit A (the "Stock Purchase Warrant").
---------
Section 2.4 Closing. The closing of the transactions contemplated
-------
herein ("Closing") shall occur simultaneously with the closing contemplated
under the Contribution Agreement (i.e., on the sixth business day following the
satisfaction or waiver of the conditions set forth in Articles VII and VIII of
the Contribution Agreement (other than those that are closing deliveries) and in
Articles VII and VIII herein (other than those that are closing deliveries)) but
in no event later than January 31, 2000 (the "Final Closing Date"), at the
offices of Cooperman Levitt Winikoff Lester & Newman, P.C., 800 Third Avenue,
New York, New York 10022, counsel to the Company, at 10:00 a.m., local time,
unless another time, date and place is agreed to in writing by Insight and the
Company. The effective time of the transactions contemplated by this Agreement
shall be 11:59 p.m. on the date of Closing (the "Closing Date").
ARTICLE III
Company Covenants Regarding Shareholder Rights Granted Insight
--------------------------------------------------------------
Section 3.1 Board of Directors. On or prior to Closing, the Company
------------------
will take all measures necessary to file with the Delaware Secretary of State an
amendment to its Certificate of Incorporation in the form of the Certificate of
Designations for Non-Participating Preferred Stock in the form attached hereto
as Exhibit B-2 (the "Certificate of Designations"), and at Closing, for no
-----------
additional consideration, to issue to Insight all of the authorized shares of
such Preferred Stock, which will entitle Insight to
3
<PAGE>
designate the number of voting members of the Board of Directors ("Board") of
the Company in accordance with the following schedule:
<TABLE>
<CAPTION>
Number of Board Seats Number of Board Seats Percentage of Voting Stock Owned
Appointed by Insight on Appointed by Insight on 10 by
7 Person Board Person Board Insight on a Fully Diluted Basis
- -------------------------- --------------------------- -----------------------------------
<S> <C> <C>
3 4 15% or greater
2 3 7.5% or more but less than 15%
1 2 5% or more but less than 7.5%
1 1 2.5% or more but less than 5%
0 0 less than 2.5%
</TABLE>
At all times from and after Closing the Board shall be comprised of seven
(7) members or ten (10) members and Insight shall be entitled to appoint the
number of members set forth above based upon Insight's Fully Diluted stock
ownership. Source may only change the number of board members to a number other
than seven (7) or ten (10) with the written consent of Insight and Insight may
protect its proportionate representation in giving or not giving its consent.
Section 3.2 Board Committees. At any time that Insight is entitled to
----------------
at least one Board representative, Insight will be entitled to have at least one
voting representative on each committee of the Board, including but not limited
to the executive committee, audit committee and compensation committee.
Section 3.3 Grant of Preemptive Rights. 1
--------------------------
a. The Company hereby grants to Insight the preemptive right to
purchase up to its Proportionate Share of any New Securities which the
Company may, from time to time, propose to sell or issue after the date
hereof.
b. In the event the Company proposes to undertake an issuance or sale
of New Securities, the Company will give Insight thirty (30) days prior
written notice of its intention, describing the type of New Securities and
the price and the specific terms upon which the Company proposes to issue
or sell the same. Thereafter, Insight will have thirty (30) days from the
date of such notice to give the Company written notice of its intention to
purchase up to its Proportionate Share of such New Securities, for the same
price and upon the terms pursuant to which the New Securities will be
offered, as specified in the Company's notice, and stating therein the
quantity of such New Securities Insight intends to purchase. If the
consideration for the New Securities is in a form other than cash, Insight
shall pay equivalent value on a per share basis in cash. Insight shall
further have a forty-five (45) day period from the date of the original
notice from the Company in which to commit funding to the purchase of any
New Securities and close the acquisition thereof. Failure by Insight to
give notice within the thirty (30) day period shall be deemed a waiver by
Insight of the preemptive right with respect to such New Securities,
provided the Company consummates the issuance of New Securities within
ninety (90) days after the expiration of such thirty (30) day period in the
amount, at substantially the same price and on
4
<PAGE>
substantially the same terms specified in the notice given by the Company
under this Section 3.3. In the event the New Securities are to be issued
pursuant to an underwritten public offering or under similar circumstances
so that the final price or other material terms of the New Securities are
not established by the Company at the time the thirty day notice is
provided to Insight, the Company's notice to Insight will provide its
anticipated price of, and general terms pursuant to which it intends to
issue such New Securities. Notwithstanding the fact that Insight may notify
the Company within such thirty day period that it intends to purchase up to
its Proportionate Share of such New Securities, Insight will not be bound
by such election until the final price and terms of such offering are
established by the Company. Upon the final price and terms being
established, the Company shall provide Insight immediate notice thereof
prior to the Company's proposed sale and issuance. If such final price is
not greater than one hundred ten percent (110%) of the price stated in the
original notice, Insight will be bound by its notice to exercise its
preemptive rights; if such final price is greater than one hundred ten
percent (110%) of the price stated in the original notice, Insight shall
not be bound by its original election, but shall have the right for a
period not to exceed two (2) hours after receiving notice of the final
price to elect to purchase in accordance with the terms of this Section
3.3. In order to both minimize the potential disruption to the Company's
ability to offer such New Securities in an underwritten public offering and
to afford Insight with as much notice and information as possible regarding
the terms and pricing thereof, the Company will keep Insight reasonably
informed of the status of the on-going negotiations with the managing
underwriter with respect to such terms and anticipated pricing, and further
will afford Insight, if Insight so requests, the right to have a
representative present to observe the negotiation of the final pricing
terms immediately prior to the execution of the applicable underwriting
agreement.
c. The right of Insight to purchase New Securities pursuant to this
Section 3.3 may be exercised, in whole or in part, by any of Insight's
Affiliates, if Insight expressly grants such right of exercise to such
Affiliates, subject to compliance with applicable federal and state
securities laws.
d. The right of Insight to appoint members to the Board (and
committees thereof) in accordance with the provisions of Sections 3.1 and
3.2, and the preemptive rights granted to Insight as set forth in Section
3.3, shall lapse in the event Insight owns less than two and a half percent
(2.5%) of the Voting Stock of the Company on a Fully Diluted basis.
Section 3.4 Organic Changes. The Company will take all actions as may
---------------
be required or desirable, including amending its Bylaws or Certificate of
Incorporation (and obtaining any required shareholder or contractual consents
related thereto) as may be necessary to fully vest in Insight the rights granted
in this Article III. Not later than the Closing Date, the Company shall have
adopted: (a) the Amendment of Restated Certificate of Incorporation in the form
of Exhibit B-1 hereto (the "Certificate of Amendment"), which creates a class of
-----------
non-voting stock that may be issued under the Stock Purchase Warrant; and (b)
the amendment to its Certificate of Incorporation in the form of the Certificate
of Designations in the form of Exhibit B-2 hereto, which provides Insight with
-----------
the shareholder rights described in this Article III and grants to Insight the
preemptive rights described in Section 3.3. Thereafter, the Company will not
enter into or adopt any amendment, modification, or waiver of any provisions of
its Bylaws, Certificate of Incorporation or make any change in its capital stock
by reclassification, subdivision, reorganization or otherwise, if the effect of
any such change or modification would be detrimental to the rights granted
Insight hereunder. The Company will not enter into any
5
<PAGE>
agreement or make any amendment to any agreement or take any other action which
would restrict or adversely affect the performance of the Company's obligations
to Insight hereunder.
ARTICLE IV
Representations, Warranties and Covenants of the Company
--------------------------------------------------------
As a material inducement to Insight to enter into this Agreement and to
purchase the Common Stock and Warrants, the Company represents and warrants that
each of the following statements are true and correct as of the date hereof and
will be true and correct at Closing except as expressly qualified or modified
herein, and covenants to take all of the following actions required of it in the
manner set forth herein.
Section 4.1 Corporate Existence and Qualification. The Company is a
-------------------------------------
corporation duly incorporated, validly existing and in good standing under the
laws of the State of Delaware. The Company is duly qualified to do business and
in good standing in each jurisdiction in which the assets owned or leased by it,
or the nature of its activities with respect to its assets makes such
qualification necessary, except in such jurisdictions where the failure to be so
qualified or in good standing would not have a material adverse effect on the
business or financial condition of the Company and its Subsidiaries taken as a
whole (a "Material Adverse Effect").
Each Subsidiary of the Company (as defined below) is duly incorporated and
in good standing in the state of its incorporation, and is duly qualified to do
business and in good standing in each jurisdiction in which the assets owned or
leased by such Subsidiary, or the nature of its activities makes such
qualification necessary, except in such jurisdictions where the failure to be so
qualified or in good standing would not have a Material Adverse Effect.
Section 4.2 Subsidiaries. Each of the Company's subsidiaries is
------------
identified on Schedule 4.2 ("Subsidiaries"). Except as set forth on Schedule
4.2, the Company does not own, directly or indirectly, any equity or debt
securities of any corporation, partnership or other entity. Schedule 4.2 sets
forth for each Subsidiary: (a) its name and jurisdiction of incorporation; (b)
the number of shares of authorized capital stock of each class of its capital
stock; (c) the number of issued and outstanding shares of each class of its
capital stock, the names of the holders thereof, and the number of shares held
by each such holder; and (d) the number of shares of its capital stock held in
treasury. Except as set forth in Schedule 4.2, all of the issued and outstanding
shares of capital stock of each Subsidiary have been duly authorized and are
validly issued, fully paid, and nonassessable and have been issued in compliance
with all applicable law. Except as set forth on Schedule 4.2, one of the Company
and its Subsidiaries holds of record and owns beneficially all of the
outstanding shares of each Subsidiary, free and clear of any restrictions on
transfer (other than restrictions under applicable federal and state securities
laws), taxes, security interests, options, warrants, purchase rights, contracts,
commitments, equities, claims, and demands. Except as set forth in Section 4.3,
there are no outstanding or authorized options, warrants, purchase rights,
subscription rights, conversion rights, exchange rights, or other contracts or
commitments that could require any of the Company and its Subsidiaries to sell,
transfer, or otherwise dispose of any capital stock of any of its Subsidiaries
or that could require any Subsidiary to issue, sell, or otherwise cause to
become outstanding any of its own capital stock. There are no outstanding stock
appreciation, phantom stock, profit participation, or similar rights with
respect to any Subsidiary. There are no voting trusts, proxies, or other
agreements or understandings with respect to the voting of any capital stock of
any Subsidiary. None of the Company and its Subsidiaries controls directly or
indirectly or has any direct or indirect equity
6
<PAGE>
participation in any corporation, partnership, trust, or other business
association which is not a Subsidiary of the Company identified on Schedule 4.2.
Section 4.3 Capitalization. As of the date hereof the capitalization of
--------------
the Company is as set forth on Schedule 4.3. All of the issued and outstanding
shares of capital stock of the Company have been duly authorized and are validly
issued, fully paid and nonassessable and have been issued in compliance with all
applicable law and not in violation of the preemptive rights of any person or
entity.
Between the date hereof and the Closing, except with respect to the
exercise of the options or warrants described on Schedule 4.3, the Company shall
not issue any additional capital stock, or any additional option, warrant,
purchase right, subscription right or other contract or commitment that could
require the Company to issue any of its capital stock, without either (a)
Insight's prior written consent, or (b) agreeing to amend the terms of this
Agreement by increasing the number of Warrants to be issued to Insight and/or
adjusting the exercise price thereof, so that Insight will at Closing be
entitled to Warrants exercisable for the number of shares of Common Stock which,
when aggregated with the Shares, would equal 20% of the outstanding Common Stock
at Closing, on a Fully Diluted basis excluding the stock, options and warrants
(and the stock issued upon exercise of such options and warrants) set forth in
Notes B and C(1) on Schedule 4.3, at the same aggregate exercise price as set
forth in Section 2.3 above.
At Closing and except as set forth in this Agreement and in Schedule 4.3
with respect to warrants or stock options specifically noted thereon, there will
not be outstanding, nor will the Company be subject to any agreement under which
there may become outstanding, any right to purchase, or security convertible
into or exchangeable for, any capital stock of the Company, including but not
limited to, options, warrants, or rights. Except as set forth in the certificate
of designations relating to the Company's 13 1/2% Senior Payment in Kind
Preferred Stock, and with respect to obligations under the Company's Senior
Secured Notes in the original face amount of $100,000,000 ("Senior Notes"), or
except with respect to the terms of the warrants and stock options described on
Schedule 4.3 upon their exercise, the Company is under no obligation, contingent
or otherwise, to purchase or otherwise redeem or retire any of its securities.
Except as set forth herein and as set forth in the Company's Employment
Agreement with Stephen Palley, there are no agreements in existence which
require the Company to cause to be elected any person to its Board. There are no
voting trusts, proxies, or other agreements or understandings with respect to
the voting of the capital stock of the Company.
At all times following Closing, the Company will reserve for issuance such
number of shares of Common Stock as may be issuable upon exercise of the
Warrants.
Section 4.4 Corporate Authority, Approval and Enforceability. The
------------------------------------------------
Company has all requisite corporate power and corporate authority to execute and
deliver this Agreement and, subject only to receiving the consents and approvals
described in Section 1.1 hereof, to perform its obligations under this
Agreement. The execution and delivery of this Agreement by the Company in
accordance with the terms hereof, and the performance of the transactions
contemplated hereunder by the Company, have been duly and validly approved by
its Board of Directors. The execution and delivery of this Agreement by the
Company and the performance of the transactions contemplated hereunder by the
Company have further been validly approved by all other corporate action, if
any, necessary on behalf of the Company, other than the obtaining of the
consents and approvals described in Section 1.1 hereof. This Agreement is, and
all such other documents and agreements required to be executed
7
<PAGE>
and delivered hereunder, when so executed and delivered by the Company will be,
valid, legal and binding obligations of the Company, enforceable against it in
accordance with their terms, except as limited by bankruptcy and insolvency laws
and other laws affecting the rights of creditors generally and the application
of general equitable principles.
Section 4.5 Noncontravention. Neither the execution and delivery of
----------------
this Agreement and such other documents and agreements as may be required hereby
and thereby, nor (subject to receiving the consents and approvals described in
Section 1.1, or subject to the provisions set forth in such other documents and
agreements) the consummation of the transactions contemplated hereby by the
Company will (a) violate any law, statute, regulation, rule, injunction,
judgment, order, decree or other restriction of any government, governmental
agency or court to which the Company or any of its Subsidiaries is subject, or
any provision of the charter or bylaws of the Company or any Subsidiary, or (b)
conflict with or result in any breach of, or constitute a default under, result
in the acceleration of, create in any party the right to accelerate, terminate,
modify or cancel or require any notice under any agreement, contract, lease,
license, instrument or other arrangement to which the Company or any of its
Subsidiaries is subject, or by which either the Company's or any Subsidiary's
assets are bound or affected, including without limitation, the letter of intent
with Prevue Ventures, Inc. dated February 10, 1999 (the "Prevue Letter"), except
that certain agreements (which agreements are specifically identified on
Schedule 4.5) may require the consent of the other party to the assignment of
such agreement or agreements to NewCo under the Contribution Agreement and
Source covenants to obtain these consents or to indemnify Insight in accordance
with Section 9.1 in the event such consents are not obtained. The exclusivity
period under the Prevue Letter has expired and the Company has no further
obligations pursuant to the Prevue Letter.
Section 4.6 Shares Validly Issued/Registration. The Shares have been
----------------------------------
duly authorized and when issued to Insight against payment therefor, will be
validly issued, fully paid, nonassessable and free of any preemptive rights
except those inuring to the benefit of Insight as set forth herein and free from
all transfer or similar taxes, liens and charges and free of restrictions on
transfer other than restrictions on transfer under this Agreement and applicable
federal and state securities laws, and will be issued in compliance with all
applicable federal and state securities laws. The shares of Common Stock
issuable upon exercise of the Warrants have been duly and validly reserved for
issuance and, upon issuance in accordance with the terms of the Warrants, will
be duly and validly issued, fully paid and nonassessable and free of any
preemptive rights, except those inuring to the benefit of Insight as set forth
herein and free from all transfer or similar taxes, liens and charges and free
of restrictions on transfer other than restrictions on transfer under the
Warrants and applicable federal and state securities laws, and will be issued
in compliance with all applicable federal and state securities laws. The
issuance, offer and sale of the shares of Common Stock and the Warrants as
contemplated by this Agreement and upon exercise of the Warrants are exempt from
the registration requirements of the Securities Act of 1933, as amended (the
"1933 Act"), and neither the Company nor any person or entity authorized to act
on its behalf shall take any action hereafter that would cause the loss of such
exemptions. Immediately following Closing, the Company shall take all actions
necessary to register the Shares with the SEC under the 1933 Act, under all
applicable state securities laws, and shall take such actions so that upon the
effectiveness of the registration the Shares shall be listed for trading with
the National Association of Securities Dealers Automated Quotation System
("NASDAQ"). In connection with, but without limiting, the foregoing, the
Company, as soon as practicable after the execution of this Agreement, shall
file a registration statement under the 1933 Act covering the registration of
all of the Shares, and the Company shall use its best efforts to (i) cause such
registration statement to be declared effective under the 1933 Act and kept
effective until the disposition by Insight of all of the Shares and (ii)
register and qualify the Shares under such other securities or blue sky laws as
shall be reasonably requested by Insight. Insight shall promptly notify the
8
<PAGE>
Company in writing of any sales of Shares made pursuant to the registration
statement filed pursuant to this Section 4.6. In addition, the Company shall:
a. promptly notify Insight of the happening of any event which makes
any statement made in such registration statement or the related prospectus
untrue in any material respect or which requires the making of any changes
in such registration statement or prospectus so that, as of such date, the
statements therein are not misleading and do not omit to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading and shall promptly prepare a supplement or post-
effective amendment to the registration statement or the related prospectus
or any document incorporated therein by reference or file any other
required document so that, as thereafter delivered to the purchasers of the
Shares, such prospectus will not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading. Insight agrees that upon
receipt of any notice from the Company pursuant to this paragraph (a) of
the happening of any event of the kind described in this paragraph (a),
Insight will discontinue disposition of the Shares pursuant to such
registration statement until Insight receives copies of the supplemented or
amended prospectus; provided, however, that the aggregate number of days
that Insight shall be required to refrain from effecting public sales or
distribution of the Shares pursuant hereto shall not exceed an aggregate of
90 days;
b. comply in all material respects with the 1933 Act and the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), together
with all rules and regulations of the Securities and Exchange Commission
(the "SEC") promulgated thereunder and all applicable state securities laws
and regulations;
c. prepare and file with the SEC such amendments or supplements to
such registration statement and the prospectus used in connection with such
registration statement as may be necessary to keep such registration
statement effective in accordance with this Section 4.6 or as may be
necessary to comply with the provisions of the 1933 Act with respect to the
disposition of all the Shares;
d. furnish to Insight copies of such registration statement and any
amendments thereto and the prospectus and any supplement thereto, in such
quantities as Insight shall reasonably request, and the Company hereby
consents to the use and distribution thereof by Insight or its
representatives in connection with the sale or distribution of any of the
Shares pursuant to such registration statement;
e. prior to filing any such registration statement (or any amendment
or supplement thereto that contains information with respect to Insight),
the Company shall permit counsel to Insight to review (for a period of at
least five (5) business days ) the sections of the registration statement
covering information with respect to Insight, Insight's beneficial
ownership of the Shares and Insight's intended method of disposition of the
Shares. Such sections of the registration statement shall conform to the
information provided to the Company by Insight;
f. promptly notify Insight (and confirm such advice in writing) (i)
when such registration statement or the prospectus included therein or any
prospectus amendment or supplement or post-effective amendment has been
filed and, with respect to any such registration statement or post-
effective amendment, when the same has become effective, (ii) of any
comments
9
<PAGE>
by the SEC and by the blue sky or securities commissioner or regulator of
any state with respect thereto or any request by the SEC for amendments or
supplements to such registration statement or the prospectus or for
additional information, (iii) of the issuance by the SEC of any stop order
suspending the effectiveness of such registration statement or the
initiation of any proceedings for that purpose, and (iv) of the receipt by
the Company of any notification with respect to the suspension of the
qualification of the Shares for sale in any jurisdiction or the initiation
or threatening of any proceeding for such purpose. The Company shall use
its best efforts to prevent the issuance of any stop order or other
suspension of effectiveness of the registration statement, and, if such an
order is issued, to obtain the withdrawal of such order at the earliest
possible time and to notify Insight of the issuance of such order and the
resolution thereof;
g. hold in confidence and not make any disclosure of information
concerning Insight provided to the Company, except as may be required by
applicable law or consented to by Insight;
h. take all other actions reasonably necessary to expedite and
facilitate disposition by Insight of the Shares pursuant to the
registration statement;
i. pay all expenses incurred in connection with the registration of
the Shares hereunder, including all costs and expenses incurred by Insight
(including, without limitation, reasonable attorneys' fees and expenses);
j. indemnify and hold harmless Insight and its officers, directors,
partners, legal counsel and independent accountants and each person
controlling such persons within the meaning of Section 15 of the 1933 Act
to the same extent, and subject to the same procedures, that the Company
agrees to indemnify and hold harmless a Holder pursuant to the Warrants.
Insight shall indemnify and hold harmless the Company and its officers,
directors, partners, legal counsel and independent accountants and each
person controlling such persons within the meaning of Section 15 of the
1933 Act to the same extent, and subject to the same procedures, that the
Holder agrees to indemnify and hold harmless the Company pursuant to the
Warrants.
Section 4.7 Litigation. Schedule 4.7 contains a list of all actions,
----------
suits, demands, proceedings or governmental investigations which are pending
against the Company or its Subsidiaries, or to the knowledge of the executive
officers or general counsel of the Company, threatened against the Company or
its Subsidiaries as of the date hereof, with respect to which demand has been
made for $10,000 or more. Except as set forth on Schedule 4.7, there are no
pending or outstanding actions, suits, proceedings, orders, judgments,
injunctions, awards, or decrees of or before any governmental body, commission,
tribunal, arbitrator, board, court, agency or instrumentality, involving amounts
of $10,000 or more, by which the Company or any of its Subsidiaries are bound or
encumbered, and to the best of the Company's knowledge after due inquiry of all
officers who, in the normal course of their duties would have a reasonable basis
for being informed of such matters, except as set forth on Schedule 4.7 no such
claims or causes of action have been asserted that would result in such an
action, suit, proceeding, order, judgment, injunction, award, or decree of or
before any governmental body, commission, tribunal, arbitrator, board, court,
agency or instrumentality.
Section 4.8 Contracts. Schedule 4.8 lists the following contracts and
---------
other agreements to which either the Company or any Subsidiary is a party:
10
<PAGE>
a. any agreement (or group of related agreements) for the lease of
personal property to or from any Person providing for lease payments in
excess of $25,000 over the term of the lease;
b. any agreement (or group of related agreements) made outside the
normal course of the Company's business, relating to the purchase or sale
of materials, commodities, supplies, products, or other personal property,
or for the furnishing or receipt of services, the performance of which will
extend over a period of more than one year, result in a material loss to
either the Company or any Subsidiary, or involve consideration in excess of
$25,000;
c. any agreement concerning a partnership or joint venture;
d. any agreement (or group of related agreements) under which it has
created, incurred, assumed, or guaranteed any indebtedness for borrowed
money, or any capitalized lease obligation, in excess of $25,000 or under
which it has imposed a security interest on any of its assets, tangible or
intangible;
e. any agreement concerning confidentiality or noncompetition;
f. any agreement with any Affiliate;
g. any agreement for the employment of any individual on a full-time,
part-time, consulting, or other basis providing annual compensation in
excess of $25,000 or providing severance benefits;
h. any agreement under which it has advanced or loaned any amount in
excess of $25,000 to any of its directors, officers, and employees outside
the ordinary course of business;
i. any agreement under which the consequences of a default or
termination could have a Material Adverse Effect; or
j. any other agreement (or group of related agreements) made outside
the normal course of the Company's business and the performance of which
involves consideration in excess of $25,000 over its term.
The Company has delivered to Insight a correct and complete copy of each written
agreement listed in Schedule 4.8, and a written summary setting forth the terms
and conditions of each oral agreement listed. With respect to each such
agreement: (A) the agreement is legal, valid, binding, enforceable, and in full
force and effect; (B) no party is in breach or default, and no event has
occurred which with notice or lapse of time would constitute a breach or
default, or permit termination, modification, or acceleration, under the
agreement and no such breach or default will result from the consummation of the
transactions contemplated hereby; and (C) no party has repudiated in writing
(or, to the Company's knowledge, orally) any provision of the agreement.
Section 4.9 Licensed Intellectual Property and Intangible Property and
----------------------------------------------------------
Data.
- ----
11
<PAGE>
a. To the best of the Company's knowledge, except as set forth on
Schedule 4.9, the Company and/or its Subsidiaries own or have the exclusive
right to use pursuant to license, sublicense, agreement, or permission, all
Source Intellectual Property (as defined below) necessary for the operation of
the businesses of the Company and its Subsidiaries as presently conducted
without any further licenses or grants of rights. Each item of Source
Intellectual Property owned or used by the Company or its Subsidiaries
immediately prior to the Closing hereunder which is to be transferred to NewCo
pursuant to the Contribution Agreement will be owned or available for use by
NewCo on identical terms and conditions immediately subsequent to the Closing
hereunder. Each of the Company and its Subsidiaries has taken all necessary
action in accordance with prudent business practices to maintain and protect
each item of Source Intellectual Property that it owns or uses. The Company has
acquired any and all rights that its employees and independent contractors have,
had or may have had to the Source Intellectual Property. To the best of the
Company's knowledge, any and all consents or approvals necessary to be obtained
in connection with the sale, transfer, licensing, or other disposal of any of
the Source Intellectual Property, or in connection with the granting of any
other rights thereunder, both prior to the date hereof and through and including
the transactions contemplated at Closing, have been properly provided or
obtained.
b. Except as set forth in the Financial Statements referenced in
Section 4.12 below, none of the Company, its Subsidiaries and the directors and
officers (and employees with responsibility for intellectual property matters)
of the Company or its Subsidiaries has received in writing any charge,
complaint, claim, demand, or notice from third parties alleging that the Source
Intellectual Property interferes with, infringes upon, misappropriates or is
otherwise conflicting with or in violation of the intellectual property rights
of such third parties (including any claim that any of the Company and its
Subsidiaries must license or refrain from using either the Source Intellectual
Property or any intellectual property rights of any such third party).
c. Schedule 4.9 identifies each patent or registration which has been
issued to either the Company or its Subsidiaries with respect to any of the
Source Intellectual Property, and identifies each pending patent application or
application for registration which either the Company or its Subsidiaries has
made with respect to any of the Source Intellectual Property. The Company has
delivered to Insight correct and complete copies of all such patents,
registrations, applications, licenses, agreements, and permissions (as amended
to date), and will transfer to NewCo, pursuant to the Contribution Agreement,
correct and complete copies of all other written documentation evidencing
ownership and prosecution (if applicable) of each such item. Schedule 4.9 also
identifies each trade name or unregistered trademark used by either the Company
or its Subsidiaries in connection with any of the businesses transferred
pursuant to the Contribution Agreement. Except as set forth in Schedule 4.9,
with respect to each patent included in the Source Intellectual Property:
(i) the Company or its Subsidiaries possess all right, title,
and interest in and to the item, free and clear of any security
interest, license, or other restriction;
(ii) the item is not subject to any outstanding injunction,
judgment, order, decree, ruling, or charge;
(iii) no action, suit, proceeding, hearing, investigation, charge,
complaint, claim, or demand is pending or, to the knowledge of the
Company, is threatened which challenges the legality, validity,
enforceability, use, or ownership of the item; and
12
<PAGE>
(iv) there is no outstanding agreement by the Company or its
Subsidiaries to indemnify any Person for or against any interference,
infringement, misappropriation, or other conflict with respect to the
item.
Further, Schedule 4.9 identifies each license, agreement, or other
permission pursuant to which either the Company or any of its Subsidiaries has
granted rights of ownership or use to, or under which rights of ownership or use
are created for the benefit of, any third party with respect to the Source
Intellectual Property.
d. Schedule 4.9 also identifies each item of Source Intellectual
Property that is material to the Company's business that is owned by any third
party and that either the Company or any of its Subsidiaries uses pursuant to
license, sublicense, agreement, or permission and Schedule 4.9 also indicates
whether such item is assignable or transferable without the consent of the third
party. The Company has delivered to Insight correct and complete copies of all
such licenses, sublicenses, agreements, and permissions (as amended to date).
With respect to each such item of Source Intellectual Property:
(i) the license, sublicense, agreement, or permission covering
the item is legal, valid, binding, enforceable, and in full force and
effect;
(ii) unless otherwise indicated on Schedule 4.9, the license,
sublicense, agreement, or permission is freely transferrable and/or
assignable and the transferee thereof will obtain all rights,
privileges or ownership or use or benefits inuring to the transferor
thereunder;
(iii) no party to the license, sublicense, agreement, or
permission is in breach or default, and no event has occurred which
with notice or lapse of time would constitute a breach or default or
permit termination, modification, or acceleration thereunder;
(iv) no party to the license, sublicense, agreement, or
permission has repudiated any provision thereof;
(v) to the best of the Company's knowledge, with respect to
each sublicense, the representations and warranties set forth in
subsections (i) through (iv) above are true and correct with respect
to the underlying license;
(vi) to the best of the Company's knowledge, the underlying item
of intellectual property is not subject to any outstanding injunction,
judgment, order, decree, ruling, or charge;
(vii) to the best of the Company's knowledge, no action, suit,
proceeding, hearing, investigation, charge, complaint, claim, or
demand is pending or, to the knowledge of the Company, is threatened
which challenges the legality, validity, or enforceability of the
underlying item of intellectual property.
As used herein, "Source Intellectual Property" means any intellectual
property of every kind everywhere in the world including, without limitation,
patents, inventions, software (including all predecessor, derivative and other
versions), trademarks, tradenames, copyrights, trade secrets, ideas, know-how,
13
<PAGE>
confidential or business information or methods, processes, designs, concepts,
techniques, discoveries, improvements or other intellectual rights, regardless
of patentability or copyrightability, which is now owned by the Company or its
Subsidiaries and/or to which the Company or any Subsidiary now has a right to
license, to the full extent of such right to grant a license.
Section 4.10 Compliance with Laws. Each of the Company and its
--------------------
Subsidiaries are, and at all times have been, in material compliance with all
applicable statutes, laws, ordinances, regulations, rules and orders of any
federal, state or local government, or any governmental department or agency
("Governmental Authority") or any judgment, decree or order of any court
applicable to them or applicable to their employees, benefits, compensation
and/or working conditions and/or hiring, nondiscrimination and promotion
practices except where the failure to so comply would not result in a Material
Adverse Effect. The Company and its Subsidiaries are and have been in compliance
with all permits, licenses or other authorizations of Governmental Authorities
which are required for the operation of their respective businesses, except
where the failure to comply would not have a Material Adverse Effect. Neither
the Company nor any Subsidiary has received any written notice, report or
information regarding any corrective, investigatory or remedial obligations,
arising under applicable laws, ordinances, regulations, rules, or orders with
respect to past or present operations of the Company or any of its Subsidiaries
from any Governmental Authority that have not been complied with or can
reasonably be expected to have a Material Adverse Effect.
Section 4.11 Taxes. Except as set forth on Schedule 4.11, the Company
-----
and its Subsidiaries (with respect to returns filed either on a separate or
consolidated or combined basis) have timely filed and accurately prepared, or
will timely and accurately prepare and file, all federal, state, local, and
territorial returns, declarations and reports, information returns and
statements required to be filed by or with respect to the Company and/or any
Subsidiary on or before the Closing Date, in respect of any Taxes for each
period ending on or before the Closing Date ("Returns"). All Taxes shown as due
on such Returns, together with applicable interest and penalties, have been or
will be timely paid in full, and no notice of audit or adjustment has been
received from the Internal Revenue Service or any other taxing authority in
connection with any of such Returns, and except as set forth on Schedule 4.11,
no waivers of statutes of limitations have been given or requested. The Company
or its Subsidiaries have duly withheld and paid all Taxes required to be
withheld or paid with respect to amounts paid to employees, independent
contractors or other third parties. Except for liens for taxes, assessments and
governmental charges not yet due and payable or that are being contested in good
faith through appropriate proceedings, there are currently no liens for Taxes
upon any of the assets of the Company or its Subsidiaries and there is no event
or circumstance pursuant to which any taxing authority may claim a lien or other
encumbrance upon any of such assets, the effect of which would have a Material
Adverse Effect.
Section 4.12 Financial Statements. The Company has filed with the SEC on
--------------------
Form 10-K, its audited consolidated financial statements as at and for the
twelve months ended December 31, 1998, and its unaudited consolidated financial
statements on Form 10-Q for the three month period ended March 31, 1999
(collectively, the "Financial Statements"). The Financial Statements (a) fairly
present, in all material respects, the financial position of the Company and its
Subsidiaries as of the date thereof and the results of operations for the
periods covered thereby; and (b) have been prepared in accordance with generally
accepted accounting principles.
Section 4.13 Subsequent Events. Except as disclosed on the Company's
-----------------
Form 10-K for the period ended December 31, 1998 or its Form 10-Q for the three
month period ended March 31, 1999, since March 31, 1999:
14
<PAGE>
a. neither the Company nor any of its Subsidiaries has entered into
any material transaction (other than as contemplated by this Agreement or
the Contribution Agreement) which was not in the ordinary course of its
business;
b. there has been no Material Adverse Effect occurring to the
Company, other than changes affecting the interactive advertising and
interactive media programming industries in general, changes as a result of
general economic conditions, or negative financial operating results for
any financial period;
c. there has been no impairment of or damage to any assets carried on
the books of the Company at a value in excess of $25,000 (including
intellectual property, patents and proprietary property), or any sale,
assignment or transfer of any patent, trademark, trade secret or other
intellectual property or intangible asset of the Company carried on the
books of the Company at a value in excess of more than $25,000;
d. there has not been any payment of any obligation or liability
other than current liabilities paid in the ordinary course of business;
e. the Company has not received any notice that there has been a loss
of, or cancellation of a material contract or order by, any customer of the
Company, the effect of which will result in a loss to the Company
(including loss of anticipated profits) in excess of $25,000;
f. there have been no borrowings by the Company or agreements to
borrow or change in the contingent obligations of the Company by way of
guaranty, endorsement, indemnity, warranty or otherwise; and
g. there has been no default or breach by the Company or any
Subsidiary under any contract, license or permit, the result of which could
result in a loss to the Company or such Subsidiary in excess of $25,000.
Section 4.14 Governmental Consents and Approvals. Except for required
-----------------------------------
filings with the SEC, the National Association of Securities Dealers ("NASD"),
and filings required by HSR, the execution, delivery and performance by the
Company of this Agreement and the consummation of the transactions contemplated
hereby require no action by or in respect of, or filing with or notice to, any
Governmental Authority.
Section 4.15 Other Consents and Approvals. The Company will secure any
----------------------------
other consents (including, if applicable, the consents of its stockholders (both
common and preferred) and holders of the Senior Notes) as are necessary to
approve the transactions contemplated hereby (including but not limited to
conferring on Insight the rights described in Article III).
Section 4.16 Loan Obligations and Commitments. Except for the debt
--------------------------------
evidenced by the Senior Notes, the debt evidenced by the Company's capital lease
obligations disclosed on the Financial Statements, and trade payables incurred
in the ordinary course of business, neither the Company nor any Subsidiary is a
party to any loan agreement, promissory note or other evidence of indebtedness
and neither the Company nor any Subsidiary has any obligation for (a) any
amounts which represent the unpaid portion of the purchase price of any property
incurred in lieu of borrowing money or using available funds to pay such
amounts, whether or not evidenced by a promissory note, bond or similar written
obligation to pay money or (b) any
15
<PAGE>
obligation guaranteed by the Company or a Subsidiary for which the Company or
any Subsidiary is contingently liable.
Section 4.17 Filing Under the Securities Exchange Act of 1934. The
------------------------------------------------
Company is current with respect to all filings and reports required of it under
the 1933 Act and the Exchange Act, and no such filing contains or contained, as
applicable, as of the date hereof and as of the date thereof, any untrue
statement by the Company of a material fact or omits a material fact necessary
to make the Company's statements contained therein, in light of the
circumstances in which they were made, not misleading. All filings and reports
required of the Company under the 1933 Act and the Exchange Act, as of their
respective dates, complied as to form in all material respects with the
requirements of the 1933 Act, the Exchange Act and the applicable rules and
regulations thereunder.
Section 4.18 Registration Rights. Except for rights arising under the
-------------------
Warrants and hereunder, neither the Company, its shareholders nor the
Subsidiaries are a party to any agreement pursuant to which any person or entity
has the right to require the Company to register Company securities under the
1933 Act.
Section 4.19 Disclosures. Neither this Agreement, nor any schedule or
-----------
exhibit hereto, contains any untrue statement by the Company of a material fact
or omits a material fact necessary to make the Company's statements contained
herein or therein, in light of the circumstances in which they were made, not
misleading.
Section 4.20 Further Assurances. At any time and from time to time after
------------------
the Closing, the Company shall, at the reasonable request and expense of Insight
(but without any further consideration from Insight), execute, acknowledge and
deliver or cause to be executed, acknowledged and delivered, such further
instruments of conveyance, assignment and transfer, and to take all such actions
as Insight shall reasonably request in order to more fully and effectively vest
in Insight or confirm Insight's title to Common Stock and Warrants and to
otherwise fulfill the terms and conditions contained in this Agreement.
ARTICLE V
Representations and Warranties of Insight
-----------------------------------------
As a material inducement to the Company to enter into this Agreement and to
sell the Common Stock and Warrants, Insight represents and warrants that each of
the following statements are true and correct as of the date hereof and will be
true and correct at Closing except as expressly qualified or modified herein.
Section 5.1 Existence and Qualification. Insight is a limited
---------------------------
liability company duly formed, validly existing and in good standing under the
laws of the State of Delaware. Insight is duly qualified to do business and in
good standing in each jurisdiction in which the assets owned or leased by it, or
the nature of its activities with respect to its assets makes such qualification
necessary, except in such jurisdictions where the failure to be so qualified or
in good standing would not have a material adverse effect on the business or
financial condition of Insight.
Section 5.2 Authority, Approval and Enforceability. Insight has all
--------------------------------------
requisite limited liability company power and limited liability company
authority to execute and deliver this Agreement and, subject only to receiving
the consents and approvals described in Section 1.2 hereof, to perform its
obligations under this Agreement. The execution and delivery of this Agreement
by Insight in accordance with the terms hereof, and the performance of the
transactions contemplated hereunder by it, will have been duly and validly
approved by its member prior to the Closing Date. The execution and delivery of
this Agreement by Insight
16
<PAGE>
and the performance of the transactions contemplated hereunder by Insight will
have further been validly approved by all other limited liability company
action, if any, necessary on behalf of Insight prior to the Closing Date. This
Agreement is, and all such other documents and agreements required to be
executed and delivered hereunder, when so executed and delivered by Insight will
be, valid, legal and binding obligations of Insight, enforceable against it
accordance with their terms, except as limited by bankruptcy and insolvency laws
and other laws affecting the rights of creditors generally and the application
of general equitable principles. The execution and delivery of this Agreement
and such other documents and agreements as may be required hereby and thereby,
and the consummation of the transactions contemplated hereby by Insight will
not, subject to receiving the consents and approvals described in Section 1.2,
or subject to the provisions set forth in such other documents and agreements,
(a) violate any law, statute, regulation, rule, injunction, judgment, order,
decree or other restriction of any government, governmental agency or court to
which Insight is subject, or (b) conflict with or result in any breach of, or
constitute a default under, Insight's Certificate of Formation or limited
liability company agreement, if any, or any agreement or contract to which it is
a party or by which it or its assets are bound or affected.
Section 5.3 Information Provided by Insight with Respect to Share
-----------------------------------------------------
Registration. Any information provided to the Company by Insight which may be
- ------------
required in connection with the Company's filing a registration statement with
the SEC and applicable State securities commissions, shall be true and accurate
in all material respects.
Section 5.4 Governmental Consents and Approvals. The execution,
-----------------------------------
delivery and performance by Insight of this Agreement and the consummation of
the transactions by Insight contemplated hereby, require no action by or in
respect of, or filing with or notice to, any governmental or regulatory body,
agency or official except as provided in Section 1.1 hereof.
Section 5.5 Acquisition for Investment. Insight is acquiring the
--------------------------
Warrants for its own account, for investment purposes only, and not with a view
to, or for sale in connection with, a distribution, as that term is used in
Section 2(11) of the 1933 Act, in a manner which would require registration
under the 1933 Act or any state securities laws. Insight acknowledges the
Shares, the Warrants and the shares of common stock underlying in the Warrants
have not been registered under the 1933 Act or the securities laws of any state,
and the Shares and Warrants are being offered and sold pursuant to applicable
exemptions from such registration and will be issued as "restricted securities"
as defined by Rule 144 promulgated pursuant to the 1933 Act; provided that the
Company shall nevertheless be bound by its representation and covenant contained
in Section 4.6 with respect to the registration of the Shares immediately
following Closing.
ARTICLE VI
Closing Deliveries
------------------
Section 6.1 Deliveries by the Company. At Closing, the Company will
-------------------------
deliver the following to Insight:
a. A certificate or certificates representing the Shares.
b. One or more fully executed copies of the Stock Purchase Warrant.
c. A copy of all necessary consents to the transaction as
contemplated by this Agreement.
17
<PAGE>
d. Copies of: (i) the Certificate of Amendment certified by the
Secretary of State of Delaware; (ii) the Certificate of Designations
certified by the Secretary of State of Delaware; (iii) the Certificate of
Incorporation of the Company as currently in full force and effect,
certified by the Secretary of State of Delaware; and (iv) the Bylaws of the
Company (containing any amendments that may be required by reason of the
fulfillment of the Company's obligations hereunder) certified by the
Secretary of the Company.
e. A copy of all resolutions, consents and actions of the Board of
Directors and stockholders of the Company authorizing the execution,
delivery and performance of this Agreement, the execution, delivery and
performance of all related documents and agreements, including the
Contribution Agreement and the Operating Agreement, with such resolutions
certified by the Secretary of the Company as being true and correct copies
of the originals thereof, subject to no modification or amendment, and as
being in full force and effect.
f. A Certificate of the Secretary of State of the State of Delaware
establishing that the Company is in existence and good standing in such
State, and a Certificate of the Secretary of State of the State of
incorporation of each Subsidiary of the Company.
g. A certificate executed by the President of the Company, dated as
of the Closing, as to the truth and accuracy of the representations and
warranties of the Company contained herein on and as of the date of
Closing.
h. Originals of the Operating Agreement executed by the Company,
together with all documents and agreements required under the Contribution
Agreement and Operating Agreement, the transactions contemplated by which
will be closed simultaneously with the sale of Common Stock and Warrants
contemplated hereby.
i. An opinion of the Company's counsel in a form and substance
reasonably acceptable to Insight.
j. Originals of the Control Share Acquisition Agreement
executed by the Company in
the form of Exhibit C.
---------
Section 6.2 Deliveries by Insight. At Closing, Insight will deliver
---------------------
the following to the Company:
a. The Purchase Price, by wire transfer of immediately available
federal funds.
b. A copy of all necessary consents to the transaction as
contemplated by this Agreement.
c. A copy of all resolutions, consents and actions of the Board of
Directors of Insight authorizing the execution, delivery and performance of
this Agreement, the execution, delivery and performance of all related
documents and agreements, including the Contribution Agreement and the
Operating Agreement, with such resolutions certified by the Secretary of
Insight as being true and correct copies of the originals thereof, subject
to no modification or amendment, and as being in full force and effect.
18
<PAGE>
d. A Certificate of the Secretary of State of the State of Delaware
establishing that Insight is in existence and good standing in such State.
e. Originals of the Operating Agreement executed by Insight, together
with all documents and agreements required under the Contribution Agreement
and Operating Agreement, the transactions contemplated by which will be
closed simultaneously with the sale of Common Stock and Warrants
contemplated hereby.
f. A certificate executed by the President of Insight, dated as of
the Closing, as to the truth and accuracy of the representations and
warranties of Insight contained herein on and as of the date of Closing.
g. An opinion of Insight's counsel in a form and substance reasonably
acceptable to the Company.
h. Originals of the Control Share Acquisition Agreement executed by
Insight in the form of Exhibit C.
---------
ARTICLE VII
Conditions Precedent to the
Closing Obligation of Insight
-----------------------------
Insight's obligation to consummate the transaction contemplated by this
Agreement is subject to the fulfillment prior to or at the Closing, of each of
the following conditions, each of which may be waived in the sole discretion of
Insight:
Section 7.1 Accuracy of Representations and Warranties. Each and every
------------------------------------------
representation, warranty and covenant of the Company under this Agreement shall
be true and accurate in all material respects as of the date when made and as of
the Closing, except to the extent a representation, warranty or covenant
specifically is stated to relate only to a precise date. Not later than the
second business day prior to the anticipated date of Closing, the Company will
deliver to Insight any revisions to any Company Schedule prepared hereunder
necessary to make such Company Schedule and the representations, warranties and
covenants contained in Article IV true and correct as of the Closing Date.
Section 7.2 Performance of Covenants and Agreements. The Company shall
---------------------------------------
have performed in all material respects at or prior to the Closing all of the
covenants and agreements required to be performed by it at or prior to the
Closing in accordance with this Agreement.
Section 7.3 Litigation. No action, suit, proceeding, investigation,
----------
inquiry or request for information by any third person (including, but not
limited to, any Governmental Authority) shall have been instituted or threatened
against the Company or Insight or any of their respective Affiliates that
questions the validity or legality of this Agreement, or the transactions
contemplated hereby which, if successful, would materially adversely affect the
right of Insight to consummate the transactions contemplated hereby or might
involve possible material liability on the part of Insight.
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Section 7.4 Closing Deliveries. The Company shall have delivered to
------------------
Insight the documents and certificates described in Section 6.1.
.
Section 7.5 Contribution Agreement and Operating Agreement. The
----------------------------------------------
Operating Agreement shall be executed, and the transactions contemplated therein
and in the Contribution Agreement shall be closed, simultaneously with the
Closing of the transactions contemplated hereby.
Section 7.6 Adverse Change. Between December 31, 1998, and the Closing,
--------------
there shall have been no Material Adverse Effect occurring to the Company, other
than changes affecting the interactive advertising and interactive media
programming industries in general, changes as a result of general economic
conditions, or negative financial operating results for any financial period.
Section 7.7 Consents and Approvals. All consents and approvals
----------------------
referenced in Article I to be obtained by Insight, and all consents and
approvals referenced in Article I and the consents referenced in Section 4.15
relating to the Company's stockholders (both common and preferred) and holders
of the Senior Notes to be obtained by the Company, shall have been obtained to
the reasonable satisfaction of Insight and all applicable waiting period(s)
under the HSR Act shall have expired or been terminated.
Section 7.8 Effect of Closing. Notwithstanding anything stated in this
-----------------
Agreement to the contrary, to the extent the Closing is consummated, all
conditions to Closing set forth in this Article VII shall be deemed waived for
purposes of Closing.
ARTICLE VII
Conditions Precedent to the
Closing Obligation of the Company
---------------------------------
The Company's obligation to consummate the transaction contemplated by this
Agreement is subject to the fulfillment prior to or at the Closing, of each of
the following conditions, each of which may be waived in the sole discretion of
the Company:
Section 8.1 Accuracy of Representations and Warranties. Each and every
------------------------------------------
representation, warranty and covenant of Insight under this Agreement shall be
true and accurate in all material respects as of the date when made and as of
the Closing, except to the extent a representation, warranty or covenant
specifically is stated to relate only to a precise date. Not later than the
second business day prior to the anticipated date of Closing, Insight will
deliver to the Company any revisions to any Insight Schedule prepared hereunder
necessary to make such Insight Schedule and the representations and warranties
contained in Article V true and correct as of the Closing Date.
Section 8.2 Performance of Covenants and Agreements. Insight shall have
---------------------------------------
performed at or prior to the Closing all of the covenants and agreements
required to be performed by it at or prior to the Closing in accordance with
this Agreement.
Section 8.3 Litigation. No action, suit, proceeding, investigation,
----------
inquiry or request for information by any third person (including, but not
limited to, any Governmental Authority) shall have been instituted or threatened
against the Company or Insight or any of their respective Affiliates that
questions, or reasonably may be expected to lead to subsequent questioning of,
the validity or legality of this Agreement, or the transactions contemplated
hereby which, if successful, would affect the right of the
20
<PAGE>
Company to consummate the transactions contemplated hereby or might involve
possible material liability on the part the Company.
Section 8.4 Closing Deliveries. Insight shall have delivered to the
------------------
Company the Purchase Price and the other documents and certificates described in
Section 6.2. .
Section 8.5 Contribution Agreement and Operating Agreement. The
----------------------------------------------
Operating Agreement shall be executed, and the transactions contemplated therein
and in the Contribution Agreement shall be closed, simultaneously with the
Closing of the transactions contemplated hereby.
Section 8.6 Consents and Approvals. All consents and approvals
----------------------
referenced in Article I to be obtained by Insight, and all consents and
approvals referenced in Article I and the consents referenced in Section 4.15
relating to the Company's stockholders (both common and preferred) and holders
of the Senior Notes to be obtained by the Company, shall have been obtained to
the reasonable satisfaction of the Company and all applicable waiting period(s)
under the HSR Act shall have expired or been terminated.
Section 8.7 Effect of Closing. Notwithstanding anything stated in this
-----------------
Agreement to the contrary, to the extent the Closing is consummated, all
conditions to Closing set forth in this Article VIII shall be deemed waived for
purposes of Closing.
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ARTICLE IX
Indemnification
---------------
Section 9.1 Indemnification by the Company.
------------------------------
a. The Company's Breach. From and after the Closing the Company
--------------------
agrees to indemnify, defend and hold Insight and its Affiliates harmless
from and against and will reimburse Insight and its Affiliates for any and
all Losses resulting from any misrepresentation, breach of warranty or
nonfulfillment of any covenant or agreement by or on the part of the
Company under this Agreement or in any certificate or other document
delivered by the Company pursuant to this Agreement or Losses resulting
from or arising out of or in connection with any litigation, proceeding or
claim by any third party relating to the Company or any of its Subsidiaries
arising out of or relating to the period prior to the Closing Date,
including without limitation, those matters listed on Schedule 4.7. In
addition, to the extent that any disclosure, representation or warranty of
the Company set forth in Sections 4.5, 4.7 or 4.9 of this Agreement is
qualified, limited or subject to a materiality or other standard or
threshold, such as "to the knowledge of", "the best of the knowledge of" or
by the condition that "such disclosure, representation, warranty, covenant
or agreement would not, or is not or are not expected to have a Material
Adverse Effect" or by any other qualification or limitation (whether such
qualification, limitation, standard or threshold is set forth herein or
under applicable law pertaining to another document to which reference is
made herein), then for all purposes of this Article IX and the
indemnification obligations imposed hereunder, such disclosure,
representation or warranty shall be deemed to have been made without such
limitation, qualification, material adverse effect standard or other
standard or threshold, with it being the intent of the parties that the
Indemnified Party (as defined in Section 9.3) be fully indemnified
hereunder for any Losses incurred by such party without regard to the
qualification, limitation, standard or threshold set forth in the
disclosure, representation or warranty. Further, to the extent that
rights, potential rights, claims, or potential claims of third parties have
been disclosed by the Company on Schedules 4.5, 4.7 or 4.9 hereof or in
other documents to which reference is made herein, such items are still
fully subject to indemnification under this Article IX to the extent that
Insight incurs a Loss as a result of such rights, potential rights, claims,
or potential claims of third parties.
b. Survival. The representations and warranties of Source set
--------
forth in this Agreement will survive the Closing for a period of three
years from the date of the Closing and shall thereafter terminate except
that (i) the liability of Source will extend beyond such three-year period
with respect to any claim which has been asserted in a written notice
before the expiration of such three year period, (ii) the representation
and warranties of Source set forth in Sections 4.5, 4.7 and 4.9 and the
indemnity obligations of Source related thereto will survive the Closing
and will continue in full force and effect without limitation. The
covenants and agreements of Source in this Agreement and the indemnity
obligations of Source related thereto will survive the Closing and will
continue in full force and effect until fully performed or discharged.
Section 9.2 Indemnification by Insight. From and after the Closing,
--------------------------
Insight agrees to indemnify, defend and hold the Company and its Affiliates
harmless from and against and in respect of, and shall reimburse the Company and
its Affiliates for any and all Losses resulting from any misrepresentation,
breach of warranty or nonfulfillment of any covenant or agreement by or on the
part of Insight under this Agreement or in any certificate or other document
delivered by Insight to the Company pursuant to this Agreement. The
representations and warranties of Insight and Insight's indemnity obligations
set forth in this Agreement shall survive for a period of three years following
Closing.
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Section 9.3 Indemnity Procedure.
-------------------
a. Third Party Claims. In the event any party receives written
------------------
notice of the commencement of any action or proceeding, the assertion of
any claim by a third party or the threatened imposition of any Loss for
which indemnity may be sought pursuant to this Article IX ("Claim"), and
such party (the "Indemnified Party") intends to seek indemnification from
the other party (the "Indemnifying Party") pursuant to this Article IX, the
Indemnified Party shall provide the Indemnifying Party with prompt written
notice of such Claim, and the Indemnifying Party shall have the right to
assume control of the defense (with counsel selected by it which is
reasonably satisfactory to the Indemnified Party), appeal or settlement of
such Claim with respect to which such indemnity has been invoked, and the
Indemnified Party will fully cooperate with the Indemnifying Party in
connection therewith. The Indemnifying Party shall bear the entire cost of
defending such Claim, and the Indemnifying Party shall not be liable for
any further legal or other expenses subsequently incurred by the
Indemnified Party in connection with such defense unless otherwise agreed
to in writing by the parties or as herein provided; provided, however, the
Indemnified Party shall have the right to participate in such defense, at
its own cost and expense, and the Indemnified Party shall have the
obligation to cooperate with such defense. If the Indemnifying Party does
not timely assume the entire defense of such Claim, the Indemnified Party
may assume such defense and the Indemnifying Party shall bear the entire
cost of defending such Claim. The Indemnifying Party shall not have the
right to settle any such Claim without the written consent of the
Indemnified Party unless such settlement contemplates a general release for
money damages only. Failure of a party to give prompt notice of a Claim
for which indemnification is sought hereunder shall not affect such party's
right to indemnification hereunder except to the extent that the
Indemnifying Party shall have been materially prejudiced as a result of
such failure, and except that the Indemnifying Party shall not be liable
for any expenses incurred during the period in which the Indemnified Party
failed to give notice.
b. Other Claims. A party shall be entitled to recover from the other
------------
party for all Losses or matters described above, which are suffered,
incurred or borne by such party, even though the Losses or matter is not
related to or the result of a claim brought by a third party.
Section 9.4 Definition of Losses. As used in this Article IX, "Losses"
--------------------
shall mean any and all losses, liabilities, claims, demands, actions, or causes
of action, judgments, orders, deficiencies, fines, penalties, costs, damages, or
expenses whatsoever, including, without limitation, taxes and environmental
claims, whether foreseeable or unforeseeable, and further including, without
limitation legal, accounting and other professional fees, disbursements and
expenses incurred in the investigation, collection, prosecution and defense of
claims and amounts paid in settlement thereof.
Section 9.5 Limitation on Source Indemnification. The indemnification
------------------------------------
provided for in Section 9.1 shall be subject to the following limitations:
a. Basket. The Company shall not be required to indemnify Insight
------
for any claim until such time as the amount of all Losses arising from
asserted claims for indemnification exceed in the aggregate Twenty-Five
Thousand Dollars ($25,000). At such time that the Losses of Insight
arising from all such claims exceed $25,000, the Company shall be
responsible for indemnifying Insight for the full amount of such claims,
subject to the limitation set forth in Section 9.5 b. below.
b. Cap. The Company shall not be required to indemnify Insight for
---
any claim to the extent that the Losses incurred by them with respect to
all such claims exceed $12,000,000 plus the
23
<PAGE>
product of (i) the number of shares issued to Insight upon exercise of the
Warrants and (ii) the actual exercise price of such exercised Warrants.
c. Exclusive Remedy. From and after the Closing, the
-- ----------------
indemnification provided under this Article IX shall constitute Insight's
sole and exclusive remedy for any indemnification by the Company for claims
in respect of Losses or breach of any representation or covenant arising
under this Agreement; provided, however, that the foregoing limitations
shall not apply to fraud by the Company or its Affiliates with respect to
an action solely against the defrauding party or to any claim by Insight
relating to registration rights hereunder and the obligations of the
Company pursuant to Article III hereof, to which Insight shall have all
rights and remedies at law or in equity.
ARTICLE X
Disputes
--------
Section 10.1 Procedure. In the event of a dispute between the parties
---------
arising out of or related to this Agreement (the "Dispute"), the parties agree
to utilize the procedures specified in this Article X (the "Procedure"), unless
otherwise modified by written agreement of the parties at the time the Dispute
arises.
Section 10.2 Initiation of Procedure. A party seeking to initiate the
-----------------------
Procedure (the "Initiating Party") shall give written notice to the other party,
describing briefly the nature of the Dispute and its claim and identifying an
individual with authority to settle the Dispute on its behalf. The party
receiving such notice (the "Responding Party") shall have five (5) business days
within which to designate, in a written notice given to the Initiating Party, an
individual with authority to settle the Dispute on its behalf. The individuals
so designated shall be known as the "Authorized Individuals." Absent agreement
by the parties, neither of the Authorized Individuals shall have had direct
substantive involvement in the matters involved in the Dispute.
Section 10.3 Unassisted Settlement. Within thirty (30) days from the
---------------------
date of the Initiating Party's notice, the Authorized Individuals shall make
such investigation as they deem appropriate and shall conclude discussions
concerning resolution of the Dispute. If the Dispute has not been resolved
within such thirty (30) day period, it shall at that time be submitted
("Submission Date") to binding alternative dispute resolution ("ADR"), in
accordance with the following provisions.
Section 10.4 Selection of Arbitrator. The parties shall have ten (10)
-----------------------
days from the Submission Date to agree upon a mutually acceptable neutral person
not affiliated with either of the parties (the "Arbitrator"). If the Arbitrator
has not been selected within such time, the parties agree jointly to request the
American Arbitration Association to supply within ten (10) days a list of
potential neutrals with qualifications as specified by the parties in the joint
request. Within five (5) days of receipt of the list, the parties shall
independently rank the proposed candidates, shall simultaneously exchange
rankings, and shall select as the Arbitrator the individual receiving the
highest combined ranking who is available to serve.
Section 10.5 Time and Place for ADR. In consultation with the
----------------------
Arbitrator, the parties shall promptly designate a mutually convenient time and
place for ADR to be held not later than thirty (30) days after selection of the
Arbitrator.
Section 10.6 Exchange of Information. In the event either of the parties
-----------------------
has substantial need for information in the possession of the other party to
prepare for the ADR, the parties shall attempt in good faith
24
<PAGE>
to agree upon procedures for the expeditious exchange of such information, with
the help of the Arbitrator if required.
Section 10.7 Summary of Views. One (1) week prior to the first scheduled
----------------
session of the ADR, each party shall deliver to the Arbitrator and to the other
party a concise written summary of its views on the matter in Dispute.
Section 10.8 Staffing the ADR. During the ADR, each party shall be
----------------
represented by the Authorized Individual and by counsel. In addition, each
party may bring such additional persons as needed to respond to questions,
contribute information and participate in the negotiations; the number of such
additional persons to be agreed upon by the parties in advance, with the
assistance of the Arbitrator, if necessary.
Section 10.9 Conduct of ADR. The parties, in consultation with the
--------------
Arbitrator, will agree upon a format for the meetings, designed to assure that
both the Arbitrator and the Authorized Individuals have an opportunity to hear
an oral presentation of each party's views of the matter in Dispute, and that
the Authorized Individuals attempt to negotiate a resolution of the matter in
Dispute, with or without the assistance of counsel or others, but with the
assistance of the Arbitrator. To this end, the Arbitrator is authorized to
conduct both joint meetings and separate private caucuses with the parties. The
Arbitrator will keep confidential all information learned in private caucus with
either party unless specifically authorized by such party to make disclosure of
the information to the other party.
Section 10.10 Decision of Arbitrator. The decision of the Arbitrator
----------------------
shall be final and non-appealable, and judgment may be entered thereon in any
court of competent jurisdiction.
Section 10.11 Fees of Arbitrator; Disqualification. The fees of the
------------------------------------
Arbitrator shall be shared equally by the parties, unless the Arbitrator makes a
specific finding to the contrary. The Arbitrator shall be disqualified as a
witness, consultant, expert or counsel for either party with respect to the
matters in Dispute and any related matters.
Section 10.12 Court Order. Nothing in this Article XI shall limit the
-----------
right of any party hereto to obtain an order directing the appointment of an
Arbitrator, a temporary restraining order, injunction or similar court action
concerning any claim or dispute until the subject arbitration can be heard and
an award rendered.
ARTICLE XI
Termination
-----------
Section 11.1 Termination. This Agreement may be terminated at any time
-----------
prior to the Closing by mutual written agreement of the parties, or in
accordance with the following:
a. By Insight, if (i) the Closing has not occurred on or before the
Final Closing Date, other than as a result of a breach by Insight of its
representations, warranties or covenants contained herein or (ii) the
Company breaches any of its representations, warranties or covenants
contained herein in any material respect and fails to cure such breach
within thirty (30) days after receipt of written notice thereof from
Insight.
25
<PAGE>
b. By the Company, if (i) the Closing has not occurred on or before
the Final Closing Date, other than as a result of a breach by the Company
of its representations, warranties or covenants contained herein or (ii)
Insight breaches any of its representations, warranties or covenants
contained herein in any material respect and fails to cure such breach
within thirty (30) days after receipt of written notice thereof from the
Company.
Section 11.2 Effect of Termination. If this Agreement is terminated as
---------------------
provided in Section 11.1, then this Agreement will forthwith become null and
void and there will be no liability on the part of any party to any other party
or any other Person in respect thereof, provided that:
a. Withdrawal of Applications. All filings, applications and other
--------------------------
submissions relating to the consummation of the transaction contemplated
hereby shall, to the extent practicable, be withdrawn from the agency or
other Person to whom made.
b. Breach by Insight. No such termination will relieve Insight
-----------------
from liability for a breach of representations, warranties or covenants by
Insight of this Agreement, and in such event the Company shall have the
right to sue Insight for monetary damages.
c. Breach by the Company. No such termination will relieve the
---------------------
Company from liability for a breach of representations, warranties or
covenants by the Company of this Agreement, and in such event Insight shall
have all rights and remedies available at law and equity, including the
remedy of specific performance. Insight shall have the right to sue for
specific performance of this Agreement without termination of this
Agreement in the event of a breach of this Agreement by Source. The
parties recognize that if the Company breaches this Agreement and refuses
to perform under the provisions of this Agreement, monetary damages alone
would not be adequate to compensate Insight for its injury, and the Company
hereby waives the defense that there is an adequate remedy at law.
d. Mutual Breach. Without limiting the generality of the
-------------
foregoing, or any applicable law, (i) Insight may not rely on the failure
of any condition precedent set forth in Article VII of this Agreement and
(ii) the Company may not rely on the failure of any condition precedent set
forth in Article VIII of this Agreement, in the case of (i) or (ii) above
to be satisfied as a ground for termination of this Agreement by such party
if such failure was caused by such party's (or parties') failure to act in
good faith, or a breach of or failure to perform its representations,
warranties, covenants or other obligations in accordance with the terms
hereof.
ARTICLE XII
Notices
-------
Section 12.1 Procedure and Addresses. All notices, requests, demands and
-----------------------
other communications required or permitted to be given hereunder shall be deemed
to have been duly given if in writing and delivered personally, or on the third
business day following deposit in the U.S. mail, if mailed by registered or
certified mail, postage prepaid, return receipt requested, or by facsimile
transmission (with a confirmation of receipt) or on the next business day if by
a nationally recognized courier service, at the following addresses:
26
<PAGE>
If to Source:
Source Media, Inc.
Attention: Stephen W. Palley, Chief Executive Officer
5400 LBJ Freeway, Suite 680
Dallas, Texas 75240
Fax: (972) 701-5454
With a copy to:
Robert L. Winikoff, Esq.
Cooperman Levitt Winikoff Lester & Newman, P.C.
800 Third Avenue
New York, NY 10022
Fax: (212) 755-2839
If to Insight:
Insight Interactive, LLC
c/o Insight Communications Company, Inc.
Attention: Michael S. Willner
126 East 56/th/ Street
New York, NY 10022
Fax: (212) 371-1549
with copies to:
Dow, Lohnes & Albertson
1200 New Hampshire Avenue, NW
Suite 800
Washington, DC 20036
Attention: Leonard Baxt, Esq.
Fax: (202) 776-2222
Section 12.2 Change of Notice Address. Any party may change the address
------------------------
to which such communications are to be directed to it by giving written notice
to the other party in the manner provided in Section 12.1.
ARTICLE XII
General
-------
Section 13.1 Entire Agreement. This Agreement, together with the
----------------
schedules and exhibits hereto, and the other agreements, documents and
instruments being delivered at the Closing, set forth the entire agreement and
understanding of the parties with respect to the transactions contemplated
hereby and supersede all prior agreements, arrangements and understandings
relating to the subject matter hereof,
27
<PAGE>
whether written or oral. No representation, promise, inducement or statement of
intention relating to the transactions contemplated by this Agreement has been
made by or on behalf of any party hereto which is not set forth in this
Agreement.
Section 13.2 Headings. The Article and Section headings contained in
--------
this Agreement are for convenient reference only, and shall not in any way
affect the meaning or interpretation of this Agreement.
Section 13.3 Governing Law; Jurisdiction and Venue. This Agreement shall
-------------------------------------
be governed by, construed and enforced in accordance with the internal laws of
the State of Delaware, excluding the conflict of laws provisions thereof that
would otherwise require the application of the law of any other jurisdiction.
The parties hereto acknowledge and agree that the state and federal courts
sitting in the State of Delaware shall have jurisdiction in any matter arising
out of this Agreement, and the parties hereby consent to such jurisdiction and
agree that the venue of any such matter shall also be proper in such state and
federal courts sitting in the State of Delaware.
Section 13.4 Counterparts. This Agreement may be executed in multiple
------------
counterparts (including counterparts executed by one party), each of which shall
be an original, but all of which shall constitute a single agreement.
Section 13.5 Binding Agreement; Assignment. This Agreement shall be
-----------------------------
binding upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns, but this Agreement shall not be assignable by
either party without the prior written consent of the other party except that
Insight may assign this Agreement to any Affiliate without the prior written
consent of the Company.
Section 13.6 Amendment. This Agreement may be amended only in a writing
---------
executed by the parties hereto which specifically states that it amends this
Agreement.
Section 13.7 No Waiver. Failure of any party to insist upon strict
---------
observance of or compliance with any term of this Agreement in one or more
instances shall not be deemed to be a waiver of its rights to insist upon such
observance or compliance with the other terms hereof, or in the future.
Section 13.8 Severability. If any term, covenant or condition of this
------------
Agreement or the application thereof to any person or circumstance (other than a
term, covenant, condition or application which affects the essence of this
Agreement) shall, to any extent, be invalid or unenforceable, such
unenforceability shall not affect any other provision hereof. If any provision
of this Agreement is held invalid or unenforceable because the fulfillment of
such provision would involve exceeding the limit of validity prescribed by law,
then upon the occurrence of such a determination, the obligation to be fulfilled
shall be reduced to the limit of validity prescribed by law. If the provision
of the Agreement which is found to be invalid or unenforceable cannot be
modified so as to be enforceable under existing laws, unless such provision
affects the essence of this Agreement, this Agreement shall be construed and
enforced as if such provision had not been included herein.
Section 13.9 Certain Definitions. As used in this Agreement, the
-------------------
following terms have the meanings set forth below. Other terms that are defined
elsewhere in this Agreement shall have the meaning as therein set forth.
"Affiliate" shall mean, when used with respect to a Person, any other
Person, which directly or indirectly (through one or more intermediaries)
controls, or is controlled by, or is under common
28
<PAGE>
control with, such first mentioned Person. The term "control" (including
the terms "controlled by" and "under common control with") means the
possession, directly or indirectly, of the actual power to direct or cause
the direction of the management policies of a Person, whether through the
ownership of stock, by contract, credit arrangement or otherwise.
Notwithstanding the above, neither Insight nor the Company (nor their
Affiliates) shall be deemed an "Affiliate" of the other as used herein by
reason of their common ownership of NewCo, and NewCo shall not be deemed an
Affiliate of either Insight or the Company for purposes of this Agreement.
"Fully Diluted" shall mean, as of any date of determination, that for
purposes of calculating the relevant percentage there shall be deemed
outstanding at the time of calculation all shares of Voting Stock issuable,
whether at such time or upon the passage of time or the occurrence of
future events, upon the exercise, conversion or exchange of any warrant,
option or other right to subscribe for, purchase or otherwise acquire
directly or indirectly, any such shares of Voting Stock.
"New Securities" shall mean any equity securities of the Company,
whether now or hereafter authorized and including Common Stock and
preferred stock, and all rights, options or warrants to purchase any such
securities of the Company, and securities and indebtedness of any type
whatsoever that are, or may become convertible into or exchangeable for
capital stock of the Company, in each case to the extent issued after the
date of this Agreement, other than (i) up to a maximum of 8,147,139 shares
of Common Stock which may hereafter be issued in accordance with the
exercise of warrants, stock options or put rights identified on Schedule
4.3, (ii) the stock, options and warrants (and the stock issued upon
exercise of such options and warrants) set forth in Notes A, B and C on
Schedule 4.3, (iii) the grant of employee stock options, stock appreciation
rights or other awards pursuant to any stock option plan adopted by the
Board of Directors of the Company, (iv) the issuance of Common Stock upon
the exercise of any of the employee stock options, stock appreciation
rights or other awards specified in clause (iii) above, (v) the issuance of
any Common Stock, preferred stock or Rights in order to effect any merger,
consolidation or other acquisition of any Person, business, division or
assets outside the ordinary course of business, and (vi) the issuance of
any capital stock or Rights by the Company for sale pursuant to a
registration statement filed with the Securities and Exchange Commission.
"Person" shall mean a domestic or foreign natural person, general or
limited partnership, limited liability partnership, limited liability
company, trust, estate, association or corporation.
"Proportionate Share" shall mean a fraction, the numerator of which is
the total number of shares of Common Stock owned by a Person and the
denominator of which is the total number of shares of Common Stock issued
and outstanding.
"Rights" shall mean any option, warrant, security, rights or other
instrument convertible into or exchangeable or exercisable for, or
otherwise giving the holder thereof the right to acquire, directly or
indirectly, any Common Stock or any other such option, warrant, security,
right or instrument, including without limitation, any instrument the value
of which is measured by reference to the value of the Common Stock.
"Taxes" shall mean any tax based upon, or measured by, income or gross
receipts, and any sales, use, ad valorem, transfer, franchise, payroll,
employment, excise, occupation, premium, property or other taxes (including
any interest or any penalties or additional amounts imposed by any taxing
authority).
29
<PAGE>
"Voting Stock" shall mean equity interests with voting power under
ordinary circumstances entitling the holders thereof to elect the board of
directors or other governing body.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
30
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Common Stock and
Warrants Purchase Agreement as of the day and year first written above.
SOURCE MEDIA, INC.
By: /s/ Stephen W. Palley
--------------------------------------------
Stephen W. Palley, Chief Executive Officer
INSIGHT INTERACTIVE, LLC
By: Insight Communications Company, Inc.
Its sole member
By: /s/ Michael S. Willner
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Name: Michael S. Willner
Title: President
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SCHEDULE LIST
Schedule Description
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4.2 Source Subsidiaries
4.3 Source Capitalization Table
4.5 Source Agreements Requiring Consent
4.7 Source Litigation
4.8 Source Contracts
4.9 Source Intellectual Property
4.11 Source Tax Exceptions
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EXHIBIT LIST
Exhibit Description
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A Form of Stock Purchase Warrant
B-1 Form of the Certificate of Amendment
B-2 Form of the Certificate of Designations
C Form of Control Share Acquisition Agreement
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Exhibit D
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CERTIFICATE OF DESIGNATIONS
FOR NON-PARTICIPATING
PREFERRED STOCK
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
Source Media, Inc. (the "Corporation"), a corporation organized and
existing under the General Corporation Law of the State of Delaware, does hereby
certify that, pursuant to authority conferred upon the board of directors of the
Corporation (the "Board") by its Certificate of Incorporation, as amended (the
"Certificate of Incorporation"), and pursuant to the provisions of Section 151
of the General Corporation Law of the State of Delaware, on ___________, 1999,
the Board duly approved and adopted the following resolution:
RESOLVED, that, pursuant to the authority vested in the Board by
the Certificate of Incorporation, the Board does hereby create,
authorize and provide for the issuance of a class of Non-Participating
Preferred Stock, par value $0.001 per share, such class consisting of
one (1) share, having the designations and rights that are set forth
in the Certificate of Incorporation and in this Resolution as follows:
1. Designation. There is hereby created out of the authorized and
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unissued shares of Preferred Stock of the Corporation a class of Preferred Stock
designated as the "Non-Participating Preferred Stock." The number of shares
constituting such class shall be one (1). The holder (the "Holder") of the
share of Non-Participating Preferred Stock shall not be entitled to receive
dividends or have any other special rights except as provided herein.
2. Rank. The Non-Participating Preferred Stock shall, with respect
----
to distributions upon liquidation, winding-up and dissolution of the
Corporation, rank senior to all classes of Common Stock of the Corporation,
junior to the Corporation's 13 1/2% Senior Payment-In-Kind Preferred Stock and,
with respect to any other class or series of preferred stock, as shall be
provided in the resolutions of the Board creating such other classes or series.
3. Liquidation Preference. (a) In the event of any voluntary or
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involuntary liquidation, dissolution or winding up of the affairs of the
Corporation, the Holder shall be entitled
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to be paid out of the assets of the Corporation available for distribution to
its stockholders an amount in cash equal to the liquidation preference as set
forth in paragraph (c) below. Except as provided in the preceding sentence, the
Holder shall not be entitled to any distribution in the event of any
liquidation, dissolution or winding up of the affairs of the Corporation.
(b) For the purposes of this Section 3, neither the sale, conveyance,
exchange or transfer (for cash, shares of stock, securities or other
consideration) of all or substantially all of the property or assets of the
Corporation nor the consolidation or merger of the Corporation with or into one
or more entities shall be deemed to be a liquidation, dissolution or winding up
of the affairs of the Corporation.
(c) The liquidation preference of the Non-Participating Preferred
Stock shall be $100.00 per share.
4. Voting Rights. (a) Except as otherwise required under
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Delaware law or as set forth in this Section 4, the Holder shall not be
entitled or permitted to vote on any matter required or permitted to be voted
upon by the stockholders of the Corporation.
(b) At all such times as the Board shall consist of seven or ten
members, the Holder shall have the exclusive right, voting separately as a
single class, to elect the number of members of the Board in accordance with
the following schedule:
<TABLE>
<CAPTION>
Number of Board Seats Member of Board Seats
Appointed by the Holder Appointed by the Holder Percentage of Voting Stock Owned by
on 7 Person Board on 10 Person Board the Holder on a Fully Diluted Basis
- ------------------------- ------------------------ ------------------------------------
<S> <C> <C>
3 4 15% or greater
2 3 7.5% or more but less than 15%
1 2 5% of more but less than 7.5%
1 1 2.5% or more but less than 5%
0 0 less than 2.5%
</TABLE>
(c) The written consent of the Holder will be required in the event
the Board is ever to be comprised of a number of members other than seven or
ten. The Holder may protect its proportionate representation in giving or not
giving its consent in its sole discretion.
(1) At any time that the Holder is entitled to elect at least one
Board representative, the Holder will be entitled to elect one voting
representative to each committee of the Board.
(5) The foregoing rights of the Holder to take any actions as provided
in this Section 4 may be exercised at any annual meeting of stockholders or any
special meeting of
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stockholders or the Holder held for such purposes as provided herein or at any
adjournment thereof, or by the written consent of the Holder delivered to the
Secretary of the Corporation.
(6) So long as such right to vote continues (and unless such right has
been exercised by written consent of the Holder), the Chairman of the Board of
the Corporation may call, and upon the written request of the Holder delivered
to the Secretary of the Corporation shall call, a special meeting of the Holder.
Such meeting shall be held within 10 days after delivery of such request to the
Secretary, at the place and upon the notice provided by law and in the By-laws
of the Corporation for the holding of meetings of stockholders.
(7) The failure of the Holder to elect members of the Board shall not
prevent the election of directors other than those to be elected by the Holder,
and the absence of a quorum of the holders of shares of any other class or
series of capital stock shall not prevent the election of directors to be
elected by the Holder or the taking of any action as provided in this Section 4.
(8) Each director elected by the Holder, as provided in this Section 4
shall, unless such director's term shall expire earlier or be terminated in
accordance with this Section 4, hold office until the annual meeting of
stockholders next succeeding his election or until his successor, if any, is
elected and qualified.
(9) In case any vacancy shall occur among the directors elected by the
Holder, such vacancy may be filled for the unexpired portion of the term by vote
of the remaining director or directors theretofore elected by the Holder (if
there is a remaining director or directors). If any such vacancy is not so
filled within 10 days after the creation thereof or if any or all of the
directors so elected by the Holder shall cease to serve as directors before
their terms shall expire, the Holder, by written consent as herein provided, or
at a special meeting of the Holder called as provided herein, may elect a
successor or successors to hold office for the unexpired terms of the directors
whose places shall be vacant.
(10) Any director elected by the Holder may be removed from office with
or without cause by the vote or written consent of the Holder. A special
meeting of the Holder may be called in accordance with the procedures set forth
in paragraph 4(f) above to effect such removal.
(11) The Non-Participating Preferred Stock shall be subject to
mandatory redemption at a redemption price equal to the liquidation preference
set forth in paragraph 3(c) above in the event the Holder owns less than two and
a half percent (2.5%) of the Voting Stock of the Corporation on a Fully Diluted
Basis. Such redemption shall be automatic and shall not require any notice or
other action on the part of the Corporation. Upon such redemption, the Holder
shall surrender the certificate representing the share of Non-Participating
Preferred Stock to the Corporation, duly endorsed (or otherwise in proper form
for transfer, as determined by the Corporation), in such manner and at such
place as may be designated by the Corporation.
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5. Preemptive Rights. (a) The Holder shall have the
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preemptive right to purchase up to its Proportionate Share of any New Securities
which the Corporation may, from time to time, propose to sell or issue.
(b) In the event the Corporation proposes to undertake an issuance or
sale of New Securities, the Corporation will give the Holder thirty (30) days
prior written notice of its intention, describing the type of New Securities and
the price and the specific terms upon which the Corporation proposes to issue or
sell the same. Thereafter, the Holder will have thirty (30) days from the date
of such notice to give the Corporation written notice of its intention to
purchase up to its Proportionate Share of such New Securities, for the same
price and upon the terms pursuant to which the New Securities will be offered,
as specified in the Corporation's notice, and stating therein the quantity of
such New Securities the Holder intends to purchase. If the consideration for the
New Securities is in a form other than cash, the Holder shall pay equivalent
value on a per share basis in cash. The Holder shall further have a forty-five
(45) day period from the date of the original notice from the Corporation in
which to commit funding to the purchase of any New Securities and close the
acquisition thereof. Failure by the Holder to give notice within the thirty
(30) day period shall be deemed a waiver by the Holder of the preemptive right
with respect to such New Securities, provided the Corporation consummates the
issuance of New Securities within ninety (90) days after the expiration of such
thirty (30) day period in the amount, at substantially the same price and on
substantially the same terms specified in the notice given by the Corporation
under this paragraph 5(b). In the event the New Securities are to be issued
pursuant to an underwritten public offering or under similar circumstances so
that the final price or other material terms of the New Securities are not
established by the Corporation at the time the thirty day notice is provided to
the Holder, the Corporation's notice to the Holder will provide its anticipated
price of, and general terms pursuant to which it intends to issue such New
Securities. Notwithstanding the fact that the Holder may notify the Corporation
within such thirty day period that it intends to purchase up to its
Proportionate Share of such New Securities, the Holder will not be bound by such
election until the final price and terms of such offering are established by the
Corporation. Upon the final price and terms being established, the Corporation
shall provide the Holder immediate notice thereof prior to the Corporation's
proposed sale and issuance. If such final price is not greater than one hundred
ten percent (110%) of the price stated in the original notice, the Holder will
be bound by its notice to exercise its preemptive rights; if such final price is
greater than one hundred ten percent (110%) of the price stated in the original
notice, the Holder shall not be bound by its original election, but shall have
the right for a period not to exceed two (2) hours after receiving notice of
the final price to elect to purchase in accordance with the terms of this
Section 5. In order to both minimize the potential disruption to the
Corporation's ability to offer such New Securities in an underwritten public
offering and to afford the Holder with as much notice and information as
possible regarding the terms and pricing thereof, the Corporation will keep the
Holder reasonably informed of the status of the on-going negotiations with the
managing underwriter with respect to such terms and anticipated pricing, and
further will afford the Holder, if the Holder so requests, the right to have a
representative present to observe the negotiation of the final pricing terms
immediately prior to the execution of the applicable underwriting agreement.
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(c) The right of the Holder to purchase New Securities pursuant to
this Section 5 may be exercised, in whole or in part, by any of the Holder's
Affiliates, if the Holder expressly grants such right of exercise to such
Affiliates, subject to compliance with applicable federal and state securities
laws.
(d) The right of the Holder to elect members to the Board (and
committees thereof) in accordance with the provisions of Sections 4(b) and 4(d),
and the preemptive rights granted to the Holder as set forth in Section 5, shall
lapse in the event the Holder owns less than five percent (5%) of the Voting
Stock of the Company on a Fully Diluted basis.
6. Transfer Restrictions. Except as specifically permitted
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under this Section 6, the Holder may not without the prior written consent of
the Corporation sell, assign, transfer or otherwise dispose of the Non-
Participating Preferred Stock, or any attribute, component or right in respect
thereof, except to an Affiliate of the Holder. Any purported disposition in
violation of this Section 6 shall be void and of no force or effect. "Affiliate"
as used herein shall mean any person or entity that directly or indirectly or
through one or more intermediaries Controls, is Controlled by or is under common
Control with, the Holder, with "Control" meaning the possession, directly or
indirectly, of the power to direct or cause the direction of the management and
policies of the person or entity Controlled (whether through ownership of
securities, partnership interests or other ownership interests, by contract or
otherwise).
7. Certain Definitions. As used in this Certificate of
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Designations, the following terms have the meanings set forth below. Other
terms that are defined elsewhere in this Certificate of Designations shall have
the meaning as therein set forth.
" Fully Diluted" shall mean, as of any date of determination,
that for purposes of calculating the relevant percentage there shall be
deemed outstanding at the time of calculation all shares of Voting Stock
issuable, whether at such time or upon the passage of time or the
occurrence of future events, upon the exercise, conversion or exchange of
any warrant, option or other right to subscribe for, purchase or otherwise
acquire directly or indirectly, any such shares of Voting Stock.
" New Securities" shall mean any equity securities of the
Corporation, whether now or hereafter authorized and including Common Stock
and preferred stock, and all rights, options or warrants to purchase any
such securities of the Corporation, and securities and indebtedness of any
type whatsoever that are, or may become convertible into or exchangeable
for capital stock of the Corporation, in each case to the extent issued
after the date of filing of this Certificate of Designation, other than (i)
up to a maximum of 8,147,139 shares of Common Stock which may hereafter be
issued in accordance with the exercise of warrants, stock options or put
rights identified [on Schedule 4.3 to the Common Stock and Warrants
Purchase Agreement], (ii) the stock, options and warrants (and the stock
issued upon exercise of such options and warrants) set forth in [Notes A, B
and C on Schedule 4.3 to the Common Stock and Warrants Purchase Agreement],
(iii) the grant of employee stock
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options, stock appreciation rights or other awards pursuant to any stock
option plan adopted by the Board of Directors of the Corporation, (iv) the
issuance of Common Stock upon the exercise of any of the employee stock
options, stock appreciation rights or other awards specified in clause
(iii) above, (v) the issuance of any Common Stock, preferred stock or
Rights in order to effect any merger, consolidation or other acquisition of
any Person, business, division or assets outside the ordinary course of
business, and (vi) the issuance of any capital stock or Rights by the
Corporation for sale pursuant to a registration statement filed with the
Securities and Exchange Commission.
"Person" shall mean a domestic or foreign natural person,
general or limited partnership, limited liability partnership, limited
liability company, trust, estate, association or corporation.
"Proportionate Share" shall mean a fraction, the numerator of
which is the total number of shares of Common Stock of the Corporation
owned by a Person and the denominator of which is the total number of
shares of Common Stock of the Corporation issued and outstanding.
"Rights" shall mean any option, warrant, security, rights or
other instrument convertible into or exchangeable or exercisable for, or
otherwise giving the holder thereof the right to acquire, directly or
indirectly, any Common Stock of the Corporation or any other such option,
warrant, security, right or instrument, including without limitation, any
instrument the value of which is measured by reference to the value of the
Common Stock of the Corporation.
"Voting Stock" shall mean equity interests with voting power
under ordinary circumstances entitling the holders thereof to elect the
board of directors or other governing body.
IN WITNESS WHEREOF, Source Media, Inc. has caused this Certificate of
Designations to be signed by Stephen W. Palley, its Chief Executive Officer,
this _____ day of __________, 1999.
SOURCE MEDIA, INC.
By:__________________________________________
Stephen W. Palley, Chief Executive Officer
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SOURCE MEDIA, INC.
5400 LBJ FREEWAY
SUITE 680
DALLAS, TEXAS 75240
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Stephen W. Palley and F. Paul Tigh, and
each of them, as the undersigned's attorneys and proxies, each with the power to
appoint his substitute, and hereby authorizes them to represent and to vote, as
directed on the reverse side, all the shares of common stock of Source Media,
Inc. held of record by the undersigned on September 23, 1999, at the annual
meeting of stockholders to be held on November 17, 1999 or any adjournment
thereof.
(Continued and to be signed on reverse side)
<PAGE>
Please mark your votes as indicated in this example X
(INSTRUCTION: To withhold authority to vote for any individual nominee, strike a
line through the nominee's name below.)
1. Election of Directors:
[ ] FOR all nominees listed to the right James L. Greenwald
(except as marked to the contrary) Michael J. Marocco
Stephen W. Palley
Barry Rubenstein
[ ] WITHHOLD AUTHORITY to vote
for all nominees listed to the right
2. Proposal to Amend the 1995 Performance Equity Plan:
FOR [ ] AGAINST [ ] ABSTAIN [ ]
3. Proposal to Approve the 1999 Stock Option Plan:
FOR [ ] AGAINST [ ] ABSTAIN [ ]
4. Proposal to Approve the Insight Transaction:
FOR [ ] AGAINST [ ] ABSTAIN [ ]
5. Proposal to Ratify the Appointment of Ernst & Young LLP:
FOR [ ] AGAINST [ ] ABSTAIN [ ]
This proxy when properly executed will be voted in the manner directed herein
by the undersigned stockholder. If no direction is made, this proxy will be
voted FOR management's nominees for election as directors and FOR proposals 2,
3, 4 and 5.
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Please mark, sign, date and return the proxy card promptly using the enclosed
envelope.
Date: ____________________, 1999
______________________________
Signature
______________________________
Signature if held jointly
Please sign exactly as name appears
hereon. When shares are held by joint
tenants, both should sign. When signing
as attorney, executor, administrator,
trustee or guardian, please give full
title as such. If a corporation, please
sign in full corporate name by
President or other authorized officer.
If a partnership, please sign in
partnership name by authorized person.
