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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
Commission File Number: 0-21894
SOURCE MEDIA, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 13-3700438
(State of incorporation) (I.R.S. Employer Identification No.)
5400 LBJ FREEWAY, SUITE 680 DALLAS, TEXAS 75240
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (972) 701-5400
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.001 PER SHARE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of Common Stock held by non-affiliates as of March
24, 2000: $241,812,014.
Number of shares of Common Stock outstanding as of March 24, 2000:
16,188,252.
DOCUMENTS INCORPORATED BY REFERENCE
Listed below are documents parts of which are incorporated herein by
reference and the part of this report into which the document is incorporated:
Proxy statement for the 2000 annual meeting of stockholders-- Part III
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Unless the context otherwise requires, all references to "we", "us" or "our"
include Source Media, Inc., its wholly-owned operating subsidiaries and
SourceSuite LLC, a 50/50 joint venture with Insight Interactive LLC ("Insight
Interactive"), a subsidiary of Insight Communications Company, Inc.
PART I
ITEM 1. BUSINESS.
GENERAL
We provide streaming media content and sell interactive advertising
that can be accessed over the telephone and the Internet. We also own a 50%
interest in SourceSuite LLC, a joint venture we manage, which provides
interactive cable television programming services, including a fully interactive
program guide, known as SourceGuide(TM), and an information and entertainment
service, known as LocalSource(TM). We categorize these operations as our IT
Network business and our Interactive TV business.
We have experienced significant changes in our Interactive TV business
since the beginning of 1999. In November 1999 we contributed this business to a
50/50 joint venture with Insight Interactive. Insight Interactive contributed
$13 million of equity financing to the joint venture and purchased 842,105
shares of our common stock for $12 million ($14.25 per share) and warrants to
purchase 4,596,786 additional shares of our common stock at $20 per share. On
March 3, 2000, we and Insight Interactive sold
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our interests in the joint venture to Liberate Technologies ("Liberate") in
exchange for the issuance to each of us and Insight Interactive of 886,000
shares of Liberate common stock. Prior to the completion of the sale, the joint
venture transferred to a new joint venture with Insight Interactive, now called
SourceSuite, its assets and properties not related to the VirtualModem(TM)
products and associated businesses. The interests in this new joint venture were
distributed to us and Insight Interactive, so that each became a 50% owner of
SourceSuite. Liberate thus acquired all patents and intellectual property
related to the Virtual Modem(TM) products and businesses and granted SourceSuite
an exclusive license to use the patents necessary to its business. SourceSuite's
business is interactive television programming and services, including
SourceGuide(TM) and LocalSource(TM).
These transactions are described in more detail below under
"Organizational History."
We are a Delaware corporation formed in 1993. Our principal offices are
located at 5400 LBJ Freeway, Dallas, Texas 75240 and our telephone number is
(972)701-5400.
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INTERACTIVE TV
We designed and, prior to entering into our joint venture with Insight
Interactive, were engaged in the development of VirtualModem(TM) and
Interactive TV products and services. SourceSuite, under our management,
continues to develop and deploy the interactive program guide,
SourceGuide(TM), the interactive programming service, LocalSource(TM), and
other interactive television products.
o SourceGuide(TM). SourceSuite's interactive program guide provides
viewers with a navigational tool for all of the cable operators' digital
offerings. The program guide presents content as video, audio and data
and can include information or advertising related to particular
programming. By allowing viewers to access program guide screens and to
search by channel or time of program schedules, SourceGuide(TM) lets
viewers navigate and tune or link to broadcast and cable channels.
o LocalSource(TM). LocalSource(TM) delivers interactive programming that
is both informative and entertaining and provides extensive
communications tools to support interaction between customers,
advertisers, sponsors, merchants and direct marketers. LocalSource(TM)
is currently offered as a suite of four services:
o "Your Community Today" which provides both current local and
national information and web-links on topics such as news,
weather, sports, business, horoscopes, soap operas and
lotteries;
o LocalGuide, a source for current community information such as
a Dining Guide, Cinema Guide, Events Guide, Kidzone and Games;
o My Neighborhood, providing information on local topics such as
schools, religion, town hall and transportation; and
o QuickSource, an on-demand library of useful facts on a range of
subjects from health to legal to car care or insurance.
o Other products. Other applications that are under development include
CableMail(TM) and SourceNet(TM). CableMail(TM) will allow customers to
have e-mail accounts accessible from their television sets and
SourceNet(TM) will provide Internet access through the set-top box and
the television set. We cannot now predict when these products will
become commercially available.
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Technology
SourceGuide(TM) utilizes proprietary technology developed by our
subsidiary, Interactive Channel Technologies Inc. ("ICTI"), which developed a
server-based software platform called VirtualModem(TM). We transferred our
patents and other rights to the VirtualModem(TM) technology to SourceSuite in
November 1999. This technology, among other things, was sold to Liberate in
March 2000 and Liberate granted SourceSuite an exclusive license to use this
technology as it relates to SourceSuite's business. Liberate also agreed to
develop certain software included in the SourceGuide(TM) interactive programming
technology and related implementing technologies for SourceSuite.
VirtualModem(TM) allows LocalSource(TM) to provide real-time two-way interactive
content to cable subscribers.
Liberate is a leading provider of a comprehensive software platform for
delivering Internet-enhanced content and applications to information appliances,
such as television set-top boxes, game consoles, smart phones and personal
digital assistants. Its software allows network operators, such as
telecommunications companies, cable and satellite television operators and
Internet service providers, or ISPs, and information appliance manufacturers to
provide consumers access to Internet-based applications and services.
Distribution
In order to offer Interactive TV in a particular market, SourceSuite
must negotiate a carriage or affiliation agreement with the cable operator
serving the market. These agreements authorize the cable operator to sell and
promote Interactive TV and contain terms and conditions regarding pricing,
revenue sharing and joint marketing arrangements. SourceSuite currently has a
letter of intent with Insight Communications Company, Inc., the eighth largest
cable television system operator in the United States based on customers served
after giving effect to recently announced industry acquisitions. Under the terms
of this arrangement, Insight Communications began introducing its subscribers to
various SourceSuite interactive programming services beginning in the first
quarter of 1999. Insight Communications agreed to pay SourceSuite a service
license fee based on the number of subscribers receiving our programming,
beginning July 2000. SourceSuite agreed to share with Insight Communications a
percentage of its advertising and other revenues from Interactive TV generated
through Insight Communications' cable systems.
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We do not currently have carriage or affiliation agreements with any
other cable operator.
In connection with the sale of the VirtualModem(TM) business to
Liberate, SourceSuite entered into a preferred content provider agreement with
Liberate. This agreement provides that Liberate will use commercially reasonable
efforts to introduce SourceSuite's products to Liberate's cable operator
customers who are interested in deploying VirtualModem(TM) products. This
agreement also provides that Liberate will offer pricing incentives to its cable
operator customers that employ the VirtualModem(TM) products and also select
SourceSuite's interactive program guide or local content services. Also under
the terms of this agreement, Liberate will receive a portion of the revenues
generated by cable subscribers who use SourceSuite's products on the
VirtualModem(TM) platform.
Competition
We believe that for the foreseeable future, consumer access to
interactive television will generally be through telephone lines, cable
television systems and satellite systems. We believe that there are companies
offering similar services and alternative technologies. Some of these services
are directly competitive while others may prove to be complementary to our
products and services. Regardless, this is an industry of rapid technological
change, and new competitors can be expected.
WebTV, which is owned by Microsoft Corporation, offers Internet access
to the television over telephone lines using a separate set-top device.
Roadrunner and Excite@Home offer Internet services through the cable system to
household personal computers; Excite@Home has announced its intention to
provide its service to the television using a more advanced digital set-top
box. Wink TV provides a silent text overlay (with some graphics) displayed when
a consumer presses a button on a remote control. WorldGate Communications has
announced a product that can deliver Internet access over cable systems to the
television. The concept WorldGate Communications has announced is the subject
of patent infringement litigation initiated by us and assumed by Liberate. GTE
MainStreet is an interactive navigational system being commercially deployed in
Clearwater, Florida and Ventura, California and offers interactive programming
over cable television systems. Wink TV is available to the consumer without the
purchase of additional equipment. WorldGate Communications and GTE MainStreet
currently require additional analog hardware although they have announced their
intent to provide digital services. There are also other companies providing
Internet access to the television, either through high-speed cable modems or
satellites. These companies compete with us for consumers seeking an
interactive television experience.
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To the extent that one or more competitors is successful in developing
an interactive television service, we could be materially adversely affected. We
compete with other potential interactive television service providers, as well
as other sources of programming, to establish relationships with cable
television system operators. Microsoft Corporation, the owner of WebTV, has
invested in Comcast, Inc., one of the largest cable television system operators.
In addition, the interactive television industry and Interactive TV face
competition for consumer usage from personal computer services and other
companies offering television access to the Internet.
Our interactive program guide competes with other sources of
information regarding program schedules and subject matter. The largest program
guide is TV Guide, which distributes TV Guide magazine to households and
newsstands and provides customized monthly program guides for cable and
satellite operators. DIVA Systems Corporation's video-on-demand service
includes a program guide. Program schedule information is also available
through newspapers and other sources. We believe that SourceGuide(TM) can
provide more useful information to viewers and offers a superior method of
satisfying viewer demand for program information.
IT NETWORK
Through our IT Network business, we sell interactive advertising
promoted by print media, such as yellow page directories and newspapers, and
provide unbranded audio programming and streaming media content. Our products
and services are distributed through our "Publisher Partners", which include
over 345 Yellow Page directories, with a distribution of over 100 million
copies, 150 daily newspapers, with aggregate circulation of over 20 million, and
over 60 Internet markets. These products and services are available in over 150
dominant market areas (DMAs) across North America, Hawaii and the Caribbean.
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Significant Yellow Page Publisher Partners include Ameritech, Bell
Atlantic, BellSouth, GTE, Pacific Bell, Southern New England Telephone and
Southwestern Bell. Our major newspaper Publisher Partners include The
Washington Post, The Houston Chronicle, The Austin American Statesman, The
Arizona Republic, The Fort Worth Star-Telegram and The San Francisco Chronicle.
We and our Publisher Partners' voice information systems enable callers to
navigate to specific topics by entering a four digit code and often allow
consumers to talk directly to an advertiser at the push of a button.
Products and Services
Interactive Advertising Sales and Sales Agency Services. We sell
interactive advertising promoted by print advertisements distributed by our
Publisher Partners. This advertising directs consumers to interactive
information that can be accessed over the telephone and the Internet. In the
agreements with our Publisher Partners, we may purchase pages and retain the
related advertising revenue, or we may act as a sales agency and sell
advertising on behalf of the Publisher Partner in a revenue sharing arrangement.
In revenue sharing arrangements, the amount we retain depends on the level of
advertiser management, system management and information content services
provided to the Publisher Partner and the amount charged for services.
Streaming Media Content. We offer more than 15,000 unbranded streaming
audio information programs for delivery across all platforms. The streaming
audio information is comprised of a variety of dynamic audio programs and
consumer information services. Dynamic audio programs include news, weather,
sports, horoscopes, soap opera updates, lottery results and other entertainment
features, which are updated as appropriate. Our consumer information services
provide local consumers with advice and information on a wide array of topics
that include health, law, finance and home repair. Advertising customers
subscribing to these audio information services pay us an annual fee. All
content is provided unbranded so it appears to originate from a customer's web
site and can be incorporated into their overall on-line offering. The complete
content offering has been subdivided into 17 vertical content channels: News,
Sports, Financial, Entertainment, Canadian, Text, Health, Legal, Auto,
Lifestyle, Outdoor Recreation, Home, Technology, Women's, Spanish-Language,
Employment, and Personal Finance.
LocalSource(TM). The LocalSource(TM) product sold through our IT
Network business is one of the largest locally-focused Internet-based services,
delivering locally relevant news, business services, community resources,
entertainment and commerce to 66 cities. The product provides local businesses,
professionals and merchants with print Yellow Page advertising, audio
sponsorship messages of information content, sponsorships of Internet streaming
media and textual content on the LocalSource(TM) web site, and the right to
license the web address and telephone number in other media which they may
purchase from us separately or in bundled combinations. Customers may also
purchase sponsorship advertising for categories of LocalSource(TM) content. The
LocalSource(TM) product sold through out IT Network business is delivered via
satellite or via the Internet. In contrast, the LocalSource(TM) product sold
through our Interactive TV Business is more graphically oriented and is
delivered through digital television systems.
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Newspaper Products. We are the largest producer of interactive audiotex
content for newspapers. We produce up to 1,000 daily reports, which are
transmitted via satellite to our newspaper clients, which the newspapers then
offer to their readers at no charge. Pursuant to our agreements with
newspaper Publisher Partners, we provide audio programming to newspaper
publishers for a license and distribution fee. The fee is determined by the
amount and type of content purchased, the size of the market and the circulation
of the newspaper.
Other Services. We provide other services including advertiser
management and system management. The advertiser management service provides
advertising clients with call and web site statistics and updates for their
voice information advertisements on a regular basis. The systems management
service provides technical support and maintenance of voice information systems
for many of our Publisher Partners.
Distribution
We distribute our products through print media (yellow pages,
newspapers), telephone-based voice systems, and the Internet in accordance with
separate agreements with each of our advertiser clients. The agreements provide
for the payment to us of specified fees for advertising, advertising services
and content.
We receive monthly fees from Publisher Partners for system management
services which may be performed remotely at our facility or at the Publisher
Partners' site.
Technology and Programming
News, sports, entertainment, other content and advertiser messages are
edited and produced in our studios. Copywriters prepare written scripts from
information obtained under contract from various news-gathering services. The
written scripts are then used to produce voice recordings with mixed background
music. The finished audio recording is loaded into a central computer system
and transmitted to local voice information systems through a wide-area network
that connects individual computer systems in each of the local markets with our
central administration facility in Irving, Texas. Information may be
transmitted over our digital satellite network, over land lines or via the
Internet. Multiple telephone lines are connected to each system to process
local incoming calls. There is no charge to the caller. The finished audio
product is also distributed to World Wide Web sites using streaming technology.
Competition
We are aware of other companies currently offering some of the
information services provided by our IT Network business. Consumers can call a
variety of "900" services for information provided by, among others, AT&T, GTE,
MCI and certain major newspaper publishers. Callers are generally charged for
calls to these "900" services. In most of our markets, we are aware of a number
of companies, including local newspapers and radio stations, that provide
certain free, on-demand telephone programming similar to that offered by us.
Competitors, such as Associated Press, Interactive Media Services, Inc.,
Interactive Information Services, L.L.C. and Interactive Communications Inc. (a
subsidiary of Century Telephone Enterprises), offer services similar to those we
offer.
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These competitors may use Yellow Pages directories, newspapers, mailers or other
print media to distribute and promote their programming services. In addition to
these providers of on-demand telephone services, potential competitors include
any streaming media content provider, newspaper or telephone company.
EMPLOYEES
As of March 15, 2000, we had a total of 219 full and part-time
employees. None of our employees are subject to a collective bargaining
agreement. We have experienced no work stoppages and we believe that we have
good relations with our employees.
REGULATORY MATTERS
The telecommunications and cable television industries are subject to
extensive regulation by federal, state and local government agencies. Existing
regulations were substantially affected by the passage of the Telecommunications
Act of 1996. This legislation was implemented in administrative proceedings
conducted by the Federal Communications Commission and state regulatory
agencies.
Most current regulatory and legislative activity addresses how
telephone companies and cable television companies may enter new lines of
business, the manner in which they can participate in new lines of business and
the rates they can charge consumers. Local exchange carriers, including the
Regional Bell Operating Companies ("RBOCs"), will be facing more serious
competition and will be able to enter new markets. Cable television companies
are now also in their current markets permitted to provide telephone service.
The federal and state administrative proceedings may also affect the nature and
extent of competition that will be encountered by us.
The on-line information and services industry is evolving and will be
affected in the future by laws, regulations and policies adopted at the federal,
state and local levels of government. There are many laws, regulations and
policies, both existing and proposed, at all levels of government that may
impact, in varying degrees, the manner in which we market and deliver our
products and services. Neither the outcome of these proposals, nor their impact
on the on-line information and services industry in general, or on us in
particular, can be predicted at this time.
FORWARD LOOKING INFORMATION AND RISK FACTORS
We or our representatives from time to time may make, or may have made,
certain forward-looking statements, whether orally or in writing, including,
without limitation, any such statements made, or to be made, under Management's
Discussion and Analysis of Financial Condition and Results of Operations, press
releases and other information contained in our various filings with the
Securities and Exchange Commission. We wish to ensure that such statements are
accompanied by meaningful cautionary statements, so as to ensure to the fullest
extent possible the protections of the "safe harbor" established
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in the Private Securities Litigation Reform Act of 1995. Accordingly, such
statements are qualified in their entirety by reference to, and are accompanied
by, the following discussion of certain important factors that could cause
actual results to differ materially from those projected in such forward-looking
statements.
We caution you that this list of factors does not describe all of the
risks of an investment in our common stock. We operate in a rapidly changing
business environment, and new risk factors continually emerge. We cannot predict
every risk factor, nor can we assess the impact of all these risk factors on our
business or the extent to which any factor, or combination of factors, may cause
actual results to differ from those projected in any forward-looking statements.
Accordingly, you should not rely upon forward-looking statements as a prediction
of our actual results.
OUR HIGH DEGREE OF LEVERAGE COULD HAVE CERTAIN NEGATIVE CONSEQUENCES ON
OUR OPERATIONS AND FINANCIAL CONDITION
We are highly leveraged and substantially all of our assets are subject
to security interests securing our 12% Senior Secured Notes due 2004 ("Notes").
As of December 31, 1999, we had outstanding approximately $96.3 million
principal amount of Notes and shares of 13 1/2% Senior PIK Preferred Stock
("Preferred Stock") with a stated value of $26.1 million due in 2007.
Our high degree of leverage could have certain negative consequences,
including:
o A substantial portion of our cash flow will be required for
the payment of principal and interest on our Notes and will
not be available for other purposes;
o Our ability to obtain additional financing for capital
expenditures, acquisitions, working capital or other purposes
may be impaired;
o We may be more leveraged than some of our competitors and this
may place us at a competitive disadvantage; and
o Our high degree of leverage reduces our flexibility in
responding to changes in economic conditions, including
increased competition and demand for new products and
services.
In addition, the indenture governing the Notes and the certificate of
designation relating to the Preferred Stock impose significant financial and
operating restrictions on us.
WE MAY NOT BE ABLE TO GENERATE ENOUGH CASH TO SERVICE OUR DEBT
Our ability to meet our payment obligations with respect to the Notes
and our other indebtedness will depend on our ability to generate substantial
cash flow in the future. This, to a certain extent, is subject to general
financial, economic, competitive, legislative, regulatory and other factors that
are beyond our control. Accordingly, we cannot assure you that our business will
generate sufficient cash flow to service our debt.
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If we are unable to generate sufficient cash flow from operations or
otherwise satisfy our obligations on our Notes and other indebtedness, we may be
required to refinance all or a portion of these obligations or sell some of our
assets. We expect that any payment of the principal on any of our Notes or other
indebtedness may have to be refinanced, including the possibility that this
financing may occur by selling some of our assets. However, the indenture
governing the Notes restricts our ability to incur additional indebtedness and
to sell assets. Additionally, we may not be able to refinance or sell assets on
acceptable terms when needed. On March 3, 2000, we received 886,000 shares of
Liberate common stock with a fair market value of approximately $87.4 million,
based on the closing price of Liberate common stock on that date of $98.6875 per
share. We believe that the value received from the sale of the stock should
enable us to meet interest payments for the remaining life of the Notes.
WE MAY NEED ADDITIONAL FINANCING
We will require additional financing to repay or otherwise retire our
Notes and to redeem our Preferred Stock. The Notes mature October 31, 2004 and
the Preferred Stock must be redeemed on November 1, 2007. We cannot be certain
that any additional financing required will be available at the time or times
needed, or available on terms acceptable to us.
WE MAY HAVE INSUFFICIENT COLLATERAL TO REPAY OUR NOTES
If an event of default under the indenture governing the Notes occurs,
the collateral may not be sufficient to repay our Notes in full. Although the
collateral consists of substantially all of our assets, most of the assets
consist of cash, investments, goodwill, other intangibles and accounts
receivable. As of December 31, 1999, the tangible assets (excluding cash,
investments and receivables) included in the collateral had a net book value of
approximately $3.5 million, and consisted primarily of computer and other
equipment. On March 3, 2000, we received 886,000 shares of Liberate common stock
with a fair market value of approximately $87.4 million, based on the closing
price of Liberate common stock on that date of $98.6875 per share.
A CHANGE OF CONTROL WOULD REQUIRE US TO OFFER TO REPURCHASE OUR NOTES AND
PREFERRED STOCK, FOR WHICH WE MAY NOT HAVE SUFFICIENT FUNDS
If a change of control occurs, we must offer to repurchase our Notes at
101% of their principal amount, plus accrued and unpaid interest to the date of
repurchase, and our Preferred Stock at 101% of the liquidation preference, plus
accumulated and unpaid dividends. We cannot be certain that we will have
sufficient funds to make any required repurchase. If we do not have sufficient
available funds to pay for our Notes tendered for repurchase, an event of
default will occur under the indenture. If an event of default occurs, it will
cause an accelerated maturity of our Notes, unless waived by the holders of our
Notes. If we are required to offer to repurchase our Preferred Stock and we do
not have sufficient available funds, the holders of our Preferred Stock will
have the right to elect two directors.
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WE HAVE A HISTORY OF OPERATING AND NET LOSSES AND MAY NOT BE PROFITABLE IN THE
FUTURE
We have reported both an operating loss and a net loss in each year
since our inception, including an operating loss of $25.0 million and a net loss
attributable to common stockholders of $40.0 million in the year ended December
31, 1999. We expect to incur operating losses at least through 2000 and may
incur operating losses thereafter.
THE FAILURE OF CABLE SYSTEM OPERATORS TO PROVIDE US ACCESS TO CHANNELS WOULD
RESULT IN OUR BEING UNABLE TO SUCCESSFULLY MARKET AND SELL OUR PROGRAMMING
SERVICES
Our ability to offer our programming services on any cable television
system depends on obtaining a satisfactory agreement from cable operators.
Intense competition exists among suppliers of programming for access to
channels. We cannot be certain that we will enter into any carriage agreements.
Even if carriage agreements are entered into, there is no assurance that our
programming services will be distributed as a result of such agreements.
Currently, we have a letter of intent with Insight Communications.
THE MARKET FOR INTERACTIVE TELEVISION IS UNCERTAIN AND CONSUMERS MAY NOT CHOOSE
OUR PROGRAMMING SERVICES
Interactive television is a new and emerging business. There is no
assurance that a significant market for interactive television will develop or
that cable subscribers will use the television as a source of interactive
information and services. In addition, our programming services will be
competing with other interactive programming guides and with other interactive
information and entertainment sources. This competition includes services
offering access to the Internet through the television. There is no assurance
that our programming services will prove more desirable than these competing
services. If our programming services do not achieve market acceptance, we will
be unable to implement our business strategy and our business will be adversely
affected.
OUR FAILURE TO ATTRACT AND RETAIN HIGH-QUALITY, INDEPENDENT PROGRAMMING SOURCES
COULD INCREASE OUR COSTS AND ADVERSELY AFFECT OUR BUSINESS
If we obtain distribution for our programming services, our success
will be highly dependent on the availability of high-quality programming
applications. We depend on independent information sources, such as third-party
suppliers, local media, retailers and information service providers, to create,
produce and update such programming at no, or minimal, cost to us. There is no
assurance that we will succeed in attracting and retaining these independent
programming sources. If independent information sources do not develop high
quality, up-to-date programming applications capable of being delivered on our
programming services and that appeal to subscribers, or if suppliers are
unwilling to provide these applications to us on favorable terms, we will have
to increase the extent to which we supplement the independent programming
services with our internal programming. This will increase our operating costs.
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FAILURE TO MAKE NECESSARY TECHNICAL DEVELOPMENTS WILL INCREASE OUR COSTS OF
PROVIDING PROGRAMMING
Further technical development of network operating centers is needed
to enable us to economically deploy Interactive TV to multiple cable
television systems. There are no assurances that the necessary technology will
be completed, or if it is, that it will be completed on schedule or on budget.
A DELAY IN THE ROLL-OUT OF DIGITAL SET-TOP BOXES COULD ADVERSELY AFFECT OUR
ABILITY TO PROVIDE OUR PROGRAMMING SERVICES
Expansion of our Interactive TV business is dependent upon the
incorporation of our technology into digital set-top boxes or the development of
technology that would enable us to access other digital set-top boxes, the
widespread distribution of such digital set-top boxes and the upgrading of cable
infrastructure to two-way, digital capabilities. If cable companies delay
conversion of their systems to digital set-top boxes, limit the number of
digital set-top boxes distributed or fail to upgrade their cable
infrastructures, our business plan would be adversely affected.
OUR BUSINESS IS HIGHLY COMPETITIVE AND WE CANNOT GIVE ASSURANCES THAT WE WILL BE
ABLE TO COMPETE EFFECTIVELY
In an industry characterized by extensive capital requirements and
rapid technological change, we face potential competition for the acceptance of
our on-line programming and services from a number of companies, most of which
have significantly greater financial, technical, manufacturing and marketing
resources than us and may be in a better position to compete in the industry. We
face competition for advertiser revenues from other media, including radio,
television, newspapers, magazines and the Internet. We believe that for the
foreseeable future, public access to on-line television will generally be
through cable operators. Accordingly, we must compete with other providers of
television programming to establish relationships with cable operators to gain
channel access.
Certain RBOCs have provided consumers with voice information services
in the past. There is no assurance that RBOCs will not provide such services
again in the future. If one or more RBOCs begin providing such services, the
resulting competition may have a material adverse effect on our financial
condition and performance. In addition, certain former employees of a division
of Brite Voice Systems, Inc., acquired by us in October 1997 (some of whom are
also former employees of ours), operate a competing business.
RAPID TECHNOLOGICAL ADVANCES COULD RENDER OUR PRODUCTS AND TECHNOLOGIES OBSOLETE
OR NON-COMPETITIVE
The on-line information and services industry is experiencing rapid
change. Products or technologies developed by others could render obsolete or
otherwise significantly diminish the value of our products or technologies. Our
future performance depends substantially on our ability to respond to
competitive developments, upgrade our programming, commercialize products and
services incorporating upgraded
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programming, and adapt our operational and financial control systems as
necessary to respond to continuing changes in our businesses. We cannot be
certain that we will be successful in these efforts.
OUR SHAREHOLDER RIGHTS PLAN COULD DISCOURAGE A STRATEGIC TRANSACTION INVOLVING
OUR COMPANY WHICH COULD BENEFIT OUR SHAREHOLDERS
In April 1998, we adopted a shareholder rights plan and declared a
dividend distribution of one common share purchase right on each outstanding
share of our common stock. Our shareholder rights plan has certain anti-takeover
effects. Generally, if a person or group acquires 15% or more of our common
stock, the rights will entitle shareholders other than the acquirer to purchase
shares of the common stock (or, in certain circumstances, cash, other property
or other securities) at half price. If, after the acquisition by a person or
group of 15% or more of our common stock, we sell more than 50% of our assets or
earning power or we are acquired in a merger or other business combination
transaction, the acquirer must assume the obligations under the shareholder
rights plan and the rights become exercisable to acquire the shares of stock of
the acquirer at the discounted price. This plan expires no later than May 7,
2008. The shareholder rights plan could delay or make difficult a merger, tender
offer or proxy contest involving us.
OUR STOCK PRICE IS VOLATILE
Our common stock price can be extremely volatile and has experienced
substantial and sudden fluctuations. The price of our common stock has been and
likely will continue to be subject to wide fluctuations in response to a number
of events and factors, such as:
o variations in our operating results;
o differences between our results of operations and analysts'
estimates;
o announcements by us or our competitors of technological
innovations or new products and services;
o the announcement of the results of existing or new litigation;
and
o general economic and market conditions.
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<PAGE> 16
FUTURE STOCK SALES COULD ADVERSELY AFFECT THE PRICE OF OUR COMMON STOCK
Sale of a substantial number of shares of our common stock in the
public market could negatively impact the market price for our common stock. All
shares of our common stock currently outstanding are freely tradable without
restriction by persons other than our "affiliates" except for the shares issued
to Insight Interactive in November 1999. In addition, as of March 24, 2000 there
were options, warrants and exchange rights outstanding entitling such holders to
acquire approximately 11.4 million shares of our common stock.
THE LOSS OF OUR KEY MANAGEMENT COULD RESULT IN AN ADVERSE EFFECT ON OUR BUSINESS
The success of our business depends, to a large extent, on the services
of certain executive officers and other key personnel, the loss of any one of
whom could be detrimental to our success. In addition, for us to implement our
strategy and continue our development and growth, it will be necessary to
attract and retain qualified personnel in all areas.
OUR BUSINESS HAS BEEN AND CONTINUES TO BE SUBJECT TO EXTENSIVE GOVERNMENTAL
LEGISLATION AND REGULATION AND CHANGES IN THIS LEGISLATION AND REGULATION COULD
ADVERSELY AFFECT OUR BUSINESS
Current and future government regulation may have an impact on our
business. The telecommunications and cable television industries are heavily
regulated by federal, state and local governmental agencies. Existing
regulations were substantially affected by the passage of the Telecommunications
Act of 1996, which allows both cable television companies and telephone
companies to enter and participate in new lines of business. This introduced the
possibility of new, non-traditional competition for both cable television and
telephone companies and may result in greater competition for us. The outcome of
federal and state administrative proceedings may also affect the nature and
extent of competition that we will encounter. In addition, future regulations
may prevent us from realizing sales of database information about consumers
obtained by us from our television and telephone businesses. These competitive
developments, as well as other regulatory requirements relating to privacy
issues, may have an adverse effect on our business.
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<PAGE> 17
ORGANIZATIONAL HISTORY
For financial reporting purposes, we operate in two business segments:
IT Network and Interactive TV. For information regarding revenues, operating
results, identifiable assets and certain other information by business segment,
see Note 15 - Segment Reporting, as presented in the Notes to Consolidated
Financial Statements. Our operations are conducted through our wholly-owned
subsidiaries, IT Network, Inc. ("IT Network"), Interactive Channel, Inc.
("Interactive Channel") and ICTI and through SourceSuite, our joint venture with
Insight Interactive.
SMI Holdings, Inc. ("SMI Holdings") was incorporated on July 19, 1988.
On June 23, 1995, SMI Holdings merged with a wholly-owned subsidiary of HB
Communications Acquisition Corp. ("HBAC"), a public company formed in Delaware
in 1993 for the purpose of acquiring a company engaged in the communications
industry, with SMI Holdings surviving as a wholly-owned subsidiary of HBAC. In
connection with the merger, HBAC changed its name to Source Media, Inc., and the
outstanding common stock and preferred stock of SMI Holdings were converted into
common stock of Source Media. On January 14, 1997, we acquired all of the
outstanding shares of ICTI that we did not already own in exchange for 1,390,000
shares of our common stock, making ICTI our wholly-owned subsidiary. On October
30, 1997, we purchased certain of the electronic publishing assets of Brite
Voice Systems, Inc. ("Brite") for $35.6 million and certain of the assets of
Voice News Network ("VNN"), a unit of Tribune Company, for $9.0 million. In
October 1997, SMI Holdings formed IT Network and Interactive Channel as
wholly-owned operating subsidiaries.
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<PAGE> 18
On November 17, 1999, we conveyed certain assets related to the
VirtualModem(TM) and Interactive Channel products and businesses to a 50/50
joint venture with Insight Interactive. Insight Interactive contributed $13
million in cash to the joint venture. Insight Interactive also acquired 842,105
shares of our common stock, representing approximately 6% of our issued and
outstanding stock, for a purchase price of $12 million in cash. We also issued
to Insight Interactive five-year warrants to acquire up to 4,596,786 shares of
our common stock at an exercise price of $20.00 per share. In addition, we
issued to Insight Interactive one share of our non-participating preferred
stock, which entitles Insight Interactive to appoint up to three members to our
Board of Directors.
On March 3, 2000 we and Insight Interactive sold our respective
interests in the original joint venture to Liberate in exchange for the issuance
to each of Insight Interactive and us of 886,000 shares of common stock in
Liberate. A new 50/50 joint venture between us and Insight Interactive retained
the interactive programming guide and Local Source related content business. We
act as manager of the new joint venture which carries out the Interactive TV
business. After the completion of the sale to Liberate, the original joint
venture changed its name from SourceSuite LLC to Liberate Technologies LLC and
the new joint venture changed its name from SourceSuite Acquisition LLC to
SourceSuite LLC.
ITEM 2. PROPERTIES
We lease approximately 13,108 square feet of office space at 5400 LBJ
Freeway in Dallas, Texas for our corporate offices and for our Interactive TV
business. This lease expires in September 2001. We also sublease from GTE
Directories Corporation approximately 17,800 square feet of office space at 5601
Executive Drive, Irving, Texas where our IT Network business is headquartered.
This sublease expires in September 2000. We also have offices in major DMAs
where we maintain the voice response system that supports our voice information
services. We maintain five regional sales offices across the country from which
our sales force is based. These offices operate under various leases which
expire through March 2001. We believe that our existing facilities are suitable
to meet our requirements for the immediate future but will evaluate facilities
to accommodate our growth as necessary. Substantially all of our assets are
subject to a security interest granted in connection with the issuance of the
Notes.
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<PAGE> 19
ITEM 3. LEGAL PROCEEDINGS
On May 11, 1998, ICTI and SMI Holdings filed a patent infringement suit
against WorldGate Communications, Inc. in federal district court in Delaware. In
June 1998, WorldGate filed a counterclaim against the plaintiffs and Source
Media for, among other things, unfair competition, interference with contract
and trade secret misappropriation. The counterclaim defendants denied the
allegations in the counterclaim. The relevant patents and this litigation were
assumed by Liberate as part of the sale of our Virtual Modem business, described
above under "Business - Organizational History". Liberate agreed to defend us
against WorldGate's counterclaims.
On August 21, 1998, the first of fourteen class action complaints were
filed against us and certain of our present and former officers and directors in
the United States District Court for the Northern District of Texas asserting
violations of sections 10(b) and 20(a) of the Securities Exchange Act of 1934
and Rule 10-b5 promulgated thereunder. The fourteen complaints were consolidated
into the first filed case on October 9, 1998. The plaintiffs sought damages in
an unspecified amount. On November 12, 1999, the Court set a series of deadlines
for the disposition of the case, ending with the trial set for October 2, 2000.
We believe this case is totally without merit and we intend to vigorously defend
ourselves and our officers and directors. On October 27, 1999, plaintiffs filed
a Summary Notice of Pendency of Class Action advising class members of pendency
of the litigation. Plaintiffs filed a proposed Order Approving Class Notices on
November 5, 1999. The proposed Order was signed by the Court on November 12,
1999. Thereafter, class notice was issued by plaintiffs.
On October 6, 1998, Advanced Interactive, Inc. filed a complaint in
U.S. District Court for the Northern District of Illinois, Eastern Division,
against ICTI and the following companies: Matsushita Electric Corporation,
Matsushita Electric Industrial Co., Ltd., Sharp Electronics Corp., Sharp Corp.,
Thomson Consumer Electronics, Toshiba Consumer Products, Inc., Toshiba American,
Inc., Toshiba Corporation, General Instruments Corp., Scientific Atlanta, Inc.,
ATI Technologies, Inc., ADS Technologies Inc., Gateway 2000, Inc., STB Systems,
Inc., Hauppauge Computer Works, Inc., WebTV Networks, Inc. and WorldGate
Communications, Inc. (collectively the "Defendants"). Advanced Interactive
alleges that ICTI infringed two claims of one of its patents by manufacturing,
using and/or selling or offering to sell "Sourceware(TM)ChannelLink(TM)". The
same allegation is made against each Defendant for its particular product or
service. The Plaintiff seeks damages, but makes no claims against the patents of
ICTI or any other Defendant. ICTI, and each of the Defendants, have filed an
Answer and have collectively joined the Motion for Partial Summary Judgment
submitted by Matsushita Electric Corporation of America, Sharp Electronics
Corp., Sharp Corp. and the Toshiba Defendants. On May 12, 1999 the court denied
Advanced Interactive's Motion for summary Judgement of Infringement. On
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<PAGE> 20
February 17, 2000, the court granted the Defendants' collective Motion for
Partial Summary Judgment on patent claims interpretation. This case was
transferred to our original joint venture with Insight Interactive and
subsequently became the responsibility of SourceSuite on March 3, 2000. We
believe this case is totally without merit and we intend to vigorously defend
ourselves.
In addition, we are aware of certain claims against us that have not
developed into litigation, or if they have, are dormant, and in any case are not
expected to have a material adverse affect on our business or financial
condition. Further, we are party to ordinary routine litigation, none of which
is expected to have a material adverse effect on our business or its financial
condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On November 17, 1999, we held our annual meeting of stockholders to (a)
elect four directors to serve for a term of one year, (b) approve an amendment
to our 1995 Performance Equity Plan, (c) approve our 1999 Stock Option Plan, (d)
approve the transaction with Insight Interactive, including the approval of (i)
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 common stock, (ii) the
amendment of our Certificate of Incorporation to authorize additional preferred
stock and (iii) the amendment of the Certificate of Incorporation to create a
class of non-voting common stock, and (e) ratify the appointment of Ernst &
Young LLP as our independent auditors to serve until the 2000 annual meeting of
stockholders.
The following individuals were elected to serve as directors until the
next annual meeting:
<TABLE>
<CAPTION>
Vote For Vote Withheld
---------- -------------
<S> <C> <C>
James L. Greenwald 11,371,249 292,974
Michael J. Marocco 11,370,587 293,636
Stephen W. Palley 11,371,137 293,086
Barry Rubenstein 11,371,548 292,675
</TABLE>
The stockholders approved the proposed amendment to our 1995
Performance Equity Plan. The result of the vote was as follows: 7,156,373 votes
were for the amendment, 1,328,108 votes were against the amendment and there
were 3,179,742 abstentions and broker non-votes.
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<PAGE> 21
The stockholders approved our 1999 Stock Option Plan. The result of the
vote was as follows: 6,937,081 votes were in favor of the Plan, 1,518,868 votes
were against the Plan and there were 3,208,274 abstentions and broker non-votes.
The stockholders approved the proposed transaction with Insight
Interactive. The result of the vote was as follows: 7,975,230 votes were in
favor of the proposed transaction, 508,537 votes were against the proposed
transaction and there were 3,180,456 abstentions and broker non-votes.
The stockholders ratified the appointment of Ernst & Young LLP as our
independent auditors to serve until the 2000 annual meeting of stockholders. The
result of the vote was as follows: 11,550,127 votes were for the selection,
91,954 votes were against the selection and there were 22,142 abstentions and
broker non-votes.
On September 24, 1999, we solicited the consents of the holders of the
Notes to amend the provisions of the indenture governing the Notes to allow the
transaction with Insight Interactive. On the same date, we solicited the
consents of the holders of the Preferred Stock to amend the provisions of the
certificate of designation relating to the Preferred Stock to allow the
transaction with Insight Interactive. Holders of $87,022,000 principal amount of
the Notes, representing 87% of the Notes outstanding, gave their consent to the
amendment of the indenture. Holders of 869,457 shares of Preferred Stock,
representing 86% of the Preferred Stock outstanding, gave their consent to the
amendment of the certificate of designation.
ITEM 4A. EXECUTIVE OFFICERS
Information regarding our executive officers at March 24, 2000 is set forth
below:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
--------------------- --- ---------------------------------
<S> <C> <C>
Stephen W. Palley 54 President, Chief Executive Officer and
Director
F. Paul Tigh 47 Chief Financial Officer and Treasurer
Victoria Hamilton 46 Interim Chief Operating Officer
Howard Gross 42 President and Chief Operating Officer,
IT Network
</TABLE>
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<PAGE> 22
Stephen W. Palley has served as a director since June 1999 and joined
us in April 1999 as our President and Chief Executive Officer. Mr. Palley was
Chief Operating Officer of King World Productions, Inc. from 1986 to 1996. Mr.
Palley's background includes entertainment and securities law. He is a member of
the New York State Bar and the Museum of Radio and Television Council. Mr.
Palley is a graduate of American University and the Columbia University School
of Law.
F. Paul Tigh has served as Chief Financial Officer and Treasurer since
July 1998. Mr. Tigh joined us in April 1998 as Vice President and Corporate
Controller. Prior to joining us, Mr. Tigh was Chief Financial Officer for
Advanced Telemarketing Corporation beginning December 1995. His previous
employment includes increasingly responsible positions with Scientific Atlanta,
Inc., Allied Signal, Inc. and Bendix Corporation. Mr. Tigh is a graduate of
Syracuse University and earned an MBA from the University of Notre Dame.
Victoria Hamilton has served as a consultant to us beginning in
January 1999 and as our Interim Chief Operating Officer since March 1999. From
1992 to 1999 she was at General American Investors, a closed end investment fund
which trades on the New York Stock Exchange, becoming Chief Operating Officer in
1995. Prior to her seven years at General American Investors, Ms. Hamilton was
in venture capital for a decade with SRK Management Company.
Howard Gross joined us in June 1999 as President and Chief Operating
Officer of our subsidiary, IT Network. Mr. Gross has worked in interactive media
since 1987, when he became Vice President and General Manager of New Syndication
Operations for Standard Broadcasting. In 1988 he joined BDR Audiotex as Vice
President and General Manager. BDR was subsequently acquired by a subsidiary of
Perception Technology in 1990 and in the following year, Mr. Gross became the
Vice President of Operations for Perception, the corporate parent. In 1993,
Perception merged with Brite Voice Systems, Inc. where he served as Vice
President Legal and Corporate Affairs until 1998, when he took over as Vice
President and Managing Director, Asia-Pacific. Mr. Gross holds degrees in film
and television production, with a specialty in Communications Law from Osgoode
Hall Law School, and is a member of the Federal Communications Bar Association.
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<PAGE> 23
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock has been quoted on The Nasdaq Stock Market under the
symbol "SRCM" since December 8, 1995. Prior to that, our common stock was quoted
on the OTC Bulletin Board.
The following table sets forth the high and low closing sales prices
per share for our common stock for the periods indicated.
<TABLE>
<CAPTION>
1998 1999
--------- ---------
<S> <C> <C>
First Quarter
High $ 14.44 $ 23.94
Low 8.31 14.81
Second Quarter
High 21.63 23.44
Low 13.50 14.50
Third Quarter
High 32.25 16.88
Low 6.28 6.00
Fourth Quarter
High 19.00 19.50
Low 4.94 7.56
</TABLE>
On March 24, 2000, the last reported sale price of our common stock
was $14.9375 per share. As of March 24, 1999, there were 136 record holders of
our common stock.
We have never paid cash dividends. Management intends to retain any
future earnings for the operation and expansion of our business and does not
anticipate paying any cash dividends in the foreseeable future. In addition, the
indenture governing the Notes
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<PAGE> 24
and the certificate of designation relating to the Preferred Stock restrict our
ability to pay cash dividends to the holders of our common stock.
RECENT SALES OF UNREGISTERED SECURITIES
During 1999, we issued the following options to various employees and
non-employee directors pursuant to our 1995 Performance Equity Plan, our 1999
Stock Option Plan and our 1995 Nonqualified Stock Option Plan for Non-Employee
Directors:
<TABLE>
<CAPTION>
Number of Shares
Date Issued Underlying Options Exercise Price per Share
- ----------- ------------------- ------------------------
<S> <C> <C>
1/4/99 388,967 $16.625
3/29/99 109,998 $15.315
6/17/99 125,000 $15.000
10/22/99 50,000 $ 7.563
11/4/99 50,000 $11.188
11/15/99 36,000 $12.000
</TABLE>
In addition, we issued shares of common stock, warrants to purchase
common stock and one share of our non-participating preferred stock to Insight
Interactive, as described above under "Business - Organizational History". At
the same time, we issued to Lazard Freres & Co., LLC warrants to purchase
450,000 shares of our common stock at an exercise price of $20.00 per share.
Exemption from registration under the Securities Act of 1933 is claimed
for each sale of securities referred to above in reliance upon the exemption
afforded by Section 4(2) of the Securities Act. None of these sales involved the
payment of underwriting commissions.
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<PAGE> 25
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands, except per share data)
The following table presents selected consolidated financial data for the
five years ended December 31, 1999, which have been derived from our audited
consolidated financial statements. The information in the following table should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our Consolidated Financial Statements
and the notes thereto included elsewhere in this report.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1995 1996 1997(2) 1998(2) 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Monetary revenues $ 9,342 $ 8,575 $ 12,387 $ 24,351 $ 19,147
Nonmonetary revenues (1) 15,944 9,944 6,044 1,756 1,823
-------- -------- -------- -------- --------
Total revenues 25,286 18,519 18,431 26,107 20,970
Monetary cost of sales 4,937 3,485 8,611 12,673 13,164
Nonmonetary cost of sales (1) 15,944 9,944 6,044 1,756 1,823
-------- -------- -------- -------- --------
Total cost of sales 20,881 13,429 14,655 14,429 14,987
Gross profit 4,405 5,090 3,776 11,678 5,983
Selling, general and administrative expenses 7,952 11,747 19,599 24,772 23,714
Amortization of intangible assets 1,031 1,031 4,987 6,320 4,713
Research and development expenses 3,750 6,331 3,680 3,410 2,578
Impairment of intangible assets (2) -- -- -- 25,936 --
-------- -------- -------- -------- --------
Operating loss (8,328) (14,019) (24,490) (48,760) (25,022)
Interest (income) expense, net 137 (174) 4,498 10,897 11,991
Equity interest in losses of Joint Venture -- -- -- -- 1,013
Other (income) expense (277) 10 (62) (27) 155
Charges related to financing incentives 1,581 -- -- -- --
-------- -------- -------- -------- --------
Net loss before extraordinary item (9,769) (13,855) (28,926) (59,630) (38,181)
Extraordinary loss - extinguishment of debt -- -- 3,455 -- --
-------- -------- -------- -------- --------
Net loss (9,769) (13,855) (32,381) (59,630) (38,181)
Preferred stock dividends 833 -- 416 2,996 1,838
-------- -------- -------- -------- --------
Net loss attributable to common stockholders $(10,602) $(13,855) $(32,797) $(62,626) $(40,019)
======== ======== ======== ======== ========
Net loss per common share $ (1.65) $ (1.39) $ (2.89) $ (5.21) $ (2.93)
======== ======== ======== ======== ========
Weighted average common shares outstanding 6,413 9,935 11,354 12,012 13,679
======== ======== ======== ======== ========
</TABLE>
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<PAGE> 26
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------------------------------------
1995 1996 1997 1998 1999
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents $ 17,479 $ 4,043 $ 8,431 $ 11,662 $ 13,410
Working capital (deficit) 12,223 (466) 31,288 19,947 14,408
Total assets 24,195 15,897 113,502 56,589 58,016
Long-term debt and capital lease
obligations (including current portion): 219 4,720 100,000 100,000 96,250
Senior PIK preferred stock -- -- 13,698 16,628 18,467
Total stockholders' equity (capital deficiency) 13,037 30 (12,408) (71,509) (68,872)
</TABLE>
(1) Nonmonetary revenues and nonmonetary cost of sales associated with
barter transactions are included in the consolidated statements of
operations at the estimated fair values of advertising time and
information content received. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and Note 2 -
Significant Accounting Policies of Notes to our Consolidated Financial
Statements.
(2) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" regarding acquisitions and impairment of
intangibles.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with our
Consolidated Financial Statements and related notes which are included elsewhere
in this report.
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<PAGE> 27
GENERAL
Because of our recently completed transactions, we do not believe that
the discussion and analysis of our historical financial condition and results of
operations below are indicative of our future performance. On November 17, 1999,
we contributed our Interactive TV business to SourceSuite LLC, a joint venture
with Insight Interactive. On October 30, 1997 we purchased certain assets of
Brite for $35.6 million and certain assets of VNN, a unit of the Tribune
Company, for $9.0 million. We later found certain intangibles purchased from
Brite to be impaired, resulting in a write-off of $25.9 million in the second
quarter of 1998. The financial results and analysis include the results of these
transactions. Because of the timing of these transactions and the subsequent
sale of our original joint venture with Insight Interactive on March 3, 2000,
our future operating results are likely to be substantially different from what
is presented in the following analysis.
YEARS ENDED DECEMBER 31, 1999 AND 1998
Monetary revenues decreased 21% to $19.1 million for the year ended
December 31, 1999 from $24.4 million for the year ended December 31, 1998. This
decrease is primarily due to the decreases of $2.2 million in system management
and information services revenues and $3.0 million in advertising sales. In
addition, the 1998 period included $0.1 million of revenues associated with an
Interactive TV test market. There were no such revenues in 1999. The decrease in
system management and information services revenue is attributable to increased
industry competition, customers migrating to their own systems and customers'
Year 2000 hardware issues. Advertising sales decreased primarily due to the
discontinuation of certain products. As a result of delays in rolling out new
products in 1999, such revenues were not immediately replaced.
Monetary cost of sales increased 4% to $13.2 million for the year ended
December 31, 1999 from $12.7 million for the year ended December 31, 1998
primarily as a result of $1.6 million of expense recognized for payments to
customers for unfulfilled sales guarantees and other increased operational
expenses of $0.1 million partially offset by savings of $1.1 million in page
costs related to decreased advertising sales and savings of $0.1 million related
to the transfer of Interactive TV operations to our joint venture with Insight
Interactive.
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<PAGE> 28
Nonmonetary revenues and nonmonetary cost of sales remained relatively
flat at $1.8 million for the years ended December 31, 1999 and 1998. Nonmonetary
sales accounted for 9% of revenues for the year ended December 31, 1999 and 7%
of the revenues for the year ended December 31, 1998.
Selling, general and administrative expenses decreased 4% for the year
ended December 31, 1999 to $23.7 million from $24.8 million for the year ended
December 31, 1998. Decreased expenses were attributable to: (i) $1.0 million for
non-cash stock compensation expense for certain stock options granted to certain
employees in excess of shares authorized in 1998, (ii) $0.7 million of
transitional costs related to the integration of acquired businesses incurred in
1998, (iii) $0.7 million less of bad debt expense incurred in 1999, (iv)
decreased trade show and trade advertising expenses of $0.7 million, (v) costs
of Interactive TV operations transitioned to our joint venture with Insight
Interactive of $0.9 million, and (vi) other operational savings of $1.7 million.
These decreases were offset by increases of $3.5 million in legal and
professional fees incurred in connection with a proposed joint venture that were
expensed after the termination of the proposed transaction, $0.7 million of
professional fees incurred in connection with the transaction with Insight
Interactive and $0.6 million of severance expense.
Impairment of intangible assets included in the amount for the year
ended December 31, 1998 relates to $25.9 million of write-offs of certain
intangible assets for the year ended December 31, 1998.
Amortization of intangible assets decreased 26% to $4.7 million for the
year ended December 31, 1999 from $6.3 million in 1998 due to a lower intangible
asset balance related to the write-off of certain intangibles in 1998 and the
contribution of patents to our joint venture with Insight Interactive on
November 17, 1999.
Research and development expenses decreased 24% to $2.6 million for the
year ended December 31, 1999 from $3.4 million in 1998 primarily as a result of
the contribution of the Interactive TV business to our joint venture with
Insight Interactive on November 17, 1999.
Interest expense remained unchanged at $12.8 million for the years
ended December 31, 1999 and 1998. This expense is associated with a $100 million
debt financing we completed in October 1997 and is described in detail in the
Notes to Consolidated Financial Statements.
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<PAGE> 29
Interest income decreased 57% to $0.8 million for the year ended
December 31, 1999 from $1.9 million in 1998 due to lower investment and cash
balances as a result of debt interest payments and normal operating
expenditures.
Preferred Stock dividends of $1.8 million and $3.0 million for the
years ended December 31, 1999 and 1998, respectively, relate to the $20 million
Preferred Stock financing we completed in October 1997 and described in detail
in the Notes to Consolidated Financial Statements. Dividends are recorded at the
fair market value of the shares issued as payment-in-kind dividends. The fair
value of preferred shares issued in 1999 was lower on the respective dividend
dates in 1999 than that of 1998, resulting in a lower dividend expense
recognized in the current year.
YEARS ENDED DECEMBER 31, 1998 AND 1997
Monetary revenues increased 97% to $24.4 million for the year ended
December 31, 1998 from $12.4 million for the year ended December 31, 1997. The
net increase of $12.0 million was attributable to increases of $5.8 million in
our voice information services related to service contracts acquired from Brite
and VNN and $6.2 million from growth in our existing advertising sales business.
The introduction of our Yellow Page tab product, the expansion of our
LocalSource(SM) products, our re-entry into the Ameritech markets and further
expansion of our sales force to increase sales in other existing markets is
attributable for $3.9 million of the advertising sales growth. The remaining
advertising sales growth resulted from certain new advertising agreements that
generated approximately $2.3 million in revenue for the year ended December 31,
1998. Under the new advertising agreements, revenue from print advertising is
earned at the time of the directory distribution while revenue for services
agreements and prior advertising agreements is earned and recognized over the
term of the contract.
Monetary cost of sales increased 47% to $12.7 million for the year
ended December 31, 1998 from $8.6 million for the year ended December 31, 1997.
This increase resulted from (i) $3.5 million in Yellow Page acquisition costs
(purchased yellow pages and tabs as well as revenue shared with publishers) due
to the increase in advertising sales, (ii) $3.4 million of operating expenses
primarily related to support new services acquired in the fourth quarter of 1997
from Brite and VNN as well as the new LocalSource(SM) and tab products and (iii)
$0.3 million for expenses associated with a failure of the Galaxy IV satellite.
These increases were offset by decreased expenses in 1998 of $2.0 million
related to a 1997 write-off of certain analog assets and related electronic
components and
29
<PAGE> 30
$1.1 million primarily due to decreased headcount at Interactive Channel
associated with the termination of the Colorado Springs analog pilot.
Nonmonetary revenues and nonmonetary cost of sales declined 71% to $1.8
million for the year ended December 31, 1998 from $6.0 million for the year
ended December 31, 1997 as we reevaluated our volume of barter business.
Nonmonetary sales accounted for 7% of revenues in 1998 compared to 33% of
revenues in 1997.
Selling, general and administrative expenses, including amortization of
intangible assets, increased 26% to $31.1 million for the year ended December
31, 1998 from $24.6 million for the year ended December 31, 1997. This increase
resulted from (i) $4.9 million of expenses we incurred, primarily to support new
services and advertising contracts acquired from Brite and VNN as well as new
LocalSource(SM) and tab products, (ii) $2.1 million of non-cash stock
compensation expense for certain stock options granted to employees in excess of
shares authorized, (iii) $0.5 million in a non-cash legal settlement, (iv) $0.9
million of bad debt write-offs primarily in connection with services provided to
customers acquired as part of the Brite and VNN acquisitions, and (v) $1.9
million of amortization of certain contract rights and goodwill acquired from
Brite and VNN during the fourth quarter of 1997. These increases were offset by
decreases of $0.6 million in amortization expense at ICTI and $3.2 million in
television related expenses, primarily related to the termination of operations
in our analog markets.
Impairment of intangible assets of $25.9 million resulted from a
reduction in the carrying value of intangible assets recorded as part of the
acquisition of Brite and VNN. Subsequent to the acquisition, we learned that
former Brite and IT Network employees had formed a company to service many of
the former Brite customers. As a result, several customers canceled or did not
renew their contracts with us. We reviewed the valuation of the acquired assets
recorded at the time of acquisition and found the assets were impaired. As a
result of the financial analysis of the expected discounted future cash flows of
the remaining customer base, we recorded a $25.9 million non-cash write-down of
the Brite contract rights, non-compete agreement and goodwill in the second
quarter of 1998.
Research and development expenses declined 7% to $3.4 million for the
year ended December 31, 1998 from $3.7 million for the year ended December 31,
1997. The decrease of $0.3 million is reflective of less spending in 1998 due to
the completion of
30
<PAGE> 31
development of an analog chip and set-top box.
Other income and expenses. Net interest expense was $10.9 million for
the year ended December 31, 1998 compared to net interest expense of $4.5
million for the year ended December 31, 1997. The increase of $6.4 million was
primarily due to the interest payable on the $100 million of debt financing we
completed in October 1997 and described in detail in the Notes to the Financial
Statements.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have experienced substantial operating losses and
net losses as a result of our efforts to develop, deploy and support our IT
Network business and develop, conduct trials and commercially launch our
Interactive TV business. As of December 31, 1999, we had an accumulated deficit
of $187.1 million and had used cumulative net cash in operations of $102.7
million; $26.7 million of cash was used in operating activities in 1999. The
difference at December 31, 1999 between the accumulated deficit and cumulative
net cash used in operations since inception is attributable primarily to
nonmonetary charges related to financing incentives and extinguishment of debt,
stock compensation expense, write-downs of analog set-top boxes and intangible
assets, depreciation, amortization and other non-cash expenses.
In 1999, we generated $24.2 million of cash through financing
activities. $12 million was generated from the sales of 842,105 shares of common
stock to Insight Interactive as part of the transaction to form the joint
venture. An additional $12 million was received from proceeds of the exercise of
warrants and stock options for the issuance of our common stock.
We will continue to incur operating losses at least through 2000. Any
launch of our television products and services through SourceSuite may require
an additional capital contribution which may require us to raise additional
capital. On March 3, 2000, we sold our interest in the Virtual Modem business
owned by our joint venture with Insight Interactive to Liberate for 886,000
shares of Liberate common stock, 20% of which is immediately available for sale,
with nearly all of the remainder becoming available for sale after July 31,
2000. It is expected that this liquidity will provide the necessary funding for
expected future capital requirements. The
31
<PAGE> 32
Liberate shares had an aggregate value of approximately $87.4 million, based on
the closing price of Liberate stock of $98.6875 per share on March 3, 2000.
Liberate common stock is traded on the Nasdaq Stock Market under the symbol
"LBRT".
Since inception, we have financed our operations primarily through an
aggregate $156.6 million raised from various financing activities, including the
incurrence of debt and the issuance of our common stock and preferred stock. In
October 1997, we issued $100.0 million principal amount of Notes and $20.0
million of Preferred Stock. The interest escrow account created pursuant to the
indenture governing the Notes was used to fund the first four interest payments
on the Notes on May 1, 1998, November 1, 1998, May 1, 1999 and November 1, 1999.
Our primary source of liquidity is our cash, cash equivalents and short-term
investments, which totaled $19.4 million at December 31, 1999. This cash
position consists of $6.0 million held in escrow for debt payments (contributed
to escrow subsequent to the Insight Interactive transaction) and $13.4 million
of operating cash. The first interest payment not currently held in escrow is
due November 1, 2000.
We currently believe our financial resources will be sufficient to meet
our anticipated cash needs for working capital and other capital expenditures
related to the further development of our IT Network business and capital
requirements for SourceSuite through and beyond 2000.
Our future capital requirements will depend on many factors, including,
but not limited to the following factors, some of which are outside our control:
(i) the operating results of our IT Network business, including local
advertisers' willingness to purchase Internet based advertising, and our ability
to retain and grow our customer base; (ii) the success and timing of the
development, introduction and deployment of the Interactive TV products; (iii)
the extent of market acceptance of our products; (iv) potential acquisitions or
asset purchases; (v) the deployment of digital set-top boxes incorporating
technology that we are able to access; (vi) competitive factors; and (vii)
changes in the regulatory environment.
EFFECT OF INFLATION
We believe that the effect of inflation has not been material during
each of the years ended December 31, 1999, 1998 and 1997.
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<PAGE> 33
YEAR 2000
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of our
computer programs or hardware that have date-sensitive software or embedded
chips may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices or engage in similar normal business
activities.
Based on assessments we made, it was determined that certain of our
software and hardware would be required to be modified or replaced so that those
systems would properly utilize dates beyond December 31, 1999. We completed and
tested all required modifications or replacements of existing software and
certain hardware in 1999. There have been no disruptions of operations in the
year 2000.
To date, we are not aware of any external agent with a Year 2000 issue
that had any impact on our results of operations, liquidity or capital
resources. However, we have no means of ensuring that external agents had no
Year 2000 issues.
We utilized both internal and external resources to reprogram, or
replace, test and implement the software and operating equipment for Year 2000
modifications. Total costs of $0.8 million were incurred in 1999 in connection
with Year 2000 preparations.
NET OPERATING LOSS CARRYFORWARDS
At December 31, 1999, we had net operating loss carryforwards of
approximately $124.5 million for U.S. Federal income tax purposes, which begin
to expire in 2003. See Note 11 - Income Taxes of Notes to Consolidated Financial
Statements included elsewhere herein. The Internal Revenue Code of 1986, as
amended, imposes limitations on the use of net operating loss carryforwards if
certain stock ownership changes occur. An ownership changed occurred in 1995
that caused utilization of $23.1 million of our net operating losses incurred
prior to the ownership change to be limited to approximately $9.0 million in a
given year.
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<PAGE> 34
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to changes in interest rates related primarily to our
Notes and Preferred Stock. Under our current policies, we do not use interest
rate derivative instruments to manage exposure to interest rate changes. At
December 31, 1999, we had Notes outstanding having an aggregate principal amount
of approximately $96.3 million, due November 1, 2004, which bear interest at a
fixed rate of 12% and Preferred Stock outstanding having a liquidation
preference of $26.1 million, due November 1, 2007, which bears interest at a
fixed rate of 13 1/2%. The fair value of the Notes and Preferred Stock at
December 31, 1999 was approximately $56.0 million and $14.6 million,
respectively, based upon dealer quoted market prices.
We invest our cash balance in money market funds and commercial paper
rated A1, P1. These securities are in U.S. dollars, with maturities of six
months or less, are held to maturity and are not owned for trading purposes.
Using this strategy, we have not experienced any losses due to interest rate
risk, market risk or foreign exchange risk on our commercial paper investments,
and we do not anticipate any such losses.
On March 3, 2000, we received 886,000 share of Liberate common stock in
exchange for our interest in the VirtualModem(TM) business owned by our joint
venture with Insight Interactive. The closing price per share of the Liberate
common stock on March 3, 2000 was $98.6875, giving us a total investment in
Liberate common stock of approximately $87.4 million. We are restricted from
calling, pledging and otherwise transferring the economic consequences of
ownership of 80% of the Liberate common stock until after July 31, 2000. The
remaining 20% is unrestricted. We face the market risk associated with price
fluctuations of the Liberate common stock until such time as we sell or hedge
the stock. The closing price per share of the Liberate common stock on March 29,
2000 was $75.3125.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Report of Independent Auditors, and our consolidated financial
statements and the notes thereto appear on pages 38 through 74 of this Report.
The Report of Independent Auditors, and the consolidated financial
statements of SourceSuite LLC and the notes thereto appear on pages 75 through
85 of this Report.
34
<PAGE> 35
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information called for by Item 10 is set forth under the caption
"Executive Officers" in Part I of this report and in "Election of Directors" and
"Section 16(a) Beneficial Ownership Reporting Compliance" in our proxy statement
for the 2000 annual meeting of stockholders (the "Proxy Statement"), which are
incorporated herein by this reference.
ITEM 11. EXECUTIVE COMPENSATION
Information called for by Item 11 is set forth under the caption
"Executive Compensation" in the Proxy Statement, which is incorporated herein by
this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information called for by Item 12 is set forth under the caption
"Security Ownership of Certain Beneficial Owners and Management" in the Proxy
Statement, which is incorporated herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Information called for by Item 13 is set forth under the caption
"Certain Transactions" in the Proxy Statement, which is incorporated herein by
this reference.
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<PAGE> 36
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
(1) Financial Statements included in Item 8 herein:
(A) Report of Independent Auditors with respect to Source Media, Inc.
Covered by Report of Independent Auditors:
Consolidated Balance Sheets at December 31, 1998 and 1999
Consolidated Statements of Operations for the years ended December 31,
1997, 1998, 1999
Consolidated Statements of Stockholders' Equity (Capital deficiency)
for the years ended December 31, 1997, 1998, 1999
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1998, 1999
Notes to Consolidated Financial Statements
(B) Report of Independent Auditors with respect to SourceSuite LLC
Covered by Report of Independent Auditors:
Consolidated Balance Sheet at December 31, 1999
Consolidated Statement of Operations for the period from Inception
(November 17, 1999) through December 31, 1999
Statement of Members' Equity for the period from Inception
(November 17, 1999) through December 31, 1999
Statement of Cash Flows for the period from Inception (November 17,
1999) through December 31, 1999
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules included in Item 8 herein:
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are presented in the
consolidated financial statements or are not required under the related
instructions or are inapplicable or immaterial in relation to the
consolidated financial statements and, therefore, have been omitted.
(3) Exhibits:
The information required by this Item 14(a)(3) is set forth in the Index to
Exhibits accompanying this Annual Report on Form 10-K.
(b) Reports on Form 8-K filed during the quarter ended December 31, 1999:
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<PAGE> 37
November 17, 1999 - Reported the transfer of the VirtualModem(TM) and
Interactive TV products and businesses to our joint venture with Insight
Interactive in exchange for a 50% ownership interest in the joint venture. The
report also contained the following financial statements:
Unaudited Pro Forma Consolidated Balance Sheet As of September 30, 1999
Unaudited Pro Forma Consolidated Statement of Operations For the Nine
Months Ended September 30, 1999
Unaudited Pro Forma Consolidated Statement of Operations For the Year Ended
December 31, 1998
Unaudited Pro Forma Consolidated Statement of Operations For the Year Ended
December 31, 1997
Unaudited Pro Forma Consolidated Statement of Operations For the Year Ended
December 31, 1996
37
<PAGE> 38
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders of Source Media, Inc.
We have audited the accompanying consolidated balance sheets of Source Media,
Inc. (the Company) as of December 31, 1998 and 1999, and the related
consolidated statements of operations, stockholders' equity (capital
deficiency), and cash flows for each of the three years in the period ended
December 31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Source Media,
Inc., at December 31, 1998 and 1999, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
/s/ ERNST & YOUNG LLP
Dallas, Texas
March 3, 2000
38
<PAGE> 39
SOURCE MEDIA, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION> DECEMBER 31, DECEMBER 31,
1998 1999
------------- -------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 11,662 $ 10,910
Short-term investments -- 2,500
Restricted investments 11,716 5,997
Trade accounts receivable, less allowance for doubtful
accounts of $387 and $605 in 1998 and 1999, respectively 3,596 1,643
Related party receivables -- 1,458
Prepaid expenses and other current assets 1,384 1,068
------------- -------------
Total current assets 28,358 23,576
Property and equipment:
Production equipment 6,050 4,511
Computer equipment 3,273 3,612
Other equipment 1,150 1,612
Furniture and fixtures 660 656
------------- -------------
11,133 10,391
Accumulated depreciation 6,733 7,957
------------- -------------
Net property and equipment 4,400 2,434
Intangible assets:
Patents 14,945 --
Goodwill 6,698 3,688
Contract rights 11,933 11,933
------------- -------------
33,576 15,621
Accumulated amortization 14,557 6,119
------------- -------------
Net intangible assets 19,019 9,502
Investment in joint venture -- 18,669
Other non-current assets 4,812 3,835
------------- -------------
Total assets $ 56,589 $ 58,016
============= =============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
39
<PAGE> 40
SOURCE MEDIA, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1999
------------- -------------
<S> <C> <C>
Current Liabilities:
Trade accounts payable $ 2,501 $ 955
Accrued interest 2,000 1,991
Accrued payroll 540 591
Other accrued liabilities 1,619 3,706
Unearned income 1,750 1,925
------------- -------------
Total current liabilities 8,410 9,168
Long-term debt 100,000 96,250
Minority interests in consolidated subsidiaries 3,840 3,840
Note receivable and accrued interest from minority stockholder,
net of discount of $53 and $12 in 1998 and 1999, respectively (780) (837)
------------- -------------
3,060 3,003
Senior redeemable payment-in-kind (PIK) preferred
stock, $25 dollar per share liquidation preference, $.001 par value, net of
discount Authorized shares - 1,712; Issued and outstanding
shares 914 and 1,043 in 1998 and 1999, respectively 16,628 18,467
Non-participating preferred stock, $25 dollar per share liquidation preference,
$.001 par value; Authorized and issued - 1 single share
Stockholders' equity (capital deficiency):
Common stock, $.001 par value:
Authorized shares - 50,000; 13,201 and 16,278
issued and outstanding in 1998 and 1999, respectively 13 16
Less treasury stock, at cost - 280 and 268 shares in (2,770) (2,647)
1998 and 1999, respectively
Capital in excess of par value 80,269 120,883
Accumulated deficit (148,943) (187,124)
Notes receivable and accrued interest from stockholders (78) --
------------- -------------
Total stockholders' equity (capital deficiency) (71,509) (68,872)
------------- -------------
Total liabilities and stockholders' equity (capital deficiency) $ 56,589 $ 58,016
============= =============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
40
<PAGE> 41
SOURCE MEDIA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Monetary revenues $ 12,387 $ 24,352 $ 19,147
Nonmonetary revenues 6,044 1,756 1,823
-------- -------- --------
Total revenues 18,431 26,108 20,970
Monetary cost of sales 8,611 12,674 13,164
Nonmonetary cost of sales 6,044 1,756 1,823
-------- -------- --------
Total cost of sales 14,655 14,430 14,987
-------- -------- --------
Gross profit 3,776 11,678 5,983
Selling, general and administrative expenses 19,599 24,772 23,714
Impairment of intangible assets -- 25,936 --
Amortization of intangible assets 4,987 6,320 4,713
Research and development expenses 3,680 3,410 2,578
-------- -------- --------
28,266 60,438 31,005
-------- -------- --------
Operating loss (24,490) (48,760) (25,022)
Interest expense 5,234 12,830 12,819
Interest income (737) (1,933) (828)
Equity interest in losses of joint venture -- -- 1,013
Other expense (income) (53) (27) 155
Minority interest on earnings (losses) of
consolidated subsidiaries (9) -- --
-------- -------- --------
Net loss before extraordinary item (28,925) (59,630) (38,181)
Extraordinary loss - early extinguishment of debt 3,456 -- --
-------- -------- --------
Net loss (32,381) (59,630) (38,181)
Preferred stock dividends 416 2,996 1,838
Net loss attributable to common stockholders $(32,797) $(62,626) $(40,019)
======== ======== ========
Basic and diluted net loss per common share:
Net loss attributable to common stockholders
before extraordinary item $ (2.58) $ (5.21) $ (2.93)
Extraordinary item (0.30) -- --
-------- -------- --------
Net loss attributable to common stockholders $ (2.89) $ (5.21) $ (2.93)
======== ======== ========
Weighted average common shares outstanding 11,354 12,012 13,679
======== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
41
<PAGE> 42
SOURCE MEDIA, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NOTES TOTAL
COMMON STOCK CAPITAL IN RECEIVABLE STOCKHOLDERS'
--------------------- TREASURY EXCESS OF ACCUMULATED FROM EQUITY (CAPITAL
SHARES AMOUNT STOCK PAR VALUE DEFICIT STOCKHOLDERS DEFICIENCY)
--------- --------- --------- --------- ----------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996 10,327 $ 10 $ (3,758) $ 60,816 $ (56,932) $ (110) $ 26
Issuance of common stock upon exercise of
stock options 219 1 (317) 1,352 -- -- 1,036
Acquisition of remaining minority interest in
ICTI 1,390 1 -- 10,384 -- -- 10,385
Issuance of warrants for services provided -- -- -- 280 -- -- 280
Issuance of warrants with Aggregate Tranche
Notes -- -- -- 2,823 -- -- 2,823
Issuance of warrants associated with Units -- -- -- 5,529 -- -- 5,529
Other 33 -- -- 299 -- 11 310
Net loss -- -- -- -- (32,381) -- (32,381)
Preferred Stock Dividends -- -- -- (416) -- -- (416)
--------- --------- --------- --------- --------- --------- ---------
BALANCE AT DECEMBER 31, 1997 11,969 12 (4,075) 81,067 (89,313) (99) (12,408)
========= ========= ========= ========= ========= ========= =========
Issuance of common stock upon exercise of
stock options 94 -- -- 641 -- -- 641
Issuance of stock for legal settlements -- -- 867 (244) -- -- 623
Issuance of stock for employee stock plan -- -- 438 (253) -- -- 185
Exercise of warrants 959 1 -- -- -- -- 1
Stock Compensation -- -- -- 2,054 -- -- 2,054
Other -- -- -- -- -- 21 21
Net loss -- -- -- -- (59,630) -- (59,630)
Preferred Stock Dividends -- -- -- (2,996) -- -- (2,996)
--------- --------- --------- --------- --------- --------- ---------
BALANCE AT DECEMBER 31, 1998 13,022 13 (2,770) 80,269 (148,943) (78) (71,509)
========= ========= ========= ========= ========= ========= =========
Issuance of common stock upon exercise of
stock options 605 -- -- 6,752 -- -- 6,752
Sale of common stock 842 1 -- 11,999 -- -- 12,000
Issuance of stock for employee stock plan -- -- 123 51 -- -- 174
Exercise of warrants 1,809 2 -- 7,444 -- -- 7,446
Stock Compensation -- -- -- 1,057 -- -- 1,057
Issuance of warrants related to formation of
joint venture -- -- -- 13,800 -- -- 13,800
Issuance of warrants -- -- -- 1,350 -- -- 1,350
Other -- -- -- -- -- 78 78
Net loss -- -- -- -- (38,181) -- (38,181)
Preferred Stock Dividends -- -- -- (1,839) -- -- (1,839)
--------- --------- --------- --------- --------- --------- ---------
BALANCE AT DECEMBER 31, 1999 16,278 $ 16 $ (2,647) $ 120,883 $(187,124) $ -- $ (68,872)
========= ========= ========= ========= ========= ========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
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<PAGE> 43
SOURCE MEDIA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Loss $ (32,381) $ (59,630) $ (38,180)
Adjustments to reconcile net loss to net cash used in
operating activities:
Impairment of intangible assets -- 25,936 --
Depreciation 2,314 2,540 2,599
Amortization of intangible assets 4,987 6,320 4,713
Stock compensation -- 2,054 1,057
Write-off of analog set-top boxes 1,999 -- --
Non-cash interest expense 2,969 833 829
Non-cash interest income -- (982) (281)
Provision for losses on accounts receivable 195 1,077 250
Extinguishment of debt 3,456 -- --
Warrants issued for services provided 279 -- --
Issuance of common stock in litigation settlement 299 623 --
Equity investment in losses of joint venture -- -- 1,013
Other, net 260 (62) (57)
Changes in operating assets and liabilities:
Trade accounts receivable (2,035) (1,876) 1,703
Related party receivable -- -- (1,458)
Prepaid expenses and other current assets 324 (94) 2
Deferred expenses (261) 544 315
Trade accounts payable and accrued liabilities 312 1,586 583
Accrued interest 1,894 -- --
Unearned income 48 (2,274) 175
--------- --------- ---------
Net cash used in operating activities (15,341) (23,405) (26,737)
INVESTING ACTIVITIES
Capital expenditures (2,675) (1,510) (1,235)
Redemption of short-term investments -- 27,682 --
Restricted investments (22,189) -- 6,000
Acquisition of equipment and contract rights (1,350) -- --
Purchase of short-term investments (15,615) -- (2,500)
Acquisition of Brite (35,550) -- --
Acquisition of VNN (9,000) -- --
Capitalized acquisition costs (262) -- (478)
--------- --------- ---------
Net cash provided by (used in) investing activities (86,641) 26,172 1,787
FINANCING ACTIVITIES
Net proceeds from issuance of long-term debt 94,548 -- --
Net proceeds from issuance of Second Tranche Note 13,923 -- --
Payments on debt (21,987) -- --
Net proceeds from issuance of preferred stock and warrants 18,810 -- --
Proceeds from issuance of common stock upon exercise
of stock options and warrants 1,035 641 11,971
Proceeds from issuance of common stock -- -- 12,000
Other (219) (177) 227
--------- --------- ---------
Net cash provided by financing activities 106,110 464 24,198
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 4,128 3,231 (752)
Cash and cash equivalents at beginning of period 4,303 8,431 11,662
--------- --------- ---------
Cash and cash equivalents at end of period $ 8,431 $ 11,662 $ 10,910
========= ========= =========
Supplemental disclosures of cash flow information
Cash paid during the period for
interest on long-term debt $ 286 $ 12,066 $ 12,000
========= ========= =========
Long-term debt cancelled as part of exercise of warrants $ -- $ -- $ 3,750
========= ========= =========
Value of warrants issued to Insight Interactive capitalized
as investment in joint venture $ -- $ -- $ 13,800
========= ========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
43
<PAGE> 44
SOURCE MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. COMPANY DESCRIPTION AND HISTORY
Source Media, Inc. (the "Company") operates through its subsidiaries SMI
Holdings, Inc. ("Holdings"), IT Network, Inc. ("IT Network"), Interactive
Channel, Inc. ("Interactive Channel"), and Interactive Channel Technologies Inc.
("ICTI"); in two business segments: IT Network and Interactive TV. Effective
November 17, 1999 the operations of the Interactive TV business were conducted
through a joint venture with Insight Interactive LLC ("Insight"), SourceSuite
LLC ("SourceSuite"); and its wholly owned subsidiary, SourceSuite Canada, Inc.,
which the Company manages. (See Note 14 - Equity in SourceSuite Joint Venture
and Note 16 - Subsequent Events). The Company accounts for its investment in the
joint venture under the equity method.
IT Network sells advertising and related support services to clients who
sponsor a promotional message with interactive content supplied or otherwise
managed by IT Network. IT Network's products and services are distributed
primarily through the Company's
44
<PAGE> 45
Publisher Partners which include Yellow Page directories and daily newspapers.
IT Network's products and services are available in North America, Hawaii and
the Caribbean. Products and services are also promoted and distributed over
radio, television and the Internet.
The Company's Interactive TV business had developed 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. The Interactive TV business includes the
results of the Interactive Channel and ICTI subsidiaries and the Company's 50%
equity interest in the results of SourceSuite from November 17, 1999.
Holdings (formerly known as IT Network) was incorporated on July 19, 1988,
as a Colorado corporation and subsequently on July 23, 1991, reincorporated in
Texas. On June 23, 1995, Holdings merged into a wholly-owned subsidiary of HB
Communications Acquisition Corp. ("HBAC") and Holdings' outstanding common stock
and preferred stock were converted into an aggregate 6,696,992 shares of the
Company's common stock. In connection with the merger, HBAC changed its name to
Source Media, Inc.
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company,
its wholly-owned subsidiaries: Holdings, IT Network, Interactive Channel and
Holdings' wholly-owned Canadian subsidiaries, ICTI and 997758 Ontario Inc.
("997758"). Additionally all material inter-company amounts and transactions
have been eliminated. Certain amounts from prior year financial statements have
been reclassified to conform to the current year's presentation.
Equity Investment in Joint Venture
The Company recorded its share of SourceSuite's results of operations on
the equity method in the Consolidated Statement of
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Operations.
Related Party Transactions
The Company manages the day to day operations of SourceSuite within the
terms of SourceSuite's operating plan. As part of this arrangement, the Company
is reimbursed for direct costs of the Interactive TV business and certain
overhead costs. These costs are included in the receivable from related parties
and are reimbursed to the Company by SourceSuite on a regular basis.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Minority Interests in Consolidated Subsidiaries
Minority interests in consolidated subsidiaries represent the minority
stockholders' proportionate shares of the equity of 997758. At December 31, 1998
and 1999, the Company owned 100% of the voting Class X shares of 997758, while
an individual owned 100% of the Class Y nonvoting shares of 997758, as more
fully discussed in Note 8 - Stock Options, Warrants, Employee Stock Purchase
Plan and Retirement Plan.
Cash and Cash Equivalents
The Company classifies all highly liquid investments with original
maturities of three months or less as cash equivalents. These investments are
recorded at cost, which approximates market.
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Monetary Revenue Recognition
IT Network earns monetary revenues by selling advertising and related
support services to clients who sponsor a promotional message with interactive
content supplied primarily by IT Network. The products and services are
distributed primarily through certain Regional Bell Operating Companies or their
affiliates or other Publisher Partners. Monetary revenues and associated costs
relating to print ads appearing in Yellow Pages are recognized at the time of
distribution by the Directory Publishers. For certain contracts, where an
obligation exists to service the advertisement for the contract period, a
portion of the revenue is deferred and amortized on a straight-line basis over
the term of the respective contracts, beginning at the time of the annual
distribution of the applicable local Yellow Pages directory, or at the
applicable contract start date, if later, and continuing to the end of the term
of the respective contracts, which is typically from 3 to 12 months. The Company
also earns monetary revenues from sales of voice information services to certain
Publisher Partners. Monetary revenues relating to non-Yellow Pages products,
including Streaming Audio and Internet LocalSourceSM sales are also recognized
over the contract period as the services are performed.
Nonmonetary Revenue Recognition
In many of its markets, IT Network has entered into nonmonetary barter
agreements with local television and radio stations. These media sponsors
provide IT Network with advertising time on their stations and update local
news, weather and sports programming in exchange for promotional messages and
print advertisements. Revenues and cost of sales associated with these
nonmonetary barter transactions are included in the Company's consolidated
statements of operations at the estimated fair value of the on-air
advertisements and information content provided to the Company by media
sponsors.
Nonmonetary revenues and cost of sales are recognized on a straight-line
basis over the terms of the respective contracts. The Company was obligated to
provide future services and was entitled to receive future advertising and
information content of $1.8 million and $0.3 million at December 31, 1999 and
1998, respectively.
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
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a five-year period. Furniture and fixtures are depreciated over a seven-year
period.
Intangible Assets
Intangible assets are amortized using the straight-line method over the
following estimated useful lives: patents - five years; contract rights - three
to seven 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. Subsequent to the Brite acquisition (See
Note 5 - Acquisitions), the Company learned that former Brite and IT Network
employees had formed a company to service many of the former Brite clients. As a
result, several former Brite customers cancelled or did not renew their
contracts with IT Network. The Company reviewed the valuation of the acquired
assets recorded at the time of the acquisition, and found these assets to be
impaired. As a result of the financial analysis of the expected discounted
future cash flows of the remaining customer base, the Company recorded a $25.9
million ($2.16 per share) non-cash write-down of the Brite contract rights,
non-compete agreement and goodwill in the second quarter of 1998.
Advertising Costs
The Company expenses the costs of advertising as incurred. Advertising
expenses were $0.4 million, $0.4 million and $0.2 million for the years ended
December 31, 1997, 1998 and 1999, respectively.
Translation of Foreign Currencies
The financial positions and results of operations of ICTI and 997758 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.
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Computation of Net Loss Per Common Share
Net loss per common share is calculated in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share". Diluted
earnings per share have not been presented because the options and warrants are
anti-dilutive.
Stock Options
The Company accounts for employee and director stock option grants in
accordance with Accounting Principles Board Opinion No. 25, "Accounting For
Stock Issued to Employees" ("APB 25") and related Interpretations. Under APB 25,
no compensation expense is recognized for stock option grants to employees and
directors if the exercise price of the Company's stock option grants is at or
above the fair market value of the underlying stock on the date of grant as more
fully described in Note 8 - Stock Options, Warrants, Employee Stock Purchase
Plan and Retirement Plan.
On January 2, 1998, the Company granted stock options to its employees. The
options fully vest on January 2, 2004. If certain target stock prices are met,
the vesting accelerates. As a portion of the underlying shares for these options
had not been authorized by the common stockholders at the date of grant, the
portion of unauthorized options were treated as a variable compensation plan
through July 28, 1998, when the stockholders authorized the shares. The Company
has recognized stock compensation expense of $2.1 million and $1.1 million in
selling, general and administrative expense for the years ended December 31,
1998 and 1999, respectively.
In 1999, the option price of the stock for shares granted in excess of
authorized shares was less than the price on the date the shares were authorized
by the shareholders, therefore, no variable compensation expense was recorded on
the 1999 grant.
New Accounting Pronouncements
Financial Accounting Statement 133, Accounting for Derivative Instruments
and Hedging Activities was issued in June 1998,
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amended by FAS 137, to be effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. The Company has not yet adopted or assessed the
implications of this statement. The Company also considered the effects of the
SEC Staff Accounting Bulletin No. 101, Revenue Recognition, and believes it is
in compliance with this statement.
3. COMMITMENTS AND CONTINGENCIES
ICTI and Holdings filed a patent infringement suit against WorldGate
Communications, Inc. in federal district court in Delaware in May 1998. In June
1998, WorldGate filed a Counterclaim against the plaintiffs and the Company for,
among other things, unfair competition, interference with contract and trade
secret misappropriation. The Counterclaim defendants denied the allegations in
the Counterclaim. The relevant patents and this litigation were assumed by
Liberate Technologies ("Liberate") as part of the sale of SourceSuite. (See Note
16 - Subsequent Events). Liberate agreed to defend the Company against
WorldGate's counterclaims.
On August 21, 1998, the first of fourteen class action complaints were
filed against the Company and certain of its present and former officers and
directors in the United States District Court for the Northern District of Texas
asserting violations of sections 10(b) and 20(a) of the Securities Exchange Act
of 1934 and Rule 10-b5 promulgated thereunder. The fourteen complaints were
consolidated into the first filed case. Plaintiffs filed an amended complaint on
March 3, 1999. The plaintiffs sought damages in an unspecified amount. On
November 12, 1999, the Court set a series of deadlines for the disposition of
the case ending with the trial set for October 2, 2000. The Company believes
this case is totally without merit and intends to vigorously defend itself and
its officers and directors.
On October 6, 1998, Advanced Interactive, Inc. filed a complaint in U.S.
District Court for the Northern District of Illinois, Eastern Division, against
ICTI and the following companies: Matsushita Electric Corporation, Matsushita
Electric Industrial Co., Ltd., Sharp Electronics Corp., Sharp Corp., Thomson
Consumer Electronics, Toshiba Consumer Products, Inc., Toshiba American, Inc.,
Toshiba Corporation, General Instruments Corp., Scientific Atlanta, Inc., ATI
Technologies, Inc., ADS Technologies Inc., Gateway 2000, Inc., STB Systems,
Inc., Hauppauge Computer Works, Inc., WebTV Networks, Inc. and WorldGate
Communications, Inc. (collectively the "Defendants"). Advanced Interactive
alleges that ICTI infringed two claims of one of its patents by manufacturing,
using and/or selling or offering to sell "Sourceware(TM)ChannelLink(TM). The
same allegation is made against each
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Defendant for its particular product or service. The Plaintiff seeks damages,
but makes no claims against the patents of ICTI or any other Defendant. ICTI,
and each of the Defendants, have filed an Answer and have collectively joined
the Motion for Partial Summary Judgment submitted by Matsushita Electric
Corporation of America, Sharp Electronics Corp., Sharp Corp. and the Toshiba
Defendants. On May 12, 1999 the court denied Advanced Interactive's Motion for
summary Judgement of Infringement. On February 17, 2000, the court granted the
Defendants' collective Motion for Partial Summary Judgment on patent claims
interpretation. This case was transferred to SourceSuite and subsequently became
the responsibility of SourceSuite Acquisition on March 3, 2000 (See Note 16 -
Subsequent Events). The Company believes this case is totally without merit and
intends to vigorously defend itself.
In addition, the Company is aware of certain claims against the Company
that have not developed into litigation, or if they have, are dormant, and in
any case are not expected to have a material adverse affect on the Company.
Further, the Company is party to ordinary routine litigation, none of which is
expected to have a material adverse effect on the Company's results of
operations or its financial condition.
As part of the Company's review of its booking performance against customer
sales guarantees, the Company anticipated a shortfall on several contracts. In
connection with these guarantees, the Company recorded an accrued liability of
$1.6 million in 1999. The related expense was included in cost of sales. All
contracts with sales guarantees expire in the first quarter of 2000. These sales
guarantees are fully accrued.
The Company has employment agreements with two executives. The agreements
provide that the Company will pay a base salary amount and grant stock options
over a set term to the employees. In the event of a termination without cause,
the Company remains obligated to make certain payments as defined in the
agreements. One contract expires in 2001 and the other in 2002.
In 1999, the company entered into severance agreements totaling $0.6
million with certain executives that provide for salary continuation for up to
six months and Company payment of health insurance premiums.
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4. SHORT-TERM AND RESTRICTED INVESTMENTS
The Company held certain short-term investments in 1999, which consisted of
securities that were held to maturity, and other highly liquid investments with
maturities of three months or less, which were classified as cash equivalents.
In 1998, all investments were highly liquid investments with maturities of three
months or less and, therefore, are classified as cash equivalents.
In connection with the October 1997 offering of Senior Secured Notes, as
more fully described in Note 6 - Long-term Debt, the Company placed
approximately $22.6 million of the net proceeds from the offering, representing
funds sufficient, together with interest thereon, to pay the first four interest
payments on the Senior Secured Notes, into an Interest Escrow Account (the
"Escrow Account") for the benefit of the holders of the Senior Secured Notes.
Additionally, in November 1999 the Company placed another $6.0 million in to the
Escrow Account from proceeds received in the transaction with Insight. As of
December 31, 1999, the Escrow Account, including accrued interest, totaled $6.0
million. Until disbursed in accordance with the Escrow and Disbursement
Agreement relating to the Escrow Account, the Escrow Account is designed to
secure a portion of the Company's obligations under the Senior Secured Notes.
Funds will be disbursed from the Escrow Account only to pay interest on the
Notes and, upon certain repurchases or redemptions of the Senior Secured Notes,
to pay principal of and premium, if any, thereon. Management has the intent and
ability to hold the securities in the Escrow Account to maturity. These
investments are carried at amortized cost and are summarized as follows as of
December 31, 1999:
<TABLE>
<CAPTION>
GROSS UNREALIZED
(IN THOUSANDS) AMORTIZED COST GAINS FAIR VALUE
-------------- -------------- --------------
<S> <C> <C> <C>
U.S. Government agencies $ 94 $ 1 $ 95
Corporate obligations 5,865 37 5,902
-------------- -------------- --------------
Restricted investments $ 5,959 $ 38 $ 5,997
============== ============== ==============
</TABLE>
Fair values of the securities are based on market prices or dealer quotes.
All securities mature before May 1, 2000.
5. ACQUISITIONS
In January 1997, the Company acquired all of the outstanding shares of ICTI
held by minority interest shareholders in exchange for 1,390,000 shares of the
Company's common stock, making ICTI a wholly-owned subsidiary of the Company.
The Company also issued options to purchase 177,000 shares of the Company's
common stock at exercise prices ranging from $1.43 to $4.96 per share to
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certain employees and directors of ICTI in exchange for their outstanding
options to purchase ICTI common shares. Cash expenses related to the acquisition
were approximately $0.8 million. The aggregate purchase price for the
acquisition of the ICTI minority interest was approximately $11.3 million, and
the acquisition was accounted for by the purchase method of accounting. The
purchase price was allocated to patents, which are being amortized over a five
year period.
On October 30, 1997, the Company acquired certain of the electronic
publishing assets of Brite Voice Systems, Inc. ("Brite") for a purchase price of
approximately $35.6 million. The Brite acquisition has been accounted for by the
purchase method of accounting and the purchase price was allocated to equipment,
contract rights and goodwill based on the estimated fair values of the assets at
the date of acquisition. (See Note 2 - Significant Accounting Policies for a
description of events subsequent to the date of acquisition.)
Also on October 30, 1997, the Company acquired certain assets of Voice News
Network, Inc. ("VNN"), a subsidiary of Tribune Media Services, Inc., a unit of
Tribune Company, for a purchase price of $9.0 million. The VNN acquisition has
been accounted for by the purchase method of accounting and the purchase price
was allocated to equipment, contract rights and goodwill based on the estimated
fair values of the assets at the date of acquisition.
The operating results of Brite and VNN are included in the Company's results
from the date of acquisition. The following table represents the unaudited pro
forma results of operations as if the acquisitions of ICTI, Brite and VNN had
occurred on January 1, 1996, after giving effect to certain adjustments,
including minority interest in earnings (losses) of consolidated subsidiaries,
interest expense, preferred stock dividends and amortization of intangibles
resulting from the allocation of the purchase price.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
--------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
<S> <C>
Total revenues $ 31,637
Operating loss $(28,789)
Net loss $(40,778)
Net loss attributable to common stockholders $(43,904)
Net loss per common share $ (3.87)
</TABLE>
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Pro forma results presented above are not necessarily indicative of what
actually would have occurred if the acquisitions had been consummated as of
January 1, 1997, and are not intended to be a projection of future results or
trends.
6. LONG-TERM DEBT
On April 3, 1996, the Company issued a senior note (the "First Tranche
Note") in the principal amount of $5.0 million and a warrant (the "First Tranche
Warrant") which entitled the holder to purchase 500,000 shares of the Company's
common stock at a purchase price of $10.21 per share. On September 30, 1996 and
March 31, 1997, the Company issued additional senior notes in the amounts of
$0.3 million and $0.4 million, respectively, for the payment of interest on the
First Tranche Note. The First Tranche Note and the additional senior notes
(collectively, the "Aggregate First Tranche Notes") were due on March 31, 2001
and bore interest at the rate of 13% per annum through March 31, 1998 and 12%
thereafter. The estimated fair market value at the date of issuance of the First
Tranche Warrant of $0.7 million was credited to capital in excess of par value
and the First Tranche Note was recorded at a corresponding discount. The
discount on the First Tranche Note was being amortized to interest expense using
the effective interest rate method over the stated term of the First Tranche
Note, resulting in an effective interest rate of 16.2%.
On April 9, 1997, the Company received cash proceeds of $15.0 million upon
the issuance of additional senior notes (the "Second Tranche Notes") in the
principal amount of $15.0 million and warrants (the "Second Tranche Warrants")
which entitled the holders thereof to purchase in the aggregate 2,000,000 shares
of the Company's common stock at a purchase price of $6.00 per share at any time
until their expiration on March 31, 2004. The estimated fair market value of the
Second Tranche Warrants of $1.7 million at the date of issuance was credited to
capital in excess of par value and the Second Tranche Notes were recorded at a
corresponding discount. The discount on the Second Tranche Notes was being
amortized to interest expense using the effective interest rate method over the
stated terms of the Second Tranche Notes resulting in an effective interest rate
of 15.4%. Additionally, in connection with the issuance of the Second Tranche
Notes and the Second Tranche Warrants, the Aggregate First Tranche Notes and the
First Tranche Warrant were amended and restated to terms identical to those of
the Second Tranche Notes and the Second Tranche Warrants, respectively. The
amended Aggregate First Tranche Notes and the Second Tranche Notes were due on
March 31, 2002 and bore interest at the rate of either: (i) 12% per annum
through March 31, 1999 if paid in cash, or (ii) 13% per annum through March 31,
1999 if paid through the issuance of additional notes, and 12% thereafter. On
September 30, 1997 the interest due was paid through the issuance of additional
notes, with terms identical to those of the Second Tranche Notes, in the amount
of approximately $1.3
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million and warrants to purchase approximately 165,000 shares of common stock in
payment of the interest accrued on the Aggregate First Tranche Notes and the
Second Tranche Notes. The estimated fair market values of the notes and warrants
issued in lieu of a cash interest payment on September 30, 1997 were
approximately $1.1 million and $1.1 million, respectively, which were recorded
as interest expense during 1997.
The amendment of the Aggregate First Tranche Notes and First Tranche Warrant
was accounted for as the extinguishment and replacement of the existing senior
notes and the cancellation of the existing warrants and issuance of new warrants
due to the significance of the modification to the terms of the senior notes and
warrants. The extinguishment resulted in a loss of approximately $0.3 million,
which was included in other (income) expense during the second quarter of 1997.
In connection with the issuance of the Senior Secured Notes (the "Senior
Secured Notes", or the "Notes"), the Company used $22.2 million of the proceeds
received to pay off the amended Aggregate First Tranche Notes and the Second
Tranche Notes, including accrued interest thereon, and the notes issued on
September 30, 1997 in lieu of a cash interest payment. The early extinguishment
of these notes resulted in a charge to earnings of approximately $3.5 million
related to unamortized discount on the Second Tranche Notes and unamortized
issuance costs which were recorded as an extraordinary item in 1997. The
proceeds were also used in part to complete the Company's acquisitions of
certain assets more fully described in Note 5 - Acquisitions.
On October 30, 1997, the Company issued Senior Secured Notes in the
principal amount of $100 million, which bear interest at the rate of 12% per
annum through November 1, 2004. Interest on the Notes is payable semi-annually
on May 1 and November 1 of each year commencing on May 1, 1998, to holders of
record at the close of business on April 15th or October 15th immediately
preceding the interest payment date. The Company placed approximately $22.6
million of the net proceeds from the offering, representing funds sufficient,
together with interest thereon, to pay the first four interest payments on the
Notes, into the Escrow Account. Additionally, the Company placed in escrow $6.0
million in November 1999 from proceeds received in the transaction with Insight.
Interest payments of $12.1 million and $12.0 million were made in 1998 and 1999,
respectively. As discussed in Note 4 - Short-term and Restricted Investments,
$6.0 million remains in escrow at December 31, 1999 to pay the interest due in
May 2000.
The Notes are fully and unconditionally guaranteed, jointly and severally,
by each of the Company's subsidiaries (the "Subsidiary Guarantors"). The
guarantees are senior obligations of the Subsidiary Guarantors and are secured
by substantially all of the assets of
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the Subsidiary Guarantors. The guarantees rank pari passu in right of payment
with all existing and future senior indebtedness of the Subsidiary Guarantors
and rank senior in right of payment to all existing and future subordinated
obligations of the Subsidiary Guarantors. The guarantees may be released upon
the occurrence of certain events. The guarantee executed by IT Network contains
a covenant that restricts payments of dividends on its capital stock to an
amount sufficient to cover debt service on the Notes, redemptions or repurchases
of the Notes or the Preferred Stock, dividends on the Preferred Stock and
corporate overhead. The assets of the Company consist solely of investments in
its subsidiaries and SourceSuite and invested proceeds from the Notes and the
Preferred Stock and related warrants. Financial statements for the Subsidiary
Guarantors and the parent, Source Media, Inc., on a non-consolidated basis, are
not presented because management has determined that they would not be material
to investors. In conjunction with the formation of the joint venture with
Insight, the Company pledged its membership units in the joint venture as
collateral to secure payments on the Notes.
On December 13, 1999, $3.75 million of Notes were tendered to the Company
and additional cash received in exchange for an exercise of warrants to purchase
shares of common stock. Except as described below, the Company may not redeem
the Notes prior to November 1, 2001. On or after such date, the Company may
redeem the Notes, in whole or in part, at any time, at various redemption prices
set forth in the indenture governing the Notes, together with accrued and unpaid
interest, if any, to the date of redemption. In addition, at any time and from
time to time on or prior to November 1, 2000, the Company may, subject to
certain requirements, redeem up to 35% of the aggregate principal amount of the
Notes with the cash proceeds of one or more equity offerings at a redemption
price equal to 112% of the principal amount to be redeemed, together with
accrued and unpaid interest, if any, to the date of redemption, provided, that,
at least $65.0 million of the aggregate principal amount of the Notes remain
outstanding immediately after each such redemption. The Notes are not subject to
any sinking fund requirement. Upon the occurrence of a change in control, the
Company will be required to make an offer to repurchase the Notes at a price
equal to 101% of the principal amount thereof, together with accrued and unpaid
interest, if any, to the date of the repurchase. The indenture contains certain
covenants including, but not limited to, limitations on indebtedness, restricted
payments, liens, restrictions on distributions from restricted subsidiaries,
sales of assets and subsidiary stock, affiliate transactions, issuances of
capital stock of restricted subsidiaries and sale/leaseback transactions. See
Note 16 - Subsequent Events for additional information. As of December 31, 1999,
the dealer quoted value of a Note was $0.56 per dollar face value resulting in
an aggregate fair market value of approximately $53.9 million.
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7. SENIOR PIK PREFERRED STOCK
On October 30, 1997, the Company issued 800 units (the "Units") for an
aggregate purchase price of $20 million, each Unit consisting of 1,000 shares of
non-voting Senior Preferred Stock (the "Preferred Stock") with a liquidation
preference of $25.00 per share and 558.75 warrants (the "October 1997
Warrants"). Each October 1997 Warrant entitles the holder to purchase one share
of the Company's common stock at a purchase price of $0.01 per share. In the
aggregate, the October 1997 Warrants represent the right to purchase 447,000
shares of common stock. The Units were sold in connection with the Company's
acquisitions of certain assets more fully described in Note 5 - Acquisitions.
Dividends on the Preferred Stock are payable quarterly on each February 1,
May 1, August 1 and November 1, commencing February 1, 1998, at a rate of 13
1/2% of the liquidation preference per share. At the Company's option, any
dividend payment occurring on or prior to November 1, 2002 may be paid either in
cash or by the issuance of additional shares of Preferred Stock with a
liquidation preference equal to the amount of such dividends; thereafter,
dividends will be paid in cash. The certificate of designation governing the
sale of the Units limits the amount of cash dividends that may be paid on the
Preferred Stock. At any time and from time to time on or prior to November 1,
2000, the Company may, subject to certain requirements, redeem up to 35% of the
aggregate liquidation value of the Preferred Stock with the cash proceeds of one
or more equity offerings at a redemption price equal to 113 1/2% of the
liquidation preference thereof, plus accumulated dividends, on the date of
redemption. After November 1, 2000 and prior to November 1, 2002, the Preferred
Stock is not redeemable. On or after November 1, 2002, the Company may redeem
the Preferred Stock, in whole or in part, at any time, at various redemption
prices, plus accumulated and unpaid dividends, to the date of redemption. Upon
the occurrence of a change in control, the Company will be required to make an
offer to purchase the outstanding shares of the Preferred Stock at a price equal
to 101% of the liquidation preference thereof, plus accumulated and unpaid
dividends, to the date of purchase. The Preferred Stock will be subject to
mandatory redemption in whole on November 1, 2007, at a price equal to 100% of
the then effective liquidation preference thereof, plus, without duplication,
all accrued and unpaid dividends to the date of redemption. The certificate of
designation contains certain covenants including, but not limited to,
limitations on indebtedness, restricted payments, affiliate transactions,
issuances of capital stock of restricted subsidiaries and sale/leaseback
transactions. See Note 16 - Subsequent Events for addition information.
The Preferred Stock ranks senior to all classes of common stock and to each
other class of capital stock or series of preferred stock with respect to
dividend rights and rights on liquidation, winding-up and dissolution of the
Company. The Preferred Stock is non-
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voting except in certain circumstances. The Company may not authorize any new
class of preferred stock that ranks senior or pari passu to the Preferred Stock
without the approval of the holders of at least a majority of the shares of
Preferred Stock then outstanding, voting or consenting, as the case may be, as
one class, provided, however, that the Company may issue additional shares of
Preferred Stock to satisfy dividend payments on outstanding shares of Preferred
Stock; and further provided that the Company may issue shares of preferred stock
ranking pari passu with the Preferred Stock if after giving effect thereto, the
Consolidated Coverage Ratio, as defined in the certificate of designation, is
greater than 1.7 to 1.0.
The estimated fair market value of the October 1997 Warrants, which was
estimated to be approximately $5.5 million, was credited to capital in excess of
par value and the Preferred Stock was recorded at a corresponding discount.
Additionally, $1.2 million of issuance costs were recorded on the Preferred
Stock. The discount and issuance costs on the Preferred Stock are being accreted
as additional preferred stock dividends using the effective dividend rate method
over a ten year period, resulting in an effective dividend rate of 19.9%. As of
December 31, 1999, the dealer quoted fair market value of the Preferred Stock
was $14.00 per share for an aggregate value of $14.6 million.
During 1999, the quarterly dividends due on the Preferred Stock were paid
through the issuance of additional Preferred Stock having an aggregate
liquidation preference of $3.2 million with terms identical to those of the
Preferred Stock. The estimated fair market value of the stock issued in lieu of
a cash payment on the respective dividend dates totaled $1.8 million which was
recorded as preferred stock dividends.
In 1999 a new Non-Participating Preferred Stock was issued in connection
with the closing of the transaction to form the joint venture with Insight. One
share was authorized and issued to Insight. The new share of preferred stock has
a par value of $.001 per share and entitles Insight to designate a certain
number of members of the Board of Directors (based on Insight's ownership
percentage of Source Media, Inc. common stock), committee representation and
preemptive rights to maintain its ownership percentage. The share may not be
transferred without the written consent of the Company and is subject to
mandatory redemption in the event that the holder owns less than two and
one-half percent of the voting stock of the Company on a fully diluted basis.
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8. STOCK OPTIONS, WARRANTS, EMPLOYEE STOCK PURCHASE PLAN AND RETIREMENT PLAN
Stock Options
In 1999, the Company adopted the 1999 Stock Option Plan (the "1999 Plan").
The 1999 Plan provides for the grant of Incentive Stock Options to purchase
shares of common stock only to officers and key employees of the Company and
it's subsidiaries. Non-qualified stock options and stock appreciation rights
may be granted to officers and employees as well as agents, directors and
consultants of the Company. Options granted have a term not to exceed 10 years
and, if the optionee already owns more than 10% of the Company's common stock,
the incentive options cannot exceed 5 years. 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 shares.
In 1995 the Company adopted the 1995 Performance Equity Plan (the "Equity
Plan"). The Equity Plan provides for the grant of options to purchase shares of
the Company's common stock to employees, officers, directors, and consultants
of the Company and its subsidiaries, including Holdings, IT Network and
Interactive Channel. Options granted pursuant to the Equity Plan have a term of
ten years from the date of grant and generally vest over four or five years.
The Equity Plan, as amended, authorizes the granting of awards (stock options,
stock appreciation rights, restricted stock, deferred stock, stock reload
options, and other stock-based awards, as defined), the exercise of which would
allow up to an aggregate of 2,957,589 shares of the Company's common stock to
be acquired. The Company does not intend to grant any additional options under
this plan. An amendment to this Equity Plan, approved by shareholders, allows
for any authorized shares in excess of options granted and outstanding to be
granted under the 1999 Plan. Forfeited shares are canceled under the 1995 plan
and assigned as authorized under the 1999 plan.
In 1989, the Company established a qualified incentive employee stock option
plan. Options granted in 1989 and 1990 have a term of ten years from the date of
grant and vested over a three year period. During 1991 and 1993, the Company
established additional qualified incentive employee stock option plans whereby
granted options have a term of ten years from the date of grant and vest over a
five year period. The Company does not intend to grant any additional options
under these plans and, accordingly, all remaining options available for grant
under such plans are assumed to be canceled.
59
<PAGE> 60
The following table is a summary of stock option activity under the employee
stock option plans during the years ended December 31, 1997, 1998, and 1999:
<TABLE>
<CAPTION>
OPTIONS AVAILABLE SHARES UNDER AGGREGATE OPTIONS OR EXERCISE
EMPLOYEE STOCK OPTION ACTIVITY FOR GRANT OPTION PRICE PRICE PER SHARE
----------------- ------------ ------------ -------------------
<S> <C> <C> <C> <C>
Balance at December 31,1996 -- 1,061,744 $ 9,923,401 $0.74-$11.50
Options authorized 500,000 -- -- --
Options granted (176,000) 176,000 1,280,700 6.41-13.31
Options exercised -- (90,803) (758,755) 0.74-10.40
Options canceled - 1995 Plan 149,324 (149,324) (1,376,794) 6.41-11.12
Options canceled - Other plans -- (21,910) (204,820) 3.72-9.77
---------- ---------- ------------ -------------
Balance at December 31,1997 473,324 975,707 8,863,732 0.74-13.31
Options authorized 575,000 -- -- --
Options granted (1,068,201) 1,068,201 9,357,781 6.28-14.00
Options exercised -- (51,888) (469,317) 0.74-11.12
Options canceled - 1995 Plan 38,653 (38,653) (353,452) 6.41-11.12
Options canceled - Other Plans -- (9,898) (96,272) 3.72-9.77
---------- ---------- ------------ -------------
Balance at December 31, 1998 18,776 1,943,469 17,302,472 3.72-14.00
Options Authorized 2,582,589 -- -- --
Options Granted (1,276,965) 1,276,965 19,177,596 6.63-16.63
Options Exercised -- (579,076) (4,980,295) 3.72-13.31
Options Cancelled - 1995 Plan 248,285 (248,285) (2,744,506) 6.41-16.63
Options Cancelled - Other Plans -- (469) (4,581) 9.77
---------- ---------- ------------ -------------
Balance at December 31, 1999 1,572,685 2,392,604 $ 28,750,686 $3.72-$16.63
========== ========== ============ =============
</TABLE>
During 1995, the Company adopted the 1995 Nonqualified Stock Option Plan for
Non-Employee Directors (the "Directors' Plan"). The Directors' Plan provides for
the automatic annual grant to each non-employee director of the Company an
option to purchase 3,000 shares of common stock. Options granted under the
Directors' Plan have an exercise price equal to the fair market value of the
common stock (calculated as the average of the closing prices for the five
trading days prior to the grant date) and are exercisable at any time from the
date of grant until the fifth anniversary thereof. The Directors' Plan, as
amended on May 21, 1997, provides for the grant of options to purchase up to
300,000 shares of common stock. The following table is a summary of stock option
activity under the Directors' Plan during the years ended December 31, 1997,
1998, and 1999:
60
<PAGE> 61
<TABLE>
<CAPTION>
DIRECTORS' PLAN OPTIONS SHARES WEIGHTED AVERAGE
STOCK OPTION AVAILABLE UNDER AGGREGATE OPTION OR EXERCISE EXERCISE PRICE
ACTIVITY FOR GRANT OPTION PRICE PRICE PER SHARE PER SHARE
--------- ------- ----------- ------------------ ----------------
<S> <C> <C> <C> <C> <C>
Balance at
December 31, 1996 60,000 30,000 $ 318,300 $10.43-$10.89 $10.61
Options authorized 50,000 -- -- -- --
Options granted (15,000) 15,000 88,650 5.91 5.91
------- ------- ----------- --------------- ------
Balance at
December 31, 1997 95,000 45,000 406,950 5.91-10.89 9.04
Options granted (33,000) 33,000 617,670 13.77-22.84 18.72
Options exercised -- (6,000) (63,938) 10.43-10.89 10.66
------- ------- ----------- --------------- ------
Balance at
December 31, 1998 62,000 72,000 960,682 5.91-22.84 13.34
Options Granted (18,000) 18,000 237,384 13.19 13.19
Options Exercised -- (12,000) (127,875) 10.43-10.89 10.66
------- ------- ----------- --------------- ------
Balance at
December 31, 1999 44,000 78,000 $ 1,070,191 $5.91-$22.84 $13.72
======= ======= =========== =============== ======
</TABLE>
Pursuant to an agreement, each of the 176,958 options for ICTI common shares
outstanding at the effective time of the acquisition of the remaining minority
interest of ICTI was exchanged for an option (a "Replacement Option") to
purchase shares of common stock of Source Media. During 1999, 11,963 Replacement
Options were exercised at a weighted average exercise price of $4.15. As of
December 31, 1999, the remaining options represent the right to purchase 23,928
shares of common stock at a weighted average exercise price of $4.10 per share.
Certain additional information for all outstanding options as of December
31, 1999, is being presented based on a range of exercise prices as follows:
<TABLE>
<CAPTION>
EXERCISE PRICES
$3.97-$4.15 $5.91-$16.63 $22.84
------------- ------------- -------------
<S> <C> <C> <C>
Number of outstanding options 23,928 2,440,604 18,000
Weighted average exercise price
of outstanding options $ 4.10 $ 11.95 $ 22.84
Weighted average remaining life 6.38 years 8.4 years 8.58 years
Number of options exercisable 23,928 1,198,199 18,000
Weighted average exercise price
of options exercisable $ 4.10 $ 10.60 $ 22.84
</TABLE>
61
<PAGE> 62
As required by the Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("FAS 123"), pro forma information
regarding net loss and loss per share has been determined as if the Company had
accounted for employee and director stock options granted subsequent to December
31, 1994 under the fair value method provided for under FAS 123. The fair value
for the stock options granted to directors, officers and key employees of the
Company on or after January 1, 1995 was estimated at the date of the grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Risk-free interest rate 6.21% 5.31% 4.83%
Expected dividend yield 0.00% 0.00% 0.00%
Expected volatility 30% 76% 104%
Expected lives 4.0 years 2.7 years 2.6 years
</TABLE>
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
The weighted-average fair value of stock options granted during the years
ended December 31, 1997, 1998 and 1999 was $2.55, $4.50, and $9.35,
respectively. For purposes of the pro forma disclosures, the estimated fair
value of stock options granted from January 1, 1995 through December 31, 1999
have been amortized to expense over the vesting period. The Company's pro forma
information for FAS 123 follows (in thousands, except for loss per common share
information):
62
<PAGE> 63
<TABLE>
<CAPTION>
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Net loss attributable to
common stockholders As reported $ 32,797 $ 62,626 $ 40,019
Pro forma $ 33,471 $ 64,271 $ 44,548
Net loss per common share As reported $ 2.89 $ 5.21 $ 2.93
Pro forma $ 2.95 $ 5.35 $ 3.26
</TABLE>
Warrants
The Company has issued warrants for the purchase of shares of its common
stock from time to time in connection with various financing transactions and
for advisory and consulting services provided to the Company. The majority of
the warrants provide for registration rights. As of December 31, 1999,
outstanding warrants for the purchase of common stock of the Company were:
<TABLE>
<CAPTION>
SHARES ISSUABLE EXERCISE PRICE
UPON EXERCISE PER SHARE EXPIRATION DATE
--------------- -------------- --------------
<S> <C> <C>
1,025,013 $ 6.00 May 2000
100,000 6.41 May 2000
2,253,863(1) 11.00 June 2000
83,085 10.80 February 2001
147,394 10.50 December 2002
85,878 6.00 March 2004
175 4.38 June 2007
450,000 20.00 November 2004
4,596,786 20.00 November 2004
210,649 0.01 November 2007
----------
8,952,843
==========
</TABLE>
(1) In the event the sales price of the Company's common stock equals or exceeds
$20.00 per share for 20 consecutive trading days, the Company will have the
right to call warrants representing 2,253,863 common shares upon 20 days
written notice at a price of $11.00 per share.
63
<PAGE> 64
997758 Class Y Stock Exchange Rights
On September 24, 1992, the Company's subsidiary, 997758, entered into an
agreement with an individual to issue shares of 997758's nonvoting Class Y
shares in exchange for Class A Subordinate Voting Shares and Class B Multiple
Voting Shares of ICTI owned by such individual. The individual has the right at
any time through May 20, 2000, to exchange any or all of the Class Y shares of
997758 for up to an aggregate of 206,376 shares of the Company's common stock.
Each exercise of the exchange rights shall include at least Cdn $150,000 in
value of Class Y shares of 997758 being exchanged for the Company's common
stock. Subsequent to year end, the right to exchange was extended until May 20,
2001.
Shares Reserved for Future Issuance
As of December 31, 1999, common shares reserved for future issuance were as
follows:
<TABLE>
<CAPTION>
NUMBER OF
SECURITY RESERVED SHARES
---------------------------------------- ---------------
<S> <C>
Warrants............................... 8,952,843
Stock options.......................... 2,482,532
Employee stock purchase plan........... 45,036
997758 Class Y Stock exchange rights... 206,376
----------
11,686,787
==========
</TABLE>
Employee Stock Purchase Plan and Retirement Plan
During July 1996, the Company's Board of Directors adopted the Employee
Stock Purchase Plan (the "Plan"), which was approved by the Company's
stockholders at the 1997 annual meeting. Under the Plan, eligible employees may
purchase shares of the Company's common stock at a discount through voluntary
monthly payroll deductions with a maximum contribution being 10% of an eligible
employee's salary, beginning in September 1996. Semi-annually, on June 30 and
December 31, participant account balances are used to purchase shares at the
lesser of 85 percent of the fair market value of the common stock on either the
first or last day of the subscription period. In connection with the Plan, the
Company has set aside 100,000 shares of common stock held in treasury. On June
30, 1999 and December 31, 1999, 6,857 shares and 5,664 shares of common stock
were purchased by employees at prices of $14.13 per share and $13.60 per share,
respectively.
64
<PAGE> 65
The Company sponsors a defined contribution plan covering substantially all
employees; the plan is qualified under Section 401(k) of the Internal Revenue
Code. Under the provisions of the plan, eligible participating employees may
elect to contribute up to the maximum amount of tax deferred contribution
allowed by the Internal Revenue Code.
Anti-Dilution Provisions
Certain of the warrants to purchase common stock contain anti-dilution
provisions whereby the exercise price and the number of shares exercisable
pursuant to the warrants may be adjusted from time to time upon the occurrence
of certain events. In connection with such provisions, warrants to purchase
1,034,687 shares of common stock at a purchase price of $7.44 per share were
adjusted to provide for the purchase of the same number of shares at a purchase
price of $6.00 per share, and warrants to purchase 28,302 shares of common stock
at a purchase price of $10.60 per share were adjusted to provide for the
purchase of 68,498 shares at a purchase price of $4.38 per share upon the
issuance of common stock in connection with the ICTI acquisition discussed in
Note 5 - Acquisitions and the amendment to the First Tranche Warrant and
issuance of the Second Tranche Warrants discussed in Note 6 - Long-term Debt,
respectively.
9. NOTES RECEIVABLE FROM STOCKHOLDERS
On May 20, 1993, the Company loaned $0.8 million to the individual holding
Class Y shares of 997758, which note is secured by the individual's holdings in
997758 and bears interest at a rate per annum of 2%, payable quarterly. The
unpaid principal and interest become due on May 20, 2000. Subsequent to year end
the due date on the Note was extended until May 20, 2001. The Company recorded a
discount to reflect the difference between the actual interest rate and a
reasonable market rate (10%) and increased goodwill accordingly. The note and
accrued interest, net of the unamortized discount of $0.1 thousand and $0.5
thousand as of December 31, 1999 and 1998, respectively, are reflected as a
reduction of minority interests in the accompanying consolidated balance sheet.
On June 30, 1993, the Company loaned $0.1 million to an officer, director
and stockholder. This loan bore interest at the rate of
65
<PAGE> 66
10% per annum, with the principal amount and accrued interest due and payable on
May 31, 1999. All amounts due were received on May 31, 1999.
10. LEASES
The Company leases office space and various office equipment under operating
leases. Rent expense was $0.9 million, $1.1 million and $1.1 million for the
years ended December 31, 1997, 1998, and 1999, respectively.
At December 31, 1999, aggregate amounts of future minimum payments under
lease commitments are as follows:
<TABLE>
<CAPTION>
OPERATING LEASES
(IN THOUSANDS)
<S> <C>
2000 $809
2001 263
2002 14
2003 6
------
Total future minimum lease payments $1,092
======
</TABLE>
11. INCOME TAXES
For the years ended December 31, 1997, 1998 and 1999, the Company had no
provision or benefit for income taxes because the deferred benefit from the
operating losses was offset by an increase in the valuation allowance of $4.1
million, $18.3 million and $9.9 million, respectively. Significant components
of the Company's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Deferred tax liabilities:
Tax over book depreciation $ (548,386) $ (523,243) $ (353,932)
Book over tax basis in investment
in joint venture -- -- (3,909,790)
Other (11,156) (7,706) (19,707)
------------ ------------ ------------
Total deferred tax liabilities (559,542) (530,949) (4,283,429)
Deferred tax assets
Net operating loss carryforwards 24,136,650 32,431,574 46,376,006
Investment tax credits 801,712 488,025 459,279
Unearned income 1,491,716 787,065 712,132
Book over tax amortization of
intangibles 414,831 10,420,726 10,290,481
Reserve for fixed asset impairment 739,763 739,763 --
Accrued expenses 61,248 927,397 1,527,482
Other 56,967 143,312 227,303
------------ ------------ ------------
Total deferred tax assets 27,702,887 45,937,862 59,592,683
Valuation allowance for deferred tax
assets (27,143,345) (45,406,913) (55,309,254)
------------ ------------ ------------
Net of valuation allowance 559,542 530,949 4,283,429
------------ ------------ ------------
Net deferred tax asset $ -- $ -- $ --
============ ============ ============
</TABLE>
66
<PAGE> 67
At December 31, 1999, the Company had net operating loss carryforwards of
approximately $124.5 million for United States income tax purposes, that expire
in 2003 through 2019, which may be used to reduce future United States taxable
income. The Tax Reform Act of 1986 imposes limitations on the use of net
operating loss carryforwards if certain stock ownership changes occur. An
ownership change occurred in 1995 that caused utilization of $23.1 million of
the Company's net operating losses to be limited to approximately $9.0 million
in a given year.
At December 31, 1999, ICTI had net operating loss carryforwards for Canadian
income tax purposes of approximately Cdn $0.7 million, expiring in 2000 through
2003, which may be used to reduce future Canadian taxable income of ICTI. ICTI
also has available at December 31, 1999 investment tax credits totaling Cdn $0.8
million, expiring in 2000 through 2002. At December 31, 1999, ICTI had net
operating loss carryforwards for Ontario Provincial income tax purposes of
approximately Cdn $0.5 million, expiring in 2002 through 2003, which may be used
to reduce future Ontario taxable income of ICTI.
Certain transactions between ICTI and its subsidiaries in March 1997
resulted in taxable income of approximately $7.0 million in the United States
and Canada and the utilization of net operating losses in both countries in
1997. Certain transactions between ICTI and its subsidiaries in 1998 resulted in
utilization of approximately Cdn $4.0 million of Canadian net operating loss
carryforwards.
67
<PAGE> 68
12. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
The Company performs ongoing credit evaluations of its customers and does
not require collateral. Overall concentrations of credit risk with respect to
receivables, except for the customers discussed below, are limited because of
the large number of customers in the Company's customer base, the relatively
small dollar amount of individual customer balances and their dispersion across
many different industries and geographic areas. The Company maintains an
allowance for doubtful accounts which was $0.6 million and $0.4 million as of
December 31, 1999 and 1998, respectively, to reserve for potential credit
losses, which have historically been within management's expectations.
Write-offs against the accounts receivable reserve totaled $0.9 million in 1999.
As of December 31, 1999 and 1998, balances due from BellSouth Advertising
and Publishing represented 16% and 21%, respectively, of the Company's accounts
receivable. No other customer represented more than 10% of the Company's
accounts receivable as of December 31, 1999 or 1998.
For the years ended December 31, 1999 and 1998, a major customer accounted
for 18% and 12% of monetary revenue, respectively. For the year ended December
31, 1997, this major customer accounted for 11% of the monetary revenues while
another major customer accounted for 10% of monetary revenues. No other customer
accounted for greater than 10% of monetary revenues for any of the three years
ended December 31, 1999.
13. MANAGEMENT PLANS
The Company has reported a net loss of approximately $38.2 million for the
year ended December 31, 1999, incurred accumulated losses from inception to
December 31, 1999 aggregating to approximately $187.1 million, and reported
negative cash flows from operations for the year ended December 31, 1999 of
approximately $26.7 million and a capital deficiency of $68.9 million. The
Company's 2000 operating plan contemplates focusing activities to expand
revenues at the Company's IT Network division through expansion into the
internet business and successfully expanding its interactive program guide and
programming services for its Interactive TV business. Based on its plans,
management expects to be able to fund its operations and meet its current
maturing obligations through the end of 2000; however, there can be no assurance
that the Company will be successful in its efforts to grow revenues or expand
its distribution of Interactive TV products.
68
<PAGE> 69
14. EQUITY IN SOURCESUITE JOINT VENTURE
On November 17, 1999 the Company completed the creation of a joint
venture, SourceSuite LLC, with Insight to conduct the business of its former
VirtualModem(TM) and Interactive TV lines of business. The investment in
SourceSuite LLC is accounted for by the equity method. The Company contributed
certain assets of the "VirtualModem(TM)" and "Interactive Channel" products and
businesses in exchange for a 50% ownership in SourceSuite. Insight contributed
$13 million in cash to SourceSuite in exchange for a 50% interest. The joint
venture is managed by the Company within the terms of the operating agreement
and the annual operating plan approved by the Management Committee. Special
actions by SourceSuite require approval of a four member management committee
with equal representation, by both Source Media and Insight, on the Management
Committee. The Operating Agreement of SourceSuite restricts any distribution of
equity to members for a period of three years.
The Company recorded its share of SourceSuite's results of operations on
the equity method in the Consolidated Statement of Operations. Assets of the
Company which were transferred to SourceSuite were reclassified at their
historical net book value, to the investment in joint venture account in the
Consolidated Balance Sheet. In addition, the value of warrants issued to
Insight as part of the transaction have been included in the investment in the
joint venture account. The fair value of these warrants were valued at $13.8
million using a Black-Scholes model.
Assets contributed to SourceSuite have been valued within SourceSuite at
fair value based on the cash received by SourceSuite from Insight for a 50%
interest in the joint venture.
A summary of the difference between the investment and the underlying
equity interest in the net assets of the joint venture at December 31, 1999 is
as follows:
<TABLE>
<CAPTION>
<S> <C>
50% of joint venture net assets $ 12,296
Less: step-up of assets contributed to the
joint venture not reflected by Source Media (7,560)
Plus: Additional investment resulting from the
issuance of warrants to the joint venture partner
and transaction closing cost 13,933
--------
Investment in joint venture balance at
December 31, 1999 $ 18,669
========
</TABLE>
69
<PAGE> 70
The Company records amortization of the assets contributed to the joint
venture on its historical basis. The warrants issued to the joint venture
partner are amortized over five years.
Summary financial data of SourceSuite at December 31, 1999 is as follows
(in thousands):
<TABLE>
<S> <C>
Assets:
Current Assets $ 13,150
Property and Equipment, net 588
Intangible assets, net 13,834
--------
$ 27,572
========
Liabilities and Members' Equity:
Current liabilities $ 1,981
Deferred taxes 999
Members' equity 24,592
--------
$ 27,572
========
Net Loss:
Net loss before taxes $(2,192)
Income tax benefit 784
--------
Net loss $(1,408)
========
</TABLE>
70
<PAGE> 71
15. SEGMENT REPORTING
In accordance with SFAS 131, the Company has identified two reportable
operating segments, IT Network and Interactive TV, for disclosure purposes.
These two segments are regularly reviewed by the Company's management for
determination of the allocation of resources to these businesses.
IT Network sells advertising and related support services to clients who
sponsor a promotional message with interactive content supplied primarily by IT
Network.
The Interactive TV business had developed proprietary software and
interactive programming services that can enable digital, two way television
systems equipment 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. The Interactive TV business includes the results of the
Interactive Channel and ICTI subsidiaries and the Company's 50% equity interest
in the results of SourceSuite from November 17, 1999.
The total revenues, expenses and assets by reportable operating segments are
used in the Company's operations and do not include general corporate overhead
and assets not allocated to the operating units. These assets and expenses have
been separately disclosed for reconciliation purposes.
71
<PAGE> 72
The following are operating results and certain other information by
business segment:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1998 1999
--------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Monetary revenues:
IT Network $ 12,082 $ 24,244 $ 19,105
Interactive TV 305 108 42
--------- -------- --------
Total monetary revenues $ 12,387 $ 24,352 $ 19,147
========= ======== ========
Nonmonetary revenues:
IT Network $ 6,044 $ 1,756 $ 1,823
Interactive TV -- -- --
--------- -------- --------
Total nonmonetary revenues $ 6,044 $ 1,756 $ 1,823
========= ======== ========
Net revenues:
IT Network $ 18,126 $ 26,000 $ 20,928
Interactive TV 305 108 42
--------- -------- --------
Total net revenues $ 18,431 $ 26,108 $ 20,970
========= ======== ========
Operating loss:
IT Network $ (163) $(29,475) $ (6,145)
Interactive TV (19,892) (11,325) (9,017)
Corporate (4,435) (7,960) (9,860)
--------- -------- --------
Total operating loss $ (24,490) $(48,760) $(25,022)
========= ======== ========
Equity interest in loss of joint venture:
Interactive TV $ -- $ -- $ (1,013)
========= ======== ========
Identifiable assets:
IT Network $ 51,374 $ 19,408 $ 15,474
Interactive TV 9,959 8,401 20,675
Corporate 52,169 28,780 21,867
--------- -------- --------
Total identifiable assets $ 113,502 $ 56,589 $ 58,016
========= ======== ========
Depreciation and amortization:
IT Network $ 2,835 $ 5,684 $ 4,329
Interactive TV 4,466 2,925 2,765
Corporate -- 251 218
--------- -------- --------
Total depreciation and
Amortization $ 7,301 $ 8,860 $ 7,312
========= ======== ========
Equity in Joint Venture:
Interactive TV $ -- $ -- $ 18,669
========= ======== ========
Capital expenditures:
IT Network $ 2,838 $ 993 $ 643
Interactive TV 1,944 432 570
Corporate -- 85 22
--------- -------- --------
Total capital expenditures $ 4,782 $ 1,510 $ 1,235
========= ======== ========
</TABLE>
72
<PAGE> 73
16. SUBSEQUENT EVENTS
TRANSACTION WITH LIBERATE
On March 3, 2000, the Company and Insight sold their respective interests in
their joint venture to Liberate in exchange for the issuance to each of the
Company and Insight of 886,000 shares of common stock in Liberate. Prior to the
sale of the joint venture, cash equal to the value of the retained business was
contributed by the joint venture to a new joint venture, originally called
SourceSuite Acquisition LLC, of which the Company and Insight Interactive now
each own 50%. The new joint venture used these funds to purchase the retained
business, which includes the interactive programming guide and related content
business, from the original joint venture. The Company will act as manager of
the new joint venture and carry out the interactive programming guide and
related content business within the operating plan established by the Management
Committee. Additionally, the Company and Insight will be required to provide
additional funding to SourceSuite Acquisition LLC in the event of a capital call
by SourceSuite Acquisition LLC.
Following the merger, Liberate will provide to SourceSuite Acquisition LLC,
without charge, specific software development services for the Interactive
Channel products under a programming services agreement. SourceSuite Acquisition
LLC entered into a preferred content provider agreement with Liberate which
allows Liberate to offer pricing incentives to its customers that use
SourceSuite Acquisition LLC's local content services with the Virtual Modem
products.
After the completion of the sale to Liberate, the original joint venture
changed it name from SourceSuite LLC to Liberate Technologies LLC and the new
joint venture changed its name from SourceSuite Acquisition LLC to SourceSuite
LLC.
The following pro forma condensed balance sheet reflects the Company's
sale of its investment in SourceSuite as if the transaction was consummated as
of December 31, 1999. For pro forma purposes, the investment in Liberate stock
was valued at $98.6875 per share, the closing price per share on the date of
sale, March 3, 2000.
<TABLE>
<CAPTION>
As of December 31, 1999
<S> <C>
Current Assets $110,432
Total Assets 131,145
Stockholder equity 4,257
</TABLE>
73
<PAGE> 74
The following pro forma condensed statement of operations gives effect to
the Insight and Liberate transactions as if they had occurred on January 1,
1998.
<TABLE>
<CAPTION>
Year ended Year Ended
December 31, 1998 December 31, 1999
<S> <C> <C>
Pro forma net sales $ 26,001 $ 20,928
Pro forma operating loss (35,492) (12,128)
Pro forma net loss
attributable to common
shareholders (52,454) (29,892)
Pro forma basic and dilutive
loss per common share (4.08) (2.06)
</TABLE>
PROPOSED EXCHANGE
Subsequent to year end, the Company announced proposals to exchange common
stock for its Senior Secured Notes and Preferred Stock. Under the proposal to
exchange Notes, up to 50 shares of common stock would be exchanged for each
$1,000 in principal amount of the Notes held with the actual number of shares to
be determined by the average closing price of the common stock based on certain
closing price ranges. Under the proposal to exchange Preferred Stock, up to 50
shares of common stock would be exchanged for each $1,000 of liquidation
preference on the Preferred Stock held with the actual number of shares to be
determined by the average close price of the common stock based on certain
closing price ranges. The exchange offers, if made, will be subject to certain
conditions.
74
<PAGE> 75
Report of Independent Auditors
Members and Management Committee
SourceSuite, LLC
We have audited the accompanying consolidated balance sheet of SourceSuite, LLC
(the Company) at December 31, 1999, and the related consolidated statement of
operations and members' equity and cash flows for the period from inception
(November 17, 1999) through December 31, 1999. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of SourceSuite, LLC
at December 31, 1999, and the consolidated results of its operations and its
cash flows for the period from inception (November 17, 1999) through December
31, 1999 in conformity with accounting principles generally accepted in the
United States.
Dallas, Texas /s/ ERNST & YOUNG LLP
March 3, 2000
75
<PAGE> 76
SourceSuite, LLC
Consolidated Balance Sheet
December 31, 1999
(Dollars in thousands)
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 13,078
Prepaid expenses and other current assets 72
--------
Total current assets 13,150
Property and equipment:
Computer and production equipment 666
Accumulated depreciation (78)
--------
Net property and equipment 588
Intangible assets:
Patents 12,396
Goodwill 1,793
--------
14,189
Accumulated amortization (355)
--------
Net intangible assets 13,834
--------
Total assets $ 27,572
========
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Accounts payable $ 59
Accrued liabilities 464
Payable to Source Media, Inc. 1,458
--------
Total current liabilities 1,981
Deferred taxes 999
Members' equity:
Contributed capital, 1,000,000 units authorized and
outstanding 26,000
Accumulated deficit (1,408)
--------
Total members' equity 24,592
--------
Total liabilities and members' equity $ 27,572
========
</TABLE>
See accompanying notes.
76
<PAGE> 77
SourceSuite, LLC
Consolidated Statement of Operations
Period from Inception (November 17, 1999) through December 31, 1999
(In thousands)
<TABLE>
<S> <C>
Revenues $ --
Operating expenses:
Selling, general and administrative expenses 1,538
Research and development expenses 377
Amortization of intangible assets 355
-------
Total operating expenses 2,270
-------
Operating loss (2,270)
Interest income 78
-------
Net loss before taxes (2,192)
Income tax benefit 784
-------
Net loss $(1,408)
=======
</TABLE>
See accompanying notes.
77
<PAGE> 78
SourceSuite, LLC
Statement of Members' Equity
Period from Inception (November 17, 1999) through December 31, 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
MEMBERSHIP MEMBERS'
UNITS EQUITY
---------- --------
<S> <C> <C>
Sale of membership units on November 17,1999 1,000,000 $ 26,000
Net loss -- (1,408)
--------- --------
December 31, 1999 1,000,000 $ 24,592
========= ========
</TABLE>
See accompanying notes.
78
<PAGE> 79
SourceSuite, LLC
Statement of Cash Flows
Period from Inception (November 17, 1999) through December 31, 1999
(In thousands)
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net loss $ (1,408)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation 78
Amortization of intangible assets 355
Changes in operating assets and liabilities:
Prepaid expenses and other current assets (23)
Deferred taxes (794)
Accounts payable and accrued liabilities 507
Related party payable 1,458
--------
Net cash provided by operating activities 173
INVESTING ACTIVITY
Capital expenditures (95)
--------
Net cash used in investing activity (95)
FINANCING ACTIVITY
Proceeds from sale of membership units 13,000
--------
Cash provided by financing activity 13,000
--------
Net increase in cash and cash equivalents 13,078
Cash and cash equivalents at beginning of period --
--------
Cash and cash equivalents at end of period $ 13,078
========
Non-cash investing and financing activities:
Net assets contributed to SourceSuite in exchange
for membership units $ 13,000
========
</TABLE>
See accompanying notes.
79
<PAGE> 80
SourceSuite, LLC
Notes to Consolidated Financial Statements
Period from Inception (November 17, 1999) through December 31, 1999
1. DESCRIPTION OF BUSINESS
SourceSuite, LLC ("SourceSuite" or "Company"), a Delaware limited liability
company, was formed on November 17, 1999 as a joint venture between Source
Media, Inc.("Source Media") and Insight Interactive, LLC ("Insight"). Source
Media conveyed certain assets related to its "VirtualModem(TM)" and "Interactive
Channel" products and businesses and Insight contributed $13 million in cash to
SourceSuite in exchange for each owning a 50% interest in SourceSuite. On March
3, 2000, Insight and Source Media sold their respective interests in SourceSuite
to Liberate Technologies ("Liberate"). (See Note 8 - Subsequent Events.)
SourceSuite operates primarily in the United States while technological
development efforts are performed by its Canadian subsidiary, SourceSuite
Canada, Inc.
SourceSuite will continue the development of the proprietary software
contributed to SourceSuite by Source Media and will provide 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. ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned Canadian subsidiary, SourceSuite Canada, Inc. All material
inter-company amounts and transactions have been eliminated.
BASIS OF PRESENTATION
Assets contributed to the joint venture by Source Media have been valued at the
fair value on the date of contribution based on contribution of cash for an
equal ownership percentage by Insight.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
80
<PAGE> 81
SourceSuite, LLC
Notes to Consolidated Financial Statements (continued)
2. ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
The Company classifies all highly liquid investments with original maturities of
three months or less as cash equivalents. These investments are recorded at
cost, which approximates market.
COMPUTER AND PRODUCTION EQUIPMENT
Computer and production equipment are recorded at cost. Depreciation is computed
using the straight-line method over the estimated useful lives (three to five
years) of the assets.
INTANGIBLE ASSETS
Goodwill resulted from the establishment of a deferred tax liability from the
basis difference between book and tax for the assets contributed to the joint
venture. Intangible assets are patents which were recorded at a fair value based
on contribution of cash for an equal ownership interest by the other investor
less the fair value of computer and production equipment assets also received.
Intangible assets are amortized using the straight-line method over an estimated
useful life of five years.
The carrying value of intangible assets is reviewed for impairment whenever
events or changes in circumstances indicated 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.
TRANSLATION OF FOREIGN CURRENCIES
The financial position and results of operations of SourceSuite Canada are
measured using local currency (Canadian dollar) as the functional currency and
are translated to U.S. dollars in these consolidated financial statements.
Assets and liabilities of this subsidiary 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.
81
<PAGE> 82
SourceSuite, LLC
Notes to Consolidated Financial Statements (continued)
2. ACCOUNTING POLICIES (CONTINUED)
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
COMPREHENSIVE INCOME
There are no significant comprehensive income items, therefore, comprehensive
income is equal to net income and not separately shown on the Consolidated
Statement of Operations.
3. INCOME TAXES
Significant components of the income tax benefit are as follows (in thousands):
<TABLE>
<S> <C>
Current tax expense:
Foreign $ 10
Deferred tax expense (benefit):
Federal (697)
State (97)
------
Total $ (784)
======
</TABLE>
The reconciliation of income tax computed at the US federal statutory rates to
income tax benefit is (in thousands):
<TABLE>
<S> <C>
Benefit at US statutory rate $ (745)
State income taxes (net of federal effect) (66)
Foreign taxes 10
Nondeductible goodwill amortization 17
------
$ (784)
======
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets as of December 31, 1999 are as
follows (in thousands):
82
<PAGE> 83
SourceSuite, LLC
Notes to Consolidated Financial Statements (continued)
3. INCOME TAXES (CONTINUED)
Deferred tax liabilities:
Patents $ 1,750
Deferred tax assets:
Accrued expenses 167
Net operating loss 584
--------
Total deferred tax assets 751
--------
Net deferred tax liabilities $ 999
========
4. MEMBERS' EQUITY
Distribution of equity to members is restricted by the Company's Operating
Agreement for a period of three years.
5. RELATED PARTY TRANSACTIONS
As part of the joint venture agreement between Source Media and Insight, Source
Media manages the day to day operations of SourceSuite within the terms of
SourceSuite's operating plan. As part of this arrangement, SourceSuite
reimburses Source Media for the direct costs of the Interactive TV business and
certain overhead costs. These costs amounted to $1.5 million for the period
ended December 31, 1999 and are included in the payable to related parties and
are reimbursed to Source Media on a regular basis.
6. COMMITMENTS AND CONTINGENCIES
Upon formation of the joint venture, SourceSuite assumed the responsibility for
the following litigation from Source Media:
Interactive Channel Technologies, Inc. ("ICTI") and SMI Holdings, Inc.
(subsidiaries of Source Media), filed a patent infringement suit against
Worldgate Communications, Inc. ("Worldgate") in federal district court in
Delaware in May 1998. In June 1998, Worldgate filed a Counterclaim against the
plaintiffs and Source Media for, among other things, unfair competition,
interference with contract and trade secret misappropriation. The Counterclaim
defendants denied the allegations in the Counterclaim. Subsequent to year-end,
the relevant patents and this litigation were assumed by Liberate as part of the
sale of SourceSuite.
83
<PAGE> 84
SourceSuite, LLC
Notes to Consolidated Financial Statements (continued)
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
On October 6, 1998, Advanced Interactive, Inc. filed a complaint in U.S.
District Court for the Northern District of Illinois, Eastern Division, against
ICTI and the following companies: Matsushita Electric Corporation, Matsushita
Electric Industrial Co., Ltd., Sharp Electronics Corp., Sharp Corp., Thomson
Consumer Electronics, Toshiba Consumer Products, Inc., Toshiba American, Inc.,
Toshiba Corporation, General Instruments Corp., Scientific Atlanta, Inc., ATI
Technologies, Inc., ADS Technologies Inc., Gateway 2000, Inc., STB Systems,
Inc., Hauppauge Computer Works, Inc., WebTV Networks, Inc. and WorldGate
Communications, Inc. (collectively the "Defendants"). Advanced Interactive, Inc.
alleges that ICTI infringed two claims of one of its patents by manufacturing,
using and/or selling or offering to sell Sourceware(TM) ChannelLink (TM). The
same allegation is made against each Defendant for its particular product or
service. The Plaintiff seeks damages, but makes no claims against the patents of
ICTI or any other Defendant. ICTI, and each of the Defendants, have filed an
Answer and have collectively joined the Motion for Partial Summary Judgment
submitted by Matsushita Electric Corporation of America, Sharp Electronics
Corp., Sharp Corp. and the Toshiba Defendants. On May 12, 1999 the court denied
Advanced Interactive Inc.'s Motion for summary Judgement of Infringement. On
February 17, 2000, the court granted the Defendants' collective Motion for
Partial Summary Judgment on patent claims interpretation. This case was
transferred to SourceSuite under the terms of the joint venture agreement and
subsequently became the responsibility of SourceSuite Acquisition LLC on March
3, 2000 (See Note 8 - Subsequent Events).
7. YEAR 2000 DISCLOSURES (UNAUDITED)
SourceSuite is dependent upon the computer systems of Source Media. The Year
2000 issue is the result of computer programs being written using two digits
rather than four to define the applicable year. Any of the Source Media computer
programs or hardware that have date-sensitive software or embedded chips may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business.
Based on assessments made by Source Media, it was determined that certain of its
software and hardware would be required to be modified or replaced so that those
systems will properly utilize dates beyond December 31, 1999. Source Media has
informed SourceSuite that all required modifications or replacements of existing
software and certain hardware have been completed and no Year 2000 issues were
encountered.
84
<PAGE> 85
SourceSuite, LLC
Notes to Consolidated Financial Statements (continued)
7. YEAR 2000 DISCLOSURES (UNAUDITED) (CONTINUED)
To date, Source Media is not aware of any external agent with a Year 2000 issue
that would materially impact the Company's results of operations, liquidity, or
capital resources. However, Source Media has no means of ensuring that external
agents are or will continue to be Year 2000 compliant. The effect of
noncompliance by external agents is not determinable.
Source Media utilized both internal and external resources to reprogram,
replace, test and implement the software and operating equipment for Year 2000
modifications. No costs of modification were incurred by SourceSuite.
8. SUBSEQUENT EVENTS
TRANSACTION WITH LIBERATE TECHNOLOGIES
On March 3, 2000 Source Media and Insight sold their respective interests in
SourceSuite to Liberate in exchange for the issuance of 886,000 shares of common
stock in Liberate to both Source Media and Insight. Prior to the sale of
SourceSuite, cash equal to the value (as determined by an independent appraisal)
of the retained business, consisting of the interactive programming guide and
related content business, was contributed by SourceSuite to SourceSuite
Acquisition LLC, of which Source Media and Insight each own 50%. SourceSuite
Acquisition LLC used these funds to purchase the retained business from
SourceSuite, which comprised fixed assets with a net book value of approximately
$200,000 and certain accrued liabilities, for $1.1 million. After the closing of
the sale, the Company changed its name to Liberate Technologies LLC and
SourceSuite Acquisition LLC changed its name to SourceSuite, LLC.
85
<PAGE> 86
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, Source Media, Inc. has duly caused this Annual Report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 30, 2000 SOURCE MEDIA, INC.
/s/ Stephen W. Palley
------------------------------------
Stephen W. Palley, President
Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report has been signed by the following persons in the capacities and on
the dates indicated.
<TABLE>
<S> <C> <C>
/s/ Stephen W. Palley President, Chief Executive Officer March 30, 2000
--------------------- and Director (Principal Executive --------------
Stephen W. Palley Officer)
/s/ F. Paul Tigh Chief Financial Officer and Treasurer March 30, 2000
---------------- (Principal Financial and Accounting --------------
F. Paul Tigh Officer)
/s/ Michael S. Willner Director March 30, 2000
---------------------- --------------
Michael S. Willner
/s/ James L. Greenwald Director March 30, 2000
---------------------- --------------
James L. Greenwald
/s/ Michael J. Marocco Director March 30, 2000
---------------------- --------------
Michael J. Marocco
/s/ Barry Rubenstein Director March 30, 2000
-------------------- --------------
Barry Rubenstein
/s/ Kim D. Kelly Director March 30, 2000
---------------- --------------
Kim D. Kelly
/s/ Sidney Knafel Director March 30, 2000
----------------- --------------
Sidney Knafel
</TABLE>
86
<PAGE> 87
INDEX TO EXHIBITS
Exhibit Number Description
3.1 Restated Certificate of Incorporation, as amended
3.2 Bylaws, as amended
4.1 Form of Common Stock Certificate (filed as Exhibit 4.1 to
the Company's Registration Statement on Form S-1 (No.
33-97564), and incorporated herein by reference)
4.2 Certificate of Designation for Senior PIK Preferred Stock,
as amended
4.3 Certificate of Designations for Non-Participating Preferred
Stock (filed as Exhibit D to the Company's Statement on
Schedule 14A filed September 24, 1999, and incorporated
herein by reference)
4.4 Indenture dated as of October 30, 1997 among the Company,
its subsidiaries parties thereto and U. S. Trust Company of
Texas, N.A. (filed as Exhibit 4.1 to the Company's Current
Report on Form 8-K dated October 30, 1997, and incorporated
herein by reference)
4.5 First Supplemental Indenture dated as of November 1, 1999
among the Company, its subsidiaries parties thereto and U.S.
Trust Company of Texas, N.A.
4.6 Second Supplemental Indenture dated as of February 15, 2000
among the Company, its subsidiaries parties thereto and U.S.
Trust Company of Texas, N.A.
4.7 Rights Agreement dated as of April 24, 1998 between the
Company and ChaseMellon Shareholder Services, L.L.C.
10.1 Form of Guarantee for domestic subsidiaries (filed as
Exhibit 10.29 to the Company's Registration Statement on
Form S-4, as amended (No. 333-42017), and incorporated
herein by reference)
10.2 Form of Guarantee for foreign subsidiaries (filed as Exhibit
10.30 to the Company's Registration Statement on Form S-4,
as amended (No. 333-42017), and incorporated herein by
reference)
10.3 Contribution Agreement by and among Insight Interactive,
LLC, the Company and Newco, LLC dated July 29, 1999 (filed
as Exhibit B to the Company's Statement on Schedule 14A
filed September 24, 1999, and incorporated herein by
reference)
10.4 Common Stock and Warrants Purchase Agreement between the
Company and Insight Interactive, LLC dated as of July 29,
1999 (filed as Exhibit C to the Company's Statement on
Schedule 14A filed September 24, 1999, and incorporated
herein by reference)
10.5 Warrant Agreement dated as of October 30, 1997 between the
Company and ChaseMellon Shareholder Services, L.L.C. (filed
as Exhibit 4.3 to the Company's Current Report on Form 8-K
dated October 30, 1997, and incorporated herein by
reference)
10.6 Stock Purchase Warrant dated November 17, 1999 between the
Company and Insight Interactive, LLC
10.7 Stock Purchase Warrant dated November 17, 1999 between the
Company and Lazard Freres & Co., LLC
<PAGE> 88
10.8 Merger Agreement and Plan of Reorganization dated as of
January 12, 2000 by and among Liberate Technologies,
SourceSuite LLC, the Company, Insight Communications, Inc.,
Insight Interactive LLC, SourceSuite Acquisition LLC and
Liberate Acquisition Co., LLC (filed as Exhibit 10.10 to the
Company's Registration Statement on Form S-4 (no. 33-95023),
and incorporated herein by reference)
10.9* 1995 Performance Equity Plan, as amended and restated
effective as of June 10, 1998 (filed as Exhibit 10.17 to the
Company's Report on Form 10-K for the Year Ended December
31, 1998, and incorporated herein by reference)
10.10* 1995 Nonqualified Stock Option Plan for Non-Employee
Directors (filed as Exhibit 10.32 to the Company's
Registration Statement on Form S-1 (no. 33-90482), and
incorporated herein by reference)
10.11* 1999 Stock Option Plan (filed as Exhibit A to the Company's
Statement on Schedule 14A filed September 24, 1999, and
incorporated herein by reference)
10.12* Employment Agreement dated as of March 11, 1999 between the
Company and Victoria Hamilton (filed as Exhibit 10.1 to the
Company's Report on Form 10-Q for the Quarter Ended March
31, 1999, and incorporated herein by reference)
10.13* Employment Agreement dated as of March 29, 1999 between the
Company and Stephen W. Palley (filed as Exhibit 10.2 to the
Company's Report on Form 10-Q for the Quarter Ended March
31, 1999, and incorporated herein by reference)
10.14* Employment Agreement dated as of June 10, 1996 between the
Company and W. Thomas Oliver (filed as Exhibit 10.3 to the
Company's Report on Form 10-Q for the Quarter Ended March
31, 1999, and incorporated herein by reference)
10.15* Employment Agreement dated as of June 17, 1999 between the
Company and Howard Gross
10.16* Form of Severance Agreement dated March 29, 1999 between the
Company and Timothy P. Peters, John Reed and Maryann Walsh
21.1 Subsidiaries
23.1 Consent of Ernst & Young LLP
27.1 Financial Data Schedule
* Management Contract or Compensatory Plan
<PAGE> 1
EXHIBIT 3.1
RESTATED CERTIFICATE OF INCORPORATION
OF
HB COMMUNICATIONS ACQUISITION CORP.
It is hereby certified that:
1. The present name of the corporation (hereinafter called the
"corporation") is HB Communications Acquisition Corp., which is the name under
which the corporation was originally incorporated; and the date of filing the
original certificate of incorporation of the corporation with the Secretary of
State of the State of Delaware January 13, 1993.
2. The certificate of incorporation of the corporation is hereby
amended (a) by striking out Articles FIFTH and EIGHTH, (b) by correcting the
word "tho" in the first sentence of paragraph C of Article SIXTH to read "the",
(c) by substituting in lieu of paragraph B of Article EIGHTH new Article
SEVENTH, and (d) by redesignating Articles SIXTH, SEVENTH and NINTH as Articles
FIFTH, SIXTH and EIGHTH, respectively, all as set forth in the Restated
Certificate of Incorporation hereinafter provided for.
3. The provisions of the certificate of incorporation of the
corporation as herein amended are hereby restated and integrated into the single
instrument which is hereinafter set forth, and which is entitled Restated
Certificate of Incorporation of HB Communications Acquisition Corp., without any
further amendments other than the amendments herein certified and without any
other discrepancy between the provisions of the certificate of incorporation as
heretofore filed and the provisions of the said single instrument hereinafter
set forth.
RESTATED CERTIFICATE OF INCORPORATION
OF
HB COMMUNICATIONS ACQUISITION CORP.
FIRST: The name of the Corporation is HB Communications Acquisition
Corp.
SECOND: The address of the Corporation's registered office in the State
of Delaware is 32 Loockerman Square, Suite L-100, Dover, Kent County, Delaware
19901. The name of the Corporation's registered agent at such address is The
Prentice-Hall Corporation System, Inc.
<PAGE> 2
THIRD: The purpose of the Corporation shall be to engage in any lawful
act or activity for which corporations may be organized under the General
Corporation Law of the State of Delaware (the "GCL").
FOURTH: The total number of shares of all classes of capital stock
which the Corporation shall have authority to issue is 51,000,000 of which
50,000,000 shares shall be Common Stock of the par value of $0.001 per share and
1,000,000 shares shall be Preferred Stock of the par value of $0.001 per share.
A. Preferred Stock. The Board of Directors is expressly authorized to
provide for the issue of all or any shares of the Preferred Stock, in one or
more series, and to fix for each such series such voting powers, full or
limited, and such designations, preferences and relative, participating,
optional or other special rights and such qualifications, limitations or
restrictions thereof as shall be stated and expressed in the resolution or
resolutions adopted by the Board of Directors providing for the issue of such
series (a "Preferred Stock Designation") and as may be permitted by the GCL. The
number of authorized shares of Preferred Stock may be increased or decreased
(but not below the number of shares thereof then outstanding) by the affirmative
vote of the holders of a majority of the voting power of all of the then
outstanding shares of the capital stock of the Corporation entitled to vote
generally in the election of directors (the "Voting Stock"), voting together as
a single class, without a separate vote of the holders of the Preferred Stock,
or any series thereof, unless a vote of any such holders is required pursuant to
any Preferred Stock Designation.
B. Common Stock. Except as otherwise required by law or as otherwise
provided in any Preferred Stock Designation, the holders of the Common Stock
shall exclusively possess all voting power and each share of Common Stock shall
have one vote.
FIFTH: The following provisions (A) through (E) shall apply during the
period commencing upon the filing of this Certificate of Incorporation and
terminating upon the consummation of any "Business Combination," and may not be
amended prior to the consummation of any Business Combination. A "Business
Combination" shall mean the acquisition by the Corporation, whether by merger,
exchange of capital stock, asset or stock acquisition or other similar type of
transaction, of any business ("Target Business") in the communications industry.
A. Prior to the consummation of any Business Combination, the
Corporation shall submit such Business Combination to its stockholders for
approval regardless of whether the Business Combination is of a type which
normally would require such stockholder approval under the GCL. In the event
that the holders of a majority of the outstanding Voting Stock vote for the
approval of the Business Combination, the Corporation shall be authorized to
consummate the Business Combination. Notwithstanding the foregoing, in the event
that the holders of 20% or more of the Voting Stock (excluding, for this
purpose, those persons ("Insiders") who were stockholders prior to the
consummation of the Corporation's initial public offering of its securities
("IPO")) vote against the Business Combination, the Corporation shall not be
authorized to consummate such Business Combination.
2
<PAGE> 3
B. In the event that a Business Combination is approved in accordance
with the above paragraph A and is consummated by the Corporation, any
stockholder of the Corporation other than an Insider (a "Public Stockholder")
who voted against the Business Combination may demand that the Corporation
redeem his shares. If so demanded, the Corporation shall redeem such shares at a
per share redemption price equal to the quotient determined by dividing (i) the
amount in the Trust Fund, as defined below, as of the record date for
determination of stockholders entitled to vote on the Business Combination, by
(ii) the number of shares held by the Public Stockholders. "Trust Fund" shall
mean the trust account established by the Corporation at the consummation of its
IPO and into which certain amounts of the net proceeds of the IPO are deposited.
C. In the event that the Corporation does not consummate a Business
Combination by the later of (i) 18 months after the consummation of the
Corporation's IPO or (ii) 24 months after the consummation of the IPO in the
event that an agreement for a Business Combination was submitted to the
stockholders for approval but was not consummated within such 18 month period
(such later date being referred to as the "Termination Date"), the officers of
the Corporation shall take all such action necessary to dissolve and liquidate
the Corporation within sixty days of the Termination Date. In the event that the
Corporation is so dissolved and liquidated, only the Public Stockholders shall
be entitled to receive liquidating distributions and the Corporation shall pay
no liquidating distributions to any Insider.
D. A Public Stockholder shall be entitled to receive distributions from
the Trust Fund only in the event of a liquidation of the Corporation or in the
event he demands redemption of his shares in accordance with paragraph B, above.
In no other circumstances shall any Public Stockholder have any other right or
interest of any kind in or to the Trust Fund.
E. Directors shall be divided into two classes, as nearly equal in
number as possible. At each annual meeting of stockholders, directors elected to
succeed those directors whose terms expire shall be elected for a term of office
to expire at the second succeeding annual meeting of stockholders after their
election. Except as the GCL may otherwise require, in the interim between annual
meetings of stockholders or of special meetings of stockholders called for the
election of directors and/or for the removal of one or more directors and for
the filling of any vacancy in that connection, newly created directorships and
any vacancies in the Board of Directors, including unfilled vacancies resulting
from the removal of directors for cause, may be filled by the vote of a majority
of the remaining directors then in office, although less than a quorum, or by
the sole remaining director. All directors shall hold office until the
expiration of their respective terms of office and until their successors shall
have been elected and qualified.
SIXTH: The following provisions are inserted for the management of the
business and for the conduct of the affairs of the Corporation, and for further
definition, limitation and regulation of the powers of the Corporation and of
its directors and stockholders:
3
<PAGE> 4
A. Election of directors need not be by ballot unless the by-laws of
the Corporation so provide.
B. The Board of Directors shall have the power, without the assent or
vote of the stockholders, to make, alter, amend, change, add to or to repeal the
by-laws of the Corporation as provided in the by-laws of the Corporation.
C. The directors in their discretion may submit any contract or act for
approval or ratification at any annual meeting of the stockholders or at any
meeting of the stockholders called for the purpose of considering any such act
or contract, and any contract or act that shall be approved or be ratified by
the vote of the holders of a majority of the stock of the Corporation which is
represented in person or by proxy at such meeting and entitled to vote thereat
(provided that a lawful quorum of stockholders be there represented in person or
by proxy) shall be as valid and binding upon the Corporation and upon all the
stockholders as though it had been approved or ratified by every stockholder of
the Corporation, whether or not the contract or act would otherwise be open to
legal attack because of directors' interests, or for any other reason.
D. In addition to the powers and authorities hereinbefore or by statute
expressly conferred upon them, the directors are hereby empowered to exercise
all such powers and do all such acts and things as may be exercised or done by
the Corporation; subject, nevertheless, to the provisions of the statutes of
Delaware, of this Certificate of Incorporation, and to any by-laws from time to
time made by the stockholders; provided, however, that no by-law so made shall
invalidate any prior act of the directors which would have been valid if such
by-law had not been made.
SEVENTH: A director of the Corporation shall not be personally liable
to the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of the
directors' duty of loyalty to the Corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the GCL, or (iv) for any
transaction from which the director derived an improper personal benefit. If the
GCL is amended to authorize corporate action further eliminating or limiting the
personal liability of directors, then the liability of a director of the
Corporation shall be eliminated or limited to the fullest extent permitted by
the GCL, as so amended. Any repeal or modification of this Article by the
stockholders of the Corporation shall not adversely affect any right or
protection of a director of the Corporation with respect to events occurring
prior to the time of such repeal or modification.
EIGHTH. Whenever a compromise or arrangement is proposed between this
Corporation and its creditors or any class of them and/or between this
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this Corporation under
the provisions of Section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers appointed
for this Corporation under the provisions of Section 279 of Title 8
4
<PAGE> 5
of the Delaware Code order a meeting of the creditors or class of creditors,
and/or of the stockholders or class of stockholders of this Corporation, as the
case may be, to be summoned in such manner as the said court directs. If a
majority in number representing three-fourths in value of the creditors or class
of creditors, and/or of the stockholders or class of stockholders or class of
stockholders of this Corporation, as the case may be, agree to any compromise or
arrangement and to any reorganization of this Corporation as a consequence of
such compromise or arrangement, the said compromise or arrangement and the said
reorganization shall, if sanctioned by the court to which the said application
has been made, be binding on all the creditors or class of creditors, and/or on
all the stockholders or class of stockholders, of this Corporation, as the case
may be, and also on this Corporation.
4. The Corporation has not received any payment for any of its stock.
5. The amendments and the restatement of the restated certificate of
incorporation herein certified have been duly adopted by the sole director who
has been elected and qualified in the manner and by the vote prescribed by
Section 241 and Section 245 of the General Corporation Law of the State of
Delaware.
Signed on February 23, 1993
/s/ Rhodric C. Hackman
---------------------------------
Rhodric C. Hackman, President
Attest:
/s/ John F. Baring
- --------------------------------
John F. Baring, Secretary
5
<PAGE> 6
AMENDMENT OF
RESTATED CERTIFICATE OF INCORPORATION
OF
HB COMMUNICATIONS ACQUISITION CORP.
Pursuant to the General Corporation Law of the State Of Delaware
("GCL"), it is hereby certified that:
1. The present name of the corporation (hereinafter called the
"corporation") is HB Communications Acquisition Corp., which is the name under
which the corporation was originally incorporated. The date of filing the
original certificate of incorporation of the corporation with the Secretary of
State of the State of Delaware is January 13, 1993. The date of filing of the
restated certificate of incorporation of the corporation with the Secretary of
State of the State of Delaware is February 24, 1993.
2. The restated certificate of incorporation of the corporation is
hereby amended by adding as Article NINTH the following:
"NINTH: In the event (i) the acquisition (the "Acquisition") by the
Corporation of certain assets of The Microband Companies
Incorporated ("Microband") and certain affiliated companies (the
"Microband Companies"), comprising the wireless cable television
system operated by Microband Wireless Cable of New York, Inc. is
approved by the stockholders of the Corporation and (ii) the
Acquisition is approved by the U.S. Bankruptcy Court for the
Southern District of New York, then, in such event, the Corporation
must consummate the Acquisition on the terms and conditions set
forth in the Amended and Restated Asset Purchase Agreement, between
the Corporation and the Microband Companies (the "Asset Purchase
Agreement"), unless a condition set forth in the Asset Purchase
Agreement to the Corporation's obligation to consummate the
Acquisition shall not have been satisfied."
3. Except as otherwise amended hereby, the provisions of the restated
certificate of incorporation of the corporation are in full force and effect.
<PAGE> 7
4. The amendments of the restated certificate of incorporation herein
certified have been duly adopted by the directors and stockholders of the
corporation by the vote prescribed by Section 242 of the GCL and shall become
effective on the date of the filing of this certificate.
Signed on December 21, 1994.
/s/ Rhodric C. Hackman
------------------------------
Rhodric C. Hackman, President
Attest:
/s/ John F. Baring
- ------------------------------
John F. Baring, Secretary
<PAGE> 8
AMENDMENT OF
RESTATED CERTIFICATE OF INCORPORATION
OF
HB COMMUNICATIONS ACQUISITION CORP.
Pursuant to the General Corporation Law of the State of Delaware
("GCL"), it is hereby certified that:
1. The present name of the corporation (hereinafter called the
"corporation") is HB Communications Acquisition Corp., which is the name under
which the corporation was incorporated. The date of filing the original
certificate of incorporation of the corporation with the Secretary of State of
the State of Delaware is January 13, 1993. The date of filing of the restated
certificate of incorporation of the corporation with the Secretary of State of
the State of Delaware is February 24, 1993.
2. The restated certificate of incorporation of the corporation is
hereby amended by deleting Article FIRST and in its stead substituting the
following:
"FIRST: The name of the corporation is Source Media, Inc.
3. The restated certificate of incorporation of the corporation is
hereby amended by deleting Article NINTH.
4. Except as otherwise amended hereby, the provisions of the restated
certificate of incorporation, as amended, of the corporation are in full force
and effect.
5. The amendments of the restated certificate of incorporation herein
certified have been duly adopted by the directors and stockholders of the
corporation by the vote prescribed by Section 242 of the GCL and shall become
effective on the date of the filing of this certificate.
Signed on June 21, 1995.
/s/ Rhodric C. Hackman
--------------------------------
Rhodric C. Hackman, President
ATTEST:
/s/ John F. Baring
- ---------------------------------
John F. Baring, Secretary
<PAGE> 9
CERTIFICATE OF AMENDMENT
TO
CERTIFICATE OF INCORPORATION
OF
SOURCE MEDIA, INC.
SOURCE MEDIA, INC., a corporation organized and existing under the laws
of the State of Delaware (herein called the "Corporation"), hereby certifies as
follows:
1. The name of the Corporation is Source Media, Inc. The Corporation
was originally incorporated under the name "HB Communications Acquisition
Corp.", and the original Certificate of Incorporation of the Corporation was
filed with the Secretary of State of Delaware on January 13, 1993.
2. The Board of Directors of the Corporation, at a meeting duly called
and held on August 24, 1995, adopted a resolution proposing and declaring
advisable the amendment to the Restated Certificate of Incorporation, as amended
(as previously amended and restated, the "Certificate of Incorporation") of the
Corporation set forth below, and calling for the submission of said amendment to
the stockholders of the Corporation for their consideration.
3. This Certificate of Amendment has been duly adopted in accordance
with the requirements of Section 242 of the General Corporation Law of the State
of Delaware. The stockholders of the Corporation have duly adopted this
Certificate of Amendment pursuant to written consents given in accordance with
the provisions of Section 228 of the General Corporation Law of the State of
Delaware, and written notice of the taking of such corporate action without a
meeting by less than unanimous written consent has been or will be given to
stockholders who did not consent in writing to the action in accordance with the
provisions of that Section.
4. Upon this Certificate of Amendment becoming effective pursuant to
the General Corporation Law of the State of Delaware (the "Effective Time"), a
new provision (c) shall be added to Article "FOURTH" of the Restated Certificate
of Incorporation of the Corporation, as amended, such new paragraph (c) to read
in its entirety as follows:
"C. Reverse Split.
(i) Each outstanding share of Common Stock, par value $.001 per
share ("Common Stock"), of the Corporation outstanding prior to the
Effective Time ("Pre-Split Share") shall be automatically
reclassified as and changed and converted into .5 of a share of
Common Stock ("Post-Split Share"), without any action by the holder
thereof.
<PAGE> 10
(ii) No fractional Post-Split Shares shall be issued as a result
of the reclassification of Common Stock, but each stockholder whose
Pre-Split Shares are reclassified and who would otherwise be
entitled to receive a fractional Post-Split Share by reason of such
reclassification shall be entitled to receive from the Corporation,
in lieu of such fractional share, a cash payment in an amount equal
to the average of the closing high bid and low asked quotations for
the Common Stock, on October 10, 1995 as reported on the OTC
Bulletin Board, multiplied by such fraction.
(iii) Each certificate that represents Pre-Split Shares shall
thereafter be deemed to represent that number of whole Post-Split
Shares determined by multiplying the number of Pre-Split Shares
previously represented by such certificate by .5. Each person who is
a holder of record of outstanding Pre-Split Shares at the Effective
Time shall thereafter be entitled to receive from the Corporation a
certificate or certificates representing the number of whole
Post-Split Shares into which such Pre-Split Shares are reclassified
and a check in payment of the value of any fraction of a share, upon
the surrender by such holder to the Corporation of the certificate
or certificates that represented such Pre-Split Shares."
5. This Certificate of Amendment shall become effective at 12:01 a.m.,
October 10, 1995.
THE UNDERSIGNED, being the Chairman of the Board and President of the
Corporation, does make this certificate, hereby declaring and certifying, under
penalties of perjury, that this is the act and deed of the Corporation, duly
adopted by its stockholders pursuant to Section 242 of the General Corporation
Law, and the facts stated herein are true, and accordingly have hereunto set my
hand this 19th day of September, 1995.
SOURCE MEDIA, INC.
By: /s/ Timothy P. Peters
----------------------------------
Timothy P. Peters, Chairman
of the Board and President
Attest:
/s/ Michael G. Pate
- -------------------------------
Michael G. Pate
Treasurer
-2-
<PAGE> 11
AMENDMENT TO
RESTATED CERTIFICATE OF INCORPORATION
OF
SOURCE MEDIA, INC.
Pursuant to the General Corporation Law of the State of Delaware
("GCL"), it is hereby certified that:
1. The name under which the Corporation was originally incorporated
was "HB Communications Acquisition Corp." and the date of filing the Restated
Certificate of Incorporation was February 23, 1993. As set forth in the Minutes
of the annual Meeting of the Stockholders on June 23, 1995, the stockholders
holding a majority of the outstanding shares voted to approve changing the
Corporation's name to "Source Media, Inc."
2. As approved by the stockholders holding a majority of the
outstanding shares of the Corporation, the Restated Certificate of Incorporation
of the Corporation is hereby amended as follows:
(a) The first paragraph of Article FOURTH is hereby amended to
read in its entirety as follows:
"FOURTH: The total number of shares of all classes of capital stock
which the Corporation shall have authority to issue is 51,712,001 of which
50,000,000 shares shall be Common Stock of the par value of $0.001 per share and
1,712,001 shares shall be Preferred Stock of the par value of $0.001 per share."
(b) Part B of Article FOURTH is hereby amended to read in its
entirety as follows:
"B. Common Stock. The rights, preferences, privileges and
restrictions granted to and imposed upon the Common Stock are as
follows:
(i) Designation. 50,000,000 shares of the Common Stock shall
be designated "Common Stock" and 5,046,786 shares of the Common Stock shall be
designated "Non-Voting Stock". Each share of Common Stock and Non-Voting Stock
shall be identical in all respects, except as otherwise provided herein.
1
<PAGE> 12
(ii) Voting Rights.
(A) Common Stock. Except as otherwise required by law or
as otherwise provided in any Preferred Stock Designation, the holders of the
Common Stock shall exclusively possess all voting power and each share of Common
Stock shall have one vote.
(B) Non-Voting Stock. Except as otherwise required by law,
each outstanding share of Non-Voting Stock shall not be entitled to vote on any
matter on which the stockholders of the Corporation shall be entitled to vote
and shares of Non-Voting Stock shall not be included in determining the number
of shares voting or entitled to vote on any such matter; provided that,
notwithstanding the foregoing, holders of shares of Non-Voting Stock shall be
entitled to vote as a separate class on any amendment to this subparagraph
(ii)(B) and on any amendment, repeal or modification of any provision of this
Restated Certificate of Incorporation that adversely affects the powers,
preferences or special rights of holders of Non-Voting Stock, including without
limitation, subject to subparagraph (C) below, any change that adversely affects
the powers, preferences or special rights of the Common Stock.
(C) Class Voting. On any matter on which the holders of
shares of Common Stock and the holders of shares of Non-Voting Stock are
entitled to vote, except as otherwise required by law, the Common Stock and the
Non-Voting Stock shall vote together as a single class.
(iii) Dividends. The Board of Directors of the Corporation may
cause dividends to be paid to holders of its shares out of funds legally
available for the payment of dividends. Except as otherwise provided in any
Preferred Stock Designation, any dividend or distribution on the Common Stock or
the Non-Voting Stock shall be payable on shares of Common Stock and Non- Voting
Stock share and share alike to the exclusion of the holders of shares of
Preferred Stock of any and all series; provided that in the case such dividends
are payable in shares of the Corporation, or options, warrants or rights to
acquire shares of the Corporation or securities convertible into or exchangeable
for shares of the Corporation, the shares, options, warrants, rights or
securities so payable shall be payable in shares of, or options, warrants or
rights to acquire or securities convertible into or exchangeable for shares of
the same class (i.e., Common Stock or Non-Voting Stock) upon which the dividend
or distribution is being paid.
(iv) Liquidation Rights. In the event of any liquidation,
dissolution or winding up of the affairs of the Corporation, whether voluntary
or involuntary, after payment or provision for payment of the debts and other
liabilities of the Corporation, and subject to the liquidation preference of any
series of shares of Preferred Stock pursuant to a Preferred Stock Designation,
the remaining assets and funds of the Corporation, if any, shall be divided
among and paid ratably to the holders of Common Stock and the holders of
Non-Voting Stock share and share alike to the exclusion of the holders of shares
of Preferred Stock of any and all series. For the purposes of this subparagraph
(iv), 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
2
<PAGE> 13
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.
(v) Conversion.
(A) No Conversion of Shares of Common Stock. Holders of
Common Stock may not convert any of their shares of Common Stock into shares of
Non-Voting Stock.
(B) Conversion of Non-Voting Stock. Subject to the
provisions of this subparagraph (v), in the event of the transfer of shares of
Non-Voting Stock to any person or entity, said shares shall be deemed
automatically to convert, effective as of the date of transfer thereof, into the
same number of shares of Common Stock. Subject to the provisions of this
subparagraph (v), each holder of Non-Voting Stock shall be entitled to convert,
at any time and from time to time, any or all of the shares of Non-Voting Stock
held by such stockholder into the same number of shares of Common Stock;
provided, however, that no holder of shares of Non-Voting Stock shall be
entitled to convert any such shares to the extent that, as a result of such
conversion, such holder, directly or indirectly, would own, control or have the
power to vote a greater number of shares of Common Stock or other securities of
any kind issued by the Corporation than such holder shall be permitted to own,
control or have power to vote under any law, regulation, rule or other
requirement of any governmental authority at the time applicable either to such
holder or to the Corporation.
(C) Conversion Procedure.
(1) Each conversion of shares of Non-Voting Stock into
shares of Common Stock shall be effected by the surrender of the certificate or
certificates representing the shares to be converted (hereinafter called the
"Converting Shares") at the principal office of the Corporation (or such other
office or agency of the Corporation as the Corporation may designate by written
notice to the holders of Non-Voting Stock) at any time during its usual business
hours, together with written notice by the holder of such Converting Shares,
stating that such holder desires to convert the Converting Shares, or a stated
number of the shares represented by such certificate or certificates, into an
equal number of shares of Common Stock (hereinafter called the "Converted
Shares"). Such notice shall also state the name or names (with addresses) and
denominations in which the certificate or certificates for Converted Shares are
to be issued and shall include instructions for the delivery thereof. Promptly
after such surrender and the receipt of such written notice, the Corporation
will issue and deliver in accordance with the surrendering holder's instructions
the certificate or certificates evidencing the Converted Shares issuable upon
such conversion, and the Corporation will deliver to the converting holder a
certificate (which shall contain such legends as were set forth on the
surrendered certificate or certificates) representing any shares which were
represented by the certificate or certificates that were delivered to the
Corporation in connection with such conversion, but which were not converted;
provided, however, that the Corporation shall issue shares to persons or
entities other than those indicated on the certificate or certificates
representing the Converting Shares only in compliance with the Securities Act of
1933, as amended, and any other applicable state or federal securities law. Such
conversion, to the extent
3
<PAGE> 14
permitted by law, shall be deemed to have been effected as of the close of
business on the date on which such certificate or certificates shall have been
surrendered and such notice shall have been received by the Corporation, and at
such time the rights of the holder of the Converting Shares as such holder shall
cease and the person or persons in whose name or names the certificate or
certificates for the Converted Shares are to be issued upon such conversion
shall be deemed to have become the holder or holders of record of the Converted
Shares.
(2) In the event of the automatic conversion of shares
of Non-Voting Stock into shares of Common Stock, the holders of such shares
shall surrender the certificate or certificates representing the Converting
Shares in accordance with, and the parties to the transfer and the Corporation
shall otherwise comply with, the procedures set forth in subparagraph (C)(1)
hereof; provided, however, that, notwithstanding that any certificate for
Converting Shares shall not have been surrendered for cancellation, all such
Converting Shares shall no longer be deemed outstanding on and after the
effective date of conversion as set forth in subparagraph (v)(B) and all rights
with respect to such Converting Shares shall forthwith on the effective date of
such transfer cease and terminate, except only the right of the holder or
holders thereof to receive the same number of shares of Converted Shares on the
conversion thereof.
(3) Upon the issuance of shares in accordance with
this subparagraph (v), such shares shall be deemed to be duly authorized,
validly issued, fully paid and non-assessable.
(D) Stock Splits; Adjustments. If the Corporation shall in
any manner subdivide (by stock split, stock dividend or otherwise) or combine
(by reverse stock split or otherwise) the outstanding shares of the Common Stock
or Non-Voting Stock, the outstanding shares of the other class of shares shall
be subdivided or combined, as the case may be, to the same extent, share and
share alike, and effective provision shall be made for the protection of the
conversion rights hereunder.
(E) Reservation of Shares. The Corporation shall at all
times reserve and keep available out of its authorized but unissued shares of
Common Stock or its treasury shares, solely for the purpose of issuance upon the
conversion of shares of Non-Voting Stock, such number of shares of Common Stock
as are then issuable upon the conversion of all outstanding shares of Non-Voting
Stock.
(F) No Charge. The issuance of certificates for shares of
Common Stock upon conversion of shares of Non-Voting Stock shall be made without
charge to the holders of such Non-Voting Stock for any issuance tax in respect
thereof or other cost incurred by the Corporation in connection with such
conversion and the related issuance of shares of Common Stock; provided,
however, that the Corporation shall not be required to pay any tax which may be
payable in respect of any transfer involved in the issuance and delivery of any
certificate in a name other than that of the holder of the Non-Voting Stock
converted and no such issuance and delivery shall be made unless and until the
person requesting such issuance has paid to the Corporation the amount of any
such tax or has established to the satisfaction of the Corporation that such tax
has been paid.
4
<PAGE> 15
3. Except as otherwise amended hereby, the provisions of the
Restated Certificate of Incorporation of the Corporation, as amended, are in
full force and effect.
4. The amendment of the Restated Certificate of Incorporation herein
certified has been duly adopted by the directors and stockholders of the
Corporation by the vote prescribed by Section 242 of the GCL and shall become
effective on the date of the filing of this certificate.
Signed on November 17, 1999
/s/ Stephen W. Palley
-------------------------------------
Stephen W. Palley
President and Chief Executive Officer
5
<PAGE> 1
EXHIBIT 3.2
BY-LAWS
OF
HB COMMUNICATIONS ACQUISITION CORP.
(a Delaware corporation)
----------------------------
ARTICLE I
OFFICES
1.1 Registered Office. The registered office of the corporation within
the State of Delaware shall be located at the principal place of business in
said state of the corporation or individual acting as the Corporation's
registered agent in Delaware.
1.2 Other Offices. The Corporation may also have offices and places of
business at such other places, within and without the State of Delaware, as the
Board of Directors may from time to time determine or the business of the
Corporation may require.
ARTICLE II
STOCKHOLDERS
2.2 Record Date. For the purpose of determining the stockholders
entitled to notice of or to vote at any meeting of stockholders and any
adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or the allotment of any rights, or entitled to exercise any rights
in respect of any change, conversion, or exchange of stock or for the purpose of
any other lawful action, the directors may fix, in advance, a record date, which
shall not be more than 60 days nor less than 10 days before the date of such
meeting, nor more than 60 days prior to any other action. If no record date is
fixed, the record date for determining stockholders entitled to notice of or to
vote at a meeting of stockholders shall be at the close of business on the day
next preceding the day on which notice is given, or, if notice is waived, at the
close of business on the day next preceding the day on which the meeting is
held; the record date for determining stockholders entitled to express consent
to corporate action in writing without a meeting, when no prior action by the
Board of Directors is necessary, shall be the day on which the first written
consent is expressed; and the record date for determining stockholders for any
other purpose shall be at the close of business on the day on which the Board
<PAGE> 2
of Directors adopts the resolution relating thereto. A determination of
stockholders of record entitled to notice of or to vote at any meeting of
stockholders shall apply to any adjournment of the meeting; provided, however,
that the Board of Directors may fix a new record date for the adjourned meeting.
2.2 Meaning of Certain Terms. As used herein in respect of the right to
notice of a meeting of stockholders or a waiver thereof or to participate or
vote thereat or to consent or dissent in writing in lieu of a meeting, as the
case may be, the term "share" or "shares" or "share of stock" "shares of stock"
or "stockholder" or "stockholders" refers to an outstanding share or shares of
stock and to a holder or holders of record of outstanding shares of stock when
the Corporation is authorized to issue only one class of shares of stock, and
said reference is also intended to include any outstanding share or shares of
stock and any holder or holders of record of outstanding shares of stock of any
class upon which or upon whom the certificate of incorporation confers such
rights where there are two or more classes or series of shares of stock or upon
which or upon whom the General Corporation Law confers such rights
notwithstanding that the certificate of incorporation may provide for more than
one class or series of shares of stock, one or more of which are limited or
denied such rights thereunder; provided, however, that no such right shall vest
in the event of an increase or a decrease in the authorized number of shares of
stock of any class or series which is otherwise denied voting rights under the
provisions of the certificate of incorporation, except as any provision of law
may otherwise require.
2.3 Stockholders Meetings.
2.3.1 Time. The annual meeting shall be held on the date and at the
time fixed, from time to time, by the directors, provided, that the first annual
meeting shall be held on a date within thirteen months after the organization of
the Corporation, and each successive annual meeting shall be held on a date
within thirteen months after the date of the preceding annual meeting. A special
meeting shall be held on the date and at the time fixed by the directors.
2.3.2 Place. Annual meetings and special meeting shall be held at
such place, within or without the State of Delaware, as the directors may, from
time to time, fix. Whenever the directors shall fail to fix such place, the
meeting shall be held at the registered office of the Corporation in the State
of Delaware.
2.3.3 Call. Annual meetings and special meetings may be called by
the directors or by any officer instructed by the directors to call the meeting.
2.3.4 Notice or Waiver of Notice. Written notice of all meetings
shall be given, stating the place, date, and hour of the meeting and stating the
place within the city or other municipality or community at which the list of
stockholders of the Corporation may be examined. The notice of an annual meeting
shall state that the meeting is called for the election of directors and for the
transaction of other business which may properly come before the meeting, and
shall, (if any other action which could be taken at a special meeting is to be
taken at such annual meeting) state the purpose or purposes. The notice of a
special meeting shall in all instances state the purpose or
-2-
<PAGE> 3
purposes for which the meeting is called. The notice of any meeting shall also
include, or be accompanied by, any additional statements, information, or
documents prescribed by the General Corporation Law. Except as otherwise
provided by the General Corporation Law, a copy of the notice of any meeting
shall be given, personally or by mail, not less than 10 days nor more than 60
days before the date of the meeting, unless the lapse of the prescribed period
of time shall have been waived, and directed to each stockholder at his record
address or at such other address which he may have furnished by request in
writing to the Secretary of the Corporation. Notice by mail shall be deemed to
be given when deposited, with postage thereon prepaid, in the United States
Mail. If a meeting is adjourned to another time, not more than thirty days
hence, and/or to another place, and if an announcement of the adjourned time
and/or place is made at the meeting, it shall not be necessary to give notice of
the adjourned meeting unless the directors, after adjournment, fix a new record
date for the adjourned meeting. Notice need not be given to any stockholder who
submits a written waiver of notice signed by him before or after the time stated
therein. Attendance of a stockholder at a meeting of stockholders shall
constitute a waiver of notice of such meeting, except when the stockholder
attends the meeting for the express purpose of objecting, at the beginning of
the meeting, to the transaction of any business because the meeting is not
lawfully called or convened. Neither the business to be transacted at, nor the
purpose of, any regular or special meeting of the stockholders need be specified
in any written waiver of notice.
2.3.5 Stockholder List. The officer who has charge of the stock
ledger of the Corporation shall prepare and make, at least 10 days before every
meeting of stockholders, a complete list of the stockholders, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least 10 days prior to the
meeting, either at a place within the city or other municipality or community
where the meeting is to be held, which place shall be specified in the notice of
the meeting, or if not so specified, at the place where the meeting is to be
held. The list shall also be produced and kept at the time and place of the
meeting during the whole time thereof, and may be inspected by any stockholder
who is present. The stock ledger shall be the only evidence as to who are the
stockholders entitled to examine the stock ledger, the list required by this
section or the books of the Corporation, or to vote at any meeting of
stockholders.
2.3.6 Conduct of Meetings. Meetings of the stockholders shall be
presided over by one of the following officers in the order of seniority and if
present and acting: the Chairman of the Board, if any; the Vice-Chairman of the
Board, if any; the President; a Vice-President; or, if none of the foregoing is
in office and present and acting, by a chairman to be chosen by the
stockholders. The Secretary of the Corporation, or in his absence, an Assistant
Secretary, shall act as secretary of every meeting, but if neither the Secretary
nor an Assistant Secretary is present the Chairman of the meeting shall appoint
a secretary of the meeting.
2.3.7 Proxy Representation. Every stockholder may authorize another
person or persons to act for him by proxy in all matters in which a stockholder
is entitled to participate, whether by waiving notice of any meeting, voting or
participating at a meeting, or expressing
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consent or dissent without a meeting. Every proxy must be signed by the
stockholder or by his attorney-in-fact. No proxy shall be voted or acted upon
after three years from its date unless such proxy provides for a longer period.
A duly executed proxy shall be irrevocable if it states that it is irrevocable
and, if, and only as long as, it is coupled with an interest sufficient in law
to support an irrevocable power. A proxy may be made irrevocable regardless of
whether the interest with which it is coupled is an interest in the stock itself
or an interest in the Corporation generally.
2.3.8 Inspectors. The directors, in advance of any meeting, may,
but need not, appoint one or more inspectors of election to act at the meeting
or any adjournment thereof. If an inspector or inspectors are not appointed, the
person presiding at the meeting may, but need not, appoint one or more
inspectors. In case any person who may be appointed as an inspector fails to
appear or act, the vacancy may be filled by appointment made by the directors in
advance of the meeting or at the meeting by the person presiding thereat. Each
inspector, if any, before entering upon the discharge of his duties, shall take
and sign an oath faithfully to execute the duties of inspector at such meeting
with strict impartiality and according to the best of his ability. The
inspectors, if any, shall determine the number of shares of stock outstanding
and the voting power of each, the shares of stock represented at the meeting,
the existence of a quorum, the validity and effect of proxies, and shall receive
votes, ballots or consents, hear and determine all challenges and questions
arising in connection with the right to vote, count and tabulate all votes,
ballots or consents, determine the result, and do such acts as are proper to
conduct the election or vote with fairness to all stockholders. On request of
the person presiding at the meeting, the inspector or inspectors, if any, shall
make a report in writing of any challenge, question or matter determined by him
or them and execute a certificate of any fact found by him or them.
2.3.9 Quorum. The holders of a majority of the outstanding shares of
stock shall constitute a quorum at a meeting of stockholders for the transaction
of any business. The stockholders present may adjourn the meeting despite the
despite the absence of a quorum.
2.3.10 Voting. Each share of stock shall entitle the holder thereof to
one vote. In the election of directors, a plurality of the votes cast shall
elect. Any other action shall be authorized by a majority of the votes cast
except where the General Corporation Law prescribes a different percentage of
votes and/or a different exercise of voting power, and except as may be
otherwise prescribed by the provisions of the certificate of incorporation and
these By-Laws. In the election of directors, and for any other action, voting
need not be by ballot.
ARTICLE III
DIRECTORS
3.1 Functions and Definition. The business and affairs of the
Corporation shall be managed by or under the direction of the Board of Directors
of the Corporation. The Board of
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Directors shall have the authority to fix the compensation of the members
thereof. The use of the phrase "whole board" herein refers to the total number
of directors which the Corporation would have if there were no vacancies.
3.2. Qualifications and Number. A director need not be a stockholder, a
citizen of the United States, or a resident of the State of Delaware. The
initial Board of Directors shall consist of one person. Thereafter, the number
of directors constituting the whole board shall be at least three. Subject to
the foregoing limitation and except for the first Board of Directors, such
number may be fixed from time to time by action of the stockholders or of the
directors, or, if the number is not fixed, the number shall be three. The number
of directors may be increased or decreased by action of the stockholders or of
the directors.
3.3 Election and Term. The first Board of Directors, unless the members
thereof shall have been named in the certificate of incorporation, shall be
elected by the incorporator or incorporators and shall hold office for the term
prescribed in the certificate of incorporation and until their successors are
elected and qualified or until their earlier resignation or removal. Any
director may resign at any time upon written notice to the Corporation.
Thereafter, directors who are elected at an annual meeting of stockholders, and
directors who are elected in the interim to fill vacancies and newly created
directorships, shall hold office for the term prescribed in the certificate of
incorporation and until their successors are elected and qualified or until
their earlier resignation or removal. In the interim between annual meetings of
stockholders or of special meetings of stockholders called for the election of
directors and/or for the removal of one or more directors and for the filling of
any vacancy in that connection, newly created directorships and any vacancies in
the Board of Directors, including unfilled vacancies resulting from the removal
of directors for cause or without cause, may be filled by the vote of a majority
of the remaining directors then in office, although less than a quorum, or by
the sole remaining director.
3.4. Meetings.
3.4.1. Time. Meetings shall be held at such time as the Board shall
fix, except that the first meeting of a newly elected Board shall be held as
soon after its election as the directors may conveniently assemble.
3.4.2. Place. Meeting shall be held at such place within or without
the State of Delaware as shall be fixed by the Board.
3.4.3. Call. No call shall be required for regular meetings for
which the time and place have been fixed. Special meetings may be called by or
at the direction of the Chairman of the Board, if any, the Vice-Chairman of the
Board, if any, of the President, or of a majority of the directors in office.
3.4.4 Notice or Actual or Constructive Waiver. No notice shall be
required for regular meetings for which the time and place have been fixed.
Written, oral, or any other mode of
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notice of the time and place shall be given for special meetings in sufficient
time for the convenient assembly of the directors thereat. Notice need not be
given to any director or to any member of a committee of directors who submits a
written waiver of notice signed by him before or after the time stated therein.
Attendance of any such person at a meeting shall constitute a waiver of notice
of such meeting, except when he attends a meeting for the express purpose of
objecting, at the beginning of the meeting, to the transaction of any business
because the meeting is not lawfully called or convened. Neither the business to
be transacted at, nor the purpose of, any regular or special meeting of the
directors need be specified in any written waiver of notice.
3.4.5 Quorum and Action. A majority of the whole Board shall
constitute a quorum except when a vacancy or vacancies prevents such majority,
whereupon a majority of the directors in office shall constitute a quorum,
provided, that such majority shall constitute at least one-third of the whole
Board. A majority of the directors present, whether or not a quorum is present,
may adjourn a meeting to another time and place. Except as herein otherwise
provided, and except as otherwise provided by the General Corporation Law, the
vote of the majority of the directors present at a meeting at which a quorum is
present shall be the act of the Board. The quorum and voting provisions herein
stated shall not be construed as conflicting with any provisions of the General
Corporation Law and these By-Laws which govern a meeting of directors held to
fill vacancies and newly created directorships in the Board or action of
disinterested directors.
3.4.6 Telephone Participation. Any member or members of the Board
of Directors or of any committee designated by the Board, may participate in a
meeting of the Board, or any such committee, as the case may be, by means of
conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other.
3.4.7 Chairman of the Meeting. The Chairman of the Board, if any
and if present and acting, shall preside at all meetings. Otherwise, the
Vice-Chairman of the Board, if any and if present and acting, or the President,
if present and acting, or any other director chosen by the Board, shall preside.
3.5 Committees. The Board of Directors may, by resolution passed by a
majority of the whole Board, designate one or more committees, each committee to
consist of one or more of the directors of the Corporation. The Board may
designate one or more directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of the committee. In
the absence or disqualification of any member of any such committee or
committees, the member or members thereof present at any meeting and not
disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member. Any such
committee, to the extent provided in the resolution of the Board, shall have and
may exercise the powers and authority of the Board of Directors in the
management of the business and affairs of the Corporation with the exception of
any authority the delegation of which is prohibited by Section 141
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of the General Corporation Law, and may authorize the seal of the Corporation to
be affixed to all papers which may require it.
3.6 Written Action. Any action required or permitted to be taken at any
meeting of the Board of Directors or any committee thereof may be taken without
a meeting if all members of the Board or committee, as the case may be, consent
thereto in writing, and the writing or writings are filed with the minutes of
proceedings of the Board or committee.
ARTICLE IV
OFFICERS
4.1 Officers. The officers of the Corporation shall consist of a
President, a Secretary, a Treasurer, and, if deemed necessary, expedient, or
desirable by the Board of Directors, a Chairman of the Board, a Vice-Chairman of
the Board, an Executive Vice-President, one or more other Vice-Presidents, one
or more Assistant Secretaries, one or more Assistant Treasurers, and such other
officers with such titles as the resolution of the Board of Directors choosing
them shall designate. Except as may otherwise be provided in the resolution of
the Board of Directors choosing him, no officer other than the Chairman or
Vice-Chairman of the Board, if any, need be a director. Any number of offices
may be held by the same person, as the directors may determine.
4.2 Term of Office. Unless otherwise provided in the resolution
choosing him, each officer shall be chosen for a term which shall continue until
the meeting of the Board of Directors following the next annual meeting of
stockholders and until his successor shall have been chosen and qualified.
4.3 Authority and Duties. All officers of the Corporation shall have
such authority and perform such duties in the management and operation of the
Corporation as shall be prescribed in the resolutions of the Board of Directors
designating and choosing such officers and prescribing their authority and
duties, and shall have such additional authority and duties as are incident to
their office except to the extent that such resolutions may be inconsistent
therewith. The Secretary or an Assistant Secretary of the Corporation shall
record all of the proceedings of all meetings and actions in writing of
stockholders, directors, and committees of directors, and shall exercise such
additional authority and perform such additional duties as the Board shall
assign to him. Any officer may be removed, with our without cause, by the Board
of Directors. Any vacancy in any office may be filled by the Board of Directors.
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ARTICLE V
INDEMNIFICATION
5.1 Actions, Suits or Proceedings Other than by or in the Right of the
Corporation. The Corporation shall indemnify any director or officer who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Corporation) by
reason of the fact that he is or was or has agreed to become a director,
officer, employee or agent of the Corporation, or is or was serving or has
agreed to serve at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, or by reason of any action alleged to have been taken or
omitted in such capacity, against costs, charges, expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him or on his behalf in connection with such action, suit or
proceeding and any appeal therefrom, if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action suit or proceeding by judgment, order, settlement, conviction, or upon a
plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not meet the standards of conduct set forth in
this Section 5.1.
5.2 Actions or Suits by or in the Right of the Corporation. The
Corporation shall indemnify any director or officer who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the Corporation to procure a judgment in its favor by
reason of the fact that he is or was or has agreed to become a director,
officer, employee or agent of the Corporation, or is or was serving or has
agreed to serve at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, or by reason of any action alleged to have been taken or
omitted in such capacity, against costs, charges and expenses (including
attorneys' fees) actually and reasonably incurred by him or on his behalf in
connection with the defense or settlement of such action or suit and any appeal
therefrom, if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the Corporation, except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the Corporation
unless and only to the extent that the Court of Chancery of Delaware or the
court in which such action or suit was brought shall determine upon application
that, despite the adjudication of such liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such costs, charges and expenses which the Court of Chancery or
such other court shall deem proper.
5.3 Indemnification for Costs, Charges and Expenses for Successful
Party. Notwithstanding the other provisions of this Article V, to the extent
that a director or officer of the Corporation has been successful on the merits
or otherwise, including, without limitation, the dismissal of an action without
prejudice, in defense of any action, suit or proceeding referred to in
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Sections 5.1 and 5.2 of this Article V, or in the defense of any claim, issue or
matter therein, he shall be indemnified against all costs, charges and expenses
(including attorneys' fees) actually and reasonably incurred by him or on his
behalf in connection therewith.
5.4 Determination of Right to Indemnification. Any indemnification
under Sections 5.1 and 5.2 of this Article V (unless ordered by a court) shall
be paid by the Corporation unless a determination is made (1) by the Board of
Directors by a majority vote of a quorum consisting of directors who were not
parties to such action, suit or proceeding, or (2) if such a quorum is not
obtainable, or even if obtainable a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion, or (3) by the
stockholders, that indemnification of the director or officer is not proper in
the circumstances because he has not met the applicable standards of conduct set
forth in Section 5.1 and 5.2 of this Article V.
5.5 Advance of Costs, Charges and Expenses. Costs, charges and expenses
(including attorneys' fees) incurred by a person referred to in Sections 5.1 and
5.2 of this Article V in defending a civil or criminal action, suit or
proceeding (including investigations by any government agency and all costs,
charges and expenses incurred in preparing for any threatened action, suit or
proceeding) shall be paid by the Corporation in advance of the final disposition
of such action, suit or proceeding; provided, however, that the payment of such
costs, charges and expenses incurred by a director of officer in his capacity as
a director or officer (and not in any other capacity in which service was or is
rendered by such person while a director or officer) in advance of the final
disposition of such action, suit or proceeding shall be made only upon receipt
of an undertaking by or on behalf of the director or officer to repay all
amounts so advanced in the event that it shall ultimately be determined that
such director or officer is not entitled to be indemnified by the Corporation as
authorized in this Article V. No security shall be required for such undertaking
and such undertaking shall be accepted without reference to the recipient's
financial ability to make repayment. The Board of Directors may, in the manner
set forth above, and subject to the approval of such director or officer,
authorize the Corporation's counsel to represent such person, in any action,
suit or proceeding, whether or not the Corporation is a party to such action,
suit or proceeding.
5.6 Procedure for Indemnification. Any indemnification under Sections
5.1, 5.2 or 5.3 or advance of costs charges and expenses under Section 5.5 of
this Article V shall be made promptly, and in any event within 60 days, upon the
written request of the director or officer directed to the Secretary of the
Corporation. The right to indemnification or advances as granted by this Article
V shall be enforceable by the director or officer in any court of competent
jurisdiction if the Corporation denies such request, in whole or in part, or if
no disposition thereof is made within 60 days. Such person's costs and expenses
incurred in connection with successfully establishing his right to
indemnification or advances, in whole or in part, in any such action shall also
be indemnified by the Corporation. It shall be a defense to any such action
(other than an action brought to enforce a claim for the advance of costs,
charges and expenses under Section 5.5 of this Article V where the required
undertaking, if any, has been received by the Corporation) that the claimant has
not met the standard of conduct set forth in Sections 5.1 or 5.2 of this Article
V, but the burden of proving that such standard of conduct has not been met
shall be on the Corporation. Neither the failure of the
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Corporation (including its Board of Directors, its independent legal counsel,
and its stockholders) to have made a determination prior to the commencement of
such action that indemnification of the claimant is proper in the circumstances
because he has met the applicable standard of conduct set forth in Sections 5.1
and 5.2 of this Article V, nor the fact that there has been an actual
determination by the Corporation (including its Board of Directors, its
independent legal counsel, and its stockholders) that the claimant has not met
such applicable standard of conduct, shall be a defense to the action or create
a presumption that the claimant has not met the applicable standard of conduct.
5.7 Other Rights; Continuation of Right of Indemnification. The
indemnification provided by this Article V shall not be deemed exclusive of any
other rights to which a person seeking indemnification may be entitled under any
law (common or statutory), agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in his official capacity and as to
action in another capacity while holding office, and shall continue as to a
person who has ceased to be a director or officer and shall inure to the benefit
of the estate, heirs, executors and administrators of such person. All rights to
indemnification under this Article V shall be deemed to be a contract between
the Corporation and each director and officer of the Corporation who serves or
served in such capacity at any time while this Article V is in effect. No
amendment or repeal of this Article V or of any relevant provisions of the
Delaware General Corporation Law or any other applicable laws shall adversely
affect or deny to any director or officer any rights to indemnification which
such person may have, or change or release any obligations of the Corporation,
under this Article V with respect to any costs, charges, expenses (including
attorneys' fees), judgments, fines, and amounts paid in settlement which arise
out of an action, suit or proceeding based in whole or substantial part on any
act or failure to act, actual or alleged, which takes place before or while this
Article V is in effect. The provisions of this Section 5.7 shall apply to any
such action, suit or proceeding whenever commenced, including any such action,
suit or proceeding commenced after any amendment or repeal of this Article V.
5.8 Definitions. For purposes of this Article V:
(a) "the Corporation" includes any constituent corporation
(including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence continued,
would have had power and authority to indemnify its directors or
officers, so that any person who is or was a director or officer of
such constituent corporation, or is or was serving at the request of
such constituent corporation is a director, officer, employee or agent
of another corporation, partnership, joint venture, trust or other
enterprise, shall stand in the same position under the provisions of
this Article V with respect to the resulting or surviving corporation
as he would have with respect to such constituent corporation if its
separate existence had continued;
(b) "other enterprises" includes employee benefit plans,
including but not limited to any employee benefit plan of the
Corporation;
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(c) "serving at the request of the Corporation" includes any
service which imposes duties on, or involves services by, a director or
officer of the Corporation with respect to an employee benefit plan,
its participants, or beneficiaries, including acting as a fiduciary
thereof;
(d) "fines" shall include any penalties and any excise or
similar taxes assessed on a person with respect to an employee benefit
plan;
(e) a person who acted in good faith and in a manner he
reasonably believed to be in the interest of the participants and
beneficiaries of any employee benefit plan shall be deemed to have
acted in a manner "not opposed to the best interests of the
Corporation" as referred to in Sections 5.1 and 5.2 of this Article V;
(f) service as a partner, trustee or member of management or
similar committee of a partnership or joint venture, or as a director,
officer, employee or agent of a corporation which is a partner, trustee
or joint venturer, shall be considered service as a director, officer,
employee or agent of the partnership, joint venture, trust or other
enterprise.
5.9 Saving Clause. If this Article V or any portion hereof shall be
invalidated on any ground by a court of competent jurisdiction, then the
Corporation shall nevertheless indemnify each director and officer of the
Corporation as to costs, charges and expenses (including attorneys' fees)
judgments, fines and amounts paid in settlement with respect to any action, suit
or proceeding, whether civil, criminal, administrative or investigative,
including an action by or in the right of the Corporation, to the full extent
permitted by any applicable portion of this Article V that shall not have been
invalidated and to the full extent permitted by applicable law.
5.10 Insurance. The Corporation shall purchase and maintain insurance
on behalf of any person who is or was or has agreed to become a director or
officer of the Corporation or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against any liability asserted against him
and incurred by him or on his behalf in any such capacity, or arising out of his
status as such, whether or not the Corporation would have the power to indemnify
him against such liability under the provisions of Article V, provided that such
insurance is available on acceptable terms as determined by a vote of a majority
of the whole Board of Directors.
5.11 Indemnification of Other Persons. If authorized by the Board of
Directors, the Corporation may indemnify and advance expenses to any other
person whom it has the power to indemnify under Section 145 of the General
Corporation Law to the fullest extent permitted by such statute.
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ARTICLE VI
STOCK CERTIFICATES
6.1 Certificates Representing Stock.
6.1.1 Signatures. Every holder of stock in the Corporation shall be
entitled to have a certificate signed by, or in the name of, the Corporation by
the Chairman or Vice-Chairman of the Board of Directors, if any, or by the
President or a Vice-President and by the Treasurer or an Assistant Treasurer or
the Secretary or an Assistant Secretary of the Corporation certifying the number
of shares owned by him in the Corporation. Any and all signatures on any such
certificate may be facsimiles. In case any officer, transfer agent, or registrar
who has signed or whose facsimile signature has been placed upon a certificate
shall have ceased to be such officer, transfer agent, or registrar before such
certificate is issued, it may be issued by the Corporation with the same effect
as if he were such officer, transfer agent, or registrar at the date of issue.
6.1.2 Issuance in Series. Whenever the Corporation shall be
authorized to issue more than one class of stock or more than one series of any
class of stock, and whenever the Corporation shall issue any shares of its stock
as partly paid stock, the certificates representing shares of any such class or
series or of any such partly paid stock shall set forth thereon the statements
prescribed by the General Corporation Law. Any restrictions on the transfer or
registration of transfer of any shares of stock of any class or series shall be
noted conspicuously on the certificate representing such shares.
6.1.3 Lost, Stolen or Destroyed Certificates. The Corporation may
issue a new certificate of stock in place of any certificate theretofore issued
by it, alleged to have been lost, stolen, or destroyed, and the Board of
Directors may require the owner of any lost, stolen, or destroyed certificate,
or his legal representative, to give the Corporation a bond sufficient to
indemnify the Corporation against any claim that may be made against it on
account of the alleged loss, theft, or destruction of any such certificate or
the issuance of any such new certificate.
6.2 Stock Transfers. Upon compliance with provisions restricting the
transfer or registration of transfer of shares of stock, if any, transfers or
registration of transfers of shares of stock of the Corporation shall be made
only on the stock ledger of the Corporation by the registered holder thereof, or
by his attorney thereunto authorized by power of attorney duly executed and
filed with the Secretary of the Corporation or with a transfer agent or a
registrar, if any, and on surrender of the certificate or certificates for such
shares of stock properly endorsed and the payment of all taxes due thereon.
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ARTICLE VII
GENERAL PROVISIONS
7.1 Corporate Seal. The corporate seal shall be in such form as the
Board of Directors shall prescribe.
7.2 Fiscal Year. The fiscal year of the Corporation shall be fixed, and
shall be subject to change, by the Board of Directors.
7.3 Facsimile Signatures. In addition to the provisions for the use of
facsimile signatures elsewhere specifically authorized in these By-Laws,
facsimile signatures of any officer or officers of the Corporation may be used
in any manner and for any purpose authorized by the Board of Directors or a
committee thereof.
7.4 Time Periods. In applying any provision of these By-Laws which
requires that an act be done or not done a specified number of days prior to an
event or that an act be done during a period of a specified number of days prior
to an event, calendar days shall be used, the day of the doing of the act shall
be excluded and the day of the event shall be included.
ARTICLE VIII
CONTROL OVER BY-LAWS
Subject to the provisions of the certificate of incorporation and the
provisions of the General Corporation Law, the power to amend, alter or repeal
these By-Laws and to adopt new By-Laws may be exercised by the Board of
Directors or by the stockholders.
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I HEREBY CERTIFY that the foregoing is a full, true and correct copy of
the By-Laws of HB Communications Acquisition Corporation, a Delaware
corporation, as in effect on th date hereof.
WITNESS my hand and the seal of the Corporation.
Dated:
-------------------------------------
Secretary of
(SEAL)
City of
County of
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CERTIFICATE OF AMENDMENT
OF BYLAWS OF
SOURCE MEDIA, INC.
The undersigned Secretary of Source Media, Inc., hereby certifies that
Sections 2.1 and 2.3.3 of the Bylaws of this corporation were amended and a new
Section 2.3.11 was created on April 22, 1998, by the Board of Directors of this
corporation such that such Sections now read in their entirety as follows:
" 2.1 Record Date.
2.1.1 Actions other than Written Consent. For the purpose of
determining the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, or entitled to receive payment of any
dividend or other distribution or the allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion, or exchange of stock,
or other lawful purpose (other than the expression of consent to corporate
action in writing without a meeting) the directors may fix, in advance, a record
date, which, in the case of a meeting of stockholders, shall not be more than 60
days nor less than 10 days before the date of such meeting. If no record date is
fixed, the record date for determining stockholders entitled to notice of or to
vote at a meeting of stockholders shall be at the close of business on the day
next preceding the day on which the meeting is held and the record date for
determining stockholders for any other purpose pursuant to this Section 2.1.1
shall be at the close of business on the day on which the Board of Directors
adopts the resolution relating thereto. A determination of stockholders of
record entitled to notice of or to vote at any meeting of stockholders shall
apply to any adjournment of the meeting; provided, however, that the Board of
Directors may fix a new record for the adjourned meeting.
2.1.2 Action by Written Consent. In order that the Corporation
may determine the stockholders entitled to consent to corporate action in
writing without a meeting, the Board of Directors may fix a record date, which
record date shall not precede the date upon which the resolution fixing the
record date is adopted by the Board of Directors. Any stockholder of record
seeking to have the stockholders authorize or take corporate action by written
consent shall, by written notice to the Secretary, request the Board of
Directors to fix a record date. The Board of Directors may, at any time within
ten (10) days after the date on which such a request is received, adopt a
resolution fixing the record date (unless a record date has previously been
fixed by the first sentence of this Section 2.1.2). If no record date has been
fixed by the Board of Directors pursuant to the first sentence of this Section
2.1.2 or otherwise within ten (10) days of the date on which such a request is
received, the record date for determining stockholders entitled to consent to
corporate action in writing without a meeting, when no prior action by the Board
of Directors is required by applicable law, shall be the first date on which a
signed written consent setting forth the action taken or proposed to be taken is
delivered to the Corporation by delivery to its registered office in Delaware,
its principal place of business, or to any officer or agent of the Corporation
having custody of the book in which proceedings of meetings of stockholders are
recorded. Delivery shall
<PAGE> 16
be by hand or by certified or registered mail, return receipt requested. If no
record date has been fixed by the Board of Directors and prior action by the
Board of Directors is required by applicable law, the record date for
determining stockholders entitled to consent to corporate action in writing
without a meeting shall be at the close of business on the date on which the
Board of Directors adopts the resolution taking such prior action.
In the event of the delivery, in the manner provided by this Section
2.1.2, to the Corporation of the requisite written consent or consents to take
corporate action and/or any related revocation or revocations, the Corporation
may engage independent inspectors of elections for the purpose of performing
promptly a ministerial review of the validity of the consents and revocations.
For the purpose of permitting the inspectors to perform such review, in the
event such inspectors are appointed, no action by written consent without a
meeting shall be effective until such date as such appointed independent
inspectors certify to the Corporation that the consents delivered to the
Corporation in accordance herewith represent at least the minimum number of
votes that would be necessary to take the corporate action. Nothing contained in
this Section 2.1.2 shall in any way be construed to suggest or imply that the
Board of Directors or any stockholder shall not be entitled to contest the
validity of any consent or revocation thereof, whether before or after any
certification by any independent inspectors, or to take any other action
(including, without limitation, the commencement, prosecution or defense of any
litigation with respect thereto, and the seeking of injunctive relief in such
litigation).
Every written consent shall bear the date of signature of each
stockholder who signs the consent and no written consent shall be effective to
take the corporate action referred to therein unless, within sixty (60) days of
the earliest dated written consent received in accordance with this Section
2.1.2, a written consent or consents signed by a sufficient number of holders to
take such action are delivered to the Corporation in the manner prescribed
herein.
2.3.3 Call. Annual meetings and special meetings may be called
only by the Board of Directors of the Corporation.
2.3.11 Nominations and Proposals.
Nominations of persons for election to the Board of Directors
of the Corporation and the proposal of business to be considered by the
stockholders may be made at any meeting of stockholders only (a) pursuant to the
Corporation's notice of meeting, (b) by or at the direction of the Board of
Directors or (c) by any stockholder of the Corporation who was a stockholder of
record at the time of giving of notice provided for in these bylaws, who is
entitled to vote at the meeting and who complies with the notice procedures set
forth in this Section 2.3.11.
For nominations or other business to be properly brought
before a stockholders meeting by a stockholder pursuant to clause (c) of the
preceding sentence, the stockholder must have given timely notice thereof in
writing to the Secretary of the Corporation and such other business must
otherwise be a proper matter for stockholder action. To be timely, a
stockholder's notice shall be delivered to the Secretary at the principal
executive offices of the Corporation not later than the close of business on the
60th day nor earlier than the close of business on the 90th day prior to the
<PAGE> 17
meeting, provided, however, that in the event that less than 65 days notice of
the meeting is given to stockholders, notice by the stockholder to be timely
must be so delivered not earlier than the close of business on the seventh (7th)
day following the day on which the notice of meeting was mailed. In no event
shall the public announcement of an adjournment of a stockholders meeting
commence a new time period for the giving of a stockholder's notice as described
above. Such stockholder's notice shall set forth (a) as to each person whom the
stockholder proposes to nominate for election or reelection as a director all
information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors in an election contest, or is
otherwise required, in each case pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended (or any successor thereto) and Rule 14a-11
thereunder (or any successor thereto) (including such person's written consent
to being named in the proxy statement as a nominee and to serving as a director
if elected); (b) as to any other business that the stockholder proposes to bring
before the meeting, a brief description of the business desired to be brought
before the meeting, the reasons for conducting such business at the meeting and
any material interest in such business of such stockholder and the beneficial
owner, if any, on whose behalf the proposal is made; and (c) as to the
stockholder giving the notice and the beneficial owner, if any, on whose behalf
the nomination or proposal is made (i) the name and address of such stockholder
as they appear on the Corporation's books, and of such beneficial owner, and
(ii) the class and number of shares of the Corporation which are owned
beneficially and of record by such stockholder and such beneficial owner.
Notwithstanding any provision herein to the contrary, no business shall be
conducted at a stockholders meeting except in accordance with the procedures set
forth in this Section 2.3.11."
This Certificate of Amendment of Bylaws shall be effective as of this
22nd day of April, 1998.
/s/ Maryann Walsh
--------------------------------------
Maryann Walsh, Secretary
<PAGE> 1
EXHIBIT 4.2
CERTIFICATE OF DESIGNATION OF THE POWERS
PREFERENCES AND RELATIVE, PARTICIPATING,
OPTIONAL AND OTHER SPECIAL RIGHTS OF 13 1/2%
SENIOR PAYMENT-IN-KIND PREFERRED STOCK, AND
QUALIFICATIONS, LIMITATIONS AND RESTRICTIONS THEREOF
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 of Directors") by its
Certificate of Incorporation, as amended (hereinafter referred to as the
"Certificate of Incorporation"), and pursuant to the provisions of Section 151
of the General Corporation Law of the State of Delaware, said Board of
Directors, duly approved and adopted the following resolution (the
"Resolution"):
RESOLVED, that, pursuant to the authority vested in the Board
of Directors by its Certificate of Incorporation, the Board of
Directors does hereby create, authorize and provide for the issuance
of 13 1/2% Senior Payment-In-Kind Preferred Stock, par value $.01 per
share, with a stated value of $25.00 per share, consisting of
1,000,000 shares, having the designations, preferences, relative,
participating, optional and other special rights and the
qualifications, limitations and restrictions thereof that are set
forth in the Certificate of Incorporation and in this Resolution as
follows:
(a) Designation. There is hereby created out of the authorized and
unissued shares of Preferred Stock of the Corporation a class of Preferred
Stock designated as the "13 1/2% Senior PIK Preferred Stock due 2007." The
number of shares constituting such class shall be 1,000,000 and are referred to
herein as the "Senior Preferred Stock." 800,000 shares of Senior Preferred
Stock shall be initially issued with an additional 200,000 shares reserved for
issuance in accordance with paragraph (c)(i) hereof. The liquidation preference
of the Senior Preferred Stock shall be $25.00 per share.
(b) Liquidation Preference. The Senior Preferred Stock shall, with
respect to dividends and distributions upon liquidation, winding-up and
dissolution of the Corporation, rank senior to all classes of Common Stock of
the Corporation and to each other class of Capital Stock of the Corporation or
series of Preferred Stock of the Corporation hereafter created other than as
permitted in the following sentence (collectively, referred to as "Junior
Stock"). The Corporation may not issue any class or series of Capital Stock
that ranks (x) on a parity with the Senior Preferred
<PAGE> 2
Stock as to dividends and distributions upon liquidation, winding-up and
dissolution (collectively, referred to as "Parity Stock") that was not approved
by the Holders in accordance with paragraph (f)(ii)(A) hereof (to the extent
such approval is required) or (y) senior to the Senior Preferred Stock as to
dividends and distributions upon liquidation, winding-up and dissolution of the
Corporation (collectively referred to as "Senior Stock") that was not approved
by the Holders in accordance with paragraph (f)(ii)(B) hereof.
(c) Dividends. (i) Beginning on the Issue Date, the Holders of the
outstanding shares of Senior Preferred Stock shall be entitled to receive,
when, as and if declared by the Board of Directors, out of funds legally
available therefor, dividends (the "Regular Dividends") on each share of Senior
Preferred Stock, at a rate per annum equal to 13 1/2% of the liquidation
preference per share of the Senior Preferred Stock, payable quarterly; provided
that so long as a Triggering Event shall have occurred and be continuing,
additional dividends will accumulate on the Senior Preferred Stock at a rate
per annum of 2% of the liquidation preference per share of the Senior Preferred
Stock, payable quarterly; and provided further, that the Regular Dividend rate
per annum is subject to increase as provided for in clause (vi) below. All
Regular Dividends shall be cumulative, whether or not earned or declared, on a
daily basis from the date of issuance of the Senior Preferred Stock and shall
be payable quarterly in arrears on each Regular Dividend Payment Date,
commencing on the first Regular Dividend Payment Date after the Issue Date.
Regular Dividends (including Additional Dividends, if any) accumulating on or
prior to November 1, 2002 may be paid, at the Corporation's option, either in
cash or by the issuance of additional shares of Senior Preferred Stock
(including fractional shares) having an aggregate liquidation preference equal
to the amount of such Regular Dividends (but not less than $1.00). In the event
that on or prior to November 1, 2002 Regular Dividends are declared and paid
through the issuance of additional shares of Senior Preferred Stock as provided
in the previous sentence, such Regular Dividends shall be deemed paid in full
and shall not accumulate. Regular Dividends accumulating after November 1, 2002
must be paid in cash. Each Regular Dividend shall be payable, out of funds
legally available therefor, to the Holders of record as they appear on the
stock books of the Corporation on the Regular Dividend Record Date immediately
preceding the related Regular Dividend Payment Date.
(ii) All Regular Dividends paid with respect to shares of the Senior
Preferred Stock pursuant to paragraph (c)(i) shall be paid pro rata to the
Holders entitled thereto.
(iii) Regular Dividends accruing after November 1, 2002 on the Senior
Preferred Stock for any past Dividend Period and Regular Dividends in
connection with any optional redemption pursuant to paragraph (e)(i) may be
declared and paid at any time, without reference to any Regular Dividend
Payment Date, to Holders of record on such date, not more than forty-five (45)
days prior to the payment thereof, as may be fixed by the Board of Directors of
the Corporation.
(iv) So long as any share of the Senior Preferred Stock is
outstanding, the Corporation shall not declare, pay or set apart for payment
any dividend on any Junior Stock or Parity Stock or make any payment on account
of, or set apart for payment money for a sinking or
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<PAGE> 3
other similar fund for, the purchase, redemption or other retirement of, any
Junior Stock or Parity Stock or any warrants, rights, calls or options
exercisable for or convertible into any Junior Stock or Parity Stock whether in
cash, obligations or shares of the Corporation or other property, and shall not
permit any corporation or other entity directly or indirectly controlled by the
Corporation to purchase or redeem any Junior Stock or Parity Stock or any such
warrants, rights, calls or options unless full cumulative dividends determined
in accordance herewith on the Senior Preferred Stock have been paid (or are
deemed paid) in full.
(v) Regular Dividends payable on the Senior Preferred Stock for any
period less than a year shall be computed on the basis of a 360-day year of
twelve 30-day months and the actual number of days elapsed in the period for
which payable. The amount of Additional Dividends will be determined consistent
with the preceding sentence and by multiplying the applicable Additional
Dividends by a fraction, the numerator of which is the number of days (not to
exceed 90) such rate was applicable during any Dividend Period and the
denominator of which is 360.
(vi) Additional Dividends shall become due and payable with respect to
the Senior Preferred Stock as set forth in the Registration Rights Agreement.
(d) Liquidation Preference. (i) In the event of any voluntary or
involuntary liquidation, dissolution or winding up of the affairs of the
Corporation, the Holders of shares of Senior Preferred Stock then outstanding
shall be entitled 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 for each share outstanding, plus, without duplication, (x) an amount
in cash equal to accumulated and unpaid Regular Dividends and Additional
Dividends thereon to the date fixed for liquidation, dissolution or winding up
(including an amount equal to a prorated Regular Dividend for the period from
the last Dividend Payment Date to the date fixed for liquidation, dissolution
or winding up) before any distribution is made on Junior Stock, including,
without limitation, Common Stock of the Corporation. Except as provided in the
preceding sentence, Holders of Senior Preferred Stock shall not be entitled to
any distribution in the event of any liquidation, dissolution or winding up of
the affairs of the Corporation. If the assets of the Corporation are not
sufficient to pay in full the liquidation payments payable to the Holders of
outstanding shares of the Senior Preferred Stock and all Parity Stock, then the
holders of all such shares shall share equally and ratably in such distribution
of assets in proportion to the full liquidation preference to which each is
entitled until such preferences are paid in full, and then in proportion to
their respective amounts of accumulated but unpaid dividends.
(ii) For the purposes of this paragraph (d), 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.
-3-
<PAGE> 4
(e) Redemption.
(i) Optional Redemption. Up to 35% of the Senior Preferred Stock will
be redeemable, at the Corporation's option, at any time or in part from time to
time, on or prior to November 1, 2000 out of the Net Cash Proceeds of one or
more Equity Offerings by the Corporation so long as there is a Public Market as
at the time of such redemption, at a redemption price equal to 113.50% of the
liquidation preference thereof, plus, without duplication, an amount in cash
equal to all accumulated and unpaid dividends (including, but not limited to,
an amount in cash equal to a prorated dividend for the period from the
immediately preceding Dividend Payment Date to the redemption date). After
November 1, 2000 and prior to November 1, 2002, the Senior Preferred Stock is
not redeemable. On or after November 1, 2002, the Senior Preferred Stock will
be redeemable, at the Corporation's option, in whole at any time or in part
from time to time, at the following redemption prices (expressed as a
percentage of liquidation preference) if redeemed during the twelve-month
period commencing on November 1 of the applicable year set forth below plus,
without duplication, an amount in cash equal to all accumulated and unpaid
dividends (including, but not limited to, an amount in cash equal to a prorated
dividend for the period from the immediately preceding dividend payment date to
the Redemption Date):
<TABLE>
<CAPTION>
Year Percentage
---- ----------
<S> <C>
2002 106.75%
2003 104.50%
2004 102.25%
2005 and thereafter 100.000%
</TABLE>
(ii) Mandatory Redemption. The Senior Preferred Stock will be
subject to mandatory redemption, subject to contractual and other restrictions
with respect thereto and to the legal availability of funds therefor, in the
manner provided in paragraph (e)(iii) hereof, in whole on November 1, 2007 at a
redemption price equal to 100% of the then effective liquidation preference
thereof, plus, without duplication, all accumulated and unpaid dividends to the
date of redemption.
(iii) Procedures to Redemption. (A) At least thirty (30) days
and not more than sixty (60) days prior to the date fixed for any redemption of
the Senior Preferred Stock, written notice (the "Redemption Notice") shall be
given by first class mail, postage prepaid, to each Holder of record on the
record date fixed for such redemption of the Senior Preferred Stock at such
Holder's address as it appears on the stock books of the Corporation, provided
that no failure to give such notice nor any deficiency therein shall affect the
validity of the procedure for the redemption of any shares of Senior Preferred
Stock to be redeemed except as to the Holder or Holders to whom the Corporation
has failed to give said notice or except as to the Holder or Holders whose
notice was defective. The Redemption Notice shall state:
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<PAGE> 5
(1) whether the redemption is pursuant to paragraph (e)(i) or
(e)(ii) hereof;
(2) the redemption price;
(3) whether all or less than all the outstanding shares of
the Senior Preferred Stock are to be redeemed and the total number of
shares of the Senior Preferred Stock being redeemed;
(4) the date fixed for redemption;
(5) that the Holder is to surrender to the Corporation, in
the manner, at the place or places and at the price designated, his
certificate or certificates representing the shares of Senior
Preferred Stock to be redeemed; and
(6) that dividends on the shares of the Senior Preferred
Stock to be redeemed shall cease to accumulate on such Redemption Date
unless the Corporation defaults in the payment of the redemption
price.
(B) Each Holder of Senior Preferred Stock shall surrender the
certificate or certificates representing such shares of Senior Preferred Stock
to the Corporation, duly endorsed (or otherwise in proper form for transfer, as
determined by the Corporation), in the manner and at the place designated in
the Redemption Notice, and on the Redemption Date the full redemption price for
such shares shall be payable in cash to the Person whose name appears on such
certificate or certificates as the owner thereof, and each surrendered
certificate shall be canceled and retired. In the event that less than all of
the shares represented by any such certificate are redeemed, a new certificate
shall be issued representing the unredeemed shares.
(C) On and after the Redemption Date, unless the Corporation fails to
make payment in full of the applicable redemption price, dividends on the
Senior Preferred Stock called for redemption shall cease to accumulate on the
Redemption Date, and all rights of the Holders of redeemed shares shall
terminate with respect thereto on the Redemption Date, other than the right to
receive the redemption price; provided, however, that if a notice of redemption
shall have been given as provided in paragraph (iii)(A) above and the funds
necessary for redemption (including an amount in cash in respect of all
dividends that will accumulate to the Redemption Date) shall have been
irrevocably deposited in trust for the equal and ratable benefit for the
Holders of the shares to be redeemed, then, at the close of business on the day
on which such funds are segregated and set aside, the Holders of the shares to
be redeemed shall cease to be stockholders of the Corporation and shall be
entitled only to receive the redemption price.
(f) Voting Rights. (i) The Holders of Senior Preferred Stock, except
as otherwise required under Delaware law or as set forth in paragraphs (ii),
(iii) and (iv) below, shall
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<PAGE> 6
not be entitled or permitted to vote on any matter required or permitted to be
voted upon by the stockholders of the corporation.
(ii) (A) So long as any shares of the Senior Preferred Stock
are outstanding, the Corporation shall not authorize or issue any class of
Parity Stock without the affirmative vote or consent of Holders of at least a
majority of the then outstanding shares of Senior Preferred Stock, Exchange
Preferred Stock and Private Exchange Preferred Stock, voting or consenting, as
the case may be, as one class, given in person or by proxy, either in writing
or by resolution adopted at an annual or special meeting; provided, however,
that no such vote or consent shall be necessary in connection with (i) the
authorization and issuance of additional shares of Senior Preferred Stock
pursuant to the provisions of paragraph (c) of this Certificate of Designation
or (ii) the authorization and issuance of that number of shares of Exchange
Preferred Stock and/or the Private Exchange Preferred Stock not in excess of
1,712,000 shares less the sum of (x) that number of shares of Senior Preferred
Stock not exchanged in the Exchange Offer and/or Private Exchange Offer and (y)
that number of shares of Senior Preferred Stock payable as dividends on such
other shares of Senior Preferred Stock referred to in clause (x), assuming
accumulation of the maximum number of Additional Dividends payable and assuming
a Triggering Event had occurred and would remain continuing until November 1,
2007; and provided further, however, that the Corporation may issue Parity
Stock if after giving effect to such issuance the Consolidated Coverage Ratio
is greater than 1.7 to 1.
(B) So long as any shares of the Senior Preferred Stock are
outstanding, the Corporation shall not authorize or issue any class of Senior
Stock without the affirmative vote or consent of Holders of at least a majority
of the outstanding shares of Senior Preferred Stock, Exchange Preferred Stock
and Private Exchange Preferred Stock, voting or consenting, as the case may be,
as one class, given in person or by proxy, either in writing or by resolution
adopted at an annual or special meeting, unless after giving effect to the
issuance of any such preferred stock the Consolidated Coverage Ratio is greater
than 1.7 to 1.0.
(C) So long as any shares of the Senior Preferred Stock are
outstanding, the Corporation shall not amend this Certificate of Designation so
as to affect adversely the specified rights, preferences, privileges or voting
rights of holders of shares of Senior Preferred Stock without the affirmative
vote or consent of Holders of at least a majority of the issued and outstanding
shares of (x) Senior Preferred Stock, Exchange Preferred Stock and Private
Exchange Preferred Stock, voting or consenting, as the case may be, as one
class, given in person or by proxy, either in writing or by resolution adopted
at an annual or special meeting, if a corresponding amendment is to be made to
the certificate of designation governing the Exchange Preferred Stock and
Private Exchange Stock which amendment, together with such amendment to this
Certificate of Designation, affects the Senior Preferred Stock, Exchange
Preferred Stock and Private Exchange Preferred Stock identically in all
material respects (a "Corresponding Amendment") or (y) Senior Preferred Stock,
voting or consenting, as the case may be, as one class, given in person or by
proxy, either in writing or by resolution adopted at an annual or special
meeting, if such amendment is not a Corresponding
-6-
<PAGE> 7
Amendment. It is understood that no affirmative vote or consent of Holders of
Senior Preferred Stock shall be required in connection with any amendment to
the Corporation's certificate of incorporation that increases the number of
authorized shares of Senior Preferred Stock so that there is a sufficient
number of authorized shares of Senior Preferred Stock to pay dividends on the
Senior Preferred Stock in additional shares of Preferred Stock.
Notwithstanding the foregoing clauses (B) and (C), any
Restricted Subsidiary of the Corporation may consolidate with, merge into or
transfer all or part of its properties and assets to the Corporation.
For purposes of the foregoing, the transfer (by lease,
assignment, sale or otherwise, in a single transaction or series of related
transactions) of all or substantially all of the properties or assets of one or
more Subsidiaries of the Corporation, the Capital Stock of which constitutes
all or substantially all of the properties and assets of the Corporation shall
be deemed to be the transfer of all or substantially all of the properties and
assets of the Corporation.
(iii) (A) If (i) after November 1, 2002, dividends on the
Senior Preferred Stock required to be paid in cash are in arrears and unpaid or
(ii) the Corporation is subject to a material default on its outstanding
indebtedness or (iii) the Corporation fails to redeem the Senior Preferred
Stock on or before November 1, 2007 or fails to discharge any redemption
obligation with respect to the Senior Preferred Stock or (iv) the Corporation
fails to make a Change of Control Offer if such an offer is required by the
provisions set forth under paragraph (h)(i) hereof or fails to purchase shares
of Senior Preferred Stock from holders who elect to have such shares purchased
pursuant to the Change of Control Offer or (v) a breach or violation of any of
the provisions described under paragraph (l) hereof occurs and the breach or
violation continues for a period of 60 days or more after the Corporation
receives notice thereof specifying the default from the holders of at least 25%
of the shares of Senior Preferred Stock, Exchange Preferred Stock and Private
Exchange Preferred Stock then outstanding or (vi) the Corporation fails to pay
at the final stated maturity (giving effect to any extensions thereof) the
principal amount of any Indebtedness of the Corporation or any Restricted
Subsidiary of the Corporation, or the final stated maturity of any such
Indebtedness is accelerated, if the aggregate principal amount of such
Indebtedness, together with the aggregate principal amount of any other such
Indebtedness in default for failure to pay principal at the final stated
maturity (giving effect to any extensions thereof) or which has been
accelerated, aggregates $3,000,000 or more at any time, in each case, after a
20-day period during which such default shall not have been cured or such
acceleration rescinded or (vii) the Corporation (x) shall fail to amend its
certificate of incorporation to increase the number of shares of authorized
Senior Preferred Stock in an amount sufficient to allow it to pay dividends on
the Senior Preferred Stock in additional shares of Senior Preferred Stock and
(y) shall fail to pay such dividends, when due, in cash, then the number of
directors constituting the board of directors of the Corporation will be
adjusted to permit the holders of a majority of the then outstanding shares of
Senior Preferred Stock, Exchange Preferred Stock and Private Exchange Preferred
Stock, voting together and as a class, to elect two directors to the board of
directors of the Corporation. Such voting rights will continue until such
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<PAGE> 8
time as, in the case of a dividend default, all accumulated and unpaid
dividends on the Senior Preferred Stock are paid in full in cash and, in all
other cases, any failure, breach or default giving rise to such voting rights
is remedied, cured or waived by the holders of at least a majority of the
shares of Senior Preferred Stock, Exchange Preferred Stock and Private Exchange
Preferred Stock then outstanding, at which time the term of any directors
elected pursuant to the provisions of this paragraph shall terminate. Each such
event described in clauses (i) through (vii) above is referred to herein as a
"Triggering Event."
(B) The right of the Holders of Senior Preferred Stock,
Exchange Preferred Stock and Private Exchange Preferred Stock voting together
as a separate class to elect members of the Board of Directors as set forth in
subparagraph (f)(iii)(A) above shall continue until such time as (x) in the
event such right arises due to a failure to pay a dividend, all accumulated
dividends that are in arrears on the Senior Preferred Stock, Exchange Preferred
Stock and Private Exchange Preferred Stock are paid in full in cash; and (y) in
all other cases, the failure, breach or default giving rise to such Triggering
Event is remedied, cured or waived by the holders of at least a majority of the
shares of Senior Preferred Stock, Exchange Preferred Stock and Private Exchange
Preferred Stock then outstanding, at which time (1) the special right of the
Holders of Senior Preferred Stock, Exchange Preferred Stock and Private
Exchange Preferred Stock so to vote as a class for the election of directors
and (2) the term of office of the directors elected by the Holders of the
Senior Preferred Stock, Exchange Preferred Stock and Private Exchange Preferred
Stock shall each terminate and the directors elected by the holders of Common
Stock or Capital Stock (other than the Senior Preferred Stock, Exchange
Preferred Stock and Private Exchange Preferred Stock) shall constitute the
entire Board of Directors. At any time after voting power to elect directors
shall have become vested and be continuing in the Holders of Senior Preferred
Stock, Exchange Preferred Stock and Private Exchange Preferred Stock pursuant
to paragraph (f)(iii) hereof, or if vacancies shall exist in the offices of
directors elected by the Holders of Senior Preferred Stock, Exchange Preferred
Stock and Private Exchange Preferred Stock, a proper officer of the Corporation
may, and upon the written request of the Holders of record of at least
twenty-five percent (25%) of the shares of Senior Preferred Stock, Exchange
Preferred Stock and Private Exchange Preferred Stock then outstanding addressed
to the secretary of the Corporation shall, call a special meeting of the
Holders of the Senior Preferred Stock, Exchange Preferred Stock and Private
Exchange Preferred Stock, for the purpose of electing directors which such
Holders are entitled to elect. If such meeting shall not be called by a proper
officer of the Corporation within twenty (20) days after personal service of
said written request upon the secretary of the Corporation, or within twenty
(20) days after mailing the same within the United States by certified mail,
addressed to the secretary of the Corporation at its principal executive
offices, then the Holders of record of at least twenty-five percent (25%) of
the outstanding shares of Senior Preferred Stock, Exchange Preferred Stock and
Private Exchange Preferred Stock may designate in writing one of their number
to call such meeting at the expense of the Corporation, and such meeting may be
called by the Person so designated upon the notice required for the annual
meetings of stockholders of the Corporation and shall be held at the place for
holding the annual meetings of stockholders. Any Holder of Senior Preferred
Stock, Exchange
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<PAGE> 9
Preferred Stock or Private Exchange Preferred Stock so designated shall have,
and the Corporation shall provide, access to the lists of stockholders to be
called pursuant to the provisions hereof.
(C) At any meeting held for the purpose of electing directors
at which the Holders of Senior Preferred Stock, Exchange Preferred Stock and
Private Exchange Preferred Stock shall have the right, voting together as a
separate class, to elect directors as aforesaid, the presence in person or by
proxy of the Holders of at least a majority of the outstanding shares of Senior
Preferred Stock, Exchange Preferred Stock and Private Exchange Preferred Stock
entitled to vote thereat shall be required to constitute a quorum of such
Senior Preferred Stock, Exchange Preferred Stock and Private Exchange Preferred
Stock.
(D) Any vacancy occurring in the office of a director elected
by the Holders of Senior Preferred Stock, Exchange Preferred Stock and Private
Exchange Preferred Stock may be filled by the remaining director elected by the
Holders of Senior Preferred Stock, Exchange Preferred Stock and Private
Exchange Preferred Stock unless and until such vacancy shall be filled by the
Holders of Senior Preferred Stock, Exchange Preferred Stock and Private
Exchange Preferred Stock.
(iv) In any case in which the Holders of Senior Preferred
Stock shall be entitled to vote pursuant to this paragraph (f) or pursuant to
Delaware law, each Holder of Senior Preferred Stock entitled to vote with
respect to such matter shall be entitled to one vote for each share of Senior
Preferred Stock held.
(g) Mergers and Consolidations. The Corporation shall not
consolidate with or merge with or into, or convey, transfer or lease all or
substantially all of its assets to any Person, unless: (A) the resulting,
surviving or transferee Person (the "Successor Corporation") shall be a
corporation, partnership, trust or limited liability company organized and
existing under the laws of the United States of America, any State thereof or
the District of Columbia and the Successor Corporation (if not the Corporation)
shall expressly assume all the obligations of the Corporation under the Senior
Preferred Stock; (B) immediately after giving effect to such transaction (and
treating any Indebtedness that becomes an obligation of the Successor
Corporation or any Subsidiary of the Successor Corporation as a result of such
transaction as having been Incurred by the Successor Corporation or such
Restricted Subsidiary at the time of such transaction), no Triggering Event
shall have occurred and be continuing; (C) immediately after giving effect to
such transaction, the Successor Corporation would be able to incur at least an
additional $1.00 of Indebtedness pursuant to paragraph (l)(i); and (D) the
Consolidated Net Worth of the resulting, surviving, or transferee corporation
is not less than that of the Corporation immediately prior to the transaction;
(E) there has been delivered to the Transfer Agent an Opinion of Counsel to the
effect that holders of the Senior Preferred Stock will not recognize income,
gain or loss for U.S. Federal income tax purposes as a result of such
consolidation, merger, conveyance, transfer or lease and will be subject to
U.S. Federal income tax on the same amount and in the same manner and at the
same times as would have been the case if such consolidation, merger,
conveyance, transfer or lease had not occurred; and (F) the Corporation shall
have delivered to the Transfer Agent an Officers' Certificate and an Opinion
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of Counsel, each stating that such consolidation, merger or transfer comply
with this Certificate of Designation.
The Successor Corporation will succeed to, and be substituted
for, and may exercise every right and power of, the Corporation under the
Certificate of Designation, but in the case of a lease of all or substantially
all its assets, the Corporation will not be released from the obligation to pay
the liquidation preference or dividends on the Preferred Stock.
Notwithstanding the foregoing clauses (B) and (C), any
Restricted Subsidiary of the Corporation may consolidate with, merge into or
transfer all or part of its properties and assets to the Corporation.
(h) Change of Control. (i) Within 20 days of the occurrence
of a Change of Control, the Corporation shall make an offer to purchase (the
"Change of Control Offer") the outstanding Senior Preferred Stock at a purchase
price equal to 101% of the liquidation preference thereof plus, without
duplication, an amount in cash equal to all accumulated and unpaid Regular
Dividends (including Additional Dividends, if any) thereon (including an amount
in cash equal to a prorated Regular Dividend for the period from the
immediately preceding Regular Dividend Payment Date to the Change of Control
Payment Date) (such applicable purchase price being hereinafter referred to as
the "Change of Control Purchase Price") in accordance with the procedures set
forth in this paragraph (h).
(ii) Within 20 days of the occurrence of a Change of Control,
the Corporation also shall (i) cause a notice of the Change of Control to be
sent at least once to the Dow Jones News Service or similar business news
service in the United States and (ii) send by first-class mail, postage
prepaid, to each holder of Senior Preferred Stock, at the address appearing on
the stock books of the Corporation, a notice stating:
(1) that the Change of Control Offer is being made pursuant
to this paragraph (h) and that all Senior Preferred Stock tendered
will be accepted for payment, and otherwise subject to the terms and
conditions set forth herein;
(2) the Change of Control Purchase Price and the purchase
date (which shall be a Business Day no earlier than 20 Business Days
from the date such notice is mailed (the "Change of Control Payment
Date"));
(3) that any Senior Preferred Stock not tendered will
continue to accumulate dividends;
(4) that, unless the Corporation defaults in the payment of
the Change of Control Purchase Price, any Senior Preferred Stock
accepted for payment pursuant to the Change of Control Offer shall
cease to accumulate dividends after the Change of Control Payment
Date;
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<PAGE> 11
(5) that holders accepting the offer to have their Senior
Preferred Stock purchased pursuant to a Change of Control Offer will
be required to surrender their certificates representing Senior
Preferred Stock to the Corporation at the address specified in the
notice prior to the close of business on the Business Day preceding
the Change of Control Payment Date;
(6) that holders will be entitled to withdraw their
acceptance if the Corporation receives, not later than the close of
business on the third Business Day preceding the Change of Control
Payment Date, a telegram, telex, facsimile transmission or letter
setting forth the name of the holder, the number of shares of Senior
Preferred Stock delivered for purchase, and a statement that such
holder is withdrawing his election to have such Senior Preferred Stock
purchased;
(7) that holders whose Senior Preferred Stock is being
purchased only in part will be issued new certificates representing
the number of shares of Senior Preferred Stock equal to the
unpurchased portion of the certificates surrendered; and
(8) any other procedures that a holder must follow to accept
a Change of Control Offer or effect withdrawal of such acceptance.
(iii) In the event that a Change of Control occurs and the
holders of Senior Preferred Stock exercise their right to require the
Corporation to purchase Senior Preferred Stock, if such purchase constitutes a
"tender offer" for purposes of Rule 14e-1 under the Exchange Act at that time,
the Corporation will comply with the requirements of Rule 14e-1 as then in
effect with respect to such repurchase and, in the event of a conflict between
the requirements of the Exchange Act and this Certificate of Designation, the
provisions of the Exchange Act shall govern.
(iv) On the Change of Control Payment Date, the Corporation
shall (A) accept for payment the shares of Senior Preferred Stock validly
tendered pursuant to the Change of Control Offer, (B) promptly mail to the
Holders of shares so accepted the Change of Control Purchase Price therefor and
(C) cancel and retire each surrendered Certificate and execute a new Senior
Preferred Stock certificate equal to any unpurchased shares represented by a
certificate surrendered. Unless the Corporation defaults in the payment for the
shares of Senior Preferred Stock tendered pursuant to the Change of Control
Offer, dividends shall cease to accrue with respect to the shares of Senior
Preferred Stock tendered and all rights of Holders of such tendered shares
shall terminate, except for the right to receive payment therefor, on the
Change of Control Payment Date.
(v) Prior to the mailing of the notice referred to in
paragraph (g)(ii), but in any event within 20 days following the date on which
a Change of Control occurs, the Corporation covenants that, if the purchase of
the Senior Preferred Stock would violate or constitute a default or be
prohibited under the Indenture or any other instrument governing Indebtedness
outstanding at the time, then the Corporation will, to the extent needed to
permit such purchase of Senior Preferred
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<PAGE> 12
Stock, either (i) repay in full all Indebtedness under the Indenture or any
such other instrument, as the case may be, or (ii) obtain the requisite
consents under the Indenture or any such other instrument, as the case may be,
to permit the redemption of the Senior Preferred Stock as provided above. The
Corporation will first comply with the covenant in the preceding sentence
before it will be required to redeem Senior Preferred Stock pursuant to the
provisions described above.
(i) Conversion or Exchange. The Holders of shares of Senior
Preferred Stock shall not have any rights hereunder to convert such shares into
or exchange such shares for shares of any other class or classes or of any
other series of any class or classes of Capital Stock of the Corporation other
than the Exchange Preferred Stock and the Private Exchange Preferred Stock as
provided in the Registration Rights Agreement dated as of the date hereof.
(j) Reissuance of Senior Preferred Stock. Shares of Senior
Preferred Stock that have been issued and reacquired in any manner, including
shares purchased or redeemed or exchanged, shall (upon compliance with any
applicable provisions of the laws of Delaware) have the status of authorized
and unissued shares of Preferred Stock undesignated as to series and may be
redesignated and reissued as part of any series of Preferred Stock, provided
that any issuance of such shares of Preferred Stock must be in compliance with
the terms hereof.
(k) Business Day. If any payment, redemption or exchange
shall be required by the terms hereof to be made on a day that is not a
Business Day, such payment, redemption or exchange shall be made on the
immediately succeeding Business Day.
(l) Certain Additional Provisions.
(i) Limitation on Indebtedness. (A) The Corporation shall
not, and shall not permit any of its Restricted Subsidiaries to, Incur any
Indebtedness if on the date thereof the Consolidated Coverage Ratio would be
greater than 2.0:1.
(B) Notwithstanding the foregoing paragraph (A), the
Corporation and its Restricted Subsidiaries may Incur the following
Indebtedness:
(i) Indebtedness of the Corporation or any Restricted
Subsidiary under Bank Indebtedness and under standby letters of credit
or reimbursement obligations with respect thereto issued in the
ordinary course of business and consistent with industry practice,
provided, however, that the aggregate principal amount of any
Indebtedness Incurred pursuant to this clause (i) shall not exceed $10
million at any time outstanding;
(ii) Indebtedness represented by Capitalized Lease
Obligations, mortgage financings or purchase money obligations, in each
case Incurred for the purpose of financing all or any part of the
purchase price or cost of construction or improvement of property or
equipment used in a Permitted Business or Incurred to refinance any
such purchase price or
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<PAGE> 13
cost of construction or improvement, in each case Incurred no later
than 365 days after the date of such acquisition or the date of
completion of such construction or improvement; provided, however, that
the principal amount of any Indebtedness Incurred pursuant to this
clause (ii), together with Indebtedness Incurred in connection with
Sale/Leaseback Transactions in accordance with paragraph (l)(v) hereof,
shall not exceed $5 million at any time outstanding;
(iii) Indebtedness of the Corporation owing to and held by
any Wholly-Owned Subsidiary or Indebtedness of a Restricted Subsidiary
owing to and held by the Corporation or any Wholly-Owned Subsidiary;
provided, however, that any subsequent issuance or transfer of any
Capital Stock or any other event which results in any such
Wholly-Owned Subsidiary ceasing to be a Wholly-Owned Subsidiary or any
subsequent transfer of any such Indebtedness (except to the
Corporation or any Wholly-Owned Subsidiary) shall be deemed, in each
case, to constitute the Incurrence of such Indebtedness by the issuer
thereof;
(iv) Indebtedness represented by (w) the Notes, (x) the
Guarantees, (y) Existing Indebtedness and (z) any Refinancing
Indebtedness Incurred in respect of any Indebtedness described in this
clause (iv) or Incurred pursuant to paragraph (A);
(v) (A) Indebtedness of a Restricted Subsidiary Incurred and
outstanding on the date on which such Restricted Subsidiary was
acquired by the Corporation (other than Indebtedness Incurred in
anticipation of, or to provide all or any portion of the funds or
credit support utilized to consummate the transaction or series of
related transactions pursuant to which such Restricted Subsidiary
became a Subsidiary or was otherwise acquired by the Corporation);
provided, however, that at the time such Restricted Subsidiary is
acquired by the Corporation, the Corporation would have been able to
Incur $1.00 of additional Indebtedness pursuant to paragraph (A) above
after giving effect to the Incurrence of such Indebtedness pursuant to
this clause (v) and (B) Refinancing Indebtedness Incurred by a
Restricted Subsidiary in respect of Indebtedness Incurred by such
Restricted Subsidiary pursuant to this clause (v);
(vi) Indebtedness (A) in respect of performance bonds,
bankers' acceptances and surety or appeal bonds provided by the
Corporation or any of its Restricted Subsidiaries to their customers
in the ordinary course of their business, (B) in respect of
performance bonds or similar obligations of the Corporation or any of
its Restricted Subsidiaries for or in connection with pledges,
deposits or payments made or given in the ordinary course of business
in connection with or to secure statutory, regulatory or similar
obligations, including obligations under health, safety or
environmental obligations, (C) arising from Guarantees to suppliers,
lessors, licensees, contractors, franchises or customers of
obligations (other than Indebtedness) Incurred in the ordinary course
of business and (D) under Currency Agreements and Interest Rate
Agreements; provided, however, that in the case of Currency Agreements
and Interest Rate Agreements, such Currency Agreements and Interest
Rate
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<PAGE> 14
Agreements are entered into for bona fide hedging purposes of the
Corporation or its Restricted Subsidiaries (as determined in good
faith by the Board of Directors of the Corporation) and correspond in
terms of notional amount, duration, currencies and interest rates as
applicable, to Indebtedness of the Corporation or its Restricted
Subsidiaries Incurred without violation of the Certificate of
Designation or to business transactions of the Corporation or its
Restricted Subsidiaries on customary terms entered into in the
ordinary course of business;
(vii) Indebtedness arising from agreements providing for
indemnification, adjustment of purchase price or similar obligations,
or from Guarantees or letters of credits, surety bonds or performance
bonds securing any obligations of the Corporation or any of its
Restricted Subsidiaries pursuant to such agreements, in each case
Incurred in connection with the disposition of any business assets or
Restricted Subsidiary of the Corporation (other than Guarantees of
Indebtedness or other obligations Incurred by any Person acquiring all
or any portion of such business assets or Restricted Subsidiary of the
Corporation for the purpose of financing such acquisition) in a
principal amount not to exceed the gross proceeds actually received by
the Corporation or any of its Restricted Subsidiaries in connection
with such disposition; provided, however, that the principal amount of
any Indebtedness Incurred pursuant to this clause (vii) when taken
together with all Indebtedness Incurred pursuant to this clause (vii)
and then outstanding, shall not exceed $1 million;
(viii) Indebtedness consisting of (A) Guarantees by the
Corporation or a Subsidiary Guarantor of Indebtedness Incurred by a
Wholly-Owned Subsidiary without violation of the Certificate of
Designation (so long as the Corporation or such Subsidiary Guarantor,
as the case may be, could have Incurred such Indebtedness directly
without violation of the Certificate of Designation) and (B)
Guarantees by a Restricted Subsidiary of Senior Indebtedness Incurred
by the Corporation without violation of the Certificate of Designation
(so long as such Restricted Subsidiary could have Incurred such
Indebtedness directly without violation of the Certificate of
Designation);
(ix) Indebtedness arising from the honoring by a bank or
other financial institution of a check, draft or similar instrument
issued by the Corporation or its Restricted Subsidiaries drawn against
insufficient funds in the ordinary course of business in an amount not
to exceed $250,000 at any time, provided that such Indebtedness is
extinguished within two business days of its Incurrence; and
(x) Indebtedness (other than Indebtedness described in
clauses (i) - (ix)) in a principal amount which, when taken together
with the principal amount of all other Indebtedness Incurred pursuant
to this clause (x) and then outstanding, will not exceed $4 million
(it being understood that any Indebtedness Incurred under this clause
(x) shall cease to be deemed Incurred or outstanding for purposes of
this clause (x) (but shall be deemed to be Incurred for purposes of
paragraph (A)) from and after the first date on which the
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<PAGE> 15
Corporation or its Restricted Subsidiaries could have Incurred such
Indebtedness under the foregoing paragraph (A) without reliance upon
this clause (x)).
(C) The Corporation will not permit any Unrestricted
Subsidiary to Incur any Indebtedness other than Non-Recourse Debt.
(ii) Limitation on Restricted Payments. (A) The Corporation
shall not, and shall not permit any of its Restricted Subsidiaries, directly or
indirectly, to (i) declare or pay any dividend or make any distribution on or
in respect of its Capital Stock (including any payment in connection with any
merger or consolidation involving the Corporation or any of its Restricted
Subsidiaries) except (A) dividends or distributions payable in its Capital
Stock (other than Disqualified Stock) or in options, warrants or other rights
to purchase such Capital Stock, and (B) dividends or distributions payable to
the Corporation or any of its Restricted Subsidiaries by any of its
Subsidiaries (and if the Subsidiary paying the dividend or making the
distribution is not a Wholly-Owned Subsidiary, to its other holders of Capital
Stock on a pro rata basis), (ii) purchase, redeem, retire or otherwise acquire
for value any Capital Stock of the Corporation held by Persons other than a
Wholly-Owned Subsidiary of the Corporation or any Capital Stock of a Restricted
Subsidiary of the Corporation held by any Affiliate of the Corporation, other
than a Wholly-Owned Subsidiary (in either case, other than in exchange for its
Capital Stock (other than Disqualified Stock)), (iii) purchase, repurchase,
redeem, defease or otherwise acquire or retire for value, prior to scheduled
maturity, scheduled repayment or scheduled sinking fund payment, any
Subordinated Obligations purchased in anticipation of satisfying a sinking fund
obligation, principal installment or final maturity, in each case due within
one year of the date of purchase, repurchase or acquisition or (iv) make any
Investment (other than a Permitted Investment) in any Person (any such
dividend, distribution, purchase, redemption, repurchase, defeasance, other
acquisition, retirement or Investment as described in preceding clauses (i)
through (iv) being referred to as a "Restricted Payment"); if at the time the
Corporation or such Restricted Subsidiary makes such Restricted Payment:
(1) the Corporation shall have paid a dividend, on the most
recent Dividend Payment Date, by the issuance of additional Preferred
Stock; or
(2) a Triggering Event shall have occurred and be continuing
(or would result therefrom); or
(3) the Corporation is not able to Incur an additional $1.00
of Indebtedness pursuant to paragraph (A) of paragraph (l)(i); or
(4) the aggregate amount of such Restricted Payment and all
other Restricted Payments declared or made subsequent to the Issue
Date would exceed the sum of (A) 50% of the Consolidated Net Income
accrued during the period (treated as one accounting period) from the
first day of the fiscal quarter beginning on or after the Issue Date
to the end of the most recent fiscal quarter ending prior to the date
of such Restricted Payment as to which
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<PAGE> 16
financial results are available (but in no event ending more than 135
days prior to the date of such Restricted Payment) (or, in case such
Consolidated Net Income shall be a deficit, minus 100% of such
deficit); (B) the aggregate net proceeds received by the Corporation
from the issue or sale of its Capital Stock (other than Disqualified
Stock) or other capital contributions subsequent to the Issue Date
(other than net proceeds received from an issuance or sale of such
Capital Stock to (x) a Subsidiary of the Corporation, (y) an employee
stock ownership plan or similar trust or (z) management employees of
the Corporation or any Subsidiary of the Corporation); provided,
however, that the value of any non-cash net proceeds, shall be as
determined by the Board of Directors in good faith, except that in the
event the value of any non-cash net proceeds shall be $1 million or
more, the value shall be as determined in writing by an independent
investment banking firm of nationally recognized standing; (C) the
amount by which Indebtedness of the Corporation is reduced on the
Corporation's balance sheet upon the conversion or exchange (other
than by a Restricted Subsidiary of the Corporation) subsequent to the
Issue Date of any Indebtedness of the Corporation convertible or
exchangeable for Capital Stock of the Corporation (less the amount of
any cash, or other property, distributed by the Corporation upon such
conversion or exchange); and (D) the amount equal to the net reduction
in Investments (other than Permitted Investments) made after the Issue
Date by the Corporation or any of its Restricted Subsidiaries in any
Person resulting from (i) repurchases or redemptions of such
Investments by such Person, proceeds realized upon the sale of such
Investment to an unaffiliated purchaser, repayments of loans or
advances or other transfers of assets by such Person to the
Corporation or any Restricted Subsidiary of the Corporation or (ii)
the redesignation of Unrestricted Subsidiaries as Restricted
Subsidiaries (valued in each case as provided in the definition of
"Investment") not to exceed, in the case of any Unrestricted
Subsidiary, the amount of Investments previously included in the
calculation of the amounts of Restricted Payments; provided, however,
that no amount shall be included under this clause (D) to the extent
it is already included in Consolidated Net Income.
(B) Notwithstanding the foregoing, the Corporation shall not,
and shall not permit any of its Restricted Subsidiaries, to make Investments in
Interactive Channel, Inc. or Interactive Channel Technologies, Inc., if at the
time of such Investment:
(1) a Triggering Event shall have occurred and be continuing
(or would result therefrom); or
(2) the aggregate amount of such Investment and all other
Investments in Interactive Channel, Inc. made subsequent to the Issue
Date would exceed the sum of (A) $34.0 million; (B) 50% of the
Adjusted Consolidated Net Income accrued during the period (treated as
one accounting period) from the first day of the fiscal quarter
beginning on or after the Issue Date to the end of the most recent
fiscal quarter ending prior to the date of such Investment as to which
financial results are available (but in no event ending more than 135
days prior to the date such Restricted Payment) (or, in the such
Adjusted Consolidated
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<PAGE> 17
Net Income shall be a deficit, minus 100% of such deficit); and (C)
the aggregate net proceeds received by the Corporation from the issue
or sale of its Capital Stock (other than Disqualified Stock) or other
capital contributions subsequent to the Issue Date as calculated in
accordance with paragraph (A)(3)(B) above.
(C) The provisions of paragraph (A) shall not prohibit: (i)
any purchase or redemption of Capital Stock or Subordinated Obligations of the
Corporation made by exchange for, or out of the proceeds of the substantially
concurrent sale of, Capital Stock of the Corporation (other than Disqualified
Stock and other than Capital Stock issued or sold to a Subsidiary, an employee
stock ownership plan or similar trust or management employees of the
Corporation or any Subsidiary of the Corporation); provided, however, that (A)
such purchase or redemption shall be excluded in the calculation of the amount
of Restricted Payments and (B) the Net Cash Proceeds from such sale shall be
excluded from clause (3) (B) of paragraph (A); (ii) any purchase or redemption
of Subordinated Obligations of the Corporation made by exchange for, or out of
the proceeds of the substantially concurrent sale of, Subordinated Obligations
of the Corporation in compliance with (l)(i) hereof; provided, however, that
such purchase or redemption shall be excluded in the calculation of the amount
of Restricted Payments; (iii) any purchase or redemption of Subordinated
Obligations from Net Available Cash; provided, however, that such purchase or
redemption shall be excluded in the calculation of the amount of Restricted
Payments; and (iv) dividends paid within 60 days after the date of declaration
if at such date of declaration such dividend would have complied with this
provision; provided, however, that such dividend shall be included in the
calculation of the amount of Restricted Payments; provided, however, that in
each case, no Triggering Event shall have occurred or be continuing at the time
of such payment or as a result thereof.
(D) For purposes of determining compliance with the foregoing
covenant, Restricted Payments may be made with cash or non-cash assets,
provided that any Restricted Payment made other than in cash shall be valued at
the fair market value (determined, subject to the additional requirements of
the immediately succeeding proviso, in good faith by the Board of Directors) of
the assets so utilized in making such Restricted Payment, provided, further
that (i) in the case of any Restricted Payment made with capital stock or
indebtedness, such Restricted Payment shall be deemed to be made in an amount
equal to the greater of the fair market value thereof and the liquidation
preference (if any) or principal amount of the capital stock or indebtedness,
as the case may be, so utilized, and (ii) in the case of any Restricted Payment
in an aggregate amount in excess of $1 million, a written opinion as to the
fairness of the valuation thereof (as determined by the Corporation) for
purposes of determining compliance with paragraph (l)(ii) shall be issued by an
independent investment banking firm of national standing.
(E) No later than the date of making any Restricted Payment,
the Corporation shall deliver to the Trustee an Officer's Certificate stating
that such Restricted Payment complies with this Certificate of Designation and
setting forth in reasonable detail the basis upon which the
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required calculations were computed, which calculations may be based upon the
Corporation's latest available quarterly financial statements and a copy of any
required investment banker's opinion.
(iii) Limitation on Affiliate Transactions. (A) The
Corporation will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, enter into or conduct any transaction or series of
related transactions (including the purchase, sale, lease or exchange of any
property or the rendering of any service) with or for the benefit of any
Affiliate of the Corporation, other than a Wholly-Owned Subsidiary (an
"Affiliate Transaction") unless: (i) the terms of such Affiliate Transaction
are no less favorable to the Corporation or such Restricted Subsidiary, as the
case may be, than those that could be obtained at the time of such transaction
in arm's length dealings with a Person who is not such an Affiliate; (ii) in
the event such Affiliate Transaction involves an aggregate amount in excess of
$1 million, the terms of such transaction have been approved by a majority of
the members of the Board of Directors of the Corporation and by a majority of
the disinterested members of such Board, if any (and such majority or
majorities, as the case may be, determines that such Affiliate Transaction
satisfies the criteria in (i) above); and (iii) in the event such Affiliate
Transaction involves an aggregate amount in excess of $2 million, the
Corporation has received a written opinion from an independent investment
banking firm of nationally recognized standing that such Affiliate Transaction
is fair to the Corporation or such Restricted Subsidiary, as the case may be,
from a financial point of view.
(B) The foregoing paragraph (A) shall not apply to (i) any
Restricted Payment permitted to be made pursuant to paragraph (l)(ii) hereof,
(ii) any issuance of securities, or other payments, awards or grants in cash,
securities or otherwise pursuant to, or the funding of, employment
arrangements, or any stock options and stock ownership plans for the benefit of
employees, officers and directors, consultants and advisors approved by the
Board of Directors of the Corporation, (iii) loans or advances to employees in
the ordinary course of business of the Corporation or any of its Restricted
Subsidiaries in aggregate amount outstanding not to exceed $250,000 at any
time, (iv) loans or advances to senior management of the Corporation which
loans and advances are secured by shares of Common Stock of the Corporation
owned by such senior management, in an aggregate amount outstanding not to
exceed $750,000, (v) any transaction between Wholly-Owned Subsidiaries, (vi)
indemnification agreements with, and the payment of fees and indemnities to,
directors, officers and employees of the Corporation and its Restricted
Subsidiaries, in each case in the ordinary course of business, (vii)
transactions pursuant to agreements in existence on the Issue Date which are
(x) described in the Corporation's offering memorandum dated October 30, 1997
or (y) otherwise, in the aggregate, immaterial to the Corporation and its
Restricted Subsidiaries taken as a whole, (viii) any employment,
non-competition or confidentiality agreements entered into by the Corporation
or any of its Restricted Subsidiaries with its employees in the ordinary course
of business, and (ix) the issuance of Capital Stock of the Corporation (other
than Disqualified Stock).
(iv) Limitation on Issuances of Capital Stock of Restricted
Subsidiaries. The Corporation will not permit any of its Restricted
Subsidiaries to issue any Capital Stock to any
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Person (other than to the Corporation or a Wholly-Owned Subsidiary of the
Corporation) or permit any Person (other than the Corporation or a Wholly-Owned
Subsidiary of the Corporation) to own any Capital Stock of a Restricted
Subsidiary of the Corporation, if in either case as a result thereof such
restricted Subsidiary would no longer be a Restricted Subsidiary of the
Corporation; provided, however, that this provision shall not prohibit (x) the
Corporation or any of its Restricted Subsidiaries from selling or otherwise
disposing of all of the Capital Stock of any Restricted Subsidiary or (y) the
designation of a Restricted Subsidiary as an Unrestricted Subsidiary in
compliance with the Certificate of Designation.
(v) Limitation on Sale/Leaseback Transactions. The
Corporation will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, enter into, Guarantee or otherwise become liable with
respect to any Sale/Leaseback Transaction with respect to any property or
assets unless (a) the Corporation or such Restricted Subsidiary, as the case
may be, would be entitled to pursuant to this Certificate of Designation Incur
Indebtedness secured by a Permitted Lien on such property or assets in an
amount equal to the Attributable Indebtedness with respect to such
Sale/Leaseback Transaction, (b) the Net Cash Proceeds from such Sale/Leaseback
Transaction are at least equal to the fair market value of the property or
assets subject to such Sale/Leaseback Transaction (such fair market value
determined, in the event such property or assets have a fair market value in
excess of $500,000, no more than 30 days prior to the effective date of such
Sale/Leaseback Transaction, by the Board of Directors of the Corporation as
evidenced by a resolution of such Board of Directors) and (c) the Indebtedness
Incurred in connection with such Sale/Leaseback Transaction, together with
Indebtedness Incurred in accordance with (ii) of paragraph (B) of paragraph
(l)(i), does not exceed $5 million at any time outstanding.
(m) SEC Reports. The Corporation will provide to the holders
of the Senior Preferred Stock within 15 days, after it files them with the
Commission, copies of the annual reports and of the information, documents and
other reports (or copies of such portions of any of the foregoing as the
Commission may by rules and regulations prescribe) which the Corporation files
with the Commission pursuant to Section 13 or 15 (d) of the Exchange Act. In
the event that the Corporation is not required to file such reports with the
Commission pursuant to the Exchange Act, the Corporation will nevertheless
deliver such Exchange Act information to the holders of the Preferred Stock
within 15 days after it would have been required to file it with the
Commission.
(n) Conduct of Business. The Corporation will not permit IT
Network, Inc. to directly or indirectly engage in any business other than the
provision of voice information services, including the services described in
this Offering Memorandum. The Corporation will conduct all of its interactive
television business through Interactive Channel, Inc., Interactive
Technologies, Inc. and any of their Wholly-Owned Subsidiaries.
(o) Definitions. As used in this Certificate of Designation,
the following terms shall have the following meanings (with terms defined in
the singular having comparable meanings when used in the plural and vice
versa), unless the context otherwise requires:
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"Acquisitions" means the October 1997 acquisitions by the
Corporation of certain of the electronic publishing assets of Brite Voice, Inc.
for $35.6 million and certain of the assets of Voice News Network, Inc. for
$9.0 million.
"Additional Dividends" has the meaning set forth in the
Registration Rights Agreement.
"Adjusted Consolidated Net Income" means, for any period,
Consolidated Net Income minus (plus) the net income (loss) of Interactive
Channel, Inc. for such period, plus an amount equal to the corporate overhead
allocated to Interactive Channel, Inc., on an after-tax basis, unless otherwise
included in the net income of Interactive Channel, Inc., for such period (as
determined in good faith by senior management of the Corporation), plus an
amount equal to the amortization of intangible assets relating to the
Acquisitions.
"Affiliate" of any specified person means any other Person,
directly or indirectly, controlling or controlled by or under direct or
indirect common control with such specified Person. For the purposes of this
definition, "control" when used with respect to any Person means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing.
"Affiliate Transaction" shall have the meaning ascribed to it
in paragraph l(iv) hereof.
"Asset Disposition" means any sale, lease, transfer, issuance
or other disposition (or series of related sales, leases, transfers, issuances
or dispositions that are part of a common plan) of shares of Capital Stock of
(or any other equity interests in) a Restricted Subsidiary (other than
directors' qualifying shares) or of any other property or other assets (each
referred to for the purposes of this definition as a "disposition") by the
Corporation or any of its Restricted Subsidiaries (including any disposition by
means of a merger, consolidation or similar transaction) other than (i) a
disposition by a Restricted Subsidiary to the Corporation or by the Corporation
or a Restricted Subsidiary to a Wholly-Owned Subsidiary, (ii) a disposition of
inventory in the ordinary course of business and for which adequate reserves
have been established in accordance with GAAP, (iii) a disposition of obsolete
or worn out equipment or equipment that is no longer useful in the conduct of
the business of the Corporation and its Restricted Subsidiaries and that is
disposed of in each case in the ordinary course of business, (iv) dispositions
of property for net proceeds which, when taken collectively with the net
proceeds of any other such dispositions under this clause (iv) that were
consummated since the beginning of the calendar year in which such disposition
is consummated, do not exceed $1 million, and (v) transactions permitted under
paragraph (g) hereof. Notwithstanding anything to the contrary contained above,
a Restricted Payment made in compliance with paragraph (l)(ii) shall not
constitute an Asset Disposition except for purposes of determinations of the
Consolidated Coverage Ratio.
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"Attributable Indebtedness" in respect of a Sale/Leaseback
Transaction means, as at the time of determination, the present value
(discounted at the interest rate borne by the Notes, compounded annually) of
the total obligations of the lessee for rental payments during the remaining
term of the lease included in such Sale/Leaseback Transaction (including any
period for which such lease has been extended).
"Average Life" means, as of the date of determination, with
respect to any Indebtedness or Preferred Stock, the quotient obtained by
dividing (i) the sum of the product of the numbers of years (rounded upwards to
the nearest month) from the date of determination to the dates of each
successive scheduled principal payment of such Indebtedness or redemption or
similar payment with respect to Preferred Stock multiplied by the amount of
such payment by (ii) the sum of all such payments.
"Bank Indebtedness" means loans made by banks, trust
companies and other institutions principally engaged in the business of lending
money to businesses to the Company or a Restricted Subsidiary under a credit
facility, loan agreement or similar agreement.
"Board of Directors" shall have the meaning ascribed to it in
the first paragraph of this Certificate of Designation.
"Business Day" means any day except a Saturday, a Sunday, or
any day on which banking institutions in New York, New York are required or
authorized by law or other governmental action to be closed.
"Capital Stock" of any Person means any and all shares,
interests, rights to purchase, warrants, options, participations or other
equivalents of or interests in (however designated) equity of such Person,
including any Preferred Stock, but excluding any debt securities convertible
into such equity.
"Capitalized Lease Obligations" means an obligation that is
required to be classified and accounted for as a capitalized lease for
financial reporting purposes in accordance with GAAP, and the amount of
Indebtedness represented by such obligation shall be the capitalized amount of
such obligation determined in accordance with GAAP, and the Stated Maturity
thereof shall be the date of the last payment of rent or any other amount due
under such lease prior to the first date such lease may be terminated without
penalty.
"Certificate of Designation" means this Certificate of
Designation creating the Senior Preferred Stock.
"Change of Control" means (i) any sale, lease, exchange or
other transfer (in one transaction or a series of related transactions) of all
or substantially all of the assets of the Corporation and its Subsidiaries; or
(ii) a majority of the Board of Directors of the Corporation or
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<PAGE> 22
of any direct or indirect holding company thereof shall consist of Persons who
are not Continuing Directors of the Corporation; or (iii) the acquisition by
any Person or group of related Persons for purposes of Section 13 (d) of the
Exchange Act, of the power, directly or indirectly, to vote or direct the
voting of securities having more than 50% of the ordinary voting power for the
election of directors of the Corporation or of any direct or indirect holding
company thereof.
"Change of Control Offer" shall have the meaning ascribed to
it in paragraph (h)(i) hereof.
"Change of Control Payment Date" shall have the meaning
ascribed to it in paragraph (h)(ii)(2) hereof.
"Change of Control Purchase Price" shall have the meaning
ascribed to it in paragraph (h)(i) hereof.
"Common Stock" of any Person means Capital Stock of such
Person that does not rank prior, as to the payment of dividends or as to the
distribution of assets upon any voluntary or involuntary liquidation,
dissolution or winding up of such Person, to shares of Capital Stock of any
other class of such Person.
"Consolidated Cash Flow" for any period means the
Consolidated Net Income for such period, plus the following to the extent
deducted in calculating such Consolidated Net Income: (i) income tax expense,
(ii) Consolidated Interest Expense, (iii) depreciation expense, (iv)
amortization expense, (v) exchange or translation losses on foreign currencies,
and (vi) all other non-cash items reducing Consolidated Net Income (excluding
any noncash item to the extent it represents an accrual of or reserve for cash
disbursements for any subsequent period prior to the Stated Maturity of the
Notes) and less, to the extent added in calculating Consolidated Net Income,
(x) exchange or translation gains on foreign currencies and (y) non-cash items
(excluding such non-cash items to the extent they represent an accrual for cash
receipts reasonably expected to be received prior to the Stated Maturity of the
Notes), in each case for such period. Notwithstanding the foregoing, the income
tax expense, depreciation expense and amortization expense of a Subsidiary of
the Corporation shall be included in Consolidated Cash Flow only to the extent
(and in the same proportion) that the net income of such Subsidiary was
included in calculating Consolidated Net Income.
"Consolidated Coverage Ratio" as of any date of determination
means the ratio of (i) the aggregate amount of Consolidated Cash Flow for the
period of the most recent four consecutive fiscal quarters ending prior to the
date of such determination and as to which financial statements are available
to (ii) Consolidated Interest Expense for such four fiscal quarters; provided,
however, that (1) if the Corporation or any of its Restricted Subsidiaries has
Incurred any Indebtedness since the beginning of such period and through the
date of determination of the Consolidated Coverage Ratio that remains
outstanding or if the transaction giving rise to the need to calculate
Consolidated
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<PAGE> 23
Coverage Ratio is an Incurrence of Indebtedness, or both, Consolidated Cash
Flow and Consolidated Interest Expense for such period shall be calculated
after giving effect on a pro forma basis to (A) such Indebtedness as if such
Indebtedness had been Incurred on the first day of such period (provided that
if such Indebtedness is Incurred under a revolving credit facility (or similar
arrangement or under any predecessor revolving credit or similar arrangement)
only that portion of such Indebtedness that constitutes the one year projected
average balance of such Indebtedness (as determined in good faith by the Board
of Directors of the Corporation) shall be deemed outstanding for purposes of
this calculation), and (B) the discharge of any other Indebtedness repaid,
repurchased, defeased or otherwise discharged with the proceeds of such new
Indebtedness as if such discharge had occurred on the first day of such period,
(2) if since the beginning of such period any Indebtedness of the Corporation
or any of its Restricted Subsidiaries has been repaid, repurchased, defeased or
otherwise discharged (other than Indebtedness under a revolving credit or
similar arrangement unless such revolving credit Indebtedness has been
permanently repaid and the underlying commitment terminated and has not been
replaced), Consolidated Interest Expense for such period shall be calculated
after giving pro forma effect thereto as if such Indebtedness had been repaid,
repurchased, defeased or otherwise discharged on the first day of such period,
(3) if since the beginning of such period the Corporation or any of its
Restricted Subsidiaries shall have made any Asset Disposition or if the
transaction giving rise to the need to calculate the Consolidated Coverage
Ratio is an Asset Disposition, Consolidated Cash Flow for such period shall be
reduced by an amount equal to the Consolidated Cash Flow (if positive)
attributable to the assets which are the subject of such Asset Disposition for
such period or increased by an amount equal to the Consolidated Cash Flow (if
negative) attributable thereto for such period, and Consolidated Interest
Expense for such period shall be (i) reduced by an amount equal to the
Consolidated Interest Expense attributable to any Indebtedness of the
Corporation or any of its Restricted Subsidiaries repaid, repurchased, defeased
or otherwise discharged with respect to the Corporation and its continuing
Restricted Subsidiaries in connection with such Asset Disposition for such
period (or, if the Capital Stock of any Restricted Subsidiary of the
Corporation is sold, the Consolidated Interest Expense for such period directly
attributable to the Indebtedness of such Restricted Subsidiary to the extent
the Corporation and its continuing Restricted Subsidiaries are no longer liable
for such Indebtedness after such sale) and (ii) increased by interest income
attributable to the assets which are the subject of such Asset Disposition for
such period, (4) if since the beginning of such period the Corporation or any
of its Restricted Subsidiaries (by merger or otherwise) shall have made an
Investment in any Restricted Subsidiary of the Corporation (or any Person which
becomes a Restricted Subsidiary of the Corporation as a result thereof) or an
acquisition of assets occurring in connection with a transaction causing a
calculation to be made hereunder which constitutes all or substantially all of
an operating unit of a business, Consolidated Cash Flow and Consolidated
Interest Expense for such period shall be calculated after giving pro forma
effect thereto (including the Incurrence of any Indebtedness) as if such
Investment or acquisition occurred on the first day of such period and (5) if
since the beginning of such period any Person (that subsequently became a
Restricted Subsidiary of the Corporation or was merged with or into the
Corporation or any Restricted Subsidiary of the Corporation since the beginning
of such period) shall have made any Asset Disposition, Investment or
acquisition of assets that would have required an adjustment
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<PAGE> 24
pursuant to clause (3) or (4) above if made by the Corporation or a Restricted
Subsidiary of the Corporation during such period, Consolidated Cash Flow and
Consolidated Interest Expense for such period shall be calculated after giving
pro forma effect thereto as if such Asset Disposition, Investment or
acquisition occurred on the first day of such period. For purposes of this
definition, whenever pro forma effect is to be given to an acquisition of
assets, the amount of income or earnings relating thereto and the amount of
Consolidated Interest Expense associated with any Indebtedness Incurred in
connection therewith, the pro forma calculations shall be determined in good
faith by a responsible financial or accounting officer of the Corporation. If
any Indebtedness bears a floating rate of interest and is being given pro forma
effect, the interest expense on such Indebtedness shall be calculated as if the
rate in effect on the date of determination had been the applicable rate for
the entire period (taking into account any Interest Rate Agreement applicable
to such Indebtedness if such Interest Rate Agreement has a remaining term in
excess of 12 months).
"Consolidated Interest Expense" means, for any period, the
total interest expense of the Corporation and its Restricted Subsidiaries
determined in accordance with GAAP, plus, to the extent not included in such
interest expense (i) interest expense attributable to Capitalized Lease
Obligations, (ii) amortization of debt discount, (iii) capitalized interest,
(iv) non-cash interest expense, (v) commissions, discounts and other fees and
charges owned with respect to letters of credit and bankers' acceptance
financing, (vi) interest actually paid by the Corporation or any such
Restricted Subsidiary under any Guarantee of Indebtedness or other obligation
of any other Person, (vii) net payments (whether positive or negative) pursuant
to Interest Rate Agreements; (vii) the cash contributions to any employee stock
ownership plan or similar trust to the extent such contributions are used by
such plan or trust to pay interest or fees to any Person (other than the
Corporation) in connection with Indebtedness Incurred by such plan or trust and
(ix) case and Disqualified Stock dividends in respect of all Preferred Stock of
Subsidiaries and Disqualified Stock of the Corporation held by Persons other
than the Corporation or a Wholly-Owned Subsidiary and less (a) to the extent
included in such interest expense, the amortization of capitalized debt
issuance costs and (b) interest income. Notwithstanding the foregoing, the
Consolidated Interest Expense with respect to any Restricted Subsidiary of the
Corporation, that was not a Wholly-Owned Subsidiary, shall be included only to
the extent (and in the same proportion) that the net income of such Restricted
Subsidiary was included in calculating Consolidated Net Income.
"Consolidated Net Income" means, for any period, the
consolidated net income (loss) of the Corporation and its consolidated
Subsidiaries determined in accordance with GAAP; provided, however, that there
shall not be included in such Consolidated Net Income: (i) any net income
(loss) of any Person acquired by the Corporation or any of its Restricted
Subsidiaries in a pooling of interests transaction for any period prior to the
date of such acquisition, (ii) any net income of any Restricted Subsidiary of
the Corporation if such Restricted Subsidiary is subject to restrictions,
directly or indirectly, on the payment of dividends or the making of
distributions by such Restricted Subsidiary, directly or indirectly, to the
Corporation (other than restrictions in effect on the Issue Date with respect
to a Restricted Subsidiary of the Corporation and other than restrictions that
are created or exist in compliance with this certificate, (iii) any gain or
loss realized upon the
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<PAGE> 25
sale or other disposition of any assets of the Corporation or its consolidated
Restricted Subsidiaries (including pursuant to any Sale/Leaseback Transaction)
which are not sold or otherwise disposed of in the ordinary course of business
and any gain or loss realized upon the sale or other disposition of any Capital
Stock of any Person, (iv) any extraordinary gain or loss, (v) the cumulative
effect of a change in accounting principles, (vi) the net income of any Person,
other than a Restricted Subsidiary, except to the extent of the lesser of (A)
cash dividends or distributions actually paid to the Corporation or any of its
Restricted Subsidiaries by such Person and (B) the net income of such Person
(but in no event less than zero), and the net loss of such Person (other than
an Unrestricted Subsidiary) shall be included only to the extent of the
aggregate Investment of the Corporation or any of its Restricted Subsidiaries
in such Person and (vii) any non-cash expenses attributable to grants or
exercises of employee stock options. Notwithstanding the foregoing, for the
purpose of paragraph (l)(ii) only, there shall be excluded from Consolidated
Net Income any dividends, repayments of loans or advances or other transfers of
assets from Unrestricted Subsidiaries to the Corporation or a Restricted
Subsidiary to the extent such dividends, repayments or transfers increase the
amount of Restricted Payments permitted under paragraph (l)(ii) pursuant to
clause (A) (3) (D) thereof.
"Consolidated Net Worth" means, the total of the amounts
shown on the balance sheet of the Corporation and its consolidated Restricted
Subsidiaries, determined on a consolidated basis in accordance with GAAP, as of
the end of the most recent fiscal quarter of the Corporation ending prior to
the taking of any action for the purpose of which the determination is being
made and for which financial statements are available (but in no event ending
more than 135 days prior to the taking of such action), as (i) the par or
stated value of all outstanding Capital Stock of the Corporation plus (ii) paid
in capital or capital surplus relating to such Capital Stock plus (iii) any
retained earnings or earned surplus less (A) any accumulated deficit and (B)
any amounts attributable to Disqualified Stock.
"Continuing Director" of any Person means, as of the date of
determination, any Person who (i) was a member of the Board of Directors of
such Person on the date of the Certificate of Designation or (ii) was nominated
for election or elected to the Board of Directors of such Person with the
affirmative vote of a majority of the Continuing Directors of such Person who
were members of such Board of Directors at the time of such nomination or
election.
"Corresponding Amendment" shall have the meaning ascribed to
it in paragraph (f)(ii)(C) hereof.
"Currency Agreement" means in respect of a Person any foreign
exchange contract, currency swap agreement or other similar agreement to which
Person is a party or a beneficiary.
"Disqualified Stock" means any Capital Stock which, by its
terms (or by the terms of any security into which it is convertible or for
which it is exchangeable), or upon the happening of any event (other than an
event which would constitute a Change of Control), (i) matures
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<PAGE> 26
(excluding any maturity as the result of an optional redemption by the issuer
thereof) or is mandatorily redeemable, pursuant to a sinking fund obligation or
otherwise, or is redeemable at the option of the holder thereof, in whole or in
part, on or prior to the final stated maturity of the Notes, or (ii) is
convertible into or exchangeable (unless at the sole option of the issuer
thereof) for (a) debt securities or (b) any Capital Stock referred to in (i)
above, in each case at any time prior to the final stated maturity of the
Senior Preferred Stock.
"Dividend Period" means the Initial Dividend Period and,
thereafter, each quarterly dividend period.
"Equity Offerings" means an offering for cash by the
Corporation of its Common Stock or option warrants or rights with respect to
its Common Stock.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder.
"Exchange Notice" shall have the meaning ascribed to it in
paragraph (g) hereof.
"Exchange Offer" means a registered offer to exchange any and
all shares of the Senior Preferred Stock for a like number of shares (with a
liquidation preference equal to that of the surrendered shares) of another
series of the Corporation's senior exchangeable preferred stock that has terms
identical in all material respects to the Senior Preferred Stock except that
the Exchange Preferred Stock shall have been registered pursuant to an
effective registration statement under the Securities Act and the certificates
therefor shall contain no restrictive legends thereon.
"Exchange Preferred Stock" means the series of the
Corporation's senior exchangeable preferred stock publicly offered in exchange
for the Senior Preferred Stock as contemplated by the Registration Rights
Agreement and having terms identical in all material respects to the Senior
Preferred Stock.
"Existing Indebtedness" means Indebtedness of the Corporation
or its Restricted Subsidiaries in existence on the Issue Date, plus interest
accrued thereon, after application of the net proceeds of the sale of the Notes
and Units.
"GAAP" means generally accepted accounting principles in the
United States of America as in effect as of the date of the Certificate of
Designation, including those set forth in the opinions and pronouncements of
the Accounting Principles Board of the American Institute of Certified Public
Accountants and statements and pronouncements of the Financial Accounting
Standards Board or in such other statements by such other entity as approved by
a significant segment of the accounting profession. All ratios and computations
based on GAAP contained in the Certificate of Designation shall be computed in
conformity with GAAP.
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<PAGE> 27
"Guarantees" means any obligation, contingent or otherwise,
of any Person directly or indirectly guaranteeing any Indebtedness of any other
Person and any obligation, direct or indirect, contingent or otherwise, of such
Person (i) to purchase or pay (or advance or supply funds for the purchase or
payment of) such Indebtedness of such other Person (whether arising by virtue
of partnership arrangements, or by agreement to keep-well, to purchase assets,
goods, securities or services, to take-or-pay, or to maintain financial
statement conditions or otherwise) or (ii) entered into for purposes of
assuring in any other manner the obligee of such Indebtedness of the payment
thereof or to protect such obligee against loss in respect thereof (in whole or
in part); provided, however, that the term "Guarantee" shall not include
endorsements for collection or deposit in the ordinary course of business. The
term "Guarantee" used as a verb has a corresponding meaning.
"Subsidiary Guarantor" means each Subsidiary of the
Corporation in existence on the Issue Date and each Subsidiary (other than
Unrestricted Subsidiaries) created or acquired by the Corporation after the
Issue Date.
"Holder" means a holder of shares of Senior Preferred Stock,
Exchange Preferred Stock or Private Exchange Preferred Stock, as the context
requires, as reflected in the stock books of the Corporation.
"Incur" means issue, assume, guarantee, incur or otherwise
become liable for; provided, however, that any indebtedness or Capital Stock of
a Person existing at the time such person becomes a Restricted Subsidiary
(whether by merger, consolidation, acquisition or otherwise) shall be deemed to
be incurred by such Restricted Subsidiary at the time it becomes a Restricted
Subsidiary.
"Indebtedness" means, with respect to any Person on any date
of determination (without duplication), (i) the principal of and premium (if
any) in respect of indebtedness of such Person for borrowed money, (ii) the
principal of and premium (if any) in respect of obligations of such Person
evidenced by bonds, debentures, notes or other similar instruments, (iii) all
obligations of such Person in respect of letters of credit or other similar
instruments (including reimbursement obligations with respect thereto) (other
than obligations with respect to letters of credit securing obligations (other
than obligations described in clauses (i), (ii) and (v)) entered into in the
ordinary course of business of such Person to the extent that such letters of
credit are not drawn upon or, if and to the extent drawn upon, such drawing is
reimbursed no later than the third business day following receipt by such
Person of a demand for reimbursement following payment on the letter of
credit), (iv) all obligations of such Person to pay the deferred and unpaid
purchase price of property or services (except trade payables and accrued
expenses Incurred in the ordinary course of business), which purchase price is
due more than six months after the date of placing such property in service or
taking delivery and title thereto or the completion of such services, (v) all
Capitalized Lease Obligations and all Attributable Indebtedness of such Person,
(vi) all Indebtedness of other Persons secured by a Lien on any asset of such
Person, whether or not such Indebtedness is assumed by such Person, (vii) all
Indebtedness of other Persons to the extent Guaranteed by such Person,
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(viii) the amount of all obligations of such Person with respect to the
redemption, repayment or other repurchase of any Disqualified Stock or, with
respect to any Restricted Subsidiary of the Corporation, any Preferred Stock of
such Restricted Subsidiary to the extent such obligation arises on or before
the stated maturity of such Preferred Stock (but excluding, in each case,
accrued dividends) with the amount of Indebtedness represented by such
Disqualified Stock or Preferred Stock, as the case may be, being equal to the
greater of its voluntary or involuntary liquidation preference and its maximum
fixed repurchase price; provided that, for purposes hereof the "maximum fixed
repurchase price" of any Disqualified Stock or Preferred Stock, as the case may
be, which does not have a fixed repurchase price shall be calculated in
accordance with the terms of such Disqualified Stock or Preferred Stock, as the
case may be, as if such Disqualified Stock or Preferred Stock, as the case may
be, were purchased on any date on which Indebtedness shall be required to be
determined pursuant to this Certificate of Designation, and if such price is
based on the fair market value of such Disqualified Stock or Preferred Stock,
as the case may be, such fair market value shall be determined in good faith by
the Board of Directors of the Corporation and (ix) to the extent not otherwise
included in this definition, obligations under Currency Agreements and Interest
Rate Agreements. Unless specifically set forth above, the amount of
Indebtedness of any Person at any date shall be the outstanding principal
amount of all unconditional obligations as described above, as such amount
would be reflected on a balance sheet prepared in accordance with GAAP, and the
maximum liability of such Person, upon the occurrence of the contingency giving
rise to the obligation, of any contingent obligations described above at such
date.
"Indenture" means the Indenture dated as of October 30, 1997,
by, and among the Corporation and U.S. Trust Company of Texas as Trustee.
"Initial Dividend Period" means the dividend period
commencing on the Issue Date and ending on the first Regular Dividend Payment
Date to occur thereafter.
"Interest Rate Agreement" means with respect to any Person
any interest rate protection agreement, interest rate future agreement,
interest rate option agreement, interest rate swap agreement, interest rate cap
agreement, interest rate collar agreement, interest rate hedge agreement or
other similar agreement or arrangement as to which such Person is party or a
beneficiary.
"Investment" in any Person means any direct or indirect
advance, loan (other than advances to customers in the ordinary course of
business that are recorded as accounts payable on the balance sheet of such
Person) or other extension of credit (including by way of Guarantee or similar
arrangement, but excluding any debt or extension of credit represented by a
bank deposit other than a time deposit) or capital contribution to (by means of
any transfer of cash or other property to others or any payment for property or
services for the account or use of others), or any purchase or acquisition of
Capital Stock, Indebtedness or other similar instruments issued by such Person;
provided that any Investment in the interactive television business shall be
made by any Person, directly or indirectly, through Interactive Channel, Inc.,
Interactive Channel Technologies
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<PAGE> 29
Inc. and any of their Wholly-Owned Subsidiaries. For purposes of paragraph
(l)(ii), (i) "Investment" shall include the portion (proportionate to the
Corporation's equity interest in a Restricted Subsidiary to be designated as an
Unrestricted Subsidiary) of the fair market value of the net assets of such
Restricted Subsidiary of the Corporation at the time that such Restricted
Subsidiary is designated an Unrestricted Subsidiary; provided, however, that
upon a redesignation of such Subsidiary as a Restricted Subsidiary, the
Corporation shall be deemed to continue to have a permanent "Investment" in an
Unrestricted Subsidiary in an amount (if positive) equal to (x) the
Corporation's "Investment" in such Subsidiary at the time of such redesignation
less (y) the portion (proportionate to the Corporation's equity interest in
such Subsidiary) of the fair market value of the net assets of such Subsidiary
at the time that such Subsidiary is so redesignated a Restricted Subsidiary;
and (ii) any property transferred to or from an Unrestricted Subsidiary shall
be valued at its fair market value at the time of such transfer, in each case
as determined in good faith by the Board of Directors and evidenced by a
resolution of such Board of Directors certified in an Officers' Certificate to
the Trustee.
"Issue Date" means the date on which the Preferred Stock are
originally issued.
"Junior Stock" shall have the meaning ascribed to it in
paragraph (b) hereof.
"Lien" means any mortgage, pledge, security interest,
encumbrance, lien or charge of any kind (including any conditional sale or
other title retention agreement or lease in the nature thereof).
"Net Available Cash" from an Asset Disposition means cash
payments received (including any cash payments received by way of deferred
payment of principal pursuant to a note or installment receivable or otherwise,
but only as and when received, but excluding any other consideration received
in the form of assumption by the acquiring Person of Indebtedness or other
obligations relating to the properties or assets subject to, such Asset
Disposition) therefrom in each case net of (i) all legal, title and recording
tax expenses, commissions and other fees and expenses incurred, and all
Federal, state, foreign and local taxes required to be paid or accrued as a
liability under GAAP, as a consequence of such Asset Disposition, (ii) all
payments made on any Indebtedness which is secured by any assets subject to
such Asset Disposition, in accordance with the terms of any Lien upon such
assets, or which must by its terms, or in order to obtain a necessary consent
to such Asset Disposition or by applicable, law, be repaid out of the proceeds
from such Asset Disposition, (iii) all distributions and other payments
required to be made to any Person owning a beneficial interest in assets
subject to sale or minority interest holders in Subsidiaries or joint ventures
as a result of such Asset Disposition, (iv) the deduction of appropriate
amounts to be provided by the seller as a reserve, in accordance with GAAP,
against any liabilities associated with the assets disposed of in such Asset
Disposition, provided however, that upon any reduction in such reserves (other
than to the extent resulting from payments of the respective reserved
liabilities), Net Available Cash shall be increased by the amount of such
reduction to reserves, and retained by the Corporation or any Restricted
Subsidiary of the Corporation after such Asset Disposition and (v) any
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portion of the purchase price from an Asset Disposition placed in escrow
(whether as a reserve for adjustment of the purchase price, for satisfaction of
indemnities in respect of such Asset Disposition or otherwise in connection
with such Asset Disposition), provided, however, that upon the termination of
such escrow, Net Available Cash shall be increased by any portion of funds
therein released to the Corporation or any Restricted Subsidiary.
"Net Cash Proceeds" with respect to any issuance or sale of
Capital Stock, means the cash proceeds of such issuance or sale net of
attorneys' fees, accountants' fees, underwriters' or placement agents' fees,
discounts or commissions and brokerage, consultant and other fees actually
incurred in connection with such issuance or sale and net of taxes paid or
payable as a result of such issuance or sale.
"Net Income" means with respect to any Person for any period,
the net income (loss) of such Person determined in accordance with GAAP.
"Non-Recourse Debt" means Indebtedness (i) as to which
neither the Corporation nor any Restricted Subsidiary (a) provides any
guarantee or credit support of any kind (including any undertaking, guarantee,
indemnity, agreement or instrument that would constitute Indebtedness) or (b)
is directly or indirectly liable (as a guarantor, a general partner or
otherwise) and (ii) no default with respect to which (including any rights that
the holders thereof may have to take enforcement action against an Unrestricted
Subsidiary) would permit (upon notice, lapse of time or both) any holder of any
other Indebtedness of the Corporation or any Restricted Subsidiary to declare a
default under such other Indebtedness or cause the payment thereof to be
accelerated or payable prior to its stated maturity.
"Note Indenture" means the Indenture governing the Notes.
"Notes" means the $100,000,000 aggregate principal amount of
12% Senior Secured Notes due 2004 issued by the Corporation on the Issue Date.
"Officers' Certificate" shall mean a certificate signed by
two Officers of the Corporation, at least one of whom shall be the principal
executive, financial or accounting officer of the Corporation.
"Opinion of Counsel" means a written opinion, in form and
substance acceptable to the Transfer Agent, from legal counsel who is
acceptable to the Transfer Agent.
"Parity Stock" shall have the meaning ascribed to it in
paragraph (b) hereof.
"Permitted Businesses" means any business which is the same
as or related, ancillary or complementary to any of the businesses of the
Corporation and its Restricted Subsidiaries on the Issue Date, as reasonably
determined by the Corporation's Board of Directors; provided, that, an
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<PAGE> 31
entity which is not an operating entity and whose primary business is to hold
or maintain intellectual property or licenses shall not qualify as a "Permitted
Business".
"Person" means any individual, corporation, partnership,
limited liability company, joint venture, association, joint-stock company,
trust, unincorporated organization, government or any agency or political
subdivision hereof or any other entity.
"Preferred Stock," as applied to the Capital Stock of any
corporation, means Capital Stock of any class or classes (however designated)
which is preferred as to the payment of dividends, or as to the distribution of
assets upon any voluntary or involuntary liquidation or dissolution of such
corporation, over shares of Capital Stock of any other class of such
corporation.
"Private Exchange Preferred Stock" means a series of the
Corporation's senior exchangeable preferred stock contemplated by the
Registration Rights Agreement issued under the same certificate of designation
as the Exchange Preferred Stock and having terms identical in all material
respects to the Senior Preferred Stock.
A "Public Market" exists at any time with respect to the
common stock of Holding or the Corporation if (i) the common stock of Holding
or the Corporation is then registered with the Securities and Exchange
Commission pursuant to Section 12(b) or 12(g) of the Exchange Act and traded
either on a national securities exchange or in the National Association of
Securities Dealers Automated Quotation System and (ii) at least 15% of the
total issued and outstanding common stock of Holding or the Corporation, as
applicable, has been distributed prior to such time by means of an effective
registration statement under the Securities Act.
"Purchase Money Indebtedness" means any Indebtedness Incurred
in the ordinary course of business by a Person to finance the cost (including
the cost of construction) of an item of property, the principal amount of which
Indebtedness does not exceed the sum of (i) 100% of such cost and (ii)
reasonable fees and expenses of such Person incurred in connection therewith.
"Redemption Date," with respect to any shares of Senior
Preferred Stock, means the date on which such shares of Senior Preferred Stock
are redeemed by the Corporation.
"Redemption Notice" shall have the meaning ascribed to it in
paragraph (e)(iii) hereof.
"Refinancing Indebtedness" means Indebtedness that refunds,
refinances, replaces, renews, repays or extends (including pursuant to any
defeasance or discharge mechanism) (collectively, "refinances," and refinanced"
shall have a correlative meaning) any Indebtedness existing on the date of this
Certificate of Designation or Incurred in compliance with this Certificate of
Designation (including Indebtedness of the Corporation that refinances
Indebtedness of any Restricted Subsidiary and Indebtedness of any Restricted
Subsidiary that refinances Indebtedness
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<PAGE> 32
of another Restricted Subsidiary) including Indebtedness that refinances
Refinancing Indebtedness; provided, however, that (i) the Refinancing
Indebtedness has a Stated Maturity no earlier than the earlier of (A) the first
anniversary of the Stated Maturity of the Notes and (B) Stated Maturity of the
Indebtedness being refinanced, (ii) the Refinancing Indebtedness has an Average
Life at the time such Refinancing Indebtedness is Incurred that is equal to or
greater than the lesser of (A) the Average Life of the Notes and (B) the
Average Life of the Indebtedness being refinanced and (iii) the Refinancing
Indebtedness is in an aggregate principal amount (or if issued with original
issue discount, an aggregate issue price) that is equal to (or 101% of, in the
case of a refinancing of the Notes in connection with a Change of Control) or
less than the sum of the aggregate principal amount (or if issued with original
issue discount, the accreted value) then outstanding of the Indebtedness being
refinanced.
"Registration Rights Agreement" means the Preferred Stock
Registration Rights Agreement dated as of the Issue Date among the Corporation
and NatWest Capital Markets Limited and Prudential Securities, Incorporated.
"Regular Dividend Payment Date" means February 1, May 1,
August 1 and November 1 of each year.
"Regular Dividend Record Date" means January 15, April 15,
July 15 and October 15 of each year.
"Regular Dividends" shall have the meaning ascribed to it in
paragraph (c)(i) hereof.
"Restricted Payment" shall have the meaning ascribed to it in
paragraph (1)(ii) hereof.
"Restricted Subsidiary" means any Subsidiary of the
Corporation other than an Unrestricted Subsidiary.
"Sale/Leaseback Transaction" means an arrangement relating to
property now owned or hereafter acquired whereby the Corporation or a
Restricted Subsidiary transfers such property to a Person and the Corporation
or a Subsidiary leases it from such Person.
"Securities Act" means the Securities Act of 1933, as
amended, and the rules and regulations promulgated thereunder.
"Senior Indebtedness" means, whether outstanding on the Issue
Date or thereafter issued, as all Indebtedness of the Corporation, including
interest and fees thereon, unless, in the instrument creating or evidencing the
same or pursuant to which the same is outstanding, it is provided that the
obligations in respect of such Indebtedness are not superior in right of
payment to the Securities; provided, however, that Senior Indebtedness will not
include (1) any obligation of the Corporation to any Subsidiary, (2) any
liability for Federal, state, foreign, local or other taxes
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<PAGE> 33
owed or owing by the Corporation, (3) any accounts payable or other liability
to trade creditors arising in the ordinary course of business (including
Guarantees thereof or instruments evidencing such liabilities), or (4) any
Indebtedness, Guarantee or obligation of the Corporation that is expressly
subordinate or junior in right of payment to any other Indebtedness, Guarantee
or obligation of the Corporation, including any Subordinated Obligations.
"Senior Preferred Stock" shall have the meaning ascribed to
it in paragraph (a) hereof.
"Senior Stock" shall have the meaning ascribed to it in
paragraph (b) hereof.
"Stated Maturity" means, with respect to any security, the
date specified in such security as the fixed date on which the payment of
principal of such security is due and payable, including pursuant to any
mandatory redemption provision.
"Subordinated Obligations" means any Indebtedness of the
corporation (whether outstanding on the Issue Date or thereafter Incurred)
which is subordinate or junior in right of payment to the Notes pursuant to a
written agreement.
"Subsidiary" of any Person incorporated in the United States
means any corporation, association, partnership or other business entity
organized in the United States of which more than 50% of the total voting power
of shares of Capital Stock or other interests (including partnership interests)
entitled (without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by (i) such Person, (ii) such Person and
one or more Subsidiaries of such Person or (iii) one or more Subsidiaries of
such Person. Unless otherwise specified herein, each reference to a Subsidiary
shall refer to a Subsidiary of the corporation.
"Subsidiary Guarantees" means each Subsidiary of the
Corporation in existence on the Issue Date and each Subsidiary (other than
Unrestricted Subsidiaries) created or acquired by the Corporation after the
Issue Date.
"Successor Corporation" shall have the meaning ascribed to it
in paragraph (f)(iii) hereof.
"Transfer Agent" means ChaseMellon Shareholder Services,
L.L.C. or any successor or assignor thereto.
"Triggering Event" shall have the meaning ascribed to it in
paragraph(f)(iii) hereof.
"Units" means the 800 Units each consisting of (i) 1,000
shares of 13-1/2% of Senior PIK Preferred Stock with a liquidation preference
of $25 per share and (ii) Warrants to purchase
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<PAGE> 34
447,000 shares of Common Stock, representing 3% of the Company's Common Stock
on a fully diluted basis.
"Unrestricted Subsidiary" means (i) any Subsidiary of the
Corporation that at the time of determination shall be designated an
Unrestricted Subsidiary by the Board of Directors in the manner provided below
and (ii) any Subsidiary of an Unrestricted Subsidiary. The Board of Directors
may designate any Subsidiary of the Corporation (including any newly acquired
or newly formed Subsidiary of the Corporation) to be an Unrestricted Subsidiary
unless such Subsidiary or any of its Subsidiaries owns any Capital Stock or
Indebtedness of, or owns or holds any Lien on any property of, the Corporation
or any Restricted Subsidiary of the Corporation that is not a Subsidiary of the
Subsidiary to be so designated; provided, however, each Subsidiary to be so
designated and each of its Subsidiaries has not at the time of designation, and
does not thereafter, create, incur, issue, assume, guarantee or otherwise
become directly or indirectly liable with respect to any Indebtedness pursuant
to which the Lender has recourse to any of the assets of the Corporation or any
of its Restricted Subsidiaries and either (A) the Subsidiary to be so
designated has total consolidated assets of $10,000 or less or (B) if such
Subsidiary has consolidated assets greater than $10,000, then such designation
would be permitted under "Limitation on Restricted Payments." The Board of
Directors may designate any Unrestricted Subsidiary to be a Restricted
Subsidiary; provided, however, that immediately after giving effect to such
designation (x) the Corporation could Incur $1.00 of additional Indebtedness
under clause (l)(i)(a) and (y) no Triggering Event shall have occurred and be
continuing. Any such designation by the Board of Directors shall be evidenced
to the Trustee by promptly filing with the Trustee a copy of the Board
Resolution giving effect to such designation and an Officers' Certificate
certifying that such designation complied with the foregoing provisions.
"Wholly-Owned Subsidiary" means a Restricted Subsidiary of
the Corporation, at least 99% of Capital Stock of which (other than directors'
qualifying shares) is owned by the Corporation or another Wholly-Owned
Subsidiary.
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<PAGE> 35
IN WITNESS WHEREOF, said Source Media, Inc. has caused this
Certificate of Designation to be signed by Timothy Peters, its Chief Executive
Officer, this 29th day of October, 1997.
SOURCE MEDIA, INC.
By /s/ TIMOTHY P. PETERS
----------------------------------
Timothy P. Peters,
Chief Executive Officer
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<PAGE> 36
AMENDMENT TO
CERTIFICATE OF DESIGNATION OF THE POWERS,
PREFERENCES AND RELATIVE, PARTICIPATING,
OPTIONAL AND OTHER SPECIAL RIGHTS OF 13 1/2%
SENIOR PAYMENT-IN-KIND PREFERRED STOCK, AND
QUALIFICATIONS, LIMITATIONS AND RESTRICTIONS THEREOF
Pursuant to Section 242 of the
General Corporation Law of the State of Delaware
and approved by a majority of the Stockholders
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 of Directors") by its
Certificate of Incorporation, as amended (the "Certificate of Incorporation"),
and pursuant to the provisions of Section 242 of the General Corporation Law of
the State of Delaware, said Board of Directors, duly approved and adopted the
following resolution:
RESOLVED, that, pursuant to the authority vested in the Board
of Directors by the Certificate of Incorporation of the Corporation,
the Board of Directors does hereby amend the Certificate of
Designation of the Powers, Preferences and Relative, Participating,
Optional and Other Special Rights of 13 1/2% Senior Payment-In-Kind
Preferred Stock and Qualifications, Limitations and Restrictions
Thereof (the "Certificate of Designation"), as filed with the Office
of the Secretary of State of the State of Delaware on October 29,
1997, as follows:
1. Paragraph (l)(iii) of the Certificate of Designation is
amended and restated in its entirety as follows:
(A) The Corporation will not, and will not permit any of its
Restricted Subsidiaries to, directly or indirectly, enter into or
conduct any transaction or series of related transactions (including
the purchase, sale, lease or exchange of any property or the rendering
of any service) with or for the benefit of any Affiliate of the
Corporation, other than a Wholly-Owned Subsidiary (an "Affiliate
Transaction") unless: (i) the terms of such Affiliate Transaction are
no less favorable to the Corporation or such Restricted Subsidiary, as
the case may be, than those that could be obtained at the time of such
transaction in arm's length dealings
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<PAGE> 37
with a Person who is not such an Affiliate; (ii) in the event such
Affiliate Transaction involves an aggregate amount in excess of $1
million, the terms of such transaction have been approved by a
majority of members of the Board of Directors of the Corporation and
by a majority of the disinterested members of such Board, if any (and
such majority or majorities, as the case may be, determines that such
Affiliate Transaction satisfies the criteria in (i) above); and (iii)
in the event such Affiliate Transaction involves an aggregate amount
in excess of $2 million, the Corporation has received a written
opinion from an independent investment banking firm of nationally
recognized standing that such Affiliate Transaction is fair to the
Corporation or such Restricted Subsidiary, as the case may be, from a
financial point of view; provided, however, that this clause (iii)
shall not apply to any transaction between or among the Corporation
and its Restricted Subsidiaries, on the one hand, and NewCo and its
Affiliates, on the other hand.
(B) The foregoing paragraph (A) shall not apply to (i) any
Restricted Payment permitted to be made pursuant to paragraph (l)(ii)
hereof, (ii) any issuance of securities, or other payments, awards or
grants in cash, securities or otherwise pursuant to, or the funding
of, employment arrangements, or any stock options and stock ownership
plans for the benefit of employees, officers and directors,
consultants and advisors approved by the Board of Directors of the
Corporation, (iii) loans or advances to employees in the ordinary
course of business of the Corporation or any of its Restricted
Subsidiaries in aggregate amount outstanding not to exceed $250,000 at
any time, (iv) loans or advances to senior management of the
Corporation which loans and advances are secured by shares of Common
Stock of the Corporation owned by such senior management, in an
aggregate amount outstanding not to exceed $750,000, (v) any
transaction between Wholly-Owned Subsidiaries, (vi) indemnification
agreements with, and the payment of fees and indemnities to,
directors, officers and employees of the Corporation and its
Restricted Subsidiaries, in each case in the ordinary course of
business, (vii) transactions pursuant to agreements in existence on
the Issue Date which are (x) described in the Corporations offering
memorandum dated October 30, 1997 (the "Offering Memorandum") or (y)
otherwise, in the aggregate, immaterial to the Corporation and its
Restricted Subsidiaries taken as a whole, (viii) any employment,
non-competition or confidentiality agreements entered into by the
Corporation or any of its Restricted Subsidiaries with its employees
in the ordinary course of business, (ix) the issuance of Capital Stock
of the Corporation (other than Disqualified Stock), (x) Permitted
Investments pursuant to clauses (xiii) and (xiv) of the definition
thereof and (xi) any transaction or arrangement entered into pursuant
to the Contribution Agreement or the Purchase Agreement.
2. Paragraph (n) of the Certificate of Designation is amended
and restated in its entirety as follows:
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<PAGE> 38
The Corporation will not permit IT Network, Inc. to directly or
indirectly engage in any business other than the provision of voice
information services, including the services described in the Offering
Memorandum.
3. Each of the following current terms contained in paragraph
(o) of the Certificate of Designation is amended and restated in its entirety
as follows:
"Asset Disposition" means any sale, lease, transfer, issuance
or other disposition (or series of related sales, leases, transfers,
issuances or dispositions that are part of a common plan) of shares of
Capital Stock of (or any other equity interests in) a Restricted
Subsidiary (other than directors' qualifying shares) or of any other
property or other assets (each referred to for the purposes of this
definition as a "disposition") by the Corporation or any of its
Restricted Subsidiaries (including any disposition by means of a
merger, consolidation or similar transaction) other than (i) a
disposition by a Restricted Subsidiary to the Corporation or by the
Corporation or a Restricted Subsidiary to a Wholly-Owned Subsidiary,
(ii) a disposition of inventory in the ordinary course of business and
for which adequate reserves have been established in accordance with
GAAP, (iii) a disposition of obsolete or worn out equipment that is no
longer useful in the conduct of the business of the Corporation and
its Restricted Subsidiaries and that is disposed of in each case in
the ordinary course of business, (iv) dispositions of property for net
proceeds which, when taken collectively with the net proceeds of any
other such dispositions under this clause (iv) that were consummated
since the beginning of the calendar year in which such disposition is
consummated, do not exceed $1 million, (v) transactions permitted
under paragraph (g) hereof and (vi) Permitted Investments pursuant to
clauses (xii) and (xiii) of the definition thereof. Notwithstanding
anything to the contrary contained above, a Restricted Payment made in
compliance with paragraph (l)(ii) shall not constitute an Asset
Disposition except for purposes of determinations of the Consolidated
Coverage Ratio.
"Investment" in any Person means any direct or indirect
advance, loan (other than advances to customers in the ordinary course
of business that are recorded as accounts payable on the balance sheet
of such Person) or other extension of credit (including by way of
Guarantee or similar arrangement, but excluding any debt or extension
of credit represented by a bank deposit other than a time deposit) or
capital contribution to (by means of any transfer of cash or other
property to others or any payment for property or services for the
account or use of others), or any purchase or acquisition of Capital
Stock, Indebtedness or other similar instruments issued by such
Person. For purposes of paragraph (l)(ii), (i) "Investment" shall
include the portion (proportionate to the Corporation's equity
interest in a Restricted Subsidiary to be designated as an
Unrestricted Subsidiary) of the fair market value of the net assets of
such Restricted Subsidiary of the Corporation at the time that such
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<PAGE> 39
Restricted Subsidiary is designated an Unrestricted Subsidiary;
provided, however, that upon a redesignation of such Subsidiary as a
Restricted Subsidiary, the Corporation shall be deemed to continue to
have a permanent "Investment" in an Unrestricted Subsidiary in any
amount (if positive) equal to (x) the Corporation's "Investment" in
such Subsidiary at the time of such redesignation less (y) the portion
(proportionate to the Corporation's equity interest in such
Subsidiary) of the fair market value of the net assets of such
Subsidiary at the time that such Subsidiary is so redesignated a
Restricted Subsidiary; and (ii) any property transferred to or from an
Unrestricted Subsidiary shall be valued at its fair market value at
the time of such transfer, in each case as determined in good faith by
the Board of Directors and evidenced by a resolution of such Board of
Directors certified in an Officers' Certificate to the Trustee.
"Permitted Investments" means an Investment by the Corporation or
any of its Restricted Subsidiaries in (i) a Wholly-Owned Subsidiary of
the Corporation (other than Interactive Channel Technologies, Inc.,
997758 Ontario, Inc., Cableshare (U.S.) Limited, Cableshare
International Inc. and 1229501 Ontario, Inc.); provided, however, (A)
that the primary business of such Wholly-Owned Subsidiary is a
Permitted Business and (B) in the case of Investments by the
Corporation or any of its Restricted Subsidiaries in Interactive
Channel, Inc., in an amount not to exceed the amount set forth in
clause (B) of paragraph (l)(ii); (ii) another Person if as a result of
such Investment such other Person becomes a Wholly-Owned Subsidiary of
the Corporation or is merged or consolidated with or into, or
transfers or conveys all or substantially all its assets to, the
Corporation or a Wholly-Owned Subsidiary of the Corporation, provided,
however, that in each case such Person's primary business is a
Permitted Business; (iii) Temporary Cash Investments; (iv) receivables
owing to the Corporation or any of its Restricted Subsidiaries,
created or acquired in the ordinary course of business and payable or
dischargeable in accordance with customary trade terms; (v) payroll,
travel and similar advances to cover matters that are expected at the
time of such advances ultimately to be treated as expenses for
accounting purposes and that are made in the ordinary course of
business; (vi) loans and advances to employees made in the ordinary
course of business consistent with past practices of the Corporation
or such Restricted Subsidiary in an aggregate amount outstanding at
any one time not to exceed $250,000; (vii) loans or advances to senior
management of the Corporation which loans or advances are fully
secured on the date of such loans or advances by shares of Common
Stock of the Corporation owned by such senior management in an
aggregate amount outstanding not to exceed $750,000; (viii) stock,
obligations or securities received in settlement of debts created in
the ordinary course of business and owing to the Corporation or any of
its Restricted Subsidiaries or in satisfaction of judgments or claims;
(ix) a Person engaged in a Permitted Business or a loan or advance to
the Corporation the proceeds of which are used solely to make an
investment in a Person engaged in a
4
<PAGE> 40
Permitted Business or a Guarantee by the Corporation of Indebtedness
of any Person in which such Investment has been made; provided,
however, that no Permitted Investments may be made pursuant to this
clause (ix) to the extent the amount thereof would, when taken
together with all other Permitted Investments made pursuant to this
clause (ix), exceed $3 million in the aggregate (plus, to the extent
not previously reinvested, any return of capital realized on Permitted
Investments made pursuant to this clause (ix), or any release or other
cancellation of any Guarantee constituting such Permitted Investment);
(x) prepayments and other credits to suppliers made in the ordinary
course of business consistent with the past practices of the
Corporation and its Restricted Subsidiaries; (xi) Investments in
connection with pledges, deposits, payments or performance bonds made
or given in the ordinary course of business in connection with or to
secure statutory, regulatory or similar obligations, including
obligations under health, safety or environmental obligations; (xii)
the transfer, assignment, conveyance or licensing of the Source I/C
Assets to NewCo as contemplated by the Contribution Agreement; and
(xiii) the making of capital contributions by the Corporation to NewCo
pursuant to the Operating Agreement in an amount not to exceed, in the
aggregate, the sum of $10 million plus the net cash proceeds of one or
more Equity Offerings by the Corporation to the extent the intended
use of proceeds is for the making of such capital contribution to
NewCo.
4. Paragraph (o) of the Certificate of Designation is amended by
adding the following new defined terms therein in their applicable alphabetical
order:
"Contribution Agreement" means the Contribution Agreement
dated as of July 29, 1999 by and among Insight, the Corporation and
NewCo.
"Insight" means Insight Interactive, LLC, a Delaware limited
liability company, and its successors and assigns.
"Insight Communications" means Insight Communications
Corporation, Inc., a Delaware corporation, and its successors and
assigns.
"NewCo" means NewCo, L.L.C., a Delaware limited liability
company, and its successors and assigns.
"NewCo License" means the exclusive, perpetual, royalty free,
irrevocable, worldwide license, with the right to sublicense, to all
of the intellectual property that has application in the VirtualModem
and Interactive Channel businesses not freely assignable by the
Corporation and the Source Subsidiaries (as defined in the
Contribution Agreement) to the extent such intellectual property
permits the grant of licenses.
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<PAGE> 41
"Operating Agreement" means the Limited Liability Corporation
Agreement of NewCo, to be entered into by and between the Corporation
and Insight as of the closing date as contemplated by the Contribution
Agreement, as the same may be amended or modified from time to time in
accordance with the terms thereof.
"Purchase Agreement" means the Common Stock and Warrants
Purchase Agreement dated as of July 29, 1999 by and between the
Corporation and Insight.
"Source I/C Assets" means the assets transferred, assigned
and conveyed by the Corporation and the Source Subsidiaries (as
defined in the Contribution Agreement) to NewCo pursuant to the
Contribution Agreement and the NewCo License.
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<PAGE> 42
IN WITNESS WHEREOF, said Source Media, Inc. has caused this
Amendment to the Certificate of Designation to be signed by Stephen W. Palley,
its Chief Executive Officer, this 17th day of November, 1999.
SOURCE MEDIA, INC.
By: /s/ Stephen W. Palley
-------------------------------
Stephen W. Palley,
Chief Executive Officer
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<PAGE> 43
AMENDMENT TO
CERTIFICATE OF DESIGNATION OF THE POWERS,
PREFERENCES AND RELATIVE, PARTICIPATING,
OPTIONAL AND OTHER SPECIAL RIGHTS OF 13 1/2%
SENIOR PAYMENT-IN-KIND PREFERRED STOCK, AND
QUALIFICATIONS, LIMITATIONS AND RESTRICTIONS THEREOF
Pursuant to Section 242 of the
General Corporation Law of the State of Delaware
and approved by a majority of the Stockholders
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 of Directors") by its
Certificate of Incorporation, as amended (the "Certificate of Incorporation"),
and pursuant to the provisions of Section 242 of the General Corporation Law of
the State of Delaware, said Board of Directors, duly approved and adopted the
following resolution:
RESOLVED, that, pursuant to the authority vested in the Board
of Directors by the Certificate of Incorporation of the Corporation,
the Board of Directors does hereby amend the Certificate of
Designation of the Powers, Preferences and Relative, Participating,
Optional and Other Special Rights of 13 1/2% Senior Payment-In-Kind
Preferred Stock and Qualifications, Limitations and Restrictions
Thereof (the "Certificate of Designation"), as filed with the Office
of the Secretary of State of the State of Delaware on October 29,
1997, and as amended on November 17, 1999, as follows:
1. Paragraph (l)(iii) of the Certificate of Designation is
amended and restated in its entirety as follows:
(A) The Corporation will not, and will not permit any of its
Restricted Subsidiaries to, directly or indirectly, enter into or
conduct any transaction or series of related transactions (including
the purchase, sale, lease or exchange of any property or the rendering
of any service) with or for the benefit of any Affiliate of the
Corporation, other than a Wholly-Owned Subsidiary (an "Affiliate
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<PAGE> 44
Transaction") unless: (i) the terms of such Affiliate Transaction are
no less favorable to the Corporation or such Restricted Subsidiary, as
the case may be, than those that could be obtained at the time of such
transaction in arm's length dealings with a Person who is not such an
Affiliate; (ii) in the event such Affiliate Transaction involves an
aggregate amount in excess of $1 million, the terms of such
transaction have been approved by a majority of members of the Board
of Directors of the Corporation and by a majority of the disinterested
members of such Board, if any (and such majority or majorities, as the
case may be, determines that such Affiliate Transaction satisfies the
criteria in (i) above); and (iii) in the event such Affiliate
Transaction involves an aggregate amount in excess of $2 million, the
Corporation has received a written opinion from an independent
investment banking firm of nationally recognized standing that such
Affiliate Transaction is fair to the Corporation or such Restricted
Subsidiary, as the case may be, from a financial point of view;
provided, however, that this clause (iii) shall not apply to (x) any
transaction between or among the Corporation and its Restricted
Subsidiaries, on the one hand, and NewCo and its Affiliates, on the
other hand, (y) any transaction between or among the Company and its
Restricted Subsidiaries, on the one hand, and SourceSuite Acquisition
and its Affiliates, on the other hand and (z) the sale, exchange or
other disposition of any Liberate Shares so long as the proceeds are
used in the business of the Company.
(B) The foregoing paragraph (A) shall not apply to (i) any
Restricted Payment permitted to be made pursuant to paragraph (l)(ii)
hereof, (ii) any issuance of securities, or other payments, awards or
grants in cash, securities or otherwise pursuant to, or the funding
of, employment arrangements, or any stock options and stock ownership
plans for the benefit of employees, officers and directors,
consultants and advisors approved by the Board of Directors of the
Corporation, (iii) loans or advances to employees in the ordinary
course of business of the Corporation or any of its Restricted
Subsidiaries in aggregate amount outstanding not to exceed $250,000 at
any time, (iv) loans or advances to senior management of the
Corporation which loans and advances are secured by shares of Common
Stock of the Corporation owned by such senior management, in an
aggregate amount outstanding not to exceed $750,000, (v) any
transaction between Wholly-Owned Subsidiaries, (vi) indemnification
agreements with, and the payment of fees and indemnities to,
directors, officers and employees of the Corporation and its
Restricted Subsidiaries, in each case in the ordinary course of
business, (vii) transactions pursuant to agreements in existence on
the Issue Date which are (x) described in the Corporations offering
memorandum dated October 30, 1997 (the "Offering Memorandum") or (y)
otherwise, in the aggregate, immaterial to the Corporation and its
Restricted Subsidiaries taken as a whole, (viii) any employment,
non-competition
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<PAGE> 45
or confidentiality agreements entered into by the Corporation or any
of its Restricted Subsidiaries with its employees in the ordinary
course of business, (ix) the issuance of Capital Stock of the
Corporation (other than Disqualified Stock), (x) Permitted Investments
pursuant to clauses (xii), (xiii), (xiv), and (xv) of the definition
thereof and (xi) any transaction or arrangement entered into pursuant
to the Contribution Agreement or the Purchase Agreement.
2. Each of the following current terms contained in paragraph
(o) of the Certificate of Designation is amended and restated in its entirety
as follows:
"Asset Disposition" means any sale, lease, transfer, issuance
or other disposition (or series of related sales, leases, transfers,
issuances or dispositions that are part of a common plan) of shares of
Capital Stock of (or any other equity interests in) a Restricted
Subsidiary (other than directors' qualifying shares) or of any other
property or other assets (each referred to for the purposes of this
definition as a "disposition") by the Corporation or any of its
Restricted Subsidiaries (including any disposition by means of a
merger, consolidation or similar transaction) other than (i) a
disposition by a Restricted Subsidiary to the Corporation or by the
Corporation or a Restricted Subsidiary to a Wholly-Owned Subsidiary,
(ii) a disposition of inventory in the ordinary course of business and
for which adequate reserves have been established in accordance with
GAAP, (iii) a disposition of obsolete or worn out equipment that is no
longer useful in the conduct of the business of the Corporation and
its Restricted Subsidiaries and that is disposed of in each case in
the ordinary course of business, (iv) dispositions of property for net
proceeds which, when taken collectively with the net proceeds of any
other such dispositions under this clause (iv) that were consummated
since the beginning of the calendar year in which such disposition is
consummated, do not exceed $1 million, (v) transactions permitted
under paragraph (g) hereof, (vi) Permitted Investments pursuant to
clauses (xii), (xiii), (xiv) and (xv) of the definition thereof and
(vii) the sale, transfer, exchange or other disposition of any
Liberate Shares so long as the proceeds are used in the business of
the Company. Notwithstanding anything to the contrary contained above,
a Restricted Payment made in compliance with paragraph (l)(ii) shall
not constitute an Asset Disposition except for purposes of
determinations of the Consolidated Coverage Ratio.
"NewCo" means SourceSuite LLC, a Delaware limited liability
company, and its successors and assigns.
"Permitted Investments" means an Investment by the
Corporation or any of its Restricted Subsidiaries in (i) a
Wholly-Owned Subsidiary of the Corporation
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<PAGE> 46
(other than Interactive Channel Technologies, Inc., 997758 Ontario,
Inc., Cableshare (U.S.) Limited, Cableshare International Inc. and
1229501 Ontario, Inc.); provided, however, (A) that the primary
business of such Wholly-Owned Subsidiary is a Permitted Business and
(B) in the case of Investments by the Corporation or any of its
Restricted Subsidiaries in Interactive Channel, Inc., in an amount not
to exceed the amount set forth in clause (B) of paragraph (l)(ii);
(ii) another Person if as a result of such Investment such other
Person becomes a Wholly-Owned Subsidiary of the Corporation or is
merged or consolidated with or into, or transfers or conveys all or
substantially all its assets to, the Corporation or a Wholly-Owned
Subsidiary of the Corporation, provided, however, that in each case
such Person's primary business is a Permitted Business; (iii)
Temporary Cash Investments; (iv) receivables owing to the Corporation
or any of its Restricted Subsidiaries, created or acquired in the
ordinary course of business and payable or dischargeable in accordance
with customary trade terms; (v) payroll, travel and similar advances
to cover matters that are expected at the time of such advances
ultimately to be treated as expenses for accounting purposes and that
are made in the ordinary course of business; (vi) loans and advances
to employees made in the ordinary course of business consistent with
past practices of the Corporation or such Restricted Subsidiary in an
aggregate amount outstanding at any one time not to exceed $250,000;
(vii) loans or advances to senior management of the Corporation which
loans or advances are fully secured on the date of such loans or
advances by shares of Common Stock of the Corporation owned by such
senior management in an aggregate amount outstanding not to exceed
$750,000; (viii) stock, obligations or securities received in
settlement of debts created in the ordinary course of business and
owing to the Corporation or any of its Restricted Subsidiaries or in
satisfaction of judgments or claims; (ix) a Person engaged in a
Permitted Business or a loan or advance to the Corporation the
proceeds of which are used solely to make an investment in a Person
engaged in a Permitted Business or a Guarantee by the Corporation of
Indebtedness of any Person in which such Investment has been made;
provided, however, that no Permitted Investments may be made pursuant
to this clause (ix) to the extent the amount thereof would, when taken
together with all other Permitted Investments made pursuant to this
clause (ix), exceed $3 million in the aggregate (plus, to the extent
not previously reinvested, any return of capital realized on Permitted
Investments made pursuant to this clause (ix), or any release or other
cancellation of any Guarantee constituting such Permitted Investment);
(x) prepayments and other credits to suppliers made in the ordinary
course of business consistent with the past practices of the
Corporation and its Restricted Subsidiaries; (xi) Investments in
connection with pledges, deposits, payments or performance bonds made
or given in the ordinary course of business in connection with or to
secure statutory, regulatory or similar obligations, including
obligations under health, safety or environmental obligations; (xii)
the transfer,
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<PAGE> 47
assignment, conveyance or licensing of the Source I/C Assets to NewCo
as contemplated by the Contribution Agreement; (xiii) the making of
capital contributions by the Corporation to NewCo pursuant to the
Operating Agreement in an amount not to exceed, in the aggregate, the
sum of $10 million plus the net cash proceeds of one or more Equity
Offerings by the Corporation to the extent the intended use of proceeds
is for the making of such capital contribution to NewCo; (xiv) the
transfer, exchange or other disposition by the Company of its ownership
interests in NewCo for the Merger Consideration as contemplated by the
Merger Agreement and (xv) the making of capital contributions by the
Company to SourceSuite Acquisition pursuant to the SourceSuite
Acquisition Operating Agreement in an amount not to exceed, in the
aggregate, the sum of $20 million, as well as such contributions to
SourceSuite Acquisition in respect of the net cash proceeds of one or
more equity offerings by the Company to the extent the intended use of
proceeds, as set forth in the offering documents, is for the making of
such capital contribution to SourceSuite Acquisition.
3. Paragraph (o) of the Certificate of Designation is amended by
adding the following new defined terms therein in their applicable alphabetical
order:
"Liberate" means Liberate Technologies, a Delaware
corporation, and its successors and assigns.
"Liberate Acquisition" means Liberate Acquisition LLC, a
Delaware limited liability company, and its successors and assigns.
"Liberate Shares" means the shares of common stock of
Liberate to be received by the Company pursuant to the Merger
Agreement.
"Merger" means the merger of Liberate Acquisition with and
into NewCo as contemplated by the Merger Agreement.
"Merger Agreement" means the Merger Agreement and Plan of
Reorganization dated as of January 12, 2000 by and among Liberate,
Liberate Acquisition, NewCo, SourceSuite Acquisition, the Company,
Insight and Insight Communications.
"Merger Consideration" means (a) either (i) 443,000 Liberate
Shares or (ii) 378,536 Liberate Shares plus $15 million in cash and
(b) as a working capital adjustment, cash equal to one-half of the
cash and cash equivalents of NewCo at the
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<PAGE> 48
time of the Merger, less any taxes payable by NewCo on the sale of the
Retained Business to SourceSuite Acquisition.
"Retained Business" means the Interactive Channel business of
NewCo including its server-side interactive programming guide and
related content business but excluding assets and properties used in
its VirtualModem business.
"SourceSuite Acquisition" means SourceSuite Acquisition LLC,
a Delaware limited liability company, and its successors and assigns.
"SourceSuite Acquisition Operating Agreement" means the
limited liability company operating agreement of SourceSuite
Acquisition, to be entered into by and between the Company and Insight
as of the closing date of the Merger, as the same may be amended or
modified from time to time in accordance with the terms thereof.
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<PAGE> 49
IN WITNESS WHEREOF, said Source Media, Inc. has caused this
Amendment to the Certificate of Designation to be signed by Stephen W. Palley,
its President and Chief Executive Officer, this 2d day of March, 2000.
SOURCE MEDIA, INC.
By: /s/ Stephen W. Palley
-------------------------------------
Stephen W. Palley,
President and Chief Executive Officer
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<PAGE> 1
EXHIBIT 4.5
FIRST SUPPLEMENTAL INDENTURE (this "First Supplemental Indenture"),
dated as of November 1, 1999, by and among Source Media, Inc., a Delaware
corporation (the "Company"), the Subsidiary Guarantors, and U.S. Trust Company
of Texas, N.A., a banking corporation organized and existing under the laws of
the State of Texas, in its capacity as trustee (in such capacity, the "Trustee")
and in its capacity as Escrow Agent pursuant to the Escrow and Disbursement
Agreement (in such capacity, the "Escrow Agent") and in its capacity as
Collateral Agent pursuant to the Security Agreements (as defined below) (in such
capacity, the "Collateral Agent").
RECITALS:
WHEREAS, on October 30, 1997 the Company issued its 12% Senior Secured
Notes Due 2004 in the aggregate principal amount of $100,000,000 pursuant to an
Indenture, dated as of October 30, 1997, between the Company and the Trustee
(the "Indenture");
WHEREAS, Section 9.02 of the Indenture provides that the Company and
the Trustee may amend or supplement the Indenture with the written consent of
the Holders of not less than a majority in aggregate principal amount of the
outstanding Notes (the "Majority Holders");
WHEREAS, Section 9.02(b) of the Indenture provides that upon the
request of the Company and the Subsidiary Guarantors accompanied by Board
Resolutions of their respective Boards of Directors authorizing the execution of
a supplemental indenture, and upon the filing with the Trustee of evidence
satisfactory to the Trustee of the consent of the Majority Holders, and upon
receipt by the Trustee of the documents described in Section 7.02 and Section
9.06 of the Indenture, the Trustee shall join with the Company and Subsidiary
Guarantors in the execution of a supplemental indenture;
WHEREAS, in connection with the Indenture the Company, SMI Holdings,
Inc., IT Network, Inc. and Interactive Channel, Inc. entered into a Security
Agreement (the "Company Security Agreement"), Interactive Channel Technologies
Inc. entered into a Security Agreement (the "ICTI Security Agreement") and
1229501 Ontario Inc. entered into a Security Agreement (the "1229501 Security
Agreement," and collectively, with the Company Security Agreement and the ICTI
Security Agreement, the "Security Agreements"), each dated as of October 30,
1997 in favor of the Trustee in its capacity as collateral agent for the ratable
benefit of the Holders;
WHEREAS, in connection with the Indenture the Company entered into an
Escrow and Disbursement Agreement dated October 30, 1997 with U.S. Trust Company
of Texas, N.A. in its capacity as Trustee and as Escrow Agent;
<PAGE> 2
WHEREAS, on July 29, 1999, the Company entered into a Contribution
Agreement (the "Contribution Agreement") with Insight Interactive, LLC
("Insight"), a wholly-owned subsidiary of Insight Communications Company, Inc.,
to form a joint venture ("NewCo") to conduct all of the Company's lines of
business relating to its VirtualModem and Interactive Channel products and
businesses (the "Transferred Businesses") and on the same date, entered into a
Common Stock and Warrants Purchase Agreement (the "Purchase Agreement") with
Insight pursuant to which Insight will acquire shares of the Company's common
stock and five-year warrants to acquire additional shares of the Company's
common stock;
WHEREAS, the Company has obtained the valid and unrevoked written
consents of the Majority Holders to amend and supplement the Indenture and the
related Security Agreements; and
WHEREAS, all acts and proceedings required by law and under the
Indenture to constitute this First Supplemental Indenture a valid and binding
agreement for the uses and purposes set forth herein, in accordance with its
terms, have been done and taken, and the execution and delivery of this First
Supplemental Indenture have been in all respects duly authorized by the Company;
NOW, THEREFORE, in consideration of the foregoing and for other good
and valuable consideration, the receipt of which is hereby acknowledged, the
Company and the Trustee hereby agree as follows for the benefit of each other
and for the equal and ratable benefit of the Holders of the Securities:
1. DEFINITIONS. All capitalized terms not otherwise defined herein
shall have the meanings ascribed to them in the Indenture, and the rules of
construction set forth in the Indenture shall likewise govern this First
Supplemental Indenture.
2. AMENDMENT OF SECTION 1.01. (a) Each of the following current terms
contained in Section 1.01 of the Indenture is amended and restated in its
entirety as follows:
"Asset Disposition" means any sale, lease, transfer, issuance or
other disposition (or series of related sales, leases, transfers,
issuances or dispositions that are part of a common plan) of shares of
Capital Stock of (or any other equity interests in) a Restricted
Subsidiary (other than directors' qualifying shares) or of any other
property or other assets (each referred to for the purposes of this
definition as a "disposition") by the Company or any of its Restricted
Subsidiaries (including any disposition by means of a merger,
consolidation or similar transaction) other than (i) a disposition by a
Restricted Subsidiary to the Company or by the Company or a Restricted
Subsidiary to a Wholly-Owned Subsidiary, (ii) a disposition of
inventory in the ordinary course of business and for which adequate
reserves have been established in accordance with GAAP, (iii) a
disposition of obsolete or worn out equipment that is no longer useful
in the conduct of the business of the Company and its Restricted
Subsidiaries and that is disposed of in each case in the ordinary
course of business, (iv) dispositions of property for net proceeds
which, when taken collectively with the net proceeds of any other such
dispositions under this clause (iv) that were consummated since
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<PAGE> 3
the beginning of the calendar year in which such disposition is
consummated, do not exceed $1 million, (v) transactions permitted under
Section 5.01 and (vi) Permitted Investments pursuant to clauses (xiii)
and (xiv) of the definition thereof. Notwithstanding anything to the
contrary contained above, a Restricted Payment made in compliance with
Section 4.07 shall not constitute an Asset Disposition except for
purposes of determinations of the Consolidated Coverage Ratio.
"Investment" in any Person means any direct or indirect advance,
loan (other than advances to customers in the ordinary course of
business that are recorded as accounts payable on the balance sheet of
such Person) or other extension of credit (including by way of
Guarantee or similar arrangement, but excluding any debt or extension
of credit represented by a bank deposit other than a time deposit) or
capital contribution to (by means of any transfer of cash or other
property to others or any payment for property or services for the
account or use of others), or any purchase or acquisition of Capital
Stock, Indebtedness or other similar instruments issued by such Person.
For purposes of Section 4.07, (i) "Investment" shall include the
portion (proportionate to the Company's equity interest in a Restricted
Subsidiary to be designated as an Unrestricted Subsidiary) of the fair
market value of the net assets of such Restricted Subsidiary of the
Company at the time that such Restricted Subsidiary is designated an
Unrestricted Subsidiary; provided, however, that upon a redesignation
of such Subsidiary as a Restricted Subsidiary, the Company shall be
deemed to continue to have a permanent "Investment" in an Unrestricted
Subsidiary in any amount (if positive) equal to (x) the Company's
"Investment" in such Subsidiary at the time of such redesignation less
(y) the portion (proportionate to the Company's equity interest in such
Subsidiary) of the fair market value of the net assets of such
Subsidiary at the time that such Subsidiary is so redesignated a
Restricted Subsidiary; and (ii) any property transferred to or from an
Unrestricted Subsidiary shall be valued at its fair market value at the
time of such transfer, in each case as determined in good faith by the
Board of Directors and evidenced by a resolution of such Board of
Directors certified in an Officers' Certificate to the Trustee.
"Permitted Investments" means an Investment by the Company or any of
its Restricted Subsidiaries in (i) a Wholly-Owned Subsidiary of the
Company (other than Interactive Channel Technologies, Inc., 997758
Ontario, Inc., Cableshare (U.S.) Limited, Cableshare International Inc.
and 1229501 Ontario Inc.); provided, however, (A) that the primary
business of such Wholly-Owned Subsidiary is a Permitted Business and
(B) in the case of Investments by the Company or any of its Restricted
Subsidiaries in Interactive Channel, Inc., in an amount not to exceed
the amount set forth in clause (b) of Section 4.07; (ii) another Person
if as a result of such Investment such other Person becomes a
Wholly-Owned Subsidiary of the Company or is merged or consolidated
with or into, or transfers or conveys all or substantially all its
assets to, the Company or a Wholly-Owned Subsidiary of the Company,
provided, however, that in each case such Person's primary business is
a Permitted Business; (iii) Temporary Cash Investments; (iv)
receivables owing to the Company or any of its Restricted Subsidiaries,
created or acquired in the ordinary course of business and payable or
dischargeable in accordance with customary trade terms; (v) payroll,
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<PAGE> 4
travel and similar advances to cover matters that are expected at the
time of such advances ultimately to be treated as expenses for
accounting purposes and that are made in the ordinary course of
business; (vi) loans and advances to employees made in the ordinary
course of business consistent with past practices of the Company or
such Restricted Subsidiary in an aggregate amount outstanding at any
one time not to exceed $250,000; (vii) loans or advances to senior
management of the Company which loans or advances are fully secured on
the date of such loans or advances by shares of Common Stock of the
Company owned by such senior management in an aggregate amount
outstanding not to exceed $750,000; (viii) stock, obligations or
securities received in settlement of debts created in the ordinary
course of business and owing to the Company or any of its Restricted
Subsidiaries or in satisfaction of judgments or claims; (ix) a Person
engaged in a Permitted Business or a loan or advance to the Company the
proceeds of which are used solely to make an investment in a Person
engaged in a Permitted Business or a Guarantee by the Company of
Indebtedness of any Person in which such Investment has been made;
provided, however, that no Permitted Investments may be made pursuant
to this clause (ix) to the extent the amount thereof would, when taken
together with all other Permitted Investments made pursuant to this
clause (ix), exceed $3 million in the aggregate (plus, to the extent
not previously reinvested, any return of capital realized on Permitted
Investments made pursuant to this clause (ix), or any release or other
cancellation of any Guarantee constituting such Permitted Investment);
(x) Persons to the extent such Investment is received by the Company or
any Restricted Subsidiary as consideration for asset dispositions
effected in compliance with the covenant described under Section 4.10;
(xi) prepayments and other credits to suppliers made in the ordinary
course of business consistent with the past practices of the Company
and its Restricted Subsidiaries; (xii) Investments in connection with
pledges, deposits, payments or performance bonds made or given in the
ordinary course of business in connection with or to secure statutory,
regulatory or similar obligations, including obligations under health,
safety or environmental obligations; (xiii) the transfer, assignment,
conveyance or licensing of the Source I/C Assets to NewCo as
contemplated by the Contribution Agreement; and (xiv) the making of
capital contributions by the Company to NewCo pursuant to the Operating
Agreement in an amount not to exceed, in the aggregate, the sum of $10
million plus the net cash proceeds of one or more Equity Offerings by
the Company to the extent the intended use of proceeds is for the
making of such capital contribution to NewCo.
(b) Section 1.01 of the Indenture is amended by adding the following
new defined terms therein in their applicable alphabetical order:
"Contribution Agreement" means the Contribution Agreement dated as
of July 29, 1999 by and among Insight, the Company and NewCo.
"Insight" means Insight Interactive, LLC, a Delaware limited
liability company, and its successors and assigns.
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<PAGE> 5
"Insight Communications" means Insight Communications Company, Inc.,
a Delaware corporation, and its successors and assigns.
"NewCo" means NewCo, L.L.C., a Delaware limited liability company,
and its successors and assigns.
"NewCo License" means the exclusive, perpetual, royalty free,
irrevocable, worldwide license, with the right to sublicense, to all of
the intellectual property that has application in the VirtualModem and
Interactive Channel businesses not freely assignable by the Company and
the Source Subsidiaries (as defined in the Contribution Agreement) to
the extent such intellectual property permits the grant of licenses.
"Operating Agreement" means the Limited Liability Company Agreement
of NewCo, to be entered into by and between the Company and Insight as
of the closing date as contemplated by the Contribution Agreement, as
the same may be amended or modified from time to time in accordance
with the terms thereof.
"Purchase Agreement" means the Common Stock and Warrants Purchase
Agreement dated as of July 29, 1999 by and between the Company and
Insight.
"Source I/C Assets" means the assets transferred, assigned and
conveyed by the Company and the Source Subsidiaries (as defined in the
Contribution Agreement) to NewCo pursuant to the Contribution Agreement
and the NewCo License.
3. AMENDMENT OF SECTION 4.11. Section 4.11 of the Indenture is amended
and restated in its entirety as follows:
(a) The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, enter into or conduct any
transaction or series of related transactions (including the purchase,
sale, lease or exchange of any property or the rendering of any
service) with or for the benefit of any Affiliate of the Company, other
than a Wholly-Owned Subsidiary (an "Affiliate Transaction") unless: (i)
the terms of such Affiliate Transaction are no less favorable to the
Company or such Restricted Subsidiary, as the case may be, than those
that could be obtained at the time of such transaction in arm's length
dealings with a Person who is not such an Affiliate; (ii) in the event
such Affiliate Transaction involves an aggregate amount in excess of $1
million, the terms of such transaction have been approved by a majority
of members of the Board of Directors of the Company and by a majority
of the disinterested members of such Board, if any (and such majority
or majorities, as the case may be, determines that such Affiliate
Transaction satisfies the criteria in (i) above); and (iii) in the
event such Affiliate Transaction involves an aggregate amount in excess
of $2 million, the Company has received a written opinion from an
independent investment banking firm of nationally recognized standing
that such Affiliate Transaction is fair to the Company or such
Restricted Subsidiary, as the case may be, from a financial point of
view; provided,
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<PAGE> 6
however, that this clause (iii) shall not apply to any transaction
between or among the Company and its Restricted Subsidiaries, on the
one hand, and NewCo and its Affiliates, on the other hand.
(b) The foregoing paragraph (a) shall not apply to (i) any
Restricted Payment permitted to be made pursuant to Section 4.07, (ii)
any issuance of securities, or other payments, awards or grants in
cash, securities or otherwise pursuant to, or the funding of,
employment arrangements, or any stock options and stock ownership plans
for the benefit of employees, officers and directors, consultants and
advisors approved by the Board of Directors of the Company, (iii) loans
or advances to employees in the ordinary course of business of the
Company or any of its Restricted Subsidiaries in aggregate amount
outstanding not to exceed $250,000 at any time, (iv) loans or advances
to senior management of the Company which loans and advances are fully
secured on the date of such loans or advances by shares of Common Stock
of the Company owned by such senior management, in an aggregate amount
outstanding not to exceed $750,000, (v) indemnification agreements
with, and the payment of fees and indemnities to, directors, officers
and employees of the Company and its Restricted Subsidiaries, in each
case in the ordinary course of business, (vi) transactions pursuant to
agreements in existence on the Issue Date which are (x) described in
the Offering Memorandum or (y) otherwise, in the aggregate, immaterial
to the Company and its Restricted Subsidiaries taken as a whole, (vii)
any employment, non-competition or confidentiality agreements entered
into by the Company or any of its Restricted Subsidiaries with its
employees in the ordinary course of business, (viii) the issuance of
Capital Stock of the Company (other than Disqualified Stock), (ix)
Permitted Investments pursuant to clauses (xiii) and (xiv) of the
definition thereof and (x) any transaction or arrangement entered into
pursuant to the Contribution Agreement or the Purchase Agreement.
4. AMENDMENT OF SECTION 4.16. Section 4.16 of the Indenture is amended
and restated in its entirety as follows:
The Company will not permit IT Network, Inc. to directly or
indirectly engage in any business other than the provision of voice
information services, including the services described in the Offering
Memorandum.
5. RELEASE OF COLLATERAL. Pursuant to each of the Security Agreements,
the Trustee releases any and all liens upon and security interests in the
Collateral (as defined in each Security Agreement) to the extent such Collateral
consists of Source I/C Assets (as defined in Section 2(b) above). Upon the
request of the Company, and at the Company's expense, the Trustee will execute
and deliver such lien releases and/or termination statements and documents as
may be necessary to effectively terminate any and all of such liens and/or
security interests on any public record.
6. ADDITIONAL COLLATERAL. In addition to the Collateral set forth in
the Company Security Agreement, the Company grants to the Trustee, in its
capacity as Collateral Agent under
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<PAGE> 7
the Company Security Agreement and subject to the terms and conditions of the
Company Security Agreement, a security interest for the benefit of the Holders
(as defined in the Company Security Agreement) in the Company's right, title and
interest in the Membership Units of NewCo to be issued to the Company, upon the
closing of the transaction contemplated by the Contribution Agreement and the
Purchase Agreement.
7. ADDITIONAL ESCROW AMOUNT. Concurrently with the closing of the
transaction contemplated by the Contribution Agreement and the Purchase
Agreement, the Company shall deliver or shall cause to be delivered $6,000,000
or such other amount sufficient to pay the May 1, 2000 intrust payment (the
"Additional Escrow Amount") to the Escrow Agent for deposit into the Escrow
Account against the Escrow Agent's written acknowledgment and receipt of the
Additional Escrow Amount.
8. EFFECTIVENESS. Upon the execution and delivery of this First
Supplemental Indenture by the Trustee and the Company and the Subsidiary
Guarantors and the closing of the transactions contemplated by the Contribution
Agreement and the Purchase Agreement, the proposed agreements contained herein
will become effective and operative. Thereafter, all references to the Indenture
shall, unless specifically referring to the Indenture as originally executed, be
deemed to be references to the Indenture as amended and supplemented by this
First Supplemental Indenture. The Indenture, the Security Agreements and the
Escrow Agreement, as amended and supplemented by this First Supplemental
Indenture, are in all respects hereby ratified and confirmed.
9. RECITALS. The recitals contained herein shall be taken as the
statement of the Company, and the Trustee assumes no responsibility for the
correctness of the same. The Trustee makes no representation as to the validity
of this First Supplemental Indenture.
10. SUCCESSORS AND ASSIGNS. This First Supplemental Indenture shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and assigns. Except as amended herein, the terms, provisions and
covenants of the Indenture shall remain in full force and effect and continue to
govern the parties thereto.
11. COUNTERPARTS. This First Supplemental Indenture may be executed in
any number of counterparts, each of which so executed shall be an original, but
all of them together represent the same agreement.
12. GOVERNING LAW. This First Supplemental Indenture shall be governed
by, and construed in accordance with, the laws of the State of New York, but
without giving effect to applicable principles of conflicts of law to the extent
that the application of the laws of another jurisdiction would be required
thereby.
[Remainder of page intentionally
left blank; signatures follow]
7
<PAGE> 8
IN WITNESS WHEREOF, the parties have caused this First Supplemental
Indenture to be duly executed, all as of the date first above written.
COMPANY:
SOURCE MEDIA, INC.
By: /s/ Stephen W. Palley
----------------------------
Stephen W. Palley
Chief Executive Officer and President
SUBSIDIARY GUARANTORS:
SMI HOLDINGS, INC.
By: /s/ Stephen W. Palley
----------------------------
Stephen W. Palley
Chief Executive Officer and President
IT NETWORK, INC.
By: /s/ Stephen W. Palley
----------------------------
Stephen W. Palley
Chief Executive Officer
INTERACTIVE CHANNEL, INC.
By: /s/ Stephen W. Palley
----------------------------
Stephen W. Palley
Chief Executive Officer
8
<PAGE> 9
INTERACTIVE CHANNEL
TECHNOLOGIES INC.
By: /s/ Stephen W. Palley
----------------------------
Stephen W. Palley
Chief Executive Officer
1229501 ONTARIO, INC.
By: /s/ Stephen W. Palley
----------------------------
Stephen W. Palley
Chief Executive Officer and President
997758 ONTARIO, INC.
By: /s/ Stephen W. Palley
----------------------------
Stephen W. Palley
Chief Executive Officer and President
CABLESHARE (U.S.) LIMITED
By: /s/ Stephen W. Palley
----------------------------
Stephen W. Palley
Chief Executive Officer and President
CABLE SHARE INTERNATIONAL INC.
By: /s/ Stephen W. Palley
----------------------------
Stephen W. Palley
Chief Executive Officer and President
9
<PAGE> 10
CABLESHARE B.V.
By: /s/ Brad Unsworth
------------------------------------
Brad Unsworth
Managing Director
TRUSTEE:
U.S. TRUST COMPANY OF TEXAS, N.A.,
AS TRUSTEE
By: /s/ Bill Barber
------------------------------------
Name: Bill Barber
Title: Vice President
COLLATERAL AGENT:
U.S. TRUST COMPANY OF TEXAS, N.A.,
AS COLLATERAL AGENT
By: /s/ Bill Barber
------------------------------------
Name: Bill Barber
Title: Vice President
ESCROW AGENT:
U.S. TRUST COMPANY OF TEXAS, N.A.,
AS ESCROW AGENT
By: /s/ Bill Barber
------------------------------------
Name: Bill Barber
Title: Vice President
10
<PAGE> 1
EXHIBIT 4.6
SECOND SUPPLEMENTAL INDENTURE (this "Second Supplemental Indenture"),
dated as of February 15, 2000, by and among Source Media, Inc., a Delaware
corporation (the "Company"), the Subsidiary Guarantors, and U.S. Trust Company
of Texas, N.A., a banking corporation organized and existing under the laws of
the State of Texas, in its capacity as Trustee under the Indenture referred to
below (in such capacity, the "Trustee") and in its capacity as Escrow Agent
pursuant to the Escrow and Disbursement Agreement referred to below (in such
capacity, the "Escrow Agent") and in its capacity as Collateral Agent pursuant
to the Security Agreements referred to below (in such capacity, the "Collateral
Agent").
RECITALS:
WHEREAS, on October 30, 1997 the Company issued its 12% Senior Secured
Notes Due 2004 in the aggregate principal amount of $100,000,000 pursuant to an
Indenture, dated as of October 30, 1997, between the Company and the Trustee
(the "Original Indenture");
WHEREAS, the Original Indenture was amended and supplemented by a First
Supplemental Indenture dated as of November 1, 1999 (the Original Indenture, as
so amended and supplemented, is herein called the "Indenture");
WHEREAS, Section 9.02 of the Indenture provides that the Company and
the Trustee may amend or supplement the Indenture with the written consent of
the Holders of not less than a majority in aggregate principal amount of the
outstanding Securities (the "Majority Holders");
WHEREAS, Section 9.02(b) of the Indenture provides that upon the
request of the Company and the Subsidiary Guarantors accompanied by Board
Resolutions of their respective Boards of Directors authorizing the execution of
a supplemental indenture, and upon the filing with the Trustee of evidence
satisfactory to the Trustee of the consent of the Majority Holders, and upon
receipt by the Trustee of the documents described in Section 7.02 and Section
9.06 of the Indenture, the Trustee shall join with the Company and Subsidiary
Guarantors in the execution of a supplemental indenture;
WHEREAS, in connection with the Indenture the Company, SMI Holdings,
Inc., IT Network, Inc., Cableshare (U.S.) Limited and Interactive Channel, Inc.
entered into a Security Agreement (the "Company Security Agreement"),
Interactive Channel Technologies Inc. entered into a Security Agreement (the
"ICTI Security Agreement") and 1229501 Ontario Inc. entered into a Security
Agreement (the "1229501 Security Agreement," and collectively, with the Company
Security Agreement and the ICTI Security Agreement, the "Security Agreements"),
each dated as of October 30, 1997 in favor of the Trustee in its capacity as
collateral agent for the ratable benefit of the Holders;
WHEREAS, in connection with the Indenture the Company entered into an
Escrow and Disbursement Agreement dated October 30, 1997 with U.S. Trust Company
of Texas, N.A. in its capacity as Trustee and as Escrow Agent;
<PAGE> 2
WHEREAS, on January 12, 2000, the Company entered into a Merger
Agreement (the "Merger Agreement") with Liberate Technologies, a Delaware
corporation ("Liberate"), Liberate Acquisition Co., a wholly-owned subsidiary of
Liberate ("Liberate Acquisition"), SourceSuite LLC, SourceSuite Acquisition LLC,
Insight Interactive, LLC and Insight Communications Company, Inc. pursuant to
which Liberate Acquisition will merge with and into SourceSuite LLC (the
"Merger"), and the ownership interests of the Company in SourceSuite LLC will be
converted into the right to receive (a) cash in an amount equal to one-half of
SourceSuite LLC's cash and cash equivalents at the time of the Merger and (b)
(i) 886,000 shares of common stock of Liberate, or (ii) 757,072 shares of common
stock of Liberate plus $15 million in cash of Liberate;
WHEREAS, the Company has obtained the valid and unrevoked written
consents of the Majority Holders to amend and supplement the Indenture and the
related Company Security Agreement; and
WHEREAS, all acts and proceedings required by law and under the
Indenture to constitute this Second Supplemental Indenture a valid and binding
agreement for the uses and purposes set forth herein, in accordance with its
terms, have been done and taken, and the execution and delivery of this Second
Supplemental Indenture have been in all respects duly authorized by the Company;
NOW, THEREFORE, in consideration of the foregoing and for other good
and valuable consideration, the receipt of which is hereby acknowledged, the
Company and the Trustee hereby agree as follows for the benefit of each other
and for the equal and ratable benefit of the Holders of the Securities:
1. DEFINITIONS. All capitalized terms not otherwise defined herein
shall have the meanings ascribed to them in the Indenture, and the rules of
construction set forth in the Indenture shall likewise govern this Second
Supplemental Indenture.
2. AMENDMENT OF SECTION 1.01. (a) Each of the following current terms
contained in Section 1.01 of the Indenture is amended and restated in its
entirety as follows:
"Asset Disposition" means any sale, lease, transfer, issuance or
other disposition (or series of related sales, leases, transfers,
issuances or dispositions that are part of a common plan) of shares of
Capital Stock of (or any other equity interests in) a Restricted
Subsidiary (other than directors' qualifying shares) or of any other
property or other assets (each referred to for the purposes of this
definition as a "disposition") by the Company or any of its Restricted
Subsidiaries (including any disposition by means of a merger,
consolidation or similar transaction) other than (i) a disposition by a
Restricted Subsidiary to the Company or by the Company or a Restricted
Subsidiary to a Wholly-Owned Subsidiary, (ii) a disposition of
inventory in the ordinary course of business and for which adequate
reserves have been established in accordance with GAAP, (iii) a
disposition of obsolete or worn out equipment that is no longer useful
in the conduct of the business of the Company and its Restricted
Subsidiaries and that is disposed of in each case in the ordinary
course of business, (iv) dispositions of property for net proceeds
which, when taken collectively with the net proceeds of any other such
dispositions under this clause (iv) that were consummated since the
beginning of the calendar year in which such disposition is
consummated, do not exceed $1 million, (v) transactions permitted under
Section 5.01, (vi) Permitted Investments pursuant to clauses (xiii),
(xiv), (xv) and (xvi) of the definition thereof, and (vii) the sale,
transfer, exchange or other disposition of any Liberate Shares so long
as the proceeds are used in the business of the Company.
Notwithstanding anything to the contrary contained above, a Restricted
Payment made in compliance
2
<PAGE> 3
with Section 4.07 shall not constitute an Asset Disposition except for
purposes of determinations of the Consolidated Coverage Ratio.
"NewCo" means SourceSuite LLC, a Delaware limited liability company,
and its successors and assigns.
"Permitted Investments" means an Investment by the Company or any of
its Restricted Subsidiaries in (i) a Wholly-Owned Subsidiary of the
Company (other than Interactive Channel Technologies, Inc., 997758
Ontario, Inc., Cableshare (U.S.) Limited, Cableshare International Inc.
and 1229501 Ontario Inc.); provided, however, (A) that the primary
business of such Wholly-Owned Subsidiary is a Permitted Business and
(B) in the case of Investments by the Company or any of its Restricted
Subsidiaries in Interactive Channel, Inc., in an amount not to exceed
the amount set forth in clause (b) of Section 4.07; (ii) another Person
if as a result of such Investment such other Person becomes a
Wholly-Owned Subsidiary of the Company or is merged or consolidated
with or into, or transfers or conveys all or substantially all its
assets to, the Company or a Wholly-Owned Subsidiary of the Company,
provided, however, that in each case such Person's primary business is
a Permitted Business; (iii) Temporary Cash Investments; (iv)
receivables owing to the Company or any of its Restricted Subsidiaries,
created or acquired in the ordinary course of business and payable or
dischargeable in accordance with customary trade terms; (v) payroll,
travel and similar advances to cover matters that are expected at the
time of such advances ultimately to be treated as expenses for
accounting purposes and that are made in the ordinary course of
business; (vi) loans and advances to employees made in the ordinary
course of business consistent with past practices of the Company or
such Restricted Subsidiary in an aggregate amount outstanding at any
one time not to exceed $250,000; (vii) loans or advances to senior
management of the Company which loans or advances are fully secured on
the date of such loans or advances by shares of Common Stock of the
Company owned by such senior management in an aggregate amount
outstanding not to exceed $750,000; (viii) stock, obligations or
securities received in settlement of debts created in the ordinary
course of business and owing to the Company or any of its Restricted
Subsidiaries or in satisfaction of judgments or claims; (ix) a Person
engaged in a Permitted Business or a loan or advance to the Company the
proceeds of which are used solely to make an investment in a Person
engaged in a Permitted Business or a Guarantee by the Company of
Indebtedness of any Person in which such Investment has been made;
provided, however, that no Permitted Investments may be made pursuant
to this clause (ix) to the extent the amount thereof would, when taken
together with all other Permitted Investments made pursuant to this
clause (ix), exceed $3 million in the aggregate (plus, to the extent
not previously reinvested, any return of capital realized on Permitted
Investments made pursuant to this clause (ix), or any release or other
cancellation of any Guarantee constituting such Permitted Investment);
(x) Persons to the extent such Investment is received by the Company or
any Restricted Subsidiary as consideration for asset dispositions
effected in compliance with the covenant described under Section 4.10;
(xi) prepayments and other credits to suppliers made in the ordinary
course of business consistent with the past practices of the Company
and its Restricted Subsidiaries; (xii) Investments in connection with
pledges, deposits, payments or performance bonds made or given in the
ordinary course of business in connection with or to secure statutory,
regulatory or similar obligations, including obligations under health,
safety or environmental obligations; (xiii) the transfer, assignment,
conveyance or licensing of the Source I/C Assets to NewCo as
contemplated by the Contribution Agreement; (xiv) the making of capital
contributions by the Company to NewCo pursuant to the Operating
Agreement in an amount not to exceed, in the aggregate, the sum of $10
million plus the net cash proceeds of one or more Equity Offerings by
the Company to the extent the
3
<PAGE> 4
intended use of proceeds is for the making of such capital contribution
to NewCo; (xv) the transfer, exchange or other disposition by the
Company of its ownership interests in NewCo for the Merger
Consideration as contemplated by the Merger Agreement and (xvi) the
making of capital contributions by the Company to SourceSuite
Acquisition pursuant to the SourceSuite Acquisition Operating Agreement
in an amount not to exceed, in the aggregate, the sum of $20 million,
as well as such contribution to SourceSuite Acquisition in respect of
the net cash proceeds of one or more equity offerings by the Company to
the extent the intended use of proceeds, as set forth in the offering
documents, is for the making of such capital contribution to
SourceSuite Acquisition.
(b) Section 1.01 of the Indenture is amended by adding the following
new defined terms therein in their applicable alphabetical order:
"Liberate" means Liberate Technologies, a Delaware corporation.
"Liberate Acquisition" means Liberate Acquisition LLC, a Delaware
limited liability company, and its successors and assigns.
"Liberate Shares" means the shares of common stock of Liberate to be
received by the Company pursuant to the Merger Agreement.
"Merger" means the merger of Liberate Acquisition into NewCo
contemplated by the Merger Agreement.
"Merger Agreement" means the Merger Agreement and Plan of
Reorganization dated as of January 12, 2000 by and among Liberate,
Liberate Acquisition, NewCo, SourceSuite Acquisition, the Company,
Insight and Insight Communications.
"Merger Consideration" means (a) either (i) 886,000 Liberate Shares
or (ii) 757,072 Liberate Shares plus $15 million in cash, and (b) cash
in an amount equal to one-half of the cash and cash equivalents of
NewCo at the time of the Merger less any taxes payable by NewCo on the
sale of the Retained Business to SourceSuite Acquisition.
"Retained Business" means the Interactive Channel business of NewCo
including its server-side interactive programming guide and related
content business but excluding assets and properties used in its
VirtualModem business.
"SourceSuite Acquisition" means SourceSuite Acquisition LLC, a
Delaware limited liability company, and its successors and assigns.
"SourceSuite Acquisition Operating Agreement" means the limited
liability company operating agreement of SourceSuite Acquisition, to be
entered into by and between the Company and Insight as of the closing
date of the Merger, as the same may be amended or modified from time to
time in accordance with the terms thereof.
3. AMENDMENT OF SECTION 4.11. Section 4.11 of the Indenture is amended
and restated in its entirety as follows:
4
<PAGE> 5
(a) The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, enter into or conduct any
transaction or series of related transactions (including the purchase,
sale, lease or exchange of any property or the rendering of any
service) with or for the benefit of any Affiliate of the Company, other
than a Wholly-Owned Subsidiary (an "Affiliate Transaction") unless: (i)
the terms of such Affiliate Transaction are no less favorable to the
Company or such Restricted Subsidiary, as the case may be, than those
that could be obtained at the time of such transaction in arm's length
dealings with a Person who is not such an Affiliate; (ii) in the event
such Affiliate Transaction involves an aggregate amount in excess of $1
million, the terms of such transaction have been approved by a majority
of members of the Board of Directors of the Company and by a majority
of the disinterested members of such Board, if any (and such majority
or majorities, as the case may be, determines that such Affiliate
Transaction satisfies the criteria in (i) above); and (iii) in the
event such Affiliate Transaction involves an aggregate amount in excess
of $2 million, the Company has received a written opinion from an
independent investment banking firm of nationally recognized standing
that such Affiliate Transaction is fair to the Company or such
Restricted Subsidiary, as the case may be, from a financial point of
view; provided, however, that this clause (iii) shall not apply to (x)
any transaction between or among the Company and its Restricted
Subsidiaries, on the one hand, and NewCo and its Affiliates, on the
other hand, (y) any transaction between or among the Company and its
Restricted Subsidiaries, on the one hand, and SourceSuite Acquisition
and its Affiliates, on the other hand and (z) the sale, exchange or
other disposition of any Liberate Shares so long as the proceeds are
used in the business of the Company.
(b) The foregoing paragraph (a) shall not apply to (i) any
Restricted Payment permitted to be made pursuant to Section 4.07, (ii)
any issuance of securities, or other payments, awards or grants in
cash, securities or otherwise pursuant to, or the funding of,
employment arrangements, or any stock options and stock ownership plans
for the benefit of employees, officers and directors, consultants and
advisors approved by the Board of Directors of the Company, (iii) loans
or advances to employees in the ordinary course of business of the
Company or any of its Restricted Subsidiaries in aggregate amount
outstanding not to exceed $250,000 at any time, (iv) loans or advances
to senior management of the Company which loans and advances are fully
secured on the date of such loans or advances by shares of Common Stock
of the Company owned by such senior management, in an aggregate amount
outstanding not to exceed $750,000, (v) indemnification agreements
with, and the payment of fees and indemnities to, directors, officers
and employees of the Company and its Restricted Subsidiaries, in each
case in the ordinary course of business, (vi) transactions pursuant to
agreements in existence on the Issue Date which are (x) described in
the Offering Memorandum or (y) otherwise, in the aggregate, immaterial
to the Company and its Restricted Subsidiaries taken as a whole, (vii)
any employment, non-competition or confidentiality agreements entered
into by the Company or any of its Restricted Subsidiaries with its
employees in the ordinary course of business, (viii) the issuance of
Capital Stock of the Company (other than Disqualified Stock), (ix)
Permitted Investments pursuant to clauses (xiii), (xiv), (xv) and (xvi)
of the definition thereof and (x) any transaction or arrangement
entered into pursuant to the Contribution Agreement or the Purchase
Agreement.
5
<PAGE> 6
4. RELEASE OF COLLATERAL. In accordance with the preceding amendments
to be made to the Indenture , concurrently with the effectiveness of the Merger,
the Trustee releases any and all liens upon and security interests in the
Collateral (as defined in the Company Security Agreement) to the extent such
Collateral consists of Membership Units of NewCo. Upon the request of the
Company, and at the Company's expense, the Trustee will execute and deliver such
lien releases and/or termination statements and documents as may be necessary to
effectively terminate any and all of such liens and/or security interests on any
public record.
5. ADDITIONAL COLLATERAL. In addition to the Collateral set forth in
the Company Security Agreement, concurrently with the effectiveness of the
Merger, the Company grants to the Trustee, in its capacity as Collateral Agent
under the Company Security Agreement and subject to the terms and conditions of
the Company Security Agreement, a security interest for the benefit of the
Holders (as defined in the Company Security Agreement) in the Company's right,
title and interest in the ownership interests of SourceSuite Acquisition and in
the Liberate Shares.
6. EFFECTIVENESS. This Second Supplemental Indenture will become a
valid and binding obligation of the parties hereto upon execution but the
amendments and supplements to the Indenture effected hereby shall become
operative and effective only concurrently with the effectiveness of the Merger.
If the Merger is not effected by April 15, 2000 or such later date as is agreed
to by the parties to the Merger Agreement, this Second Supplemental Indenture
shall be null and void. Concurrently with such effectiveness, all references to
the Indenture shall, unless specifically referring to the Indenture as
originally executed, be deemed to be references to the Indenture as amended and
supplemented by this Second Supplemental Indenture. The Indenture, the Security
Agreements and the Escrow Agreement, as amended and supplemented by this Second
Supplemental Indenture, are in all respects hereby ratified and confirmed.
7. RECITALS. The recitals contained herein shall be taken as the
statement of the Company, and the Trustee assumes no responsibility for the
correctness of the same. The Trustee makes no representation as to the validity
of this Second Supplemental Indenture.
8. SUCCESSORS AND ASSIGNS. This Second Supplemental Indenture shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and assigns. Except as amended herein, the terms, provisions and
covenants of the Indenture shall remain in full force and effect and continue to
govern the parties thereto.
9. COUNTERPARTS. This Second Supplemental Indenture may be executed in
any number of counterparts, each of which so executed shall be an original, but
all of them together represent the same agreement.
10. GOVERNING LAW. This Second Supplemental Indenture shall be governed
by, and construed in accordance with, the laws of the State of New York, but
without giving effect to applicable principles of conflicts of law to the extent
that the application of the laws of another jurisdiction would be required
thereby.
[Remainder of page intentionally
left blank; signatures follow]
6
<PAGE> 7
IN WITNESS WHEREOF, the parties have caused this Second Supplemental
Indenture to be duly executed, all as of the date first above written.
COMPANY:
SOURCE MEDIA, INC.
By: /s/ Stephen W. Palley
--------------------------------------
Stephen W. Palley
Chief Executive Officer and President
SUBSIDIARY GUARANTORS:
SMI HOLDINGS, INC.
By: /s/ Stephen W. Palley
--------------------------------------
Stephen W. Palley
Chief Executive Officer and President
IT NETWORK, INC.
By: /s/ Stephen W. Palley
--------------------------------------
Stephen W. Palley
Chief Executive Officer
INTERACTIVE CHANNEL, INC.
By: /s/ Stephen W. Palley
--------------------------------------
Stephen W. Palley
Chief Executive Officer
INTERACTIVE CHANNEL TECHNOLOGIES INC.
By: /s/ Stephen W. Palley
--------------------------------------
Stephen W. Palley
Chief Executive Officer
7
<PAGE> 8
1229501 ONTARIO, INC.
By: /s/ Stephen W. Palley
------------------------------------
Stephen W. Palley
Chief Executive Officer and President
997758 ONTARIO, INC.
By: /s/ Stephen W. Palley
------------------------------------
Stephen W. Palley
Chief Executive Officer and President
CABLESHARE (U.S.) LIMITED
By: /s/ Stephen W. Palley
------------------------------------
Stephen W. Palley
Chief Executive Officer and President
CABLE SHARE INTERNATIONAL INC.
By: /s/ Stephen W. Palley
------------------------------------
Stephen W. Palley
Chief Executive Officer and President
CABLESHARE B.V.
By: /s/ Brad Unsworth
------------------------------------
Brad Unsworth
Managing Director
8
<PAGE> 9
TRUSTEE:
U.S. TRUST COMPANY OF TEXAS, N.A.,
AS TRUSTEE
By: /s/ Bill Barber
------------------------------------
Name: Bill Barber
Title: Vice President
COLLATERAL AGENT:
U.S. TRUST COMPANY OF TEXAS, N.A.,
AS COLLATERAL AGENT
By: /s/ Bill Barber
------------------------------------
Name: Bill Barber
Title: Vice President
ESCROW AGENT:
U.S. TRUST COMPANY OF TEXAS, N.A.,
AS ESCROW AGENT
By: /s/ Bill Barber
------------------------------------
Name: Bill Barber
Title: Vice President
9
<PAGE> 1
EXHIBIT 4.7
SOURCE MEDIA, INC.
and
CHASEMELLON SHAREHOLDER SERVICES, L.L.C.
Rights Agent
RIGHTS AGREEMENT
Dated as of April 24, 1998
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Section 1. Certain Definitions ...............................................1
Section 2. Appointment of Rights Agent .......................................7
Section 3. Issuance of Rights Certificates ...................................7
Section 4. Form of Rights Certificates .......................................9
Section 5. Countersignature and Registration ................................10
Section 6. Transfer, Split Up, Combination and Exchange of Rights
Certificates; Mutilated, Destroyed, Lost or Stolen
Rights Certificates ..............................................10
Section 7. Exercise of Rights; Exercise Price; Expiration Date of
Rights ...........................................................11
Section 8. Cancellation and Destruction of Rights Certificates ..............13
Section 9. Reservation and Availability of Common Shares ....................13
Section 10. Record Date ......................................................15
Section 11. Adjustment of Exercise Price, Number of Shares or
Number of Rights .................................................15
Section 12. Certificate of Adjusted Exercise Price or Number of
Shares ...........................................................21
Section 13. Consolidation, Merger or Sale or Transfer of
Assets or Earning Power ..........................................21
Section 14. Fractional Rights and Fractional Shares ..........................25
Section 15. Rights of Action .................................................25
Section 16. Agreement of Rights Holders ......................................26
Section 17. Rights Certificate Holder Not Deemed a Stockholder ...............26
Section 18. Concerning the Rights Agent ......................................27
Section 19. Merger or Consolidation or Change of Name of Rights
Agent ............................................................27
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C>
Section 20. Duties of Rights Agent ...........................................28
Section 21. Change of Rights Agent ...........................................30
Section 22. Issuance of New Rights Certificates ..............................31
Section 23. Redemption .......................................................31
Section 24. Exchange .........................................................32
Section 25. Notice of Certain Events .........................................34
Section 26. Notices ..........................................................34
Section 27. Supplements and Amendments .......................................35
Section 28. Successors .......................................................36
Section 29. Determinations and Actions by the Board of Directors, etc. .......36
Section 30. Benefits of this Agreement .......................................37
Section 31. Severability .....................................................37
Section 32. Governing Law ....................................................37
Section 33. Counterparts .....................................................37
Section 34. Descriptive Headings .............................................37
EXHIBITS
Exhibit A Form of Rights Certificate
Exhibit B Summary of Rights
</TABLE>
<PAGE> 4
RIGHTS AGREEMENT
Agreement, dated as of April 24, 1998, between Source Media, Inc., a
Delaware corporation and ChaseMellon Shareholder Services, L.L.C.
On April 22, 1998 (the "RIGHTS DIVIDEND DECLARATION DATE"), the Board
of Directors of the Company authorized and declared a dividend of one Common
Share Purchase Right (a "RIGHT") for each Common Share (as hereinafter defined)
of the Company outstanding as of the Close of Business (as hereinafter defined)
on May 7, 1998 (the "RECORD DATE"), each Right representing the right to
purchase one Common Share (as such number may be adjusted pursuant to the
provisions of this Agreement), upon the terms and subject to the conditions
herein set forth, and further authorized and directed the issuance of one Right
(as such number may be adjusted pursuant to the provisions of this Agreement)
with respect to each Common Share that shall become outstanding between the
Record Date and the earlier of the Distribution Date and the Expiration Date (as
such terms are hereinafter defined), and in certain circumstances after the
Distribution Date.
NOW, THEREFORE, in consideration of the promises and the mutual
agreements herein set forth, the parties hereby agree as follows:
Section 1. Certain Definitions,. For purposes of this Agreement the
following terms have the meanings indicated:
(a) "ACQUIRING PERSON" shall mean any Person who or which,
together with all Affiliates and Associates of such Person, shall be the
Beneficial Owner of 15% or more of the Common Shares then outstanding, but shall
not include the Company, any Subsidiary of the Company or any employee benefit
plan of the Company or of any Subsidiary of the Company, or any Person
organized, appointed or established by the Company for or pursuant to the terms
of any such plan. Notwithstanding the foregoing, no Person shall be deemed to be
an Acquiring Person as the result of an acquisition of Common Shares by the
Company which, by reducing the number of shares outstanding, increases the
proportionate number of shares beneficially owned by such Person to 15% or more
of the Common Shares of the Company then outstanding; provided, however, that if
a Person shall become the Beneficial Owner of 15% or more of the Common Shares
of the Company then outstanding by reason of share purchases by the Company and
shall, after such share purchases by the Company, become the Beneficial Owner of
any additional Common Shares of the Company (other than pursuant to a dividend
or distribution paid or made by the Company on the outstanding Common Shares in
Common Shares or pursuant to a split or subdivision of the outstanding Common
Shares), then such Person shall be deemed to be an Acquiring Person unless upon
becoming the Beneficial Owner of such additional Common Shares of the Company
such Person does not beneficially own 15% or more of the Common Shares of the
Company then outstanding. Notwithstanding the foregoing, (i) if the Company's
Board of Directors determines in good faith that a Person who would otherwise be
an "Acquiring Person," as defined pursuant to the foregoing provisions of this
paragraph (a), has become such inadvertently, including, without
1
<PAGE> 5
limitation, because (A) such Person was unaware that it beneficially owned a
percentage of the Common Shares that would otherwise cause such Person to be an
"Acquiring Person," as defined pursuant to the foregoing provisions of this
paragraph (a), or (B) such Person was aware of the extent of the Common Shares
it beneficially owned but had no actual knowledge of the consequences of such
beneficial ownership under this Agreement) and without any intention of changing
or influencing control, of the Company, and if such Person divested or divests
as promptly as practicable a sufficient number of Common Shares so that such
Person would no longer be an "Acquiring Person," as defined pursuant to the
foregoing provisions of this paragraph (a), then such Person shall not be deemed
to be or to have, become an "Acquiring Person" for any purposes of this
Agreement; and (ii) if, as of the date hereof, any Person is the Beneficial
Owner of 15% or more of the Common Shares outstanding, such Person shall not be
or become an "Acquiring Person," as defined pursuant to the foregoing provisions
of this paragraph (a), unless and until such time as such Person shall become
the Beneficial Owner of additional Common Shares (other than pursuant to a
dividend or distribution paid or made by the Company on the outstanding Common
Shares in Common Shares or pursuant to a split or subdivision of the outstanding
Common Shares), unless, upon becoming the Beneficial Owner of such additional
Common Shares, such Person is not then the Beneficial Owner of 15% or more of
the Common Shares then outstanding.
(b) "ADJUSTMENT FRACTION" shall have the meaning set forth in
Section 11(a)(i) hereto.
(c) "AFFILIATE" and "ASSOCIATE" shall have the respective
meanings ascribed to such terms in Rule 12b-2 of the General Rules and
Regulations under the Exchange Act, as in effect on the date of this Agreement.
(d) A Person shall be deemed the "BENEFICIAL OWNER" of and
shall be deemed to "BENEFICIALLY OWN" any securities:
(i) which such Person or any of such Person's Affiliates or
Associates beneficially owns, directly or indirectly, for purposes of Section
13(d) of the Exchange Act and Rule 13d-3 thereunder (or any comparable or
successor law or regulation);
(ii) which such Person or any of such Person's Affiliates or
Associates have (A) the right to acquire (whether such right is exercisable
immediately or only after the passage of time pursuant to any agreement,
arrangement or understanding (other than customary agreements with and between
underwriters and selling group members with respect to a bona fide public
offering of securities) or upon the exercise of conversion rights, exchange
rights, rights (other than the Rights), warrants or options, or otherwise;
provided, however, that a Person shall not be deemed pursuant to this Section
1(d)(ii)(A) to be the Beneficial Owner of, or to beneficially own, (1)
securities tendered pursuant to a tender or exchange offer made by or on behalf
of such Person or any of such Person's Affiliates or Associates until such
tendered securities are accepted for purchase or exchange, or (2) securities
which a Person or any of such Person's Affiliates or Associates may be deemed to
have the right to acquire pursuant to any merger or other acquisition agreement
between the Company and
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<PAGE> 6
such Person (or one or more of its Affiliates or Associates) if such agreement
has been approved by the Board of Directors of the Company prior to there being
an Acquiring Person; or (B) the right to vote pursuant to any agreement,
arrangement or understanding; provided, however, that a Person shall not be
deemed the Beneficial Owner of, or to beneficially own, any security under this
Section 1(d)(ii)(B) if the agreement. arrangement or understanding to vote such
security (1) arises solely from a revocable proxy or consent given to such
Person in response to a public proxy or consent solicitation made pursuant to,
and in accordance with, the applicable rules and regulations of the Exchange Act
and (2) is not also then reportable on Schedule 13D under the Exchange Act (or
any comparable or successor report); or
(iii) which are beneficially owned, directly or indirectly,
by any other Person (or any Affiliate or Associate thereof) with which such
Person or any of such Person's Affiliates or Associates has any agreement,
arrangement or understanding, whether or not in writing (other the customary
agreements with and between underwriters and selling group members with respect
to a bona fide public offering of securities) for the purpose of acquiring,
holding, voting (except to the extent contemplated by the provision to Section
l(d)(ii)(B)) or disposing of any securities of the Company, provided, however,
that in no case shall an officer or director of the Company be deemed (x) the
Beneficial Owner of any securities beneficially owned by another officer or
director of the Company solely by reason of actions undertaken by such persons
in their capacity as officers or directors of the Company or (y) the Beneficial
Owner of securities held of record by the trustee of any employee benefit plan
of the Company or any Subsidiary of the Company for the benefit of any employee
of the Company or any Subsidiary of the Company, other than the officer or
director, by reason of any influence that such officer or director may have over
the voting of the securities held in the plan.
(e) "BUSINESS DAY" shall mean any day other than a Saturday,
Sunday or a day on which banking institutions in New York are authorized or
obligated by law or executive order to close.
(f) "CLOSE OF BUSINESS" on any given date shall mean 5:00 P.M,
Dallas time, on such date; provided, however, that if such date is not a
Business Day it shall mean 5:00 P.M., Dallas time, on the next succeeding
Business Day.
(g) "COMMON SHARES" when used with reference to the Company
shall mean the shares of Common Stock of the Company, $0.001 par value. Common
Shares when used with reference to any Person other than the Company shall mean
the capital stock (or equity interest) with the greatest voting power of such
other Person or, if such other Person is a Subsidiary of another Person, the
Person or Persons which ultimately control such first-mentioned Person.
(h) "COMMON STOCK EQUIVALENTS" shall have the meaning set
forth in Section 11 (a)(iii) hereof.
(i) "COMPANY" shall mean Source Media, Inc., a Delaware
corporation, subject to the terms of Section 13(a)(iii)(C) hereof.
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<PAGE> 7
(j) "CURRENT PER SHARE MARKET PRICE" of any security (a
"Security" for purposes of this definition), for all computations other than
those made pursuant to Section 11(a)(iii) hereof, shall mean the average of the
daily closing prices per share of such Security for the thirty (30) consecutive
Trading Days immediately prior to but not including such date, and for purposes
of computations made pursuant to Section 11(a)(iii) hereof, the Current Per
Share Market Price of any Security on any date shall be deemed to be the average
of the daily closing prices per share of such Security for the ten (10)
consecutive Trading Days immediately prior to but not including such date;
provided, however, that in the event that the Current Per Share Market Price of
the Security is determined during a period following the announcement by the
issuer of such Security of (i) a dividend or distribution on such Security
payable in shares of such Security or securities convertible into such shares or
(ii) any subdivision, combination or reclassification of such Security, and
prior to the expiration of the applicable thirty (30) Trading Day or ten (10)
Trading Day period, after the ex-dividend date for such dividend or
distribution, or the record date for such subdivision, combination or
reclassification, then, and in each such case, the Current Per Share Market
Price shall be appropriately adjusted to reflect the current market price per
share equivalent of such Security. The closing price for each day shall be the
last sale price, regular way, or, in case no such sale takes place on such day,
the average of the closing bid and asked prices, regular way, in either case as
reported in the principal consolidated transaction reporting system with respect
to securities listed or admitted to trading on the New York Stock Exchange or,
if the Security is not listed or admitted to trading on the New York Stock
Exchange, as reported in the principal consolidated transaction reporting system
with respect to securities listed on the principal national securities exchange
on which the Security is listed or admitted to trading or, if the Security is
not listed or admitted to trading on any national securities exchange, the last
sale price or, if such last sale price is not reported, the average of the high
bid and low asked prices in the over-the counter market, as reported by Nasdaq
or such other system then in use, or, if on any such date the Security is not
quoted by any such organization, the average of the closing bid and asked prices
as held by a professional market maker making a market in the Securities
selected by the Board of Directors of the Company. If on any such date the
Security is not publicly held or so listed or traded, Current Per Share Market
Price shall mean the fair value per share as determined in good faith by the
Board of Directors of the Company, whose determination shall be described in a
statement filed with the Rights Agent.
(k) "CURRENT VALUE" shall have the meaning set forth in
Section 11(a)(iii) hereof.
(l) "DISTRIBUTION DATE" shall mean the earlier of (i) the
Close of Business on the tenth day after the Shares Acquisition Date (or, if the
tenth day after the Shares Acquisition Date occurs before the Record Date, the
Close of Business on the Record Date) or (ii) the Close of Business on the tenth
Business Day (or such later date as may be determined by action of the Company's
Board of Directors) after the date that a tender or exchange offer by any Person
(other than the Company, any Subsidiary of the Company, any employee benefit
plan of the Company or of any Subsidiary of the Company, or any Person
organized, appointed or established by the Company for or pursuant to the terms
of any such plan) is first published or sent or given within the meaning of Rule
14d-2(a)
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<PAGE> 8
of the General Rules and Regulations under the Exchange Act, if, assuming the
successful consummation thereof, such Person would be an Acquiring Person.
(m) "EQUIVALENT SHARES" shall mean Common Shares of the
Company and any other class or series of capital stock of the Company which is
entitled to the same rights, privileges and preferences as the Common Shares.
(n) "EXCHANGE ACT" shall mean the Securities Exchange Act of
1934, as amended.
(o) "EXCHANGE RATIO" shall have the meaning set forth in
Section 24(a) hereof.
(p) "EXERCISE PRICE" shall have the meaning set forth in
Section 4(a) hereof.
(q) "EXPIRATION DATE" shall mean the earliest to occur of (i)
the Close of Business on the Final Expiration Date, (ii) the Redemption Date, or
(iii) the time at which the Board of Director orders the exchange of the Rights
as provided in Section 24 hereof.
(r) "FINAL EXPIRATION DATE" shall mean May 7, 2008.
(s) "INTERESTED PERSON" with respect to a Transaction shall
mean any Person who (i) is or will become an Acquiring Person if the Transaction
were to be consummated or an Affiliate or Associate of such a Person, and (ii)
is, or directly or indirectly proposed, nominated or financially supported, a
director of the Company in office at the time of consideration of the
Transaction in question who was elected by written consent of stockholders.
(t) "NASDAQ" shall mean the National Association of Securities
Dealers, Inc. Automated Quotations System.
(u) "PERSON" shall mean any individual firm, corporation or
other entity, and shall include any successor (by merger or otherwise) of such
entity.
(v) "POST-EVENT TRANSFEREE" shall have the meaning set forth
in Section 7(e) hereof.
(w) "PRE-EVENT TRANSFEREE" shall have the meaning set forth in
Section 7(e) hereof.
(x) "PRINCIPAL PARTY" shall have the meaning set forth in
Section 13 (b) hereof.
(y) "RECORD DATE" shall have the meaning set forth in the
recitals at the beginning of this Agreement.
(z) "REDEMPTION DATE" shall have the meaning set forth in
Section 23(a) hereof.
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<PAGE> 9
(aa) "REDEMPTION PRICE" shall have the meaning set forth in
Section 23(a) hereof.
(bb) "RIGHTS" shall have the meaning set forth in the recitals
at the beginning of this Agreement.
(cc) "RIGHTS AGENT" shall mean ChaseMellon Shareholder
Services, L.L.C. or its successor or replacement as provided in Sections 19 and
21 hereof.
(dd) "RIGHTS CERTIFICATE" shall mean a certificate
substantially in the form attached hereto as Exhibit A.
(ee) "RIGHTS DIVIDEND DECLARATION DATE" shall have the meaning
set forth in the recitals at the beginning of this Agreement.
(ff) "SECTION 11(a)(ii) TRIGGER DATE" shall have the meaning
set forth in Section 11 (a)(iii) hereof.
(gg) "SECTION 13 EVENT" shall mean any event described in
clause (i), (ii) or (iii) or Section 13(a) hereof.
(hh) "SECURITIES ACT" shall mean the Securities Act of 1933,
as amended.
(ii) "SHARES ACQUISITION DATE" shall mean the first date of
public announcement (which, for purposes of this definition, shall include,
without limitation, a report filed pursuant to Section 13(d) under the Exchange
Act) by the Company or an Acquiring Person that an Acquiring Person has become
such; provided that, if such Person is determined not to have become an
Acquiring Person pursuant to Section 1(a) hereof, then no Shares Acquisition
Date shall be deemed to have occurred.
(jj) "SPREAD" shall have the meaning set forth in Section
11(a)(iii) hereof.
(kk) "SUBSIDIARY" of any Person shall mean any corporation or
other entity of which an amount of voting securities sufficient to elect a
majority of the directors or Persons having similar authority of such
corporation or other entity is beneficially owned, directly or indirectly, by
such Person, or any corporation or other entity otherwise controlled by such
Person.
(ll) "SUBSTITUTION PERIOD" shall have the meaning set forth in
Section 11(a)(iii) hereof.
(mm) "SUMMARY OF RIGHTS" shall means a summary of this
Agreement substantially in the form attached hereto as Exhibit B.
(nn) "TOTAL EXERCISE PRICE" shall have the meaning set forth
in Section 4(a) hereof.
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<PAGE> 10
(oo) "TRADING DAY" shall mean a day on which the principal
national securities exchange on which a referenced security is listed or
admitted to trading is open for the transaction of business or, if a referenced
security is not listed or admitted to trading on any national securities
exchange, a Business Day.
(pp) "TRANSACTION" shall mean any merger, consolidation or
sale of assets described in Section 13(a) hereof or any acquisition of Common
Shares which would result in a Person becoming an Acquiring Person.
(qq) A "TRIGGERING EVENT" shall be deemed to have occurred
upon any Person becoming an Acquiring Person.
Section 2. Appointment of Rights Agent. The Company hereby appoints the
Rights Agent to act as agent for the Company in accordance with the terms and
conditions hereof, and the Rights Agent hereby accepts such appointment. The
Company may from time to time appoint such co-Rights Agents as it may deem
necessary or desirable.
Section 3. Issuance of Rights Certificates.
(a) Until the Distribution Date, (i) the Rights will be
evidenced (subject to the provisions of Sections 3(b) and 3(c) hereof) by the
certificates for Common Shares registered in the names of the holders thereof
(which certificates shall also be deemed to be Rights Certificates) and not by
separate Rights Certificates and (ii) the Rights will be transferable only in
connection with the transfer of Common Shares. Until the earlier of the
Distribution Date or the Expiration Date, the surrender for transfer of
certificates for Common Shares shall also constitute the surrender for transfer
of the Rights associated with the Common Shares represented thereby. As soon as
practicable after the Distribution Date, the Company will prepare and execute,
the Rights Agent will countersign, and the Company will send or cause to be sent
(and the Rights Agent will, if requested and, if necessary, provided with a
shareholder fist of the Company's Common Shares, send) by first-class,
postage-prepaid mail to each record holder of Common Shares as of the Close of
Business on the Distribution Date, at the address of such holder shown on the
records of the Company, a Rights Certificate evidencing one Right for each
Common Share so held, subject to adjustment as provided herein. In the event
that an adjustment in the number of Rights per Common Share has been made
pursuant to Section 11 hereof, then at the time of distribution of the Rights
Certificates, the Company shall make the necessary and appropriate rounding
adjustments (in accordance with Section 14(a) hereof) so that Rights
Certificates representing only whole numbers of Rights are distributed and cash
is paid in lieu of any fractional Rights. As of and after the Distribution Date,
the Rights will be evidenced solely by such Rights Certificates and may be
transferred by the transfer of the Rights Certificates as permitted hereby,
separately and apart from any transfer of Common Shares, and the holders of such
Rights Certificates as listed in the records of the Company or any transfer
agent or registrar for the Rights shall be the record holders thereof.
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<PAGE> 11
(b) On the Record Date or as soon as practicable thereafter,
the Company will send a copy of the Summary of Rights by first-class,
postage-prepaid mail to each record holder of Common Shares as of the Close of
Business on the Record Date, at the address of such holder shown on the records
of the Company's transfer agent and registrar. With respect to certificates for
Common Shares outstanding as of the Record Date, until the Distribution Date,
the Rights will be evidenced by such certificates registered in the names of the
holders thereof together with the Summary of Rights. Until the Distribution Date
(or, if earlier, the Expiration Date), the surrender for transfer of any
certificate for Common Shares outstanding on the Record Date, with or without a
copy of the Summary of Rights, shall also constitute the transfer of the Rights
associated with the Common Shares represented thereby.
(c) Unless the Board of Directors by resolution adopted at or
before the time of the issuance of any Common Shares specifies to the contrary,
Rights shall be issued in respect of all Common Shares that are issued after the
Record Date but prior to the earlier of the Distribution Date or the Expiration
Date or, in certain circumstances provided in Section 22 hereof, after the
Distribution Date.
Certificates representing such Common Shares shall also be deemed to be
certificates for Rights, and shall bear the following legend:
THIS CERTIFICATE ALSO EVIDENCES AND ENTITLES THE HOLDER HEREOF TO
CERTAIN RIGHTS AS SET FORTH IN A RIGHTS AGREEMENT BETWEEN SOURCE
MEDIA, INC. AND CHASEMELLON SHAREHOLDER SERVICES, L.L.C., AS THE
RIGHTS AGENT, DATED AS OF APRIL 24,1998, (THE "RIGHTS AGREEMENT"),
THE TERMS OF WHICH ARE HEREBY INCORPORATED HEREIN BY REFERENCE AND A
COPY OF WHICH IS ON FILE AT THE PRINCIPAL EXECUTIVE OFFICES OF SOURCE
MEDIA, INC. UNDER CERTAIN CIRCUMSTANCES, AS SET FORTH IN THE RIGHTS
AGREEMENT, SUCH RIGHTS WILL BE EVIDENCED BY SEPARATE CERTIFICATES AND
WHICH NO LONGER BE EVIDENCED BY THIS CERTIFICATE. SOURCE MEDIA, INC.
WILL MAIL TO THE HOLDER OF THIS CERTIFICATE A COPY OF THE RIGHTS
AGREEMENT WITHOUT CHARGE AFTER RECEIPT OF A WRITTEN REQUEST THEREFOR.
UNDER CERTAIN CIRCUMSTANCES SET FORTH IN THE RIGHTS AGREEMENT, RIGHTS
ISSUED TO, OR HELD BY, ANY PERSON WHO IS, WAS OR BECOMES AN ACQUIRING
PERSON OR ANY AFFILIATE OR ASSOCIATE THEREOF (AS SUCH TERMS ARE
DEFINED IN THE RIGHTS AGREEMENT), WHETHER CURRENTLY HELD BY OR ON
BEHALF OF SUCH PERSON OR BY ANY SUBSEQUENT HOLDER, MAY BECOME NULL
AND VOID.
With respect to such certificates containing the foregoing legend, until the
earlier of (i) the Distribution Date or (ii) the Expiration Date, the Rights
associated with the Common Shares represented by such certificates shall be
evidenced by such certificates alone, and the surrender for transfer of any such
certificate shall also constitute the transfer of the Rights associated with the
Common Shares represented thereby.
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<PAGE> 12
(d) In the event that the Company purchases or acquires any
Common Shares after the Record Date but prior to the Distribution Date, any
Rights associated with such Common Shares shall be deemed canceled and retired
so that the Company shall not be entitled to exercise any Rights associated with
the Common Shares which are no longer outstanding.
Section 4. Form of Rights Certificates.
(a) The Rights Certificates (and the forms of election to
purchase Common Shares and of assignment to be printed on the reverse thereof)
shall be substantially in the form of Exhibit A hereto and may have such marks
of identification or designation and such legends, summaries or endorsements
printed thereon as the Company may deem appropriate and as are not inconsistent
with the provisions of this Agreement (subject to the consent of the Rights
Agent, not to be unreasonably withheld, for any changes to the Rights
Certificate which affect the duties or responsibilities of the Rights Agent), or
as may be required to comply with any applicable law or with any rule or
regulation made pursuant thereto or with any rule or regulation of any stock
exchange or automated quotation system, on which the Rights may from time to
time be listed or included, or to conform to usage. Subject to the provisions of
Section 11 and Section 22 hereof, the Rights Certificates, whenever distributed,
shall be dated as of the Record Date (or in the case of Rights issued with
respect to Common Shares issued by the Company after the Record Date, as of the
date of issuance of such Common Shares) and on their face shall entitle the
holders thereof to purchase such number of Common Shares as shall be set forth
therein at the price set forth therein (such exercise price per Common Share
being hereinafter referred to as the "EXERCISE PRICE" and the aggregate Exercise
Price of all Common Shares issuable upon exercise of one Right being hereinafter
referred to as the "TOTAL EXERCISE PRICE"), but the number and type of
securities purchasable upon the exercise of each Right and the Exercise Price
shall be subject to adjustment as provided herein.
(b) Any Rights Certificate issued pursuant to Section 3(a) or
Section 22 hereof that represents Rights beneficially owned by: (i) an Acquiring
Person or any Associate or Affiliate of an Acquiring Person, (ii) a transferee
of an Acquiring Person (or of any such Associate or Affiliate) who becomes a
transferee after the Acquiring Person becomes such or (iii) a transferee of an
Acquiring Person (or of any such Associate or Affiliate) who becomes a
transferee prior to or concurrently with the Acquiring Person becoming such and
receives such Rights pursuant to either (A) a transfer (whether or not for
consideration) from the Acquiring Person to holders of equity interests in such
Acquiring Person or to any Person with whom such Acquiring Person has any
continuing agreement, arrangement or understanding regarding the transferred
Rights or (B) a transfer which the Company's Board of Directors has determined
is part of a plan, arrangement or understanding which has as a primary purpose
or effect avoidance of Section 7(e) hereof, and any Rights Certificate issued
pursuant to Section 6 or Section 11 hereof upon transfer, exchange, replacement
or adjustment of any other Rights Certificate referred to in this sentence,
shall contain (to the extent feasible) the following legend:
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<PAGE> 13
THE RIGHTS REPRESENTED BY THIS RIGHTS CERTIFICATE ARE OR WERE
BENEFICIALLY OWNED BY A PERSON WHO WAS OR BECAME AN ACQUIRING PERSON OR
AN AFFILIATE OR ASSOCIATE OF AN ACQUIRING PERSON (AS SUCH TERMS ARE
DEFINED IN THE RIGHTS AGREEMENT). ACCORDINGLY, THIS RIGHTS CERTIFICATE
AND THE RIGHTS REPRESENTED Y MAY BECOME NULL AND VOID IN THE
CIRCUMSTANCES SPECIFIED IN SECTION 7(e) OF THE RIGHTS AGREEMENT.
Section 5. Countersignature and Registration.
(a) The Rights Certificates shall be executed on behalf of the
Company by its Chairman of the Board, its Chief Executive Officer, its Chief
Financial Officer, its President or any Vice President, either manually or by
facsimile signature, and by the Secretary or an Assistant Secretary of the
Company, either manually or by facsimile signature, and shall have affixed
thereto the Company's seal (if any) or a facsimile thereof. The Rights
Certificates shall be manually countersigned by the Rights Agent and shall not
be valid for any purpose unless countersigned. In case any officer of the
Company who shall have signed any of the Rights Certificates shall cease to be
such officer of the Company before countersignature by the Rights Agent and
issuance and delivery by the Company, such Rights Certificates, nevertheless,
may be countersigned by the Rights Agent and issued and delivered by the Company
with the same force and effect as though the person who signed such Rights
Certificates on behalf of the Company had not ceased to be such officer of the
Company; and any Rights Certificate may be signed on behalf of the Company by
any person who, at the actual date of the execution of such Rights Certificate,
shall be a proper officer of the Company to sign such Rights Certificate,
although at the date of the execution of this Rights Agreement any such person
was not such an officer.
(b) Following the Distribution Date and, if necessary, receipt
by the Rights Agent of a list of record holders of Common Shares, the Rights
Agent will keep or cause to be kept, at its office designated for such purposes,
books for registration and transfer of the Rights Certificates issued hereunder.
Such books shall show the names and addresses of the respective holders of the
Rights Certificates, the number of Rights evidenced on its face by each of the
Rights Certificates and the date of each of the Rights Certificates.
Section 6. Transfer, Split Up, Combination and Exchange of Rights
Certificates, Mutilated, Destroyed, Lost or Stolen Rights Certificates.
(a) Subject to the provisions of Sections 7(e), 14 and 24
hereof, at any time after the Close of Business on the Distribution Date, and at
or prior to the Close of Business on the Expiration Date, any Rights Certificate
or Rights Certificates may be transferred, split up, combined or exchanged for
another Rights Certificate or Rights Certificates, entitling the registered
holder to purchase a like number of Common Shares (or, following a Triggering
Event, other securities, cash or other assets, as the case may be) as the Rights
Certificate or Rights Certificates surrendered then entitled such holder to
purchase. Any registered holder desiring to transfer, split up, combine or
exchange any Rights Certificate or Rights Certificates shall make such request
in writing delivered to the Rights Agent, and shall surrender the Rights
Certificate or Rights Certificates to be
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<PAGE> 14
transferred, split up, combined or exchanged at the principal Dallas office of
the Rights Agent (the "DESIGNATED OFFICE"). Neither the Rights Agent nor the
Company shall be obligated to take any action whatsoever with respect to the
transfer of any such surrendered Rights Certificate until the registered holder
shall have completed and signed the certificate contained in the form of
assignment on the reverse side of such Rights Certificate and shall have
provided such additional evidence of the identity of the Beneficial Owner (or
former Beneficial Owner) or Affiliate or Associates thereof as the Company shall
reasonably request. Thereupon the Rights Agent shall, subject to Sections 7(e),
14 and 24 hereof, countersign and deliver to the person entitled thereto a
Rights Certificate or Rights Certificates, as the case may be, as so requested.
The Company may require payment of a sum sufficient to cover any tax or
governmental charge that may be imposed in connection with any transfer, split
up, combination or exchange of Rights Certificates.
(b) Upon receipt by the Company and the Rights Agent of
evidence reasonably satisfactory to them of the loss, theft, destruction or
mutilation of a Rights Certificate, and, in case of loss, theft or destruction,
of indemnity or security satisfactory to them and, at the Company's request
reimbursement to the Company and the Rights Agent of all reasonable expenses
incidental thereto, and upon surrender to the Rights Agent and cancellation of
the Rights Certificate if mutilated, the Company will make and deliver a new
Rights Certificate of like tenor to the Rights Agent for delivery to the
registered holder in lieu of the Rights Certificate so lost, stolen, destroyed
or mutilated.
Section 7. Exercise of Rights; Exercise Price; Expiration Date of
Rights.
(a) Subject to Sections 7(e), 23(b) and 24(b) hereof, the
registered holder of any Rights Certificate may exercise the Rights evidenced
thereby (except as otherwise provided herein) in whole or in part at any time
after the Distribution Date and prior to the Close of Business on the Expiration
Date by surrender of the Rights Certificate, with the form of election to
purchase on the reverse side thereof duly executed, to the Rights Agent at the
Designated Office, together with payment of the Exercise Price for each Common
Share (or, following a Triggering Event, other securities, cash or other assets
as the case may be) as to which the Rights are exercised.
(b) The Exercise Price for each Common Share issuable pursuant
to the exercise of a Right shall initially be Sixty-Five Dollars ($65.00), shall
be subject to adjustment from time to time as provided in Sections 11 and 13
hereof and shall be payable in lawful money of the United States of America in
accordance with paragraph (c) below.
(c) Upon receipt of a Rights Certificate representing
exercisable Rights, with the form of election to purchase duly executed,
accompanied by payment of the Exercise Price for the number of Common Shares
(or, following a Triggering Event, other securities, cash or other assets as the
case may be) to be purchased and an amount equal to any applicable tax or
governmental charge required to be paid by the holder of such Rights Certificate
in accordance with Section 9(e) hereof, the Rights Agent shall, subject to
Section 20(k) hereof, thereupon promptly (i) (A) requisition from any transfer
agent of the Common Shares (or make available, if the Rights Agent is the
transfer agent
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<PAGE> 15
for the Common Shares) a certificate or certificates for the number of Common
Shares (or, following a Triggering Event, other securities, cash or other assets
as the case may be) to be purchased and the Company hereby irrevocably
authorizes its transfer agent to comply with all such requests or (B) if the
Company shall have elected to deposit the total number of Common Shares (or,
following a Triggering Event, other securities, cash or other assets as the case
may be) issuable upon exercise of the Rights hereunder with a depositary agent,
requisition from the depositary agent depositary receipts representing such
number of Common Shares (or, following a Triggering Event, other securities,
cash or other assets as the case may be) as are to be purchased (in which case
certificates for the Common Shares (or, following a Triggering Event, other
securities, cash or other assets as the case may be) represented by such
receipts shall be deposited by the transfer agent with the depositary agent) and
the Company hereby directs the depositary agent to comply with such request,
(ii) when appropriate, requisition from the Company the amount of cash to be
paid in lieu of issuance of fractional shares in accordance with Section 14
hereof, (iii) after receipt of such certificates or depositary receipts, cause
the same to be delivered to or upon the order of the registered holder of such
Rights Certificate, registered in such name or names as may be designated by
such holder and (iv) when appropriate, after receipt thereof, deliver such cash
to or upon the order of the registered holder of such Rights Certificate. The
payment of the Exercise Price (as such amount may be reduced (including to zero)
pursuant to Section 11(a)(iii) hereof) and an amount equal to any applicable tax
or governmental charge required to be paid by the holder of such Rights
Certificate in accordance with Section 9(e) hereof may be made in cash or by
certified bank check, cashier's check or bank draft payable to the order of the
Company. In the event that the Company is obligated to issue securities of the
Company other than Common Shares, pay cash and/or distribute other property
pursuant to Section 11(a) hereof, the Company will make all arrangements
necessary so that such other securities, cash and/or other property are
available for distribution by the Rights Agent, if and when necessary to comply
with this Agreement.
(d) In case the registered holder of any Rights Certificate
shall exercise less than the Rights evidenced thereby, a new Rights Certificate
evidencing Rights equivalent to the Rights remaining unexercised shall be issued
by the Rights Agent to the registered holder of such Rights Certificate to his
or her duly authorized assigns, subject to the provisions of Section 6 and
Section 14 hereof.
(e) Notwithstanding anything in this Agreement to the
contrary, from and after the first occurrence of a Triggering Event, any Rights
beneficially owned by (i) an Acquiring Person or an Associate or Affiliate of an
Acquiring Person, (ii) a transferee of an Acquiring Person (or of any such
Associate or Affiliate) who becomes a transferee after the Acquiring Person
becomes such (a "POST EVENT TRANSFEREE"), (iii) a transferee of an Acquiring
Person (or of any such Associate or Affiliate) who becomes a transferee prior to
or concurrently with the Acquiring Person becoming such and receives such Rights
pursuant to either (A) a transfer (whether or not for consideration) from the
Acquiring Person, holders of equity interests in such Acquiring Person or to any
Person with whom the Acquiring Person has any continuing agreement arrangement
or understanding regarding the transferee Rights or (B) transfer which the
Company's Board of Directors has determined is part of a plan, arrangement
understanding which has as a primary purpose or effect
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the avoidance of this Section 7(e) (a "PRE-EVENT TRANSFEREE") or (iv) any
subsequent transferee receiving transferred Rights from a Post-Event Transferee
or a Pre-Event Transferee, either directly or through one or more intermediate
transferees, shall become null and void without any further action and no holder
of such Rights shall have any rights whatsoever with respect to such Rights,
whether under any provision of this Agreement or otherwise. The Company shall
use all reasonable efforts to ensure that the provisions of this Section 7(e)
and Section 4(b) here(are complied with, but neither the Company nor the Rights
Agent shall have any liability to any hold of Rights Certificates or to any
other Person as a result of the Company to make any determinations with respect
to an Acquiring Person or any of such Acquiring Person's Affiliate Associates or
transferees hereunder.
(f) Notwithstanding anything in this Agreement to the
contrary, neither the Rights Agent nor the Company shall be obligated to
undertake any action with respect to a registered hold upon the occurrence of
any purported exercise as set forth in this Section 7 unless such registered
holder shall, in addition to having complied with the requirements of Section
7(a), have (i) properly completed and signed the certificate contained in the
form of election to purchase set forth on the reverse side of the Rights
Certificate surrendered for such exercise and (ii) provided such additional
evidence of the identity of the Beneficial Owner (or former Beneficial Owner) or
Affiliates or Associates thereof as the Company or the Rights Agent shall
reasonably request.
Section 8. Cancellation and Destruction of Rights Certificates. All
Rights Certificate surrendered for the purpose of exercise, transfer, split up,
combination or exchange shall, if surrendered to the Company or to any of its
agents, be delivered to the Rights Agent for cancellation or in canceled form,
or, if surrendered to the Rights Agent, shall be canceled by it, and no Rights
Certificates shall be issued in lieu thereof except as expressly permitted by
any of the provisions of this Agreement. The Company shall deliver to the Rights
Agent for cancellation and retirement, and the Rights Agent shall cancel and
retire, any Rights Certificate purchased or acquired by the Company otherwise
than upon the exercise thereof. The Rights Agent shall deliver all canceled
Rights Certificates to the Company, or shall, at the written request of the
Company, destroy such canceled Rights Certificates, and in such case shall
deliver a certificate of destruction thereof to the Company.
Section 9. Reservation and Availability of Common Shares.
(a) The Company covenants and agrees that it will use its best
efforts to cause to be reserved and kept available out of and to the extent of
its authorized and unissued Common Shares not reserved for another purpose (and,
following the occurrence of a Triggering Event, out of its authorized and
unissued Common Shares and/or other securities), the number of Common Shares
(and, following the occurrence of the Triggering Event, Common Shares and/or
other securities) that will be sufficient to permit the exercise in full of all
outstanding Rights.
(b) If the Company has in the past or shall hereafter list any
of its Common Shares on a national securities exchange or quotation system, then
so long as the Common Shares (and, following the occurrence of a Triggering
Event, Common Shares and/or other securities) issuable
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<PAGE> 17
and deliverable upon exercise of the Rights may be listed on such exchange or
quotation system, the Company shall us its best efforts to cause, from and after
such time as the Rights become exercisable (but only to the extent that it is
reasonably likely that the Rights will be exercised), all shares reserved for
such issuance to be listed on such exchange upon official notice of issuance
upon such exercise.
(c) The Company shall use its best efforts to (i) file, as
soon as practicable following the earliest date after the first occurrence of a
Triggering Event in which the consideration to be delivered by the Company upon
exercise of the Rights is described in Section 11(a)(ii) or Section 11(a)(iii)
hereof, or as soon as is required by law following the Distribution Date, as the
case may be, a registration statement under the Securities Act with respect to
the securities purchasable upon exercise of the Right, on an appropriate form,
(ii) cause such registration statement to become effective as soon as
practicable after such filing and (iii) cause such registration statement to
remain effective (with a prospectus at all times meeting the requirements of the
Securities Act) until the earlier of (A) the date as of which the Rights are no
longer exercisable for such securities and (B) the Expiration Date. The Company
may temporarily suspend, for a period not to exceed ninety (90) days after the
date set forth in clause (i) of the first sentence of this Section 9(c), the
exercisability of the Rights in order to prepare and file such registration
statement and permit it to become effective. Upon any such suspension, the
Company shall issue a public announcement stating, and notify the Rights Agent,
that the exercisability of the Rights has been temporarily suspended, as well as
a public announcement and notification to the Rights Agent at such time as the
suspension is no longer in effect. The Company may also take such action as may
be appropriate under, or to ensure compliance with, the securities or "blue sky"
laws of the various states in connection with the exercisability of the Rights.
Notwithstanding any provision of this Agreement to the contrary, the Rights
shall not be exercisable in any jurisdiction, unless the requisite qualification
in such jurisdiction shall have been obtained, or an exemption therefrom shall
be available, and until a registration statement has been declared effective.
(d) The Company covenants and agrees that it will take all
such action as may be necessary to ensure that all Common Shares (or other
securities of the Company) delivered upon exercise of Rights, shall, at the time
of delivery of the certificates for such securities (subject to payment of
Exercise Price), be duly and validly authorized and issued and fully paid and
nonassessable shares.
(e) The Company further covenants and agrees that it will pay
when due and pay any and all taxes and governmental charges which may be payable
in respect of the original issuance delivery of the Rights Certificates or of
any Common Shares (or other securities) upon the exercise Rights. The Company
shall not, however, be required to pay any tax or governmental charge which may
be payable in respect to any transfer or delivery of Rights Certificates to a
person other than, or the issuance of delivery of certificates or depositary
receipts for the Common Shares (or other securities of the Company) in the name
other than that of, the registered holder of the Rights Certificate evidencing
Rights surrendered for exercise or to issue or deliver any certificates or
depositary receipts Common Shares (or other securities of the Company) upon the
exercise of any
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<PAGE> 18
Rights until any such tax or governmental charge shall have been paid (any such
tax or governmental charge being payable by the holder of such Rights
Certificate at the time of surrender) or until it has been established to the
Company's satisfaction that no such tax is due.
Section 10. Record Date. Each Person is whose name any certificate for
a number of Common Shares (or other securities) is issued upon the exercise of
Rights shall for all purposes be deemed to have become the holder of record of
the Common Shares (or other securities) represented thereby on, and such
certificate shall be dated, the date upon which the Rights Certificate
evidencing such Rights was duly surrendered and payment of the Exercise Price
with respect to which the Rights have been exercised (and any applicable taxes
or governmental charges) was made; provided, however, that if the date of such
surrender and payment is a date upon which the transfer books of the Company
closed, such Person shall be deemed to have become the record holder of such
shares on, and such certificate shall be dated, the next succeeding Business Day
on which the transfer books of the Company are open. Prior to the exercise of
the Rights evidenced thereby, the holder of the Rights Certificate shall not be
entitled to any rights of a holder of Common Shares (or other securities) for
which the Rights shall not be entitled to any rights of a holder of Common
Shares (or other securities) for which the Rights shall be exercisable,
including, without limitation, the right to vote, to receive dividends or other
distributions or to exercise any preemptive rights, and shall not be entitled to
receive any notice of any proceeding of the Company, except as provided herein.
Section 11. Adjustment of Exercise Price, Number of Shares or Number of
Rights. Exercise Price, the number and kind of shares or other property covered
by each Right and the number of Rights outstanding are subject to adjustment
from time to time as provided in this Section 11.
(a) (i) In the event the Company shall at any time after the date of
this Agreement (A) declare a dividend on the Common Shares payable in Common
Shares, (B) subdivide the outstanding Common Shares, (C) combine the outstanding
Common Shares (by reverse stock split or otherwise) into a smaller number of
Common Shares, or (D) issue any shares of its capital stock in the
reclassification of the Common Shares (including any such reclassification in
connection with a consolidation or merger in which the Company is the continuing
or surviving corporation), then, in each such event, except as otherwise
provided in this Section 11 and Section 7(e) hereof: (1) the Exercise Price in
effect at the time the record date for such dividend or of the effective date of
such subdivision, combination or reclassification shall be adjusted so that the
Exercise Price thereafter shall equal the result obtained by dividing the
Exercise Price in effect immediately prior to such time by a fraction (the
"ADJUSTMENT FRACTION") the numerator of which shall be the total number of
Common Shares (or shares of capital stock issued in such reclassification of the
Common Shares) outstanding immediately following such time and the denominator
of which shall be the total number of Common Shares outstanding immediately
prior to such time; provided, however, that in no event shall the consideration
to be paid upon the exercise of one Right be less than the aggregate par value
of the shares of capital stock of the Company issuable upon exercise of such
Right; and
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<PAGE> 19
(2) the number of Common Shares (or shares of such other capital stock) issuable
upon the exercise of each Right shall equal the number of Common Shares (or
shares of such other capital stock) as were issuable upon exercise of a Right
immediately prior to the occurrence of the event described in clauses (A)-(D) of
this Section 11(a)(i), multiplied by the Adjustment Fraction. Each Common Share
that shall become outstanding after an adjustment has been made pursuant to this
Section 11(a)(i) shall have associated with it the number of Rights, exercisable
at the Exercise Price and for the number of Common Shares (or shares of such
other capital stock) as one Common Share has associated with it immediately
following the adjustment made pursuant to this Section 11(a)(i).
(ii) Subject to Section 24 of this Agreement, in the event a
Triggering Event shall have occurred, then promptly following such Triggering
Event each holder of a Right, except as provided in Section 7(e) hereof, shall
thereafter have the right to receive for each Right, upon exercise thereof in
accordance with the terms of this Agreement and payment of the Exercise Price in
effect immediately prior to the occurrence of the Triggering Event, such number
of Common Shares of the Company as shall equal the result obtained by
multiplying the Exercise Price in effect immediately prior to the occurrence of
the Triggering Event by the number of Common Shares for which a Right was
exercisable (or would have been exercisable if the Distribution Date had
occurred) immediately prior to the first occurrence of a Triggering Event, and
dividing that product by 50% of the Current Per Share Market Price for Common
Shares on the date of occurrence of the Triggering Event; provided, however,
that the Exercise Price and the number of Common Shares of the Company so
receivable upon exercise of a Right shall be subject to further adjustment as
appropriate in accordance with Section 11(e) hereof to reflect any events
occurring in respect of the Common Shares of the Company after the occurrence of
the Triggering Event.
(iii) In lieu of issuing Common Shares in accordance with
Section 11(a)(ii) hereof, the Company may, if the Company's Board of Directors
determines that such action is necessary or appropriate and not contrary to the
interest of holders of Rights and, in the event that the number of Common Shares
which are authorized by the Company's Certificate of Incorporation but not
outstanding or reserved for issuance for purposes other than upon exercise of
the Rights are not sufficient to permit the exercise in full of the Rights, or
if any necessary regulatory approval for such issuance has not been obtained by
the Company, the Company shall: (A) determine the excess of (1) the value of the
Common Shares issuable upon the exercise of a Right (the "CURRENT VALUE") over
(2) the Exercise Price (such excess, the "SPREAD") and (B) with respect to each
Right, make adequate provision to substitute for such Common Shares, upon
exercise of the Rights, (1) cash, (2) a reduction in the Exercise Price, (3)
other equity securities of the Company (including, without limitation, shares or
units of shares of any series of preferred stock which the Company's Board of
Directors has deemed to have the same value as Common Shares (such shares or
units of shares of preferred stock are herein called "COMMON STOCK
EQUIVALENTS")), except to the extent that the Company has not obtained any
necessary stockholder or regulatory approval for such issuance, (4) debt
securities of the Company, except to the extent that the Company has not
obtained any necessary stockholder or regulatory approval for such issuance, (5)
other assets or (6) any combination of the foregoing, having an aggregate value
equal to the Current Value where such aggregate value has been determined by the
Company's Board of Directors based upon the advice
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<PAGE> 20
of a nationally recognized investment banking firm selected by the Company's
Board of Directors, provided, however, if the Company shall not have made
adequate provision to deliver value pursuant to clause (B) above within thirty
(30) days following the later of (x) the first occurrence of a Triggering Event
and (y) the date on which the Company's right of redemption pursuant to Section
23 (a) expires (the later of (x) and (y) being referred to herein as the
"SECTION 11(a)(ii) TRIGGER Date"), then the Company shall be obligated to
deliver, upon the surrender for exercise of a Right and without requiring
payment of the Exercise Price, Common Shares (to the extent available), except
to the extent that the Company has not obtained any necessary stockholder or
regulatory approval for such issuance, and then, if necessary, cash, which
shares and/or cash have an aggregate value equal to the Spread. If the Company's
Board of Directors shall determine in good faith that it is likely that
sufficient additional Common Shares could be authorized for issuance upon
exercise in full of the Rights or that any necessary regulatory approval for
such issuance will be obtained, the thirty (30) day period set forth above may
be extended to the extent necessary, but not more than ninety (90) days after
the Section 11 (a)(ii) Trigger Date, in order that the Company may seek
stockholder approval for the authorization of such additional shares or take
action to obtain such regulatory approval (such period, as it may be extended,
the "SUBSTITUTION PERIOD"). To the extent that the Company determines that some
action need be taken pursuant to the first and/or second sentences of this
Section 11(a)(iii), the Company (x) shall provide, subject to Section 7(e)
hereof, that such action shall apply uniformly to all outstanding Rights and (y)
may suspend the exercisability of the Rights until the expiration of the
Substitution Period in order to seek any authorization of additional shares, to
take any action to obtain any required regulatory approval and/or to decide the
appropriate form of distribution to be made pursuant to such first sentence and
to determine the value thereof. In the event of any such suspension, the Company
shall notify the Rights Agent thereof and issue a public announcement stating
that the exercisability of the Rights has been temporarily suspended, as well as
notify the Rights Agent and issue a public announcement at such time as the
suspension is no longer in effect. For purposes of this Section 11(a)(iii), the
value of the Common Shares shall be the Current Per Share Market Price of the
Common Shares on the Section 11(a)(ii) Trigger Date and the value of any Common
Stock Equivalent shall be deemed to have the same value as the Common Shares on
such date.
(b) In case the Company shall, at any time after the date of
this Agreement, fix a record date for the issuance of rights, options or
warrants to all holders of Common Shares or of any class or series of Equivalent
Shares entitling such holders (for a period expiring within forty-five (45)
calendar days after such record date) to subscribe for or purchase Common Shares
or Equivalent Shares or securities convertible into Common Shares or Equivalent
Shares at a price per share (or having a conversion price per share, if a
security convertible into Common Shares or Equivalent Shares) less than the then
Current Per Share Market Price of the Common Shares or Equivalent Shares on such
record date, there in each such case, the Exercise Price to be in effect after
such record date shall be determined by multiplying the Exercise Price in effect
immediately prior to such record date by a fraction, the numerator of which
shall be the number of Common Shares and Equivalent Shares (if any) outstanding
on such record date, plus the number of Common Shares or Equivalent Shares, as
the case may be, which the aggregate-offering price of the total number of
Common Shares or Equivalent Shares, as the case may be, to be offered or issued
(and/or the
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<PAGE> 21
aggregate initial conversion price of the convertible securities to be offered
or issued) would purchase at such current market price, and the denominator of
which shall be the number of Common Shares and Equivalent Shares (if any)
outstanding on such record date, plus the number of additional Common Shares or
Equivalent Shares, as the case may be, to be, offered for subscription or
purchase (or into which the convertible securities so to be offered are
initially convertible) provided, however, that in no event shall the
consideration to be paid upon the exercise of one Right be less than the
aggregate par value of the shares of capital stock of the Company issuable upon
exercise of one Right. In case such subscription price may be paid in a
consideration part or all of which shall be in a form other than cash, the value
of such consideration shall be as determined in good faith by the Company's
Board of Directors, whose determination shall be described in a statement filed
with the Rights Agent and shall be binding on the Rights Agent and the holders
of the Rights. Common Shares and Equivalent Shares owned by or held for the
account of the Company shall not be deemed outstanding for the purpose of any
such computation. Such adjustment shall be made successively whenever such a
record date is fixed, and in the event that such rights, options or warrants are
not so issued, the Exercise Price shall be adjusted to be the Exercise Price
which would then be in effect if such record date had not been fixed.
(c) In case the Company shall, at any time after the date of
this Agreement, fix a record date for the making of a distribution to all
holders of the Common Shares or of any class or series of Equivalent Shares
(including any such distribution made in connection with a consolidation or
merger in which the Company is the continuing or surviving corporation) of
evidences of indebtedness or assets (other than a regular quarterly cash
dividend, if any, or a dividend payable in Common Shares) or subscription
rights, options or warrants (excluding those referred to in Section 11 (b)),
then, in each such case, the Exercise Price to be in effect after such record
date shall be determined by multiplying the Exercise Price in effect immediately
prior to such record date by a fraction, the numerator of which shall be the
Current Per Share Market Price of a Common Share or an Equivalent Share on such
record date, less the fair market value per Common Share or Equivalent Share (as
determined in good faith by the Board of Directors of the Company, whose
determination shall be described in a statement filed with the Rights Agent) of
the portion of the cash, assets or evidences of indebtedness so to be
distributed or on such subscription rights or warrants applicable to a Common
Share or Equivalent Share, as the case may be, and the denominator of which
shall be such Current Per Share Market Price of a Common Share or Equivalent
Share on such record date; provided, however, that in no event shall the
consideration to be paid upon the exercise of one Right be less than the
aggregate par value of the shares of capital stock of the Company issuable upon
exercise of one Right. Such adjustments shall be made successively whenever such
a record date is fixed, and in the event that such distribution is not so made,
the Exercise Price shall be adjusted to be the Exercise Price which would have
been in effect if such record date had not been fixed.
(d) Anything herein to the contrary notwithstanding, no
adjustment in the Exercise Price shall be required unless such adjustment would
require an increase or decrease of at least 1% in the Exercise Price; provided,
however, that any adjustments which by reason of this Section 11(d) are not
required to be made shall be carried forward and taken into account in any
subsequent
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<PAGE> 22
adjustment. All calculations under this Section 11 shall be made to the nearest
cent or to the nearest ten-thousandth on a Common Share or other share, as the
case may be. Notwithstanding the first sentence of this Section 11(d), any
adjustment required by this Section 11 shall be made no later than the earlier
(i) three (3) years from the date of the transaction which requires such
adjustment or (ii) the Expiration Date.
(e) If as a result of an adjustment made to Section 11(a) or
13(a) hereof, the holder of any Right thereafter exercised shall become entitled
to receive any shares of capital stock other than Common Shares, thereafter the
number of such other shares so receivable upon exercise of any Rights and, if
required, the Exercise Price thereof, shall be subject to adjustment from time
to time in a manner and on terms as nearly equivalent as practicable to the
provisions with respect to the Common Shares contained in Sections 11(a), 11(b),
11(c), 11(d), 11(f), 11(g), 11(h), 11(i), 11(j), 11(k) and 11(l), and the
provisions of Sections 7, 9, 10, 13 and 14 with respect to the Common Shares
shall apply on like terms to any such other shares.
(f) All Rights originally issued by the Company subsequent to
any adjustment made to the Exercise Price hereunder shall evidence the right to
purchase, at the adjusted Exercise Price, the number of Common Shares
purchasable from time to time hereunder upon exercise of the Rights, all subject
to further adjustment as provided herein.
(g) Unless the Company shall have exercised its election as
provided in Section 11(h), upon each adjustment of the Exercise Price as a
result of the calculations made in Section 11(b), each Right outstanding
immediately prior to the making of such adjustment shall thereafter evidence the
right to purchase, at the adjusted Exercise Price, that number of Common Shares
(calculated to the nearest ten thousandth of a share) obtained by (i)
multiplying (x) the number of Common Shares covered by a Right immediately prior
to this adjustment, by (y) the Exercise Price in effect immediately prior to
such adjustment of the Exercise Price, and (ii) dividing the product so obtained
by the Exercise Price in effect immediately after such adjustment of the
Exercise Price.
(h) The Company may elect on or after the date of any
adjustment of the Exercise Price as a result of the calculations made in Section
11(b) to adjust the number of Rights, in substitution for any adjustment in the
number of Common Shares purchasable upon the exercise of a Right. Each of the
Rights outstanding after such adjustment of the number of Rights shall be
exercisable for the number of Common Shares for which a Right was exercisable
immediately prior to such adjustment. Each Right held of record prior to such
adjustment of the number of Rights shall become that number of Rights
(calculated to the nearest ten-thousandth) obtained by dividing the Exercise
Price in effect immediately prior to adjustment of the Exercise Price by the
Exercise Price in effect immediately after adjustment of the Exercise Price. The
Company shall make a public announcement of its election to adjust the number of
Rights (with notice thereof to the Rights Agent), indicating the record date for
the adjustment, and, if known at the time, the amount of the adjustment to be
made. This record date may be the date on which the Exercise Price is adjusted
or any day thereafter, but if the Rights Certificates have been issued shall be
at least ten (10) days later than the date of the public announcement. If Rights
Certificates have been issued, upon each
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<PAGE> 23
adjustment of the number of Rights pursuant to this Section 11(h), the Company
shall, as promptly as practicable, cause to be distributed to holders of record
of Rights Certificates or such record date Rights Certificates evidencing,
subject to Section 14 hereof, the additional Rights to which such holders shall
be entitled as a result of such adjustment, or, at the option of the Company,
shall cause to be distributed to such holders of record in substitution and
replacement for the Rights Certificates held by such holders prior to the date
of adjustment, and upon surrender thereof, if required by the Company, new
Rights Certificates evidencing all the Rights to which such holders shall be
entitled after such adjustment. Rights Certificates so to be distributed shall
be issued, executed and countersigned in the manner provided for herein (and may
bear, at the option of the Company, the adjusted Exercise Price) and shall be
registered in the names of the holders of record of Rights Certificates on the
record date specified in the public announcement.
(i) Irrespective of any adjustment or change in the Exercise
Price or the number of Common Shares issuable upon the exercise of the Rights,
the Rights Certificates theretofore and thereafter issued may continue to
express the Exercise Price per Common Share and the number of Common Shares
which were expressed in the initial Rights Certificates issued hereunder.
(j) Before taking any action that would cause an adjustment
reducing the Exercise Price below the par or stated value, if any, of the number
of Common Shares issuable upon exercise of the Rights, the Company shall take
any corporate action which may, in the opinion of its counsel, be necessary in
order that the Company may validly and legally issue as fully paid and
nonassessable shares such number of Common Shares at such adjusted Exercise
Price.
(k) In any case in which this Section 11 shall require that an
adjustment in the Exercise Price be made effective as of a record date for a
specified event the Company may elect to defer until the occurrence of such
event the issuing to the holder of any Right exercised after such record date,
the number of Common Shares and other capital stock or securities of the
Company, if any, issuable upon such exercise over and above the number of Common
Shares and other capital stock or securities of the Company, if any, issuable
upon such exercise on the basis of the Exercise Price in effect prior to such
adjustment; provided, however, that the Company shall deliver to such holder a
due bill or other appropriate instrument evidencing such holder's right to
receive such additional shares (fractional or otherwise) upon the occurrence of
the event requiring such adjustment.
(l) Anything in this Section 11 to the contrary
notwithstanding, prior to the Distribution Date, the Company shall be entitled
to make such reductions in the Exercise Price, in addition to those adjustments
expressly required by this Section 11, as and to the extent that it in its sole
discretion shall determine to be advisable in order that any (i) consolidation
or subdivision of the Common Shares or any Equivalent Shares, (ii) issuance
wholly for cash of any Common Shares or Equivalent Shares at less than the
current market price, (iii) issuance wholly for cash of Common Share or
Equivalent Shares or securities which by their terms are convertible into or
exchangeable for Common Shares or Equivalent Shares, (iv) stock dividends or (v)
issuance of rights, options or warrants referred to in this Section 11,
hereafter made by the Company to holders of its Common Shares shall not be
taxable to such stockholders.
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<PAGE> 24
(m) The Company covenants and agrees that, after the
Distribution Date, it will not, except as permitted by Sections 23, 24 or 27
hereof, take (or permit to be taken) any action if at the time such action is
taken it is reasonably foreseeable that such action will diminish substantially
or otherwise eliminate the benefits intended to be afforded by the Rights.
Section 12. Certificate of Adjusted Exercise Price or Number of Shares.
Whenever an adjustment is made as provided in Sections 11 or 13 hereof, the
Company shall promptly (a) prepare a certificate setting forth such adjustment
and a brief statement of the facts and computations accounting for such
adjustment, (b) file with the Rights Agent and with each transfer agent for the
Common Shares, a copy of such certificate and (c) mail a brief summary thereof
to each holder of a Rights Certificate in accordance with Section 26 hereof.
Notwithstanding the foregoing sentence, the failure of the Company to make such
certification or give such notice shall not affect the validity of such
adjustment or the force or effect of the requirement for such adjustment. The
Rights Agent shall be fully protected in relying on any such certificate and on
any adjustment contained therein, shall have no duty with respect to and shall
not be deemed to have knowledge of such adjustment unless and until it shall
have received such certificate.
Section 13. Consolidation, Merger or Sale or Transfer of Assets or
Earning Power.
(a) In the event that, following a Triggering Event, directly
or indirectly:
(i) the Company shall consolidate with, or merge with and
into, any other Person (other than a wholly-owned Subsidiary of the Company in a
transaction the principal purpose of which is to change the state of
incorporation of the Company and which complies with Section 11(m) hereof);
(ii) any Person (other than a Subsidiary of the Company in a
transaction that complies with Section 11(m) hereof) shall consolidate with the
Company, or merge with and into the Company and the Company shall be the
continuing or surviving corporation of such consolidation or merger; or
(iii) the Company shall sell or otherwise transfer (or one
or more of its Subsidiaries shall sell or otherwise transfer), in one or more
transactions, assets or earning power aggregating 50% or more of the assets or
earning power of the Company and its Subsidiaries (taken as a whole) to any
other Person or Persons (other than the Company or one or more of its wholly
owned Subsidiaries in one or more transactions, each of which individually (and
together) complies with Section 11(m) hereto,
then, concurrent with and in each such case,
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(A) each holder of a Right (except as provided in Section
7(e) hereof) shall thereafter have the right to receive, upon the exercise
thereof at a price equal to the Total Exercise Price applicable immediately
prior to the occurrence of the Section 13 Event in accordance with the terms of
this Agreement, such number of validly authorized and issued, fully paid,
nonassessable and freely tradeable Common Shares of the Principal Party (as
hereinafter defined), free of any liens, encumbrances, rights of first refusal
or other adverse claims, as shall be equal to the result obtained by dividing
such Total Exercise Price by 50% of the Current Per Share Market Price of the
Common Shares of such Principal Party on the date of consummation of such
Section 13 Event, provided, however, that the Exercise Price and the number of
Common Shares of such Principal Party so receivable upon exercise of a Right
shall be subject to further adjustment as appropriate in accordance with Section
11(e) hereof;
(B) such Principal Party shall thereafter be liable for, and
shall assume, by virtue of such Section 13 Event, all the obligations and duties
of the Company pursuant to this Agreement;
(C) the term "Company" shall thereafter be deemed to refer
to such Principal Party, it being specifically intended that the provisions of
Section 11 hereof shall apply only to such Principal Party following the first
occurrence of a Section 13 Event;
(D) such Principal Party shall take such steps (including,
but not limited to, the reservation of a sufficient number of its Common Shares)
in connection with the consummation of any such transaction as may be necessary
to ensure that the provisions hereof shall thereafter be applicable, as nearly
as reasonably may be, in relation to its Common Shares thereafter deliverable
upon the exercise of the Rights; and
(E) upon the subsequent occurrence of any consolidation,
merger, sale or transfer of assets or other extraordinary transaction in respect
of such Principal Party, each holder of a Right shall thereupon be entitled to
receive, upon exercise of a Right and payment of the Total Exercise Price as
provided in this Section 13(a), such cash, shares, rights, warrants and other
property which such holder would have been entitled to receive had such holder,
at the time of such transaction, owned the Common Shares of the Principal Party
receivable upon the exercise of such Right pursuant to this Section 13(a), and
such Principal Party shall take such steps (including, but not limited to,
reservation of shares of stock) as may be necessary to permit the subsequent
exercise of the Rights in accordance with the terms hereof for such cash,
shares, rights, warrants and other property.
(F) For purposes hereof the "earning power" of the Company
and its Subsidiaries shall be determined in good faith by the Company's Board of
Directors on the basis of the operating earnings of each business operated by
the Company and its Subsidiaries during the three fiscal years preceding the
date of such determination (or, in the case of any business not operated by the
Company or any Subsidiary during three full fiscal years preceding such date,
during the period such business was operated by the Company or any Subsidiary).
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(b) For purposes of this Agreement, the term "PRINCIPAL PARTY"
shall mean:
(i) in the case of any transaction described in clause (i)
or (ii) of Section 13(a) hereof: (A) the Person that is the issuer of the
securities into which the Common Shares are converted in such merger or
consolidation, or, if there is more than one such issuer, the issuer the Common
Shares of which have the greatest aggregate market value of shares outstanding,
or (B) if no securities are so issued, (x) the Person that is the other party to
the merger, if such Person survives said merger, or, if there is more than one
such Person, the Person the Common Shares of which have the greatest aggregate
market value of shares outstanding or (y) if the Person that is the other party
to the merger does not survive the merger, the Person that does survive the
merger (including the Company if it survives) or (z) the Person resulting from
the consolidation; and
(ii) in the case of any transaction described in clause
(iii) of Section 13(a) hereof, the Person that is the party receiving the
greatest portion of the assets or earning power transferred pursuant to such
transaction or transactions, or, if more than one Person that is a party to such
transaction or transactions receives the same portion of the assets or earning
power so transferred and each such portion would, were it not for the other
equal portions, constitute the greatest portion of the assets or earning power
so transferred, or if the Person receiving the greatest portion of the assets or
earning power cannot be determined, whichever of such Persons is the issuer of
Common Shares having the greatest aggregate market value of shares outstanding;
provided, however, that in any such case described in the foregoing clause
(b)(i) or (b)(ii), if the Common Shares of such Person are not at such time or
have not been continuously over the preceding 12-month period registered under
Section 12 of the Exchange Act, then (1) if such Person is a direct or indirect
Subsidiary of another Person the Common Shares of which are and have been so
registered, the term "Principal Party" shall refer to such other Person, or (2)
if such Person is a Subsidiary, directly or indirectly, of more than one Person,
the Common Shares of which are and have been so registered, the term "Principal
Party" shall refer to whichever of such Persons is the issuer of Common Shares
having the greatest aggregate market value of shares outstanding, or (3) if such
Person is owned, directly or indirectly, by a joint venture formed by two or
more Persons that are not owned, directly or indirectly, by the same Person, the
rules set forth in clauses (1) and (2) above shall apply to each of the owners
having an interest in the venture as if the Person owned by the joint venture
was a Subsidiary of both or all of such joint venturers, and the Principal Party
in each such case shall bear the obligations set forth in this Section 13 in the
same ratio as its interest in such Person bears to the total of such interests.
(c) The Company shall not consummate any Section 13 Event
unless the Principal Party shall have a sufficient number of authorized Common
Shares that have not been issued or reserved for issuance to permit the exercise
in full of the Rights in accordance with this Section 13 and unless prior
thereto the Company and such issuer shall have executed and delivered to the
Rights Agent a supplemental agreement confirming that such Principal Party
shall, upon consummation of such Section 13 Event, assume this Agreement in
accordance with Sections 13(a) and 13(b) hereof, that all rights of first
refusal or preemptive rights in respect of the issuance of
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<PAGE> 27
Common Shares of such Principal Party upon exercise of outstanding Rights have
been waived, that there are no rights, warrants, instruments or securities
outstanding or any agreements or arrangements which, as a result of the
consummation of such transaction, would eliminate or substantially diminish the
benefits intended to be afforded by the Rights and that such transaction shall
not result in a default by such Principal Party under this Agreement, and
further providing that as soon as practicable after the date of such Section 13
Event, such Principal Party will:
(i) prepare and file a registration statement under the
Securities Act with respect to the Rights and the securities purchasable upon
exercise of the Rights on an appropriate form, use its best efforts to cause
such registration statement to become effective as soon as practicable after
such filing and use its best efforts to cause such registration statement to
remain effective (with prospectus at all times meeting the requirements of the
Securities Act) until the Expiration Date, and similarly comply with applicable
state securities laws;
(ii) use its best efforts to list (or continue the listing
of) the Rights and the securities purchasable upon exercise of the Rights on a
national securities exchange or to meet the eligibility requirements for
quotation on Nasdaq and list (or continue the listing of) the Rights and the
securities purchasable upon exercise of the Rights on Nasdaq; and
(iii) deliver to holders of the Rights historical financial
statements for such Principal Party which comply in all respects with the
requirements for registration on Form 10 (or any successor form) under the
Exchange Act.
In the event that at any time after the occurrence of a Triggering
Event some or all of the Rights shall not have been exercised at the time of a
transaction described in this Section 13, the Rights which have not theretofore
been exercised shall thereafter be exercisable in the manner described in
Section 13(a) (without taking into account any prior adjustment required by
Section 11(a)(ii)).
(d) In case the "Principal Party" for purposes of Section
13(b) hereof has provision in any of its authorized securities or in its
certificate of incorporation or by-laws or other instrument governing its
corporate affairs, which provision would have the effect of (i) causing such
Principal Party to issue (other than to holders of Rights pursuant to Section 13
hereof), in connection with, or as a consequence of, the consummation of a
Section 13 Event, Common Shares or Equivalent Shares of such Principal Party at
less than the then Current Per Share Market Price thereof or securities
exercisable for, or convertible into, Common Shares or Equivalent Shares of such
Principal Party at less than such then Current Per Share Market Price, or (ii)
providing for any special payment, tax or similar provision in connection with
the issuance of the Common Shares of such Principal Party pursuant to the
provisions of Section 13 hereof, then, in such event, the Company hereby agrees
with each holder of Rights that it shall not consummate any such transaction
unless prior thereto the Company and such Principal Party shall have executed
and delivered to the Rights Agent a supplemental agreement providing that the
provision in question of such Principal Party shall have been canceled, waived
or amended, or that the authorized securities shall be redeemed, so that the
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applicable provision will have no effect in connection with or as a consequence
of, the consummation of the proposed transaction.
(e) The Company covenants and agrees that it shall not, at any
time after the Distribution Date, effect or permit to occur any Section 13
Event, if (i) at the time or immediately after such Section 13 Event there are
any rights, warrants or other instruments or securities outstanding or
agreements in effect which would substantially diminish or otherwise eliminate
the benefits intended to be afforded by the Rights, (ii) prior to,
simultaneously with or immediately after such Section 13 Event, the stockholders
of the Person who constitutes, or would constitute, the "Principal Party" for
purposes of Section 13(b) hereof shall have received a distribution of Rights
previously owned by such Person or any of its Affiliates or Associates or (iii)
the form or nature of organization of the Principal Party would preclude or
limit the exercisability of the Rights.
(f) The provisions of this Section 13 shall similarly apply to
successive mergers or consolidations or sales or other transfers.
Section 14. Fractional Rights and Fractional Shares
(a) The Company shall not be required to issue fractions of
Rights or to distribute Rights Certificates which evidence fractional Rights. In
lieu of such fractional Rights, there shall be paid to the registered holders of
the Rights Certificates with regard to which such fractional Rights would
otherwise be issuable, an amount in cash equal to the same fraction of the
current market value of a whole Right. For the purposes of this Section 14(a),
the current market value of a whole Right shall be the closing price of the
Rights for the Trading Day immediately prior to the date on which such
fractional Rights would have been otherwise issuable, as determined pursuant to
the second sentence of Section 1(j) hereof.
(b) The Company shall not be required to issue fractions of
Common Shares or to distribute certificates which evidence fractional Common
Shares upon the exercise or exchange of Rights. In lieu of such fractional
Common Shares, the Company shall pay to the registered holders of Rights
Certificates at the time such Rights are exercised as herein provided an amount
in cash equal to the same fraction of the current market value of a Common
Share. For purposes of this Section 14(b), the current market value of a Common
Share shall be the closing price of a Common Share (as determined pursuant to
the second sentence of Section 1(j) hereof) for the Trading Day immediately
prior to the date of such exercise.
(c) The holder of a Right by the acceptance of the Right
expressly waives his or her right to receive any fractional Rights or any
fractional shares upon exercise of a Right.
Section 15. Rights of Action. All rights of action in respect of this
Agreement, excepting the rights of action given to the Rights Agent under
Section 18 hereof, are vested in the respective registered holders of the Rights
Certificates (and, prior to the Distribution Date, the registered holders of the
Common Shares); and any registered holder of any Rights Certificate (or, prior
to the
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Distribution Date, of the Common Shares), without the consent of the Rights
Agent or of the holder of any other Right Certificate (or, prior to the
Distribution Date, of the Common Shares), may, in his or her own behalf and for
his or her own benefit, enforce, and may institute and maintain any suit, action
or proceeding against the Company to enforce, or otherwise act in respect of,
his or her right to exercise the Rights evidenced by such Rights Certificate in
the manner provided in such Rights Certificate and in this Agreement. Without
limiting the foregoing or any remedies available to the holders of Rights, it is
specifically acknowledged that the holders of Rights would not have an adequate
remedy at law for any breach of this Agreement and will be entitled to specific
performance of the obligations under, and injunctive relief against actual or
threatened violations of, the obligations of any Person subject to this
Agreement.
Section 16. Agreement of Rights Holders. Every holder of a Right, by
accepting the same, consents and agrees with the Company and the Rights Agent
and with every other holder of a Right that:
(a) prior to the Distribution Date, the Rights will be
transferable only in connection with the transfer of the Common Shares;
(b) after the Distribution Date, the Rights Certificates are
transferable only on the registry books of the Rights Agent if surrendered at
the Designated Office, duly endorsed or accompanied by a proper instrument of
transfer and with the appropriate forms and certificates fully and properly
executed; and
(c) subject to Sections 6(a) and 7(f) hereof, the Company and
the Rights Agent may deem and treat the Person in whose name the Rights
Certificate (or, prior to the Distribution Date, the associated Common Shares
certificate) is registered as the absolute owner thereof and of the Right
evidenced thereby (notwithstanding any notations of ownership or writing on the
Rights Certificates or the associated Common Shares certificate made by anyone
other than the Company or the Rights Agent) for all purposes whatsoever, and
neither the Company nor the Rights Agent shall be affected by any notice to the
contrary.
Section 17. Rights Certificate Holder Not Deemed a Stockholder. No
holder, as such, of any Rights Certificate shall be entitled to vote, receive
dividends or be deemed for any purpose to be the holder of the Common Shares or
any other securities of the Company which may at any time be issuable on the
exercise of the Rights represented thereby, nor shall anything contained herein
or in any Rights Certificate be construed to confer upon the holder of any
Rights Certificate, as such, any of the rights of a stockholder of the Company
or any right to vote for the election of directors or upon any matters submitted
to stockholders at any meeting thereof or to give or withhold consent to any
corporate action or to receive notice of meetings or other actions affecting
stockholders (except as provided in Section 25 hereof) or to receive dividends
or subscription rights, or otherwise, until the Right or Rights evidenced by
such Rights Certificate shall have been exercised in accordance with the
provisions hereof.
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Section 18. Concerning the Rights Agent.
(a) The Company agrees to pay to the Rights Agent reasonable
compensation for all services rendered by it hereunder and, from time to time,
on demand of the Rights Agent, its reasonable expenses and counsel fees and
other disbursements incurred in the administration, execution and any amendment
of this Agreement and the exercise and performance of its duties hereunder. The
Company also agrees to indemnify the Rights Agent for, and to hold it harmless
against, any loss, liability, damage, judgment, fine, penalty, claim, demand,
settlement, cost or expense, incurred without gross negligence, bad faith or
willful misconduct on the part of the Rights Agent, for any action taken,
suffered or omitted by the Rights Agent in connection with the acceptance and
administration of this Agreement, including the costs and expenses of defending
against any claim of liability in the premises. In no event will the Rights
Agent be liable for special indirect, incidental or consequential loss or damage
of any kind whatsoever, even if the Rights Agent has been advised of the
possibility of such loss or damage.
(b) The Rights Agent shall be authorized to rely on, shall be
protected and shall incur no liability for, or in respect of any action taken,
suffered or omitted by it in connection with, its acceptance and administration
of this Agreement in reliance upon any Rights Certificate or certificate for the
Common Shares or for other securities of the Company, instrument of assignment
or transfer, power of attorney, endorsement, affidavit letter, notice,
direction, consent certificate, statement or other paper or document reasonably
believed by it to be genuine and to be signed, executed and, where necessary
verified or acknowledged, by the proper Person or Persons, or otherwise upon the
advice of counsel set forth in Section 20 hereof.
Section 19. Merger or Consolidation or Change of Name of Rights Agent.
(a) Any corporation, partnership or similar entity into which
the Rights Agent or any successor Rights Agent may be merged or with which it
may be consolidated, or any corporation resulting from any merger or
consolidation to which the Rights Agent or any successor Rights Agent shall be a
party, or any corporation, partnership or similar entity succeeding to the
business of the Rights Agent or any successor Rights Agent shall be the
successor to the Rights Agent under this Agreement without the execution or
filing of any paper or any other act on the part of any of the parties hereto;
provided, however, that such corporation, partnership or similar entity would be
eligible for appointment as successor Rights Agent under the provisions of
Section 21 hereof. In case at the time such successor Rights Agent shall succeed
to the agency created by this Agreement, any of the Rights Certificates shall
have been countersigned, but not delivered, any such successor Rights Agent may
adopt the countersignature of the predecessor Rights Agent and deliver such
Rights Certificates so countersigned, and in case at that time any of the Rights
Certificates shall not have been countersigned, any successor Rights Agent may
countersign such Rights Certificates either in the name of the predecessor
Rights Agent or in the name of the successor Rights Agent; and in all such cases
such Rights Certificates shall have the full force provided in the Rights
Certificates and in this Agreement.
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(b) In case at any time the name of the Rights Agent shall be
changed and at such time any of the Rights Certificates shall have been
countersigned but not delivered, the Rights Agent may adopt the countersignature
under its prior name and deliver Rights Certificates so countersigned; and in
case at that time any of the Rights Certificates shall not have been
countersigned, the Rights Agent may countersign such Rights Certificates either
in its prior name or in its changed name; and in all such cases such Rights
Certificates shall have the full force provided in the Rights Certificates and
in this Agreement.
Section 20. Duties of Rights Agent. The Rights Agent undertakes only
the duties and obligations expressly imposed by this Agreement upon the
following terms and conditions, by all of which the Company and the holders of
Rights Certificates, by their acceptance thereof, shall be bound:
(a) The Rights Agent may consult with legal counsel (who may
be legal counsel for the Company), and the written advice or opinion of such
counsel shall be full and complete authorization and protection to the Rights
Agent, and the Rights Agent shall incur no liability for, or in respect of, any
action taken, suffered or omitted by it in good faith and in accordance with
such written advice or opinion.
(b) Whenever in the performance of its duties under this
Agreement the Rights Agent shall deem it necessary or desirable that any fact or
matter (including, without limitation, the identity of any Acquiring Person and
the determination of Current Per Share Market Price) be proved or established by
the Company prior to taking, suffering or omitting any action hereunder, such
fact or matter (unless other evidence in respect thereof be herein specifically
prescribed) may be deemed to be conclusively proved and established by a
certificate signed by any one of the Chairman of the Board, the Chief Executive
Officer, the President, any Vice President, the Chief Financial Officer, the
Secretary or any Assistant Secretary of the Company and delivered to the Rights
Agent; and such certificate shall be full authorization and protection to the
Rights Agent and the Rights Agent shall incur no liability for, or in respect of
any action taken, omitted or suffered in good faith by it under the provisions
of this Agreement in reliance upon such certificate.
(c) The Rights Agent shall be liable hereunder to the Company
and any other Person only for its own gross negligence, bad faith or misconduct.
(d) The Rights Agent shall not be liable for or by reason of
any of the statements of fact or recitals contained in this Agreement or in the
Rights Certificates except its countersignature thereto or be required to verify
the same, but all such statements and recitals are and shall be deemed to have
been made by the Company only.
(e) The Rights Agent shall not have any liability for nor be
under any responsibility in respect of the validity of this Agreement or the
execution and delivery hereof (except the due execution hereof by the Rights
Agent) or in respect of the validity or execution of any Rights Certificate
(except its countersignature thereof); nor shall it be responsible for any
breach by the
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<PAGE> 32
Company of any covenant or condition contained in this Agreement or in any
Rights Certificate; nor shall it be responsible for any change in the
exercisability of the Rights or any adjustment in the terms of the Rights
(including the manner, method or amount thereof) provided for in Sections 3, 11,
13, 23 or 24, or the ascertaining of the existence of facts that would require
any such change or adjustment (except with respect to the exercise of Rights
evidenced by Rights Certificates after receipt by the Rights Agent of a
certificate furnished pursuant to Section 12 describing such change or
adjustment); nor shall it by any act hereunder be deemed to make any
representation or warranty as to the authorization or reservation of any Common
Shares to be issued pursuant to this Agreement or any Rights Certificate or as
to whether any Common Shares will, when issued, be validly authorized and
issued, fully paid and nonassessable.
(f) The Company agrees that it will perform, execute,
acknowledge and deliver or cause to be performed, executed, acknowledged and
delivered all such further and other acts, instruments and assurances as may
reasonably be required by the Rights Agent for the carrying out or performing by
the Rights Agent of the provisions of this Agreement.
(g) The Rights Agent is hereby authorized and directed to
accept instructions with respect to the performance of its duties hereunder from
any one of the Chairman of the Board, the Chief Executive Officer, the
President, any Vice President, the Chief Financial Officer, the Secretary or any
Assistant Secretary of the Company, and to apply to such officers for advice or
instructions in connection with its duties, and it shall not be liable for any
action taken, omitted or suffered by it in good faith in accordance with
instructions of any such officer or for any delay in acting while waiting for
those instructions. Any application by the Rights Agent for written instructions
from the Company may, at the option of the Rights Agent, set forth in writing
any action proposed to be taken, suffered or omitted by the Rights Agent under
this Rights Agreement and the date on and/or after which such action shall be
taken or such omission shall be effective. The Rights Agent shall not be liable
for any action taken by, or omission of, the Rights Agent in accordance with a
proposal included in any such application on or after the date specified in such
application (which date shall not be less than five (5) Business Days after the
date any officer of the Company actually receives such application, unless any
such officer shall have consented in writing to an earlier date) unless, prior
to taking any such action (or the effective date in the case of an omission),
the Rights Agent shall have received written instructions in response to such
application specifying the action to be taken, suffered or omitted.
(h) The Rights Agent and any stockholder, affiliate, director,
officer or employee the Rights Agent may buy, sell or deal in any of the Rights
or other securities of the Company or become pecuniarily interested in any
transaction in which the Company may be interested, or contract with or lend
money to the Company or otherwise act as fully and freely as though it were not
Rights Agent under the Agreement. Nothing herein shall preclude the Rights Agent
from acting in any other capacity for the Company or for any other Person.
(i) The Rights Agent may execute and exercise any of the
rights or powers hereby vested in it or perform any duty hereunder either itself
or by or through its attorneys or agents, and
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the Rights Agent shall not be answerable or accountable for any act, default,
neglect or misconduct of any such attorneys or agents or for any loss to the
Company resulting from any such act, default, neglect, misconduct, absent gross
negligence, bad faith or willful misconduct.
(j) No provision of this Agreement shall require the Rights
Agent to expend or risk its own funds or otherwise incur any financial liability
in the performance of any of its duties hereunder or in the exercise of its
rights if there shall be reasonable grounds for believing that repayment of such
funds or adequate indemnification against such risk or liability is not assured
to it.
(k) If, with respect to any Rights Certificate surrendered to
the Rights Agent for exercise or transfer, the certificate attached to the form
of assignment or form of election to purchase, as the case may be, has either
not been completed or indicates an affirmative response to clause 1 and/or 2
thereof, the Rights Agent shall not take any further action with respect to such
requested exercise transfer without first consulting with the Company.
Section 21. Change of Rights Agent. The Rights Agent or any successor
Rights Agent may resign and be discharged from its duties under this Agreement
upon thirty (30) days' notice in writing mailed to the Company and to each
transfer agent of the Common Shares by registered or certified mail and to the
holders of the Rights Certificates by first-class mail. The Company may remove
the Rights Agent or any successor Rights Agent upon thirty (30) days' notice in
writing, mailed to the Rights Agent, or successor Rights Agent, as the case may
be, and to each transfer agent of the Common Shares by registered or certified
mail and to the holders of the Rights Certificates by first-class mail. If the
Rights Agent shall resign or be removed or shall otherwise become incapable of
acting, the Company shall appoint a successor to the Rights Agent. If the
Company shall fail to make such appointment within period of thirty (30) days
after giving notice of such removal or after it has been notified in writing of
such resignation or incapacity by the resigning or incapacitated Rights Agent or
by the holder of a Rights Certificate (who shall, with such notice, submit his
or her Rights Certificate for inspection by the Company), then the registered
holder of any Rights Certificate may apply to any court of competent
jurisdiction for the appointment of a new Rights Agent. Any successor Rights
Agent, whether appointed by the Company or by such a court shall be (i) a
corporation, partnership or similar entity organized and doing business under
the laws of the United States or of any state of the United States, in good
standing, which is authorized under such laws to exercise corporate trust or
stockholder services powers and subject to supervision or examination by federal
or state authority and which has at the time of its appointment as Rights Agent
a combined capital and surplus of at least $50 million or (ii) a wholly-owned
subsidiary of one or more such corporations, partnerships or similar entities.
After appointment, the successor Rights Agent shall be vested with the same
powers, rights, duties and responsibilities as if had been originally named as
Rights Agent without further act or deed; but the predecessor Rights Agent shall
deliver and transfer to the successor Rights Agent any property at the time held
by it hereunder, and execute and deliver any other assurance, conveyance, act or
deed necessary for the purpose. Not later than the effective date of any such
appointment, the Company shall file notice thereof in writing with the
predecessor Rights Agent and each transfer agent of the Common Shares, and mail
a notice
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thereof in writing to the registered holders of the Rights Certificates. Failure
to give any notice provided for in this Section 21, however, or any defect
therein, shall not affect the legality or validity of the resignation or removal
of the Rights Agent or the appointment of the successor Rights Agent, as the
case may be.
Section 22. Issuance of New Rights Certificates. Notwithstanding any of
the provisions of the Agreement or of the Rights to the contrary, the Company
may, at its option, issue new Rights Certificate evidencing Rights in such form
as may be approved by its Board of Directors to reflect any adjustment or change
in the Exercise Price and the number or kind or class of shares or other
securities or property purchasable under the Rights Certificates made in
accordance with the provisions of this Agreement. In addition, in connection
with the issuance or sale of Common Shares following the Distribution Date and
prior to the redemption or expiration of the Rights, the Company (a) shall, with
respect to Common Shares so issued or sold pursuant to the exercise of stock
options or under any employee plan or arrangement or upon the exercise,
conversion or exchange of other securities of the Company outstanding at the
date hereof or upon the exercise, conversion or exchange of securities
hereinafter issued by the Company and (b) may, in any other case, if deemed
necessary or appropriate by the Board of Director of the Company, issue Rights
Certificates representing the appropriate number of Rights in connection with
such issuance or sale; provided, however, that (i) no such Rights Certificate
shall be issued and this sentence shall be null and void ab initio if, and to
the extent that, such issuance or this sentence would create a significant risk
of or result in material adverse tax consequences to the Company or the Person
to whom such Rights Certificate would be issued or would create a significant
risk of or result in such options or employee plans' or arrangements' failing to
qualify for otherwise available special tax treatment and (ii) no such Rights
Certificate shall be issued if, and to the extent that, appropriate adjustment
shall otherwise have been made in lieu of the issuance thereof.
Section 23. Redemption.
(a) The Company may, at its option and with the approval of
the Board of Directors, at any time prior to the earlier of (i) the Distribution
Date or (ii) the Close of Business on the Final Expiration Date, redeem all but
not less than all the then outstanding Rights at a redemption price of $0.001
per Right, appropriately adjusted to reflect any stock split, stock dividend or
similar transaction occurring after the date hereof (such redemption price being
herein referred to as the "REDEMPTION PRICE") and the Company may, at its
option, pay the Redemption Price either in Common Shares (based on the Current
Per Share Market Price thereof at the time of redemption) or cash. Such
redemption of the Rights by the Company may be made effective at such time, on
such basis and with such conditions as the Board of Directors in its sole
discretion may establish. The date on which the Board of Directors of the
Company elects to make the redemption effective shall be referred to as the
"REDEMPTION DATE".
(b) Immediately upon the action of the Board of Directors of
the Company ordering the redemption of the Rights, evidence of which shall have
been filed with the Rights Agent, and without any further action and without any
notice, the right to exercise the Rights will terminate and
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the only right thereafter of the holders of Rights shall be to receive the
Redemption Price. The Company shall promptly give public notice of any such
redemption, provided, however, that the failure to give or any defect in, any
such notice shall not affect the validity of such redemption. Within ten (10)
days after the action of the Board of Directors ordering the redemption of the
Rights, the Company shall give notice of such redemption to the Rights Agent and
the holders of the then outstanding Rights by mailing such notice to all such
holders at their last addresses as they appear upon the registry books of the
Rights Agent or, prior to the Distribution Date, on the registry books of the
transfer agent for the Common Shares. Any notice which is mailed in the manner
herein provided shall be deemed given, whether or not the holder receives the
notice. Each such notice of redemption will state the method by which the
payment of the Redemption Price will be made. Neither the Company nor any of its
Affiliates or Associates may redeem, acquire or purchase for value any Rights at
any time in any manner other than that specifically set forth in this Section 23
or in Section 24 hereof, and other than in connection with the purchase of
Common Shares prior to the Distribution Date.
(c) Notwithstanding the provisions of Section 23(a), in the
event that a majority of the Board of Directors of the Company is elected by
stockholder action by written consent, then until the 180th day following the
effectiveness of such election the Rights shall not be redeemed if such
redemption is reasonably likely to have the purpose or effect of facilitating a
Transaction with an Interested Person.
Section 24. Exchange.
(a) Subject to applicable laws, rules and regulations, and
subject to subsection 24(c) below, the Company may, at its option, by action of
its Board of Directors, at any time after the occurrence of a Triggering Event,
exchange all or part of the then outstanding and exercisable Rights (which shall
not include Rights that have become null and void pursuant to the provisions of
Section 7(e) hereof) for Common Shares at an exchange ratio of one Common Share
per Right, appropriately adjusted to reflect any stock split, stock dividend or
similar transaction occurring after the date hereof (such exchange ratio being
hereinafter referred to as the "EXCHANGE RATIO"). Notwithstanding the foregoing,
such Board of Directors shall not be empowered to effect such exchange at any
time after any Person (other than the Company, any Subsidiary of the Company,
any employee benefit plan of the Company or any such Subsidiary, or any Person
organized, appointed or established by the Company for or pursuant to the terms
of any such plan), together with all Affiliates and Associates of such Person,
becomes the Beneficial Owner of 50% or more of the Common Shares then
outstanding.
(b) Immediately upon the action of the Board of Directors
ordering the exchange of any Rights pursuant to subsection 23(c), 24(a), 24(g)
and without any further action and without any notice, the right to exercise
such Rights shall terminate and the only right thereafter of the holders of such
Rights shall be to receive that number of Common Shares equal to the number of
such Rights held by such holder multiplied by the Exchange Ratio. The Company
shall give public notice of any such exchange (with notice thereof to the Rights
Agent); provided, however, that the failure to give,
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<PAGE> 36
or any defect in, such notice shall not affect the validity of such exchange.
The Company shall mail a notice of any such exchange to all of the holders of
such Rights at their last addresses as they appear upon the registry books of
the Rights Agent. Any notice which is mailed in the manner herein provided shall
be deemed given, whether or not the holder receives the notice. Each such notice
of exchange will state the method by which the exchange of the Common Shares for
Rights will be effected and, in the event of any partial exchange, the number of
Rights which will be exchanged. Any partial exchange shall be effected pro rata
based on the number of Rights (other than Rights which have become void pursuant
to the provisions of Section 7(e) hereof) held by each holder of Rights.
(c) In the event that there shall not be sufficient Common
Shares issued but not outstanding or authorized but unissued to permit any
exchange of Rights as contemplated in accordance with Section 23(c), 24(a),
24(g), the Company shall either take such action as may be necessary to
authorize additional Common Shares for issuance upon exchange of the Rights or
alternatively, at the option of a majority of the Board of Directors, with
respect to each Right (i) pay cash in an amount equal to the Current Value (as
hereinafter defined), in lieu of issuing Common Shares in exchange therefor,
(ii) issue debt or equity securities or a combination thereof, having a value
equal to the Current Value in lieu of issuing Common Shares in exchange for each
such Right, where the value of such securities shall be determined by a
nationally recognized investment banking firm selected by majority vote of the
Board of Directors, or (iii) deliver any combination of cash, property, Common
Shares and/or other securities having a value equal to the Current Value in
exchange for each Right. For purposes of this Section 24(c) only, the "Current
Value" shall mean the product of the Current Per Share Market Price of Common
Shares on the date of the occurrence of the event described above in
subparagraph (a) multiplied by the number of Common Shares for which the Right
otherwise would be exchangeable in there were sufficient shares available. To
the extent that the Company determines that some action need be taken pursuant
to clauses (i), (ii) or (iii) of this Section 24(c), the Board of Directors may
temporarily suspend the exercisability of the Rights for a period of up to sixty
(60) days following the date on which the event described in Section 23(c),
24(a), 24(g) shall have occurred, in order to seek any authorization of
additional Common Shares and/or to decide the appropriate form of distribution
to be made pursuant to the above provision and to determine the value thereof in
the event of any such suspension, the Company shall issue a public announcement
stating that the exercisability of the Rights has been temporarily suspended
(with notice thereof to the Rights Agent).
(d) The Company shall not be required to issue fractions of
Common Shares or to distribute certificates which evidence fractional Common
Shares. In lieu of such fractional Common Shares, there shall be paid to the
registered holders of the Rights Certificates with regard to which such
fractional Common Shares would otherwise be issuable, an amount in cash equal to
the same fraction of the current market value of a whole Common Share (as
determined pursuant to the second sentence of Section 1(j) hereof).
(e) The Company may, at its option, by majority vote of its
Board of Directors, at any time before any Person has become an Acquiring
Person, exchange all or part of the then outstanding
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<PAGE> 37
Rights for rights of substantially equivalent value, as determined reasonably
and with good faith by the Board of Directors, based upon the advice of one or
more nationally recognized investment banking firms.
(f) Immediately upon the action of the Board of Directors
ordering the exchange of any Rights pursuant to subsection 24(e) of this Section
24 and without any further action and without any notice, the right to exercise
such Rights shall terminate and the only right thereafter of a holder of such
Rights shall be to receive that number of rights in exchange therefor as has
been determined by the Board of Directors in accordance with subsection 24(e)
above. The Company shall give public notice of any such exchange (with notice
thereof to the Rights Agent); provided, however, that the failure to give, or
any defect in, such notice shall not affect the validity of such exchange. The
Company shall mail a notice of any such exchange to all of the holders of such
Rights at their last addresses as they appear upon the registry books of the
transfer agent for the Common Shares of the Company. Any notice which is mailed
in the manner herein provided shall be deemed given, whether or not the holder
receives the notice. Each such notice of exchange will state the method by which
the exchange of the Rights will be effected.
(g) Notwithstanding the provisions of this Section 24, in the
event that a majority of the Board of Directors of the Company is elected by
stockholder action by written consent, then until the 180th day following the
effectiveness of such election the Rights shall not be exchanged for Common
Shares or rights of substantially equivalent value if such exchange is
reasonably likely to have the purpose or effect of facilitating a Transaction
with an Interested Person.
Section 25. Notice of Certain Events.
(a) In case the Company shall propose to effect or permit to
occur any Triggering Event or Section 13 Event, the Company shall give notice
thereof to the Rights Agent and to each holder of Rights in accordance with
Section 26 hereof at least twenty (20) days prior to occurrence of such
Triggering Event or such Section 13 Event.
(b) In case any Triggering Event or Section 13 Event shall
occur, then, in any such case, the Company shall as soon as practicable
thereafter give to the Rights Agent and each holder of a Rights Certificate, in
accordance with Section 26 hereof, a notice of the occurrence of such event,
which shall specify the event and the consequences of the event to holders of
Rights under Sections 11(a)(ii) and 13 hereof.
Section 26. Notices. Notices or demands authorized by this
Agreement to be given or made by the Rights Agent or by the holder of any Rights
Certificate to or on the Company shall be sufficiently given or made if sent by
first-class mail, postage prepaid, addressed (until another address is filed in
writing with the Rights Agent) as follows:
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Source Media, Inc.
5400 LBJ Freeway
Suite 680
Dallas, Texas 75240
Telephone: (972) 701-5558
Facsimile: (972) 701-5567
Attention: General Counsel
with a copy to:
Wilson Sonsini Goodrich & Rosati
Professional Corporation
650 Page Mill Road
Palo Alto, California 94304-1050
Telephone: (650) 493-9300
Facsimile: (650) 493-6811
Attention: Marty Korman
Subject to the provisions of Section 21 hereof, any notice or
demand authorized by this Agreement to be given or made by the Company or by the
holder of any Rights Certificate to or on the Rights Agent shall be sufficiently
given or made if sent by first-class mail postage prepaid, addressed (until
another address is filed in writing with the Company) as follows:
ChaseMellon Shareholder Services, L.],.C.
2323 Bryan Street
Suite 2300
Dallas, Texas 75201
Telephone: (214) 965-2222
Facsimile: (213) 965-2233
Attention: Cindy Bennet
Notices or demands authorized by this Agreement to be given or made by the
Company or the Rights Agent to the holder of any Rights Certificate shall be
sufficiently given or made if sent by first-class mail postage prepaid,
addressed to such holder at the address of such holder as shown on the registry
books of the Company.
Section 27. Supplements and Amendments.
(a) Prior to the Distribution Date, the Company may supplement
or amend this Agreement in any respect without the approval of any holders of
Rights and the Rights Agent shall, if the Company so directs (subject to the
Rights Agent's consent, not to be unreasonably withheld, if such supplement or
amendment changes or increases the Rights Agreement duties, liabilities or
obligation hereunder), execute such supplement or amendment. From and after the
Distribution Date, the Company and the Rights Agent may from time to time
supplement or amend this Agreement without the approval of any holders of Rights
in order to (i) cure any ambiguity,
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<PAGE> 39
(ii) correct or supplement any provision contained herein which may be defective
or inconsistent with any other provisions herein, (iii) shorten or lengthen any
time period hereunder or (iv) to change or supplement the provisions hereunder
in any manner that the Company may deem necessary or desirable and that shall
not adversely affect the interests of the Rights Agent or the holders of Rights
(other than an Acquiring Person or an Affiliate or Associate of an Acquiring
Person); provided, this Agreement may not be supplemented or amended to lengthen
pursuant to clause (iii) of this sentence, (A) a time period relating to when
the Rights may be redeemed at such time as the Rights are not then redeemable or
(B) any other t me period unless such lengthening is for the purpose of
protecting, enhancing or clarifying the rights of and/or the benefits to, the
holder of Rights (other than an Acquiring Person or an Affiliate or Associate of
an Acquiring Person). Upon the delivery of a certificate from an appropriate
officer of the Company that states that the propose supplement or amendment is
in compliance with the terms of this Section 27, the Rights Agent shall execute
such supplement or amendment. Prior to the Distribution Date, the interests of
the holders Rights shall be deemed coincident with the interests of the holders
of Common Shares.
(b) Notwithstanding the provisions of Section 27(a), in the
event that a majority of the Board of Directors of the Company is elected by
stockholder action by written consent, then until the 180th day following the
effectiveness of such election, this Rights Agreement shall not be supplemented
or amended in any manner reasonably likely to have the purpose or effect of
facilitating a Transaction with an Interested Person.
Section 28. Successors. All the covenants and provisions of
this Agreement by or for the benefit of the Company or the Rights Agent shall
bind and inure to the benefit of their respective successors and assigns
hereunder.
Section 29. Determinations and Actions by the Board of
Directors, etc. For all purposes of this Agreement, any calculation of the
number of Common Shares outstanding at any particular time, including for
purposes of determining the particular percentage of such outstanding Common
Shares of which any Person is the Beneficial Owner, shall be made in accordance
with the last sentence of Rule 13d-3(d)(1)(i) of the General Rules and
Regulations under the Exchange Act. The Board of Directors of the Company shall
have the exclusive power and authority to administer this Agreement and to
exercise all rights and powers specifically granted to the Board, or the
Company, or as may be necessary or advisable in the administration of this
Agreement, including, without limitation, the right and power (i) interpret the
provisions of this Agreement and (ii) make all determinations deemed necessary
or advisable for the administration of this Agreement (including a determination
to redeem or not redeem the Rights or to amend the Agreement). All such actions,
calculations, interpretations and determination (including, for purposes of
clause (y) below, all omissions with respect to the foregoing) which are done or
made by the Board in good faith, shall (x) be final, conclusive and binding on
the Company, the Rights Agent, the holders of the Rights Certificates and all
other parties and (y) not subject the Board to any liability to the holders of
the Rights and (y) not subject liability to the holders of the Rights. The
Rights Agent shall be entitled to assume that the Company's Board of Directors
acts in good faith at all times and shall incur no liability for such reliance.
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<PAGE> 40
Section 30. Benefits of this Agreement. Nothing in this
Agreement shall be construed to give to any Person other than the Company, the
Rights Agent and the registered holders of the Rights Certificates (and, prior
to the Distribution Date, the Common Shares) any legal or equitable right,
remedy or claim under this Agreement; but this Agreement shall be for the sole
and exclusive benefit of the Company, the Rights Agent and the registered
holders of the Rights Certificates (and, prior to the Distribution Date, the
Common Shares).
Section 31. Severability. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction or
other authority to be invalid, void or unenforceable, the remainder of the
terms, provisions, covenants and restrictions of this Agreement shall remain in
full force and effect and shall in no way be affected, impaired or invalidated;
provided, however, that notwithstanding anything in this Agreement to the
contrary, if any such term, provision, covenant or restriction is held by such
court or authority to be invalid, void or unenforceable and the Board of
Directors of the Company determines in its good faith judgment that severing the
invalid language from this Agreement would adversely affect the purpose or
effect of this Agreement, the right of redemption set forth in Section 23 hereof
shall be reinstated and shall not expire until the Close of Business on the
tenth day following the date of such determination by the Company's Board of
Directors.
Section 32. Governing Law. This Agreement and each Right and
each Rights Certificate issued hereunder shall be deemed to be a contract made
under the laws of the State of Delaware and for all purposes shall be governed
by and construed in accordance with the laws of such State applicable to
contracts to be made and performed entirely within such State.
Section 33. Counterparts. This Agreement may be executed in
any number of counterparts and each of such counterparts shall for all purposes
be deemed to be an original, and all such counterparts shall together constitute
but one and the same instrument.
Section 34. Descriptive Headings. Descriptive headings of the
several Sections of this Agreement are inserted for convenience only and shall
not control or affect the meaning or construction of any of the provisions
hereof.
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<PAGE> 41
IN WITNESS WHEREOF, the parties hereto have this Agreement to
be duly executed as of the day and year first above written.
"COMPANY" SOURCE MEDIA, INC.
By: /s/ John J. Reed
Name: John J. Reed
Title: President
"RIGHTS AGENT" CHASEMELLON SHAREHOLDER
SERVICES, L.L.C.
By: /s/ Cindy Bennett
Name: Cindy Bennett
Title: Relationship Manager
38
<PAGE> 1
EXHIBIT 10.6
NEITHER THIS WARRANT NOR THE SECURITIES ISSUABLE UPON THE EXERCISE HEREOF HAVE
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE
SOLD, PLEDGED, OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION
THEREOF UNDER SUCH ACT OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL
REASONABLY SATISFACTORY TO THE CORPORATION AND ITS COUNSEL THAT SUCH
REGISTRATION IS NOT REQUIRED.
STOCK PURCHASE WARRANT
THIS STOCK PURCHASE WARRANT CERTIFIES THAT, for the agreed upon value of
$10.00 and for other good and valuable consideration, INSIGHT INTERACTIVE, LLC
or its registered successors and assigns (collectively, the "Holder"), is
entitled to purchase fully paid and nonassessable shares of the $.001 par value
per share common stock (the "Common Stock") of SOURCE MEDIA, INC., a Delaware
corporation (the "Company") at $20.00 per share (the "Exercise Price") all as
set forth herein and as adjusted pursuant to Article 2 of this Warrant, subject
to the provisions and upon the terms and conditions set forth in this Warrant.
This Warrant allows the Holder to purchase 4,596,786 shares of Common Stock,
subject to adjustment as provided herein, and the shares so subject to purchase
hereunder shall be referred to herein as the "Warrant Shares". This Warrant is
issued pursuant to the terms of the Common Stock and Warrants Purchase
Agreement, dated as of July 29, 1999 (the "Purchase Agreement") between the
Company and the Holder, as well as pursuant to the terms of the Contribution
Agreement dated as of July 29, 1999 ("Contribution Agreement") among the Holder,
the Company and SourceSuite LLC ("SourceSuite") and the Limited Liability
Company Agreement of SourceSuite LLC ("Operating Agreement") which will be
executed and delivered at the Closing of the Contribution Agreement and which
was made and entered into by and between the Company and the Holder, pursuant to
which the Company and the Holder have agreed to form, capitalize and thereafter
manage SourceSuite to conduct certain specified businesses previously conducted
separately. Capitalized terms used herein but not otherwise defined herein shall
have the meanings set forth for such terms in the Purchase Agreement. The amount
and kind of securities receivable pursuant to the rights granted hereunder are
subject to adjustment pursuant to the provisions contained in this Warrant.
This Warrant is subject to the following provisions:
ARTICLE 1
EXERCISE
1.1 Method of Exercise. The Holder may exercise this Warrant in whole or in
part at any time and from time to time after the date of issuance up to and
including the fifth anniversary of the date of issuance (the "Expiration Date");
provided, however, that until (a) April 1, 2004, the Holder may exercise only
such portion of this Warrant that would entitle the Holder to own up to
forty-five percent (45%) of the Common Stock of the Company, on a Fully Diluted
basis and (b) June 24, 2000 the Holder may exercise only such portion of this
Warrant that would entitle the Holder to own up to 24.99% of the outstanding
Common Stock of the Company. Deferral of the exercise of a portion of this
Warrant shall not affect or limit in any manner the anti-dilution provisions of
Article 2, which shall apply as if this Warrant were exercisable at any time.
Between April 1, 2004 and the Expiration Date, the Holder may exercise this
1
<PAGE> 2
Warrant in whole or in part without restriction. The Holder may exercise this
Warrant by delivering a duly executed Notice of Exercise in substantially the
form attached as Appendix 1, to the principal office of the Company. The Holder
shall also deliver to the Company a check for the aggregate Exercise Price for
the Warrant Shares being purchased.
1.2 [Intentionally Omitted]
1.3 Share Coverage. The number of Warrant Shares for which this Warrant may
be exercised shall be 4,596,786 shares of Common Stock, subject to adjustment as
provided herein.
1.4 Fair Market Value. The fair market value of the Warrant Shares for
purposes of Section 2.1.1(a) below shall be the higher of (i) the average
closing price of the Warrant Shares reported for the five (5) Trading Days
immediately before the Holder delivers its Notice of Exercise to the Company, or
the date of the issuance of additional shares under Section 2.1.1(a) below, as
applicable; or (ii) the average closing price of the Warrant Shares reported for
the thirty (30) Trading Days immediately before the Holder delivers its Notice
of Exercise, or the date of the issuance of additional shares under Section
2.1.1(a) below, as applicable. The reported closing price for each day shall be
the reported closing price (and if no sales take place on any day, such day
shall not be a Trading Day), as reported in the principal consolidated or
composite transaction reporting system on the principal national securities
exchange on which such security is listed or admitted to trading or, if not
listed or admitted to trading on any national securities exchange, on the Nasdaq
National Market or, if such security is not quoted on the Nasdaq National
Market, the average of the closing bid and asked prices on such day in the
over-the-counter market as reported by Nasdaq. As used herein, the term "Trading
Day" means a day on which the New York Stock Exchange, each national securities
exchange on which the Warrant Shares is listed and the Nasdaq National Market
are open for business. If the Warrant Shares are not then traded in a public
market, the Board of Directors of the Company shall propose the fair market
value in its reasonable good faith judgment. The foregoing notwithstanding, if
the Holder advises the Board of Directors in writing that the Holder disagrees
with such proposed fair market value, then each of the Company and the Holder
shall select a reputable investment banking firm, and the two firms so selected
shall promptly agree upon a third reputable investment banking firm, and the
three firms shall undertake such valuation. If the valuation of such investment
banking firms is greater than that determined by the Board of Directors, then
all fees and expenses of such investment banking firms shall be paid by the
Company. In all other circumstances, such fees and expenses shall be paid by the
Holder.
1.5 Delivery of Certificate and New Warrant. In the event of any exercise
of this Warrant, in whole or in part, certificates for the Warrant Shares so
purchased representing the aggregate number of shares specified in the Notice of
Exercise, shall be delivered to the Holder within a reasonable time, not
exceeding seven business days, after this Warrant shall have been so exercised.
If this Warrant shall have been exercised only in part, then, unless this
Warrant has expired, the Company shall, at its expense, at the time of delivery
of said certificates representing the Warrant Shares, deliver to the Holder a
new Warrant representing the Warrant Shares not so exercised. The Company will
pay all taxes and other expenses in connection with the preparation, execution
and delivery of the certificates except that, in the case such certificates are
to be registered in a name or names other than the Holder, the Holder will pay
any and all stock transfer taxes associated with such transfer.
1.6 Replacement of Warrants. On receipt of evidence reasonably satisfactory
to the Company of the loss, theft, destruction or mutilation of this Warrant
and, in the case of loss, theft or destruction, on
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<PAGE> 3
delivery of an indemnity agreement reasonably satisfactory in form and amount to
the Company or, in the case of mutilation, on surrender and cancellation of this
Warrant, the Company at its expense shall execute and deliver in lieu of this
Warrant, a new warrant of like tenor.
ARTICLE 2
ADJUSTMENT TO THE WARRANT SHARES
2.1 Antidilution Provisions. The intent of this Article 2 is to insure
appropriate adjustment to the Exercise Price and/or number of Warrant Shares to
be acquired in the event of the exercise of this Warrant, in the event of future
issuances of capital stock or securities into which this Warrant may ultimately
be convertible in the instances described below, to the end that the provisions
set forth herein (including adjustments to the Exercise Price) shall be made to
provide the Holder the right to receive essentially the same proportion of
shares of capital stock (in relation to all shares of capital stock outstanding)
on the date of conversion, redemption or other exchange as the Holder would have
been entitled to had it initially been issued shares of Common Stock on the date
hereof. Simultaneously with each adjustment to the Exercise Price set forth in
this Article 2, an appropriate adjustment in the number of Warrant Shares
obtainable upon the exercise of this Warrant shall be made so that the holder of
this Warrant shall receive the same number and kind of securities and other
property such holder would have been entitled to receive had this Warrant been
exercised and converted into Warrant Shares immediately prior to the event or
occurrence giving rise to the adjustment to the Exercise Price.
2.1.1 Adjustments for Diluting Issuances.
(a) In the event the Company shall issue additional shares of capital
stock without consideration or for a consideration per share which is less
than both the Exercise Price for the Warrant Shares and the fair market
value for the Warrant Shares as determined pursuant to Section 1.4 above,
then and in each such event, the Exercise Price shall be reduced,
concurrently with such issue of shares, to an amount equal to the quotient
of: (a) the sum of (i) the number of shares of Common Stock outstanding (on
a Fully Diluted basis) immediately prior to such issuance multiplied by the
Exercise Price plus (ii) the aggregate consideration received by the
Company upon such issuance, divided by (b) the number of shares of Common
Stock outstanding (on a Fully Diluted basis) immediately after such
issuance. For purposes of this Section 2.1, the consideration received by
the Company for the issue of any additional shares of capital stock shall
be computed as follows: (i) insofar as such consideration consists of cash,
such consideration shall consist of the aggregate amount of cash received
by the Company excluding amounts paid or payable for accrued interest or
accrued dividends, and without deduction of any expenses incurred or
underwriting commissions or concessions paid or allowed by the Company;
(ii) insofar as such consideration consists of property other than cash,
such consideration shall be computed at the fair market value thereof at
the time of such issue, as determined in good faith by the Board of
Directors of the Company, except where such consideration consists of
securities, in which case the amount of consideration received by the
Company shall be the fair market value thereof (determined as provided in
Section 1.4 hereof) as of the date of receipt, but in each such case
without deduction therefrom of any expenses incurred or any underwriting
commissions or concessions paid or allowed by the Company in connection
therewith. In computing the market price of a note or other obligation that
is not listed or admitted to trading on any securities exchange or quoted
in the Nasdaq Stock Market or reported by the National Quotation Bureau,
Inc., or a similar reporting organization, the total consideration to be
received by the Company thereunder (including interest)
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<PAGE> 4
shall be discounted to present value at the prime rate announced or
published in The Wall Street Journal under the caption "Money Rate" in
effect at the time the note or obligation is deemed to have been
issued; and (iii) in the event additional Shares of capital stock are
issued together with other securities or other assets of the Company
for consideration which covers both, such consideration shall be the
proportion of such consideration so received, computed as determined in
good faith by the Board of Directors of the Company.
(b) Treatment of Options and Convertible Securities.
(i) In the event the Company should ever grant rights to
subscribe for or purchase, or any options for the purchase of any
shares of its capital stock or securities convertible into or
exchangeable for capital stock (such rights and options herein
referred to as "Options", and such convertible or exchangeable
securities herein referred to as "Convertible Securities"), whether or
not such Options or rights to convert or exchange any such Convertible
Securities are immediately exercisable, and the price per share for
which capital stock is issuable upon the exercise of such Option or
upon the conversion or exchange of such Convertible Securities shall
be less than the Exercise Price in effect immediately prior to the
time of the granting of such Options, then the total maximum number of
shares of capital stock issuable upon the exercise of such Options or
upon the conversion or exchange of the total maximum amount of such
Convertible Securities issuable upon the exercise of such Options
shall (as of the date of granting of such Options) be deemed to be
outstanding and to have been issued and sold for such price per share
and the Exercise Price shall be reduced to the extent required by
Section 2.1.1(a). For purposes of this Section 2.1.1(b)(i), the price
per share for which such capital stock is issuable shall be determined
by dividing (x) the total amount, if any, received or receivable by
the Company as consideration for the granting of such Options, plus
the minimum aggregate amount of additional consideration payable to
the Company upon the exercise of such Options, plus, in the case of
any such Options which relate to Convertible Securities, the minimum
aggregate amount of additional consideration, if any, other than such
Convertible Securities, payable to the Company upon the conversion or
exchange of such Convertible Securities, by (y) the total maximum
number of shares of capital stock issuable upon the exercise of such
Options or upon the conversion or exchange of all such Convertible
Securities issuable upon the exercise of such Options. No further
adjustments of the Exercise Price shall be made upon the actual issue
of such capital stock or of such Convertible Securities upon the
exercise of such Options or upon the actual issue of such capital
stock upon the conversion or exchange of such Convertible Securities.
(ii) If at any time the Company shall issue or sell Convertible
Securities, whether or not the rights to convert or exchange such
Convertible Securities are immediately exercisable, and the price per
share for which capital stock is issuable upon the conversion or
exchange of such Convertible Securities shall be less than the
Exercise Price in effect immediately prior to the time of the issue or
sale of such Convertible Securities, then the total maximum number of
shares of capital stock issuable upon the conversion or exchange of
all such Convertible Securities shall (as of the date of the issue or
sale of such Convertible Securities) be deemed to be outstanding and
to have been issued and sold for such price per share and the Exercise
Price shall be reduced to the extent required by Section 2.1.1(a),
provided that (a) except as provided in Section
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<PAGE> 5
2.1.1(b)(vi) hereof, no further adjustments of the Exercise Price
shall be made upon the actual issue of such capital stock upon the
conversion or exchange of such Convertible Securities and (b) if any
such issue or sale of such Convertible Securities is made upon
exercise of any Options for which adjustments of the Exercise Price
have been or are to be made pursuant to other provisions of this
Section 2.1.1, no further adjustment of the Exercise Price shall be
made by reason of such issue or sale. For purposes of this Section
2.1.1(b)(ii), the price per share for which capital stock is issuable
shall be determined by dividing (x) the total amount received or
receivable by the Company as consideration for the issue or sale of
such Convertible Securities, plus the minimum aggregate amount of
additional consideration, if any, other than such Convertible
Securities, payable to the Company upon the conversion or exchange
thereof, by (y) the total maximum number of shares of capital stock
issuable upon the conversion or exchange of all such Convertible
Securities.
(iii) If at any time the Company shall pay a dividend or make any
other distribution upon the capital stock payable in capital stock or
Convertible Securities, any capital stock or Convertible Securities,
as the case may be, issuable in payment of such dividend or
distribution shall be deemed to have been issued without
consideration, and the Exercise Price shall be reduced as if the
Company had subdivided the outstanding shares of capital stock into a
greater number of shares as provided in Section 2.2 hereof.
(iv) In case at any time the Company shall take a record of the
holders of capital stock for the purpose of entitling them (a) to
receive a dividend or other distribution payable in capital stock or
Convertible Securities, or (b) to subscribe for or purchase capital
stock or Convertible Securities, then such record date shall be deemed
to be the date of the issue or sale of such capital stock or
Convertible Securities.
(v) If the purchase price provided for in any Option referred to
in Section 2.1.1(b)(i) hereof, or the price at which any Convertible
Securities referred to in Sections 2.1.1(b)(i) or (iii) hereof are
convertible into or exchangeable for capital stock, shall change at
any time (whether by reason of provisions designed to protect against
dilution or otherwise), the Exercise Price then in effect hereunder
shall forthwith be increased or decreased to such Exercise Price as
would have obtained had the adjustments made upon the issuance of such
Options or Convertible Securities been made upon the basis of (a) the
issuance of the number of shares of capital stock theretofore actually
delivered upon the exercise of such Options or upon the conversion or
exchange of such Convertible Securities, and the total consideration
received therefor, and (b) the number of shares of capital stock to be
issued for the consideration, if any, received by the Company therefor
and to be received on the basis of such changed price.
(vi) If any adjustment has been made in the Exercise Price
because of the issuance of Options or Convertible Securities and if
any of such Options or rights to convert or exchange such Convertible
Securities expire or otherwise terminate, then the Exercise Price
shall be readjusted to eliminate the adjustments previously made in
connection with the Options or rights to convert or exchange
Convertible Securities which have expired or terminated.
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(vii) The number of shares of capital stock outstanding at any
given time shall not include shares owned or held by or for the
account of the Company, and the disposition of any such treasury
shares shall be considered an issue or sale of capital stock.
(viii) Anything in Section 2.1.1 hereof to the contrary
notwithstanding, the Company shall not be required to make any
adjustment of the Exercise Price in the case of (A) the issuance of
the Warrants or any other warrant issued to the Holder, (B) the
issuance of shares of Common Stock upon exercise of the Warrants or
any other warrant issued to the Holder, (C) the granting of stock
options by the Company or any of its subsidiaries pursuant to the
option plans identified on Schedule 4.3 to the Purchase Agreement,
provided that the exercise price of such stock options is at least
equal to the fair market value of such shares of capital stock (as
determined by the appropriate plan) on the date such stock options are
granted, (D) the issuance of shares of capital stock upon the exercise
of the stock options referred to in clause (C) above, and (E) the
issuance of shares of capital stock upon the exercise, conversion, or
exchange of the securities which are set forth on Schedule 4.3 of the
Purchase Agreement, all of which were issued prior to or
simultaneously with the date of the original issue of this Warrant.
2.2. Adjustment for Subdivisions and Combinations. In the event at any time
the Company shall, by subdivision, stock split, reverse stock split, dividend,
combination or reclassification of any shares of its capital stock or otherwise
change any of the securities then issuable upon the exercise of this Warrant
into the same or a different number of securities of any class or classes, this
Warrant shall thereafter be exercisable, for the same period as the remaining
duration of the period during which this Warrant is exercisable, for the same
number and kind of securities which the holder hereof would have received had
this Warrant been exercised and converted into Warrant Shares immediately prior
to such change, whether by subdivision, stock split, reverse stock split,
dividend, combination or reclassification of any shares of its capital stock or
otherwise. In the event at any time the Company shall, by subdivision, dividend,
stock split, reclassification or otherwise, change the outstanding shares of
capital stock into a greater number of shares, the Exercise Price in effect
immediately prior to such subdivision shall be proportionately reduced, and
conversely, in case the outstanding shares of capital stock shall be combined
into a smaller number of shares, by reverse stock split, combination,
reclassification or otherwise, the Exercise Price in effect immediately prior to
such combination shall be proportionately increased. An adjustment made pursuant
to this Section 2.2 shall become effective immediately after the effective date
of such subdivision or combination.
2.3. Adjustment for Dividends and Distributions. If at any time the Company
shall pay a dividend or make a distribution to all holders of capital stock, as
such, which dividend or distribution is payable otherwise than in cash out of
earnings or earned surplus and otherwise than in capital stock, Convertible
Securities, or Options, then thereafter the Holder of this Warrant, upon the
exercise of this Warrant, shall be entitled to receive the number of shares of
Common Stock being purchased upon such exercise and, in addition thereto and
without further payment, the stock and other securities and property (including
cash) which such Holder would have received by way of dividends or distributions
(otherwise than in cash out of earnings or earned surplus or in capital stock,
Convertible Securities, or Options) as if continuously, since the date of the
original issue of this Warrant, such Holder (a) had been the record holder of
the number of shares of Common Stock then being purchased, and (b) had retained
all dividends and distributions in stock or other securities (other than capital
stock, Convertible Securities, or Options)
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which would have been paid in respect of such Common Stock or in respect of any
stock or other securities which would have been paid as dividends or
distributions on such Common Stock.
2.4 Repurchase on Sale, Merger, or Consolidation of the Company.
2.4.1 Acquisition. For the purpose of this Warrant, "Acquisition"
means any sale, license, or other disposition of all or substantially all of the
assets of the Company, or any reorganization, consolidation, or merger of the
Company where the holders of the Company's securities before the transaction
beneficially own less than fifty percent (50%) of the outstanding voting
securities of the surviving entity after the transaction.
2.4.2 Assumption of Warrant. If such Acquisition shall be effected in
such a way that the holders of Common Stock (or any other securities of the
Company then issuable upon the exercise of this Warrant) shall be entitled to
receive stock or other securities or property (including cash) with respect to
or in exchange for Common Stock (or such other securities), then lawful and
adequate provision shall be made whereby the Holder of this Warrant shall
thereafter have the right to purchase and receive upon the basis and upon the
terms and conditions specified in this Warrant, and in lieu of the shares of
Common Stock (or such other securities) immediately theretofore purchasable and
receivable upon the exercise hereof, such stock or other securities or property
(including cash) as may be issuable or payable with respect to or in exchange
for a number of outstanding shares of Common Stock (or such other securities)
equal to the number of shares of Common Stock (or such other securities)
immediately theretofore purchasable and receivable upon the exercise of this
Warrant, had such Acquisition not taken place. In any such case appropriate
provision shall be made with respect to the rights and interests of the Holder
to the end that the provisions hereof (including, without limitation, the
provisions for adjustments of the Exercise Price and of the number of Warrant
Shares purchasable upon exercise hereof) shall thereafter be applicable, as
nearly as reasonably may be, in relation to the stock or other securities or
property thereafter deliverable upon the exercise hereof. In the event of a
consolidation or merger of the Company with or into another corporation or
entity as a result of which a greater or lesser number of shares of common stock
of the surviving corporation or entity are issuable to holders of capital stock
in respect of the number of shares of capital stock outstanding immediately
prior to such consolidation or merger, then the Exercise Price in effect
immediately prior to such consolidation or merger shall be adjusted in the same
manner as though there were a subdivision or combination of the outstanding
shares of capital stock.
2.5 Reclassification, Exchange or Substitution. Upon any reclassification,
exchange, substitution, or other event that results in a change of the number
and/or class of the securities issuable upon exercise or conversion of this
Warrant, the Holder shall be entitled to receive, upon exercise or conversion of
this Warrant, the number and kind of securities and property that the Holder
would have received for the Warrant Shares if this Warrant had been exercised
immediately before such reclassification, exchange, substitution, or other
event. Such an event shall include any automatic conversion of the outstanding
or issuable securities of the Company of the same class or series as the Warrant
Shares to Common Stock pursuant to the terms of the Company's Certificate of
Incorporation upon the closing of a new registered public offering of the
Company's Common Stock. The Company or its successor shall promptly issue to the
Holder a new Warrant for such new securities or other property. The new Warrant
shall provide for adjustments which shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Article 2 including, without
limitation, adjustments to the Exercise
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Price and to the number of securities or property issuable upon exercise of the
new Warrant. The provisions of this Section 2.5 shall similarly apply to
successive reclassifications, exchanges, substitutions, or other events.
2.6 Record Date Adjustments. In any case in which this Article 2 requires
that a downward adjustment of the Exercise Price shall become effective
immediately after a record date for an event, the Company may defer until the
occurrence of such event (a) issuing to the Holder of this Warrant (exercised
after such record date and before the occurrence of such event) the additional
Warrant Shares issuable upon such exercise by reason of the adjustment required
by such event over and above the Warrant Shares issuable upon such exercise
before giving effect to such adjustment and (b) paying to such Holder any amount
in cash in lieu of a fractional share pursuant to Section 2.8 hereof.
2.7 Minimum Adjustment of Exercise Price. No adjustment of the Exercise
Price shall be made in an amount less than $.05 per share in effect at the time
such adjustment is otherwise required to be made, but any such lesser adjustment
shall be carried forward and shall be made at the time and together with the
next subsequent adjustment which, together with any adjustments so carried
forward, shall amount to not less than $.05 per share. In case at any time the
Company shall issue capital stock by way of dividend on capital stock or
subdivide or combine the outstanding shares of capital stock, said amount of
$.05 per share (as theretofore increased or decreased, if the said amount shall
have been adjusted in accordance with the provisions of this Section 2.7) shall
forthwith be proportionately increased in the case of such a combination or
decreased in the case of such a subdivision or stock dividend so as
appropriately to reflect the same.
2.8 Fractional Shares. No fractional Shares shall be issuable upon exercise
or conversion of the Warrant and the number of Warrant Shares to be issued shall
be rounded down to the nearest whole Share. If a fractional share interest
arises upon any exercise or conversion of the Warrant, the Company shall
eliminate such fractional share interest by paying the Holder an amount computed
by multiplying the fractional interest by the last reported sale price of the
Common Stock on the trading day immediately preceding the date of exercise.
2.9 Certificate as to Adjustments. Upon each adjustment of the Exercise
Price, the Company, at its expense, shall promptly compute such adjustment, and
furnish the Holder with a certificate of its Chief Financial Officer setting
forth such adjustment, and the corresponding adjustment in the number of Warrant
shares obtainable upon the exercise of this Warrant, and the facts upon which
such adjustments are based. The Company shall, upon written request, furnish the
Holder a certificate setting forth the Exercise Price in effect upon the date
thereof and the series of adjustments leading to such Exercise Price.
2.10 Certain Events. If any event occurs of the type contemplated by the
provisions of this Article 2 but not expressly provided for by such provisions
(including, without limitation, the granting of stock appreciation rights,
phantom stock rights or other rights with equity features), then the Company's
Board of Directors shall make an appropriate adjustment in the number of Warrant
Shares obtainable upon exercise of this Warrant and in the Exercise Price so as
to protect the rights of the Holder of this Warrant; provided that no such
adjustment shall decrease the number of Warrant Shares obtainable as otherwise
determined pursuant to this Article 2.
2.11 Purchase Rights. If at any time the Company grants, issues or sells
any rights to purchase stock, warrants, securities or other property pro rata to
the record holders of any class of stock (the
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<PAGE> 9
"Purchase Rights") then the Holder of this Warrant shall be entitled to obtain,
upon the same terms on which the holders of Common Stock are to receive such
Purchase Rights, the aggregate Purchase Rights which such Holder could have
acquired if such Holder had held the number of Warrant Shares acquirable upon
complete exercise of this Warrant immediately before the date on which a record
is taken for the grant, issuance or sale of such Purchase Rights, or, if no such
record is taken, the date as of which the record holders of Common Stock are to
be determined for the grant, issue or sale of such Purchase Rights.
ARTICLE 3
REPRESENTATIONS AND COVENANTS OF THE COMPANY
The Company hereby represents and warrants to the Holder as follows:
3.1 Title to Warrant Shares. All Warrant Shares which may be issued upon
the exercise of the rights represented by this Warrant, and all securities, if
any, issuable upon conversion of the Warrant Shares, shall, upon issuance be
duly authorized, validly issued, fully paid and nonassessable, and free of any
liens and encumbrances.
3.2 Reservation of Shares. During the period which this Warrant may be
exercised, the Company will at all times have authorized and reserved for
issuance a sufficient number of shares of Common Stock to cover such exercise.
3.3 No Impairment. The Company shall not, by amendment of its Certificate
of Incorporation or through a reorganization, transfer of assets, consolidation,
merger, dissolution, issue, or sale of securities or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms to be
observed or performed under this Warrant by the Company, but shall at all times
in good faith assist in carrying out all the provisions of this Warrant and in
taking all such action as may be necessary or appropriate to protect the
Holder's rights under this Warrant against impairment. If the Company takes any
action affecting the Shares or its Common Stock other than as provided for above
that adversely affects the Holder's rights under this Warrant, then the Company
shall make appropriate adjustment to the Exercise Price and/or the number of
Warrant Shares to carry out the intent of Article 2 as set forth in Section 2.1.
3.4 Notice of Certain Events. If the Company proposes at any time to (a)
declare any dividend or distribution upon its Common Stock, whether in cash,
property, stock or other securities and whether or not a regular cash dividend;
(b) offer for subscription pro rata to the holders of any class or series of
stock any additional shares of stock of any class or series or other rights; (c)
effect any reclassification or recapitalization of Common Stock; or (d) merge or
consolidate with or into any other corporation, or sell, lease, license, or
convey all or substantially all of its assets, or to liquidate, dissolve or wind
up, then, in connection with each such event, the Company shall give the Holder:
(1) at least twenty (20) days prior written notice of the date on which a record
will be taken for such dividend, distribution, or subscription rights (and
specifying the date on which the holders of Common Stock will be entitled
thereto) or for determining rights to vote, if any, in respect of the matters
referred to in (c) and (d) above; and (2) in the case of the matters referred to
in (c) and (d) above at least twenty (20) days prior written notice of the date
when the same will take place (and specifying the date on which the holders of
Common Stock will be entitled to exchange their Common Stock for securities or
other property deliverable upon the occurrence of such event).
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3.5 Registration under the Securities Act of 1933.
3.5.1 Piggyback Rights. In the event that the Company files a
registration statement under the Securities Act of 1933, as amended (the
"Act") which relates to an offering of securities of the Company by the
Company or any holder of securities (except in connection with an offering
to or by employees), such registration statement and the prospectus
included therein shall also, at the written request to the Company by the
Holder, include and relate to, and meet the requirements of the Act with
respect to, the public offering of such Warrant Shares as the Holder
indicates it intends to exercise and offer under the registration statement
for sale and sell, so as to permit the public sale thereof in compliance
with the Act, and any related qualifications under blue sky laws or other
compliance or any underwriting involved therein shall also relate thereto.
The Company shall use its best efforts to effect such registration, any
such qualification, any such compliance and any such underwriting as soon
as practicable. The Company shall give prompt written notice to the Holder
of its intention to file a registration statement under the Act relating to
an offering of the aforesaid securities of the Company, but in no event
less than twenty-five (25) days prior to the filing of such registration
statement, and the written request provided for in the first sentence of
this Section shall be made by the Holder ten (10) or more days prior to the
date specified in the notice as the date on which it is intended to file
such registration statement. Neither the delivery of such notice by the
Company nor of such request pursuant to this Section 3.5.1 by the Holder
shall in any way obligate the Company to file any such registration
statement and, notwithstanding the filing of such registration statement,
the Company may, at any time prior to the effective date thereof, determine
not to offer the securities to which such registration statement relates,
without liability to the Holder, except that the Company shall pay such
expenses as are contemplated to be paid by it under Section 3.5.3 and by
the Holder pursuant to Section 3.5.3(d). Provided, that, anything above in
this Section 3.5.1 to the contrary notwithstanding, the inclusion of
Warrant Shares in any such registration will require the approval of the
underwriters, if any, but which approval shall not be unreasonably
withheld, and such inclusion shall be conditioned upon the provision by the
Holder to the Company of all information regarding the Holder reasonably
required to be included in the registration statement under applicable law
and the rules and regulations promulgated by the Securities and Exchange
Commission (the "SEC") pursuant to the Act. The "piggy-back" registration
rights granted hereunder shall terminate five (5) years from the date
hereof.
3.5.2 Demand Registration Rights.
(a) In addition, upon written notice at any time after the second
anniversary of the date of this Warrant, and on or before the
Expiration Date, upon written request from a holder or holders of
fifty percent (50%) or more of the securities issued or issuable upon
exercise of this Warrant, the Company, as promptly as possible after
the receipt of such notice, shall file a new registration statement
under the Act with respect to the Warrant Shares covered by such
notice and use its best efforts to effect such registration, all
qualifications under blue sky laws and all other compliance as soon as
practicable. Within ten (10) days after receiving any such notice, the
Company shall give notice to any other Holders of
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<PAGE> 11
the Warrant Shares issued or issuable pursuant to this Warrant,
advising that the Company is proceeding with such registration
statement to include therein Warrant Shares of such Holders. The
Company shall not be obligated to any such other Holder unless such
other Holder shall accept such offer by notice in writing to the
Company within ten (10) days thereafter. The Company shall be required
to effect two (2) registrations of Warrant Shares pursuant to this
Section 3.5.2. The Holder agrees to become subject to a customary
lock-up agreement, for a reasonable period of time, if required by the
underwriter of a public offering by the Company during the period in
which the Holder is entitled to registration of the Warrant Shares
under this Section 3.5.2; provided, however, that the Expiration Date
shall be extended by the effective period of any such lock-up
agreement. The Company may postpone, one time, for up to ninety (90)
days the registration of Warrant Shares pursuant to this Section 3.5.2
if its Board of Directors determines in good faith that such
registration would have a material adverse effect on a significant
transaction proposed by the Company; provided, however, that the
Expiration Date shall be extended by the period of any such
postponement. The distribution of Warrant Shares covered by the
request of a Holder pursuant to this Section 3.5.2 shall be effected
by means of the method of distribution selected by such Holder. If
such distribution is effected by means of an underwriting, the Company
shall enter into an underwriting agreement in customary form with a
managing underwriter of nationally recognized standing selected for
such underwriting by the Holder and approved by the Company, which
approval shall not be unreasonably withheld. Notwithstanding any other
provision of this Section 3.5.2, if the managing underwriter advises
the Holder in writing that marketing factors require limitation of the
number of shares to be underwritten, then the underwriters may exclude
shares requested to be included in such registration. The number of
shares to be included in the registration and underwriting shall be
allocated first among the Holders who requested registration pursuant
to this Section 3.5.2 and then among other Holders who have requested
registration of securities in such registration and underwriting in
proportion as nearly as practicable to the respective amounts of
securities of the Company held by such Holders at the time of filing
the registration statement. No securities excluded from the
underwriting by reason of the managing underwriter's marketing
limitation shall be included in such registration. If any Holder
disapproves of the terms of the underwriting, such Holder may elect to
withdraw therefrom by written notice to the Company, the managing
underwriter and the Holder requesting such registration pursuant to
this Section 3.5.2 and the securities so withdrawn shall also be
withdrawn from registration. If the distribution of the Warrant Shares
is being effected by means of an underwriting and if the managing
underwriter has not limited the number of securities to be
underwritten, the Company may include securities for its own account
in such registration if the managing underwriter so agrees and may
include securities for the account of holders of securities other than
Holders of the Warrant Shares issued or issuable upon exercise of this
Warrant. The inclusion of such securities by the Company or such other
holders shall be on the same terms as the registration of Warrant
Shares held by the Holders requesting registration pursuant to this
Section 3.5.2. In the event that the underwriters exclude some of the
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securities to be registered, the securities to be sold for the account
of the Company and any other holders shall be excluded in their
entirety prior to the exclusion of any Warrant Shares issued or
issuable pursuant to this Warrant.
(b) If the Company is a registrant for purposes of the Act which
is entitled to use Form S-3 (or any successor form to Form S-3) to
register securities for any registration requested pursuant to Section
3.5.2, at the request of a holder pursuant to Section 3.5.2, the
Company shall use its best efforts to cause the shares to be
registered on Form S-3.
(c) A holder requesting registration pursuant to Section 3.5.2
shall have the right to cancel a proposed registration pursuant to
Section 3.5.2 when, in its discretion, market conditions are so
unfavorable as to be seriously detrimental to an offering pursuant to
such registration. For the avoidance of doubt, such cancellation of a
registration shall not be counted as one of the two (2) registrations
pursuant to Section 3.5.2, subject to the condition that the canceling
Holder shall promptly reimburse the Company for its expenses
reasonably incurred in connection with the cancelled registration,
unless such registration was cancelled after having been deferred,
postponed or interrupted by the Company pursuant to Section 3.5.2, in
which case, such expense reimbursement shall not be required.
3.5.3 Agreements Related to Registrations. In each instance in which
pursuant to Sections 3.5.1 and 3.5.2 of this Section, the Company shall
take any action to permit a public offering or sale or other distribution
of the Warrant Shares, the Company shall:
(a) Supply to the Holders of Warrant Shares intending to make a
public distribution of their Warrant Shares a reasonable number of
copies of the preliminary, final and other prospectus in conformity
with requirements of the Act and the rules and regulations promulgated
thereunder and such other documents as the Holders shall reasonably
request.
(b) In regard to a registration under Section 3.5.2 only,
cooperate in taking such action as may be necessary to register or
qualify the Warrant Shares under such other securities acts or blue
sky laws of such jurisdictions as the Holders shall reasonably request
and to do any and all other acts and things which may be necessary or
advisable to enable the Holders of such Warrant Shares to consummate
such proposed sale or other disposition of the Warrant Shares in any
such jurisdiction.
(c) Keep effective all such registrations under the Act and
cooperate in taking such action as may be necessary to facilitate a
public sale or other disposition of such Warrant Shares by such
Holders.
(d) Pay all expenses of any registration under Section 3.5.2.
Each registration under Section 3.5.1 shall be at the Company's
expense, except for the direct, incremental costs attributable to the
"piggy-backed" Warrant Shares, which
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shall be paid by the Holders thereof. The Company shall not be
required to pay any underwriting discount or commission or applicable
transfer taxes relating to the disposition of the Warrant Shares.
(e) Indemnify and hold harmless each Holder with respect to which
registration, qualification or compliance has been effected pursuant
to this Agreement and any underwriter, within the meaning of the Act
who may purchase from or sell for any Holder any Warrant Shares, and
each of their respective officers, directors, partners and such
Holder's legal counsel and independent accountants, if any, and such
person controlling such persons, within the meaning of the Act, from
and against any and all losses, claims, damages, expenses and
liabilities (including, but not limited to, legal fees and expenses
and any and all expenses whatsoever reasonably incurred in
investigating, preparing, defending or settling any claim (including,
but not limited to, legal fees and expenses)) arising from or based on
(i) any untrue statement (or alleged untrue statement) of a material
fact contained in any registration statement furnished pursuant to
clause (a) of this Section, or any prospectus included therein or any
amendment or supplement thereto, (ii) any omission (or alleged
omission) to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading
(unless such untrue statement (or alleged untrue statement) or
omission (or alleged omission) was based upon and in conformity with
information furnished in writing, or required to be furnished, to the
Company by the Holder or underwriter expressly for use therein), or
(iii) any violation by the Company of any rule or regulation
promulgated under the Act or any state securities law applicable to
the Company and relating to action or inaction by the Company in
connection with any such registration, qualification or compliance.
(f) Each Holder which has securities included in any registration
pursuant to this Agreement shall indemnify and hold harmless the
Company and any underwriter, within the meaning of the Act, and each
of their respective officers, directors, partners, legal counsel and
independent accountants, and each person controlling such persons
within the meaning of the Act, from and against any and all losses,
claims, damages, expenses and liabilities (including, but not limited
to, legal fees and expenses and any and all expenses whatsoever
reasonably incurred in investigating, preparing, defending or settling
any claim (including, but not limited to, legal fees and expenses))
arising from or based on (i) any untrue statement (or alleged untrue
statement) of a material fact contained in any registration statement
furnished pursuant to clause (a) of this Section or any prospectus
included therein or any amendment or supplement thereto, or (ii) any
omission (or alleged omission) to state therein a material fact
required to be stated therein or necessary to make the statements
therein not misleading, provided, that the indemnity by such Holder
shall be limited to liability based upon information furnished in
writing, or required to be furnished, to the Company by such Holder
expressly for use therein. The indemnity agreement of the Company
herein shall not inure to the benefit of any such underwriter (or to
the benefit of any person who controls such underwriter) on account of
any losses, claims, damages, liabilities (or actions or proceedings in
respect thereof) arising from the sale of any
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of such Warrant Shares by such underwriter to any person if such
underwriter failed to send or give a copy of the prospectus furnished
pursuant to clause (a) of this Section, to such person with or prior
to the written confirmation of the sale involved. The obligation of
any Holder pursuant to this Section 3.5.3(f) shall be limited to an
amount equal to the net proceeds to such Holder from securities sold
in such registration pursuant to this Agreement.
(g) Each party entitled to indemnification hereunder (the
"Indemnifying Party") shall give notice to the party required to
provide indemnification (the "Indemnifying Party") promptly after such
Indemnified Party has actual knowledge of any claim as to which
indemnity may be sought, and shall permit the Indemnifying Party to
assume the defense of any such claim or any litigation resulting
therefrom, provided that counsel for the Indemnifying Party, who shall
conduct the defense of such claim or litigation, shall be approved by
the Indemnified Party (whose approval shall not be unreasonably
withheld). The Indemnified Party may participate in such defense at
such party's expense; provided, however, that the Indemnifying Party
shall bear the expense of such defense of the Indemnified Party if
representation of both parties by the same counsel would be
inappropriate due to actual or potential conflicts of interest. The
failure of any Indemnified Party to give notice as provided herein
shall not relieve the Indemnifying Party of its obligations under this
Agreement, unless and to the extent such failure is prejudicial to the
ability of the Indemnifying Party to defend the action. No
Indemnifying Party, in the defense of any such claim or litigation
shall, except with the consent of each Indemnified Party, consent to
entry of any judgment or enter into any settlement which does not
include as an unconditional term thereof the giving by the claimant or
plaintiff to such Indemnified Party of a release from all liability in
respect of such claim or litigation.
(h) If the indemnification provided for in paragraphs (e) and (f)
above is unavailable or insufficient to hold harmless an Indemnified
Party, then each Indemnifying Party shall contribute to the amount
paid or payable by such Indemnified Party as a result of the expenses,
claims, losses, damages or liabilities (or actions or proceedings in
respect thereof) referred to in such paragraphs in such proportion as
is appropriate to reflect the relative fault of the Company, on the
one hand, and the holders of securities registered pursuant hereto, on
the other hand, in connection with the statement or omissions which
resulted in such losses, claims, damages, expenses and liabilities, as
well as any other relevant equitable considerations. The relative
fault shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to
information supplied by the Company or any such holder and the
parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such untrue statement or omission.
The Company and the Holder agree that it would not be just and
equitable if contributions pursuant to this paragraph (h) were to be
determined by pro rata allocation or by any other method of allocation
which does not take account of the equitable consideration referred to
in this paragraph. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f)
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of the Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation.
(i) In addition, in connection with any registration requested
pursuant hereto, the Company shall:
(1) prepare and file with the SEC pursuant to the Act such
amendments and supplements to such registration statement and
prospectus included therein as may be necessary to effect and
maintain the effectiveness of such registration statement for a
period of 180 days or such longer period as may be required in
order to complete the distribution of the securities covered
thereby and furnish to the Holders of such securities copies of
any such supplement or amendment prior to it being used and/or
filed with the SEC and comply with the provisions of the Act with
respect to the disposition of all securities to be included in
such registration statement.
(2) provide the Holders, any underwriters in connection
therewith, one counsel for such underwriters and one counsel for
the Holders the opportunity to participate in the preparation of
such registration statement and each amendment and supplement
thereto.
(3) for a reasonable period prior to the filing of the
registration statement and throughout the period specified in
paragraph (1) above, make available for inspection by the parties
specified in paragraph (2) above such financial and other
information and books and records of the Company, and cause the
officers, directors, employees and representatives of the Company
to respond to such inquiries as shall be reasonably necessary to
conduct a reasonable investigation of the Company within the
meaning of the Act.
(4) promptly notify the holders of securities included in
such registration statement and the managing underwriter in
connection therewith (and confirm such advice in writing) (A)
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 such
registration statement or any post-effective amendment, when the
same has become effective, (B) of any comments 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, (C) 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,
(D) of the receipt by the Company of any notification with
respect to the suspension of the qualification of the securities
for sale in any jurisdiction or the initiation of any proceeding
for such purpose, or (E) if it shall be the case, at any time
when a prospectus is required to be delivered under the Act, that
such registration statement, prospectus, or any document
incorporated by reference, in any of the foregoing contains an
untrue statement of a material fact or omits to state a material
fact required to be stated therein or
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necessary to make the statements therein not misleading in light
of the circumstances then existing, in which case such Holders of
securities covered by such registration statement shall suspend
sales of such securities until they have been advised by the
Company that an appropriate prospectus amendment or supplement or
post-effective amendment has been filed; provided, however, that
in such instance the Company shall use its best efforts to
promptly file such prospectus amendment or supplement or
post-effective amendment and the period during which such holders
shall be so required to suspend sales hereunder shall not exceed
30 days.
(5) use its best efforts to obtain the withdrawal of any
order suspending the effectiveness of such registration statement
or any post-effective amendment thereto at the earliest
practicable date.
(6) enter into one or more underwriting agreements,
engagement letters, agency agreements, "best efforts"
underwriting agreements, lock-up agreements or similar
agreements, as appropriate, and take such other actions in
connection therewith as the Holders of securities registered
pursuant hereto shall reasonably request in order to expedite or
facilitate the disposition of such securities.
(7) whether or not an agreement of the type referred to in
the preceding paragraph is entered into and whether or not any
portion of the offering contemplated by such registration
statement is an underwritten offering, (A) make such
representations and warranties to the Holders of securities
registered pursuant hereto and any underwriters thereof, in form,
substance and scope as are customarily made in connection with
any offering of equity securities pursuant to any appropriate
agreement and/or to a registration statement filed on the form
applicable to such registration statement, (B) obtain an opinion
of counsel to the Company in customary form and covering such
matters of the type customarily covered by such an opinion as the
managing underwriters and Holders of securities registered
pursuant hereto may reasonably request, (C) obtain a "cold"
comfort letter or letters from the independent certified public
accountants of the Company addressed to the Holders and the
underwriters, if any, dated the effective date of such
registration statement , the effective date of any prospectus
supplement to the prospectus included in such registration
statement or post- effective amendment to such registration
statement and the date of any consummation of the sale of
securities pursuant hereto, such letter or letters to be in
customary form and covering such matters of the type customarily
covered by letters of such type, (D) deliver such documents and
certificates as may reasonably be requested by the holders of
securities covered by such registration statement and the
managing underwriter, if any, and (E) undertake such obligations
relating to expense reimbursement, indemnification and
contribution as are provided herein.
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(8) otherwise use its best efforts to comply with all
applicable rules and regulations of the SEC and otherwise take
all actions as may reasonably be necessary to accomplish the
intentions and purposes of this Section 3.5.
3.6 Additional Covenants. The Company and Holder understand that the
possibility exists that in connection with the exercise (including certain
partial exercises) of this Warrant, each of the Company and Holder may be
required to make certain filings under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 ("HSR"). The Company covenants that it 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 exercises of the Warrant hereunder as required on its
part under HSR (each an "HSR Warrant Consent"), in the event the Company is
notified by the Holder that the Holder has been advised by its counsel of the
necessity of making such filings. This covenant is in addition to any covenants
to obtain the HSR Consent under the Purchase Agreement. The Company agrees and
covenants that it shall use good faith commercially reasonable efforts to obtain
the HSR Warrant Consent to allow the Holder to exercise the Warrant, and shall
inform the Holder of all material developments in the Company's efforts to
obtain the HSR Warrant Consent, and that simultaneously with the transmittal to
third parties or to governmental agencies, it shall provide the Holder with
copies of all correspondence, filings or other written documentation related to
efforts to obtain the HSR Warrant Consent. If, notwithstanding the Company's
satisfaction of its obligations above, the Company fails to obtain the HSR
Warrant Consent, then the Company shall issue Warrant Shares in the maximum
number of shares permissible without obtaining HSR consent and in lieu of
issuing the remaining Warrant Shares in Common Stock (meaning those that cannot
be issued without HSR Consent), the Company shall issue an equivalent number of
shares of a new class of non-voting common stock of the Company ("Non-Voting
Stock") which shall be identical in all respects to the Common Stock, except
that shares of Non-Voting Stock shall not have the right to vote on any matters
presented to the Company's stockholders, unless otherwise required by law; and
by their terms the Non-Voting Stock shall automatically, without notice or any
other further action on the part of either the Company or the Holder, be
converted into shares of Common Stock if they are transferred by the Holder.
Thus, if HSR Warrant Consent shall not have been obtained, the Holder shall
continue to have the right to exercise this Warrant, as otherwise allowed in
accordance with the terms hereof; provided, that upon such exercise, in lieu of
receiving Warrant Shares, the Holder shall receive an equal number of shares of
Non-Voting Stock, to the extent of the affected Warrant Shares (i.e., if a
portion of the Warrant Shares can then be issued without HSR Warrant Consent,
the Non-Voting Stock shall be issued only with respect to the remainder of the
Warrant Shares then exercised as evidenced by this Warrant). The Amendment of
the Restated Certificate of Incorporation of the Company adopted pursuant to
Section 3.4 of the Purchase Agreement and which is attached thereto as Exhibit
B-1 authorized a number of shares of Non-Voting Stock equal to or greater than
the number of Warrant Shares.
The intent of this Section 3.6 is to place the Holder in the position most
nearly identical to the position that the Holder would have been in upon such
exercise if either the HSR Warrant Consent was not necessary or had been
obtained. The Company covenants that, at the cost and expense of the Holder, it
will use commercially reasonable efforts and continue to take all reasonable
steps to attempt to secure for the Holder the Warrant Shares or equivalents
which deliver to the Holder the voting rights and economic benefits bargained
for under the Purchase Agreement, which efforts shall include, but not be
limited to, appealing any decision of the Federal Trade Commission and/or
Justice Department which denies consent to the exercise in question if, in the
opinion of counsel to the Holder, there is a reasonable basis for such appeal.
In the event the Company is unable to issue the Non-Voting Stock as contemplated
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herein, the Company covenants that it will use commercially reasonable efforts
to secure for the Holder the benefits set forth herein.
ARTICLE 4
MISCELLANEOUS
4.1 Term. This Warrant is exercisable, in whole or in part, at any time and
from time to time on or before the Expiration Date set forth above.
4.2 Legends. This Warrant shall be imprinted with a legend in substantially
the following form:
NEITHER THIS SECURITY NOR THE SECURITIES ISSUABLE UPON THE EXERCISE HEREOF HAVE
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE
SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF
UNDER SUCH ACT OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO THE COMPANY AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT
REQUIRED.
4.3 Compliance with Securities Laws on Transfer. This Warrant may not be
transferred or assigned by the Company. This Warrant may not be transferred or
assigned by the Holder in whole or in part without compliance with applicable
federal and state securities laws by the transferor and the transferee
(including, without limitation, the delivery of investment representation
letters and legal opinions reasonably satisfactory to the Company, as reasonably
requested by the Company). The Company shall not require the Holder to provide
an opinion of counsel if the transfer is to (a) an Affiliate of the Holder; (b)
the respective successors of the Holder in a merger or consolidation; (c) the
purchaser of all or substantially all of the assets of Holder; (d) the
shareholders of the Holder in the event the Holder is liquidated or dissolved;
or (e) any other person or entity with respect to whom such transfer has been
approved by the Company. If requested by the Company, and if the transfer is
other than a circumstance described above, the Holder shall provide a reasonable
opinion of counsel in connection with the transfer of the Warrant Shares
pursuant to Rule 144.
4.4 Transfer Procedure. Subject to the provisions of Section 4.3, the
Holder may transfer all or part of this Warrant or the Warrant Shares issuable
upon exercise of this Warrant (or the securities issuable, directly or
indirectly, upon conversion of the Warrant Shares, if any).
4.5 Notices. All notices and other communications from the Company to the
Holder, or vice versa, shall be deemed delivered and effective when given
personally or mailed by first-class registered or certified mail, postage
prepaid, at such address set forth in the Purchase Agreement or as may have been
thereafter furnished to the Company or the Holder, as the case may be, in
writing by the Company or such the Holder from time to time.
4.6 Waiver. This Warrant and any term hereof may be changed, waived,
discharged or terminated only by an instrument in writing signed by the party
against which enforcement of such change, waiver, discharge or termination is
sought.
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4.7 Attorneys Fees. In the event of any dispute between the parties
concerning the terms and provisions of this Warrant, the party prevailing in
such dispute shall be entitled to collect from the other party all costs
incurred in such dispute, including reasonable attorney's fees.
4.8 Governing Law; Jurisdiction and Venue. This Warrant 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 Company
acknowledges and agrees that the state and federal courts sitting in the State
of Delaware shall have jurisdiction in any matter arising out of this Warrant,
and the Company hereby consents to such jurisdiction and agrees that the venue
of any such matter shall also be proper in such state and federal courts sitting
in the State of Delaware.
Dated November 17, 1999.
SOURCE MEDIA, INC.
By: /s/ Stephen W. Palley
-------------------------------------------
Stephen W. Palley
President and Chief Executive Officer
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<PAGE> 1
EXHIBIT 10.7
NEITHER THIS WARRANT NOR THE SECURITIES ISSUABLE UPON THE EXERCISE HEREOF HAVE
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE
SOLD, PLEDGED, OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION
THEREOF UNDER SUCH ACT OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL
REASONABLY SATISFACTORY TO THE CORPORATION AND ITS COUNSEL THAT SUCH
REGISTRATION IS NOT REQUIRED.
STOCK PURCHASE WARRANT
THIS STOCK PURCHASE WARRANT CERTIFIES THAT, for the agreed upon value
of $10.00 and for other good and valuable consideration, LAZARD FRERES & CO. LLC
or its registered successors and assigns (collectively, the "Holder"), is
entitled to purchase fully paid and nonassessable shares of the $.001 par value
per share common stock (the "Common Stock") of SOURCE MEDIA, INC., a Delaware
corporation (the "Company") at $20.00 per share (the "Exercise Price") all as
set forth herein and as adjusted pursuant to Article 2 of this Warrant, subject
to the provisions and upon the terms and conditions set forth in this Warrant.
This Warrant allows the Holder to purchase 450,000 shares of Common Stock,
subject to adjustment as provided herein, and the shares so subject to purchase
hereunder shall be referred to herein as the "Warrant Shares". In addition to
the representations and warranties of the Company contained in Article 3 of this
Warrant, the Company represents and warrants to the Holder that neither the
issuance of this Warrant nor the performance by the Company of its obligations
hereunder violates or will violate any of the provisions of the Common Stock and
Warrants Purchase Agreement, dated as of July 29, 1999 (the "Purchase
Agreement") between the Company and Insight Interactive, LLC ("Insight"), the
Contribution Agreement dated as of July 29, 1999 ("Contribution Agreement")
among Insight, the Company and NewCo, LLC ("NewCo") and the Operating Agreement
("Operating Agreement") which will be executed and delivered at the Closing of
the Contribution Agreement and which was made and entered into by and between
the Company and Insight, pursuant to which the Company and Insight have agreed
to form, capitalize and thereafter manage NewCo to conduct certain specified
businesses previously conducted separately. Capitalized terms used herein but
not otherwise defined herein shall have the meanings set forth for such terms in
the Purchase Agreement. The amount and kind of securities receivable pursuant to
the rights granted hereunder are subject to adjustment pursuant to the
provisions contained in this Warrant.
This Warrant is subject to the following provisions:
ARTICLE 1
EXERCISE
1.1 Method of Exercise. The Holder may exercise this Warrant in whole
or in part at any time and from time to time after the date of issuance up to
and including the fifth anniversary of the date of issuance (the "Expiration
Date"); provided, however, that until (a) April 1, 2004, the Holder may exercise
only such portion of this Warrant that would entitle the Holder to own up to
forty-five percent (45%) of the Common Stock of the Company, on a Fully Diluted
basis and (b) June 24, 2000 the Holder may exercise only such portion of this
Warrant that would entitle the Holder to own up to 24.99% of the
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outstanding Common Stock of the Company. Deferral of the exercise of a portion
of this Warrant shall not affect or limit in any manner the anti-dilution
provisions of Article 2, which shall apply as if this Warrant were exercisable
at any time. Between April 1, 2004 and the Expiration Date, the Holder may
exercise this Warrant in whole or in part without restriction. The Holder may
exercise this Warrant by delivering a duly executed Notice of Exercise in
substantially the form attached as Appendix 1, to the principal office of the
Company. The Holder shall also deliver to the Company a check for the aggregate
Exercise Price for the Warrant Shares being purchased.
1.2 [Intentionally Omitted]
1.3 Share Coverage. The number of Warrant Shares for which this Warrant
may be exercised shall be 450,000 shares of Common Stock, subject to adjustment
as provided herein.
1.4 Fair Market Value. The fair market value of the Warrant Shares for
purposes of Section 2.1.1(a) below shall be the higher of (i) the average
closing price of the Warrant Shares reported for the five (5) Trading Days
immediately before the Holder delivers its Notice of Exercise to the Company, or
the date of the issuance of additional shares under Section 2.1.1(a) below, as
applicable; or (ii) the average closing price of the Warrant Shares reported for
the thirty (30) Trading Days immediately before the Holder delivers its Notice
of Exercise, or the date of the issuance of additional shares under Section
2.1.1(a) below, as applicable. The reported closing price for each day shall be
the reported closing price (and if no sales take place on any day, such day
shall not be a Trading Day), as reported in the principal consolidated or
composite transaction reporting system on the principal national securities
exchange on which such security is listed or admitted to trading or, if not
listed or admitted to trading on any national securities exchange, on the Nasdaq
National Market or, if such security is not quoted on the Nasdaq National
Market, the average of the closing bid and asked prices on such day in the
over-the-counter market as reported by Nasdaq. As used herein, the term "Trading
Day" means a day on which the New York Stock Exchange, each national securities
exchange on which the Warrant Shares is listed and the Nasdaq National Market
are open for business. If the Warrant Shares are not then traded in a public
market, the Board of Directors of the Company shall propose the fair market
value in its reasonable good faith judgment. The foregoing notwithstanding, if
the Holder advises the Board of Directors in writing that the Holder disagrees
with such proposed fair market value, then each of the Company and the Holder
shall select a reputable investment banking firm, and the two firms so selected
shall promptly agree upon a third reputable investment banking firm, and the
three firms shall undertake such valuation. If the valuation of such investment
banking firms is greater than that determined by the Board of Directors, then
all fees and expenses of such investment banking firms shall be paid by the
Company. In all other circumstances, such fees and expenses shall be paid by the
Holder.
1.5 Delivery of Certificate and New Warrant. In the event of any
exercise of this Warrant, in whole or in part, certificates for the Warrant
Shares so purchased representing the aggregate number of shares specified in the
Notice of Exercise, shall be delivered to the Holder within a reasonable time,
not exceeding seven business days, after this Warrant shall have been so
exercised. If this Warrant shall have been exercised only in part, then, unless
this Warrant has expired, the Company shall, at its expense, at the time of
delivery of said certificates representing the Warrant Shares, deliver to the
Holder a new Warrant representing the Warrant Shares not so exercised. The
Company will pay all taxes and other expenses in connection with the
preparation, execution and delivery of the certificates except that, in the case
such certificates are to be registered in a name or names other than the Holder,
the Holder will pay any and all stock transfer taxes associated with such
transfer.
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1.6 Replacement of Warrants. On receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and, in the case of loss, theft or destruction, on delivery of an
indemnity agreement reasonably satisfactory in form and amount to the Company
or, in the case of mutilation, on surrender and cancellation of this Warrant,
the Company at its expense shall execute and deliver in lieu of this Warrant, a
new warrant of like tenor.
ARTICLE 2
ADJUSTMENT TO THE WARRANT SHARES
2.1 Antidilution Provisions. The intent of this Article 2 is to insure
appropriate adjustment to the Exercise Price and/or number of Warrant Shares to
be acquired in the event of the exercise of this Warrant, in the event of future
issuances of capital stock or securities into which this Warrant may ultimately
be convertible in the instances described below, to the end that the provisions
set forth herein (including adjustments to the Exercise Price) shall be made to
provide the Holder the right to receive essentially the same proportion of
shares of capital stock (in relation to all shares of capital stock outstanding)
on the date of conversion, redemption or other exchange as the Holder would have
been entitled to had it initially been issued shares of Common Stock on the date
hereof. Simultaneously with each adjustment to the Exercise Price set forth in
this Article 2, an appropriate adjustment in the number of Warrant Shares
obtainable upon the exercise of this Warrant shall be made so that the holder of
this Warrant shall receive the same number and kind of securities and other
property such holder would have been entitled to receive had this Warrant been
exercised and converted into Warrant Shares immediately prior to the event or
occurrence giving rise to the adjustment to the Exercise Price.
2.1.1 Adjustments for Diluting Issuances.
(a) In the event the Company shall issue additional shares of
capital stock without consideration or for a consideration per share
which is less than both the Exercise Price for the Warrant Shares and
the fair market value for the Warrant Shares as determined pursuant to
Section 1.4 above, then and in each such event, the Exercise Price
shall be reduced, concurrently with such issue of shares, to an amount
equal to the quotient of: (a) the sum of (i) the number of shares of
Common Stock outstanding (on a Fully Diluted basis) immediately prior
to such issuance multiplied by the Exercise Price plus (ii) the
aggregate consideration received by the Company upon such issuance,
divided by (b) the number of shares of Common Stock outstanding (on a
Fully Diluted basis) immediately after such issuance. For purposes of
this Section 2.1, the consideration received by the Company for the
issue of any additional shares of capital stock shall be computed as
follows: (i) insofar as such consideration consists of cash, such
consideration shall consist of the aggregate amount of cash received by
the Company excluding amounts paid or payable for accrued interest or
accrued dividends, and without deduction of any expenses incurred or
underwriting commissions or concessions paid or allowed by the Company;
(ii) insofar as such consideration consists of property other than
cash, such consideration shall be computed at the fair market value
thereof at the time of such issue, as determined in good faith by the
Board of Directors of the Company, except where such consideration
consists of securities, in which case the amount of consideration
received by the Company shall be the fair market value thereof
(determined as provided in Section 1.4 hereof) as of the date of
receipt, but in each such case without deduction therefrom of any
expenses incurred or any underwriting commissions or concessions paid
or allowed by the Company in connection therewith. In computing the
market price of a note or other obligation that is not listed or
admitted to trading on any securities exchange or quoted in the
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Nasdaq Stock Market or reported by the National Quotation Bureau, Inc.,
or a similar reporting organization, the total consideration to be
received by the Company thereunder (including interest) shall be
discounted to present value at the prime rate announced or published in
The Wall Street Journal under the caption "Money Rate" in effect at the
time the note or obligation is deemed to have been issued; and (iii) in
the event additional Shares of capital stock are issued together with
other securities or other assets of the Company for consideration which
covers both, such consideration shall be the proportion of such
consideration so received, computed as determined in good faith by the
Board of Directors of the Company.
(b) Treatment of Options and Convertible Securities.
(i) In the event the Company should ever grant rights to
subscribe for or purchase, or any options for the purchase of any
shares of its capital stock or securities convertible into or
exchangeable for capital stock (such rights and options herein
referred to as "Options", and such convertible or exchangeable
securities herein referred to as "Convertible Securities"),
whether or not such Options or rights to convert or exchange any
such Convertible Securities are immediately exercisable, and the
price per share for which capital stock is issuable upon the
exercise of such Option or upon the conversion or exchange of such
Convertible Securities shall be less than the Exercise Price in
effect immediately prior to the time of the granting of such
Options, then the total maximum number of shares of capital stock
issuable upon the exercise of such Options or upon the conversion
or exchange of the total maximum amount of such Convertible
Securities issuable upon the exercise of such Options shall (as of
the date of granting of such Options) be deemed to be outstanding
and to have been issued and sold for such price per share and the
Exercise Price shall be reduced to the extent required by Section
2.1.1(a). For purposes of this Section 2.1.1(b)(i), the price per
share for which such capital stock is issuable shall be determined
by dividing (x) the total amount, if any, received or receivable
by the Company as consideration for the granting of such Options,
plus the minimum aggregate amount of additional consideration
payable to the Company upon the exercise of such Options, plus, in
the case of any such Options which relate to Convertible
Securities, the minimum aggregate amount of additional
consideration, if any, other than such Convertible Securities,
payable to the Company upon the conversion or exchange of such
Convertible Securities, by (y) the total maximum number of shares
of capital stock issuable upon the exercise of such Options or
upon the conversion or exchange of all such Convertible Securities
issuable upon the exercise of such Options. No further adjustments
of the Exercise Price shall be made upon the actual issue of such
capital stock or of such Convertible Securities upon the exercise
of such Options or upon the actual issue of such capital stock
upon the conversion or exchange of such Convertible Securities.
(ii) If at any time the Company shall issue or sell
Convertible Securities, whether or not the rights to convert or
exchange such Convertible Securities are immediately exercisable,
and the price per share for which capital stock is issuable upon
the conversion or exchange of such Convertible Securities shall be
less than the Exercise Price in effect immediately prior to the
time of the issue or sale of such Convertible Securities, then the
total maximum number of shares of capital stock issuable upon the
conversion or exchange of all such Convertible Securities shall
(as of the date of the issue or sale of such Convertible
Securities) be deemed to be outstanding and to have been
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issued and sold for such price per share and the Exercise Price
shall be reduced to the extent required by Section 2.1.1(a),
provided that (a) except as provided in Section 2.1.1(b)(vi)
hereof, no further adjustments of the Exercise Price shall be made
upon the actual issue of such capital stock upon the conversion or
exchange of such Convertible Securities and (b) if any such issue
or sale of such Convertible Securities is made upon exercise of
any Options for which adjustments of the Exercise Price have been
or are to be made pursuant to other provisions of this Section
2.1.1, no further adjustment of the Exercise Price shall be made
by reason of such issue or sale. For purposes of this Section
2.1.1(b)(ii), the price per share for which capital stock is
issuable shall be determined by dividing (x) the total amount
received or receivable by the Company as consideration for the
issue or sale of such Convertible Securities, plus the minimum
aggregate amount of additional consideration, if any, other than
such Convertible Securities, payable to the Company upon the
conversion or exchange thereof, by (y) the total maximum number of
shares of capital stock issuable upon the conversion or exchange
of all such Convertible Securities.
(iii) If at any time the Company shall pay a dividend or make
any other distribution upon the capital stock payable in capital
stock or Convertible Securities, any capital stock or Convertible
Securities, as the case may be, issuable in payment of such
dividend or distribution shall be deemed to have been issued
without consideration, and the Exercise Price shall be reduced as
if the Company had subdivided the outstanding shares of capital
stock into a greater number of shares as provided in Section 2.2
hereof.
(iv) In case at any time the Company shall take a record of
the holders of capital stock for the purpose of entitling them (a)
to receive a dividend or other distribution payable in capital
stock or Convertible Securities, or (b) to subscribe for or
purchase capital stock or Convertible Securities, then such record
date shall be deemed to be the date of the issue or sale of such
capital stock or Convertible Securities.
(v) If the purchase price provided for in any Option referred
to in Section 2.1.1(b)(i) hereof, or the price at which any
Convertible Securities referred to in Sections 2.1.1(b)(i) or
(iii) hereof are convertible into or exchangeable for capital
stock, shall change at any time (whether by reason of provisions
designed to protect against dilution or otherwise), the Exercise
Price then in effect hereunder shall forthwith be increased or
decreased to such Exercise Price as would have obtained had the
adjustments made upon the issuance of such Options or Convertible
Securities been made upon the basis of (a) the issuance of the
number of shares of capital stock theretofore actually delivered
upon the exercise of such Options or upon the conversion or
exchange of such Convertible Securities, and the total
consideration received therefor, and (b) the number of shares of
capital stock to be issued for the consideration, if any, received
by the Company therefor and to be received on the basis of such
changed price.
(vi) If any adjustment has been made in the Exercise Price
because of the issuance of Options or Convertible Securities and
if any of such Options or rights to convert or exchange such
Convertible Securities expire or otherwise terminate, then the
Exercise Price shall be readjusted to eliminate the adjustments
previously made in
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connection with the Options or rights to convert or exchange
Convertible Securities which have expired or terminated.
(vii) The number of shares of capital stock outstanding at any
given time shall not include shares owned or held by or for the
account of the Company, and the disposition of any such treasury
shares shall be considered an issue or sale of capital stock.
(viii) Anything in Section 2.1.1 hereof to the contrary
notwithstanding, the Company shall not be required to make any
adjustment of the Exercise Price in the case of (A) the issuance
of the Warrants or any other warrant issued to the Holder, (B) the
issuance of shares of Common Stock upon exercise of the Warrants
or any other warrant issued to the Holder, (C) the granting of
stock options by the Company or any of its subsidiaries pursuant
to the option plans identified on Schedule 4.3 to the Purchase
Agreement (a copy of which is attached to this Warrant as Appendix
2), provided that the exercise price of such stock options is at
least equal to the fair market value of such shares of capital
stock (as determined by the appropriate plan) on the date such
stock options are granted, (D) the issuance of shares of capital
stock upon the exercise of the stock options referred to in clause
(C) above, and (E) the issuance of shares of capital stock upon
the exercise, conversion, or exchange of the securities which are
set forth on Schedule 4.3 of the Purchase Agreement, all of which
were issued prior to or simultaneously with the date of the
original issue of this Warrant.
2.2. Adjustment for Subdivisions and Combinations. In the event at any
time the Company shall, by subdivision, stock split, reverse stock split,
dividend, combination or reclassification of any shares of its capital stock or
otherwise change any of the securities then issuable upon the exercise of this
Warrant into the same or a different number of securities of any class or
classes, this Warrant shall thereafter be exercisable, for the same period as
the remaining duration of the period during which this Warrant is exercisable,
for the same number and kind of securities which the holder hereof would have
received had this Warrant been exercised and converted into Warrant Shares
immediately prior to such change, whether by subdivision, stock split, reverse
stock split, dividend, combination or reclassification of any shares of its
capital stock or otherwise. In the event at any time the Company shall, by
subdivision, dividend, stock split, reclassification or otherwise, change the
outstanding shares of capital stock into a greater number of shares, the
Exercise Price in effect immediately prior to such subdivision shall be
proportionately reduced, and conversely, in case the outstanding shares of
capital stock shall be combined into a smaller number of shares, by reverse
stock split, combination, reclassification or otherwise, the Exercise Price in
effect immediately prior to such combination shall be proportionately increased.
An adjustment made pursuant to this Section 2.2 shall become effective
immediately after the effective date of such subdivision or combination.
2.3. Adjustment for Dividends and Distributions. If at any time the
Company shall pay a dividend or make a distribution to all holders of capital
stock, as such, which dividend or distribution is payable otherwise than in cash
out of earnings or earned surplus and otherwise than in capital stock,
Convertible Securities, or Options, then thereafter the Holder of this Warrant,
upon the exercise of this Warrant, shall be entitled to receive the number of
shares of Common Stock being purchased upon such exercise and, in addition
thereto and without further payment, the stock and other securities and property
(including cash) which such Holder would have received by way of dividends or
distributions (otherwise than in cash out of earnings or earned surplus or in
capital stock, Convertible Securities, or Options) as
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if continuously, since the date of the original issue of this Warrant, such
Holder (a) had been the record holder of the number of shares of Common Stock
then being purchased, and (b) had retained all dividends and distributions in
stock or other securities (other than capital stock, Convertible Securities, or
Options) which would have been paid in respect of such Common Stock or in
respect of any stock or other securities which would have been paid as dividends
or distributions on such Common Stock.
2.4 Repurchase on Sale, Merger, or Consolidation of the Company.
2.4.1 Acquisition. For the purpose of this Warrant, "Acquisition"
means any sale, license, or other disposition of all or substantially all of the
assets of the Company, or any reorganization, consolidation, or merger of the
Company where the holders of the Company's securities before the transaction
beneficially own less than fifty percent (50%) of the outstanding voting
securities of the surviving entity after the transaction.
2.4.2 Assumption of Warrant. If such Acquisition shall be effected
in such a way that the holders of Common Stock (or any other securities of the
Company then issuable upon the exercise of this Warrant) shall be entitled to
receive stock or other securities or property (including cash) with respect to
or in exchange for Common Stock (or such other securities), then lawful and
adequate provision shall be made whereby the Holder of this Warrant shall
thereafter have the right to purchase and receive upon the basis and upon the
terms and conditions specified in this Warrant, and in lieu of the shares of
Common Stock (or such other securities) immediately theretofore purchasable and
receivable upon the exercise hereof, such stock or other securities or property
(including cash) as may be issuable or payable with respect to or in exchange
for a number of outstanding shares of Common Stock (or such other securities)
equal to the number of shares of Common Stock (or such other securities)
immediately theretofore purchasable and receivable upon the exercise of this
Warrant, had such Acquisition not taken place. In any such case appropriate
provision shall be made with respect to the rights and interests of the Holder
to the end that the provisions hereof (including, without limitation, the
provisions for adjustments of the Exercise Price and of the number of Warrant
Shares purchasable upon exercise hereof) shall thereafter be applicable, as
nearly as reasonably may be, in relation to the stock or other securities or
property thereafter deliverable upon the exercise hereof. In the event of a
consolidation or merger of the Company with or into another corporation or
entity as a result of which a greater or lesser number of shares of common stock
of the surviving corporation or entity are issuable to holders of capital stock
in respect of the number of shares of capital stock outstanding immediately
prior to such consolidation or merger, then the Exercise Price in effect
immediately prior to such consolidation or merger shall be adjusted in the same
manner as though there were a subdivision or combination of the outstanding
shares of capital stock.
2.5 Reclassification, Exchange or Substitution. Upon any
reclassification, exchange, substitution, or other event that results in a
change of the number and/or class of the securities issuable upon exercise or
conversion of this Warrant, the Holder shall be entitled to receive, upon
exercise or conversion of this Warrant, the number and kind of securities and
property that the Holder would have received for the Warrant Shares if this
Warrant had been exercised immediately before such reclassification, exchange,
substitution, or other event. Such an event shall include any automatic
conversion of the outstanding or issuable securities of the Company of the same
class or series as the Warrant Shares to Common Stock pursuant to the terms of
the Company's Certificate of Incorporation upon the closing of a new registered
public offering of the Company's Common Stock. The Company or its successor
shall promptly issue to the Holder a new Warrant for such new securities or
other property. The new Warrant shall provide for adjustments which shall be as
nearly equivalent as may be practicable
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to the adjustments provided for in this Article 2 including, without limitation,
adjustments to the Exercise Price and to the number of securities or property
issuable upon exercise of the new Warrant. The provisions of this Section 2.5
shall similarly apply to successive reclassifications, exchanges, substitutions,
or other events.
2.6 Record Date Adjustments. In any case in which this Article 2
requires that a downward adjustment of the Exercise Price shall become effective
immediately after a record date for an event, the Company may defer until the
occurrence of such event (a) issuing to the Holder of this Warrant (exercised
after such record date and before the occurrence of such event) the additional
Warrant Shares issuable upon such exercise by reason of the adjustment required
by such event over and above the Warrant Shares issuable upon such exercise
before giving effect to such adjustment and (b) paying to such Holder any amount
in cash in lieu of a fractional share pursuant to Section 2.8 hereof.
2.7 Minimum Adjustment of Exercise Price. No adjustment of the Exercise
Price shall be made in an amount less than $.05 per share in effect at the time
such adjustment is otherwise required to be made, but any such lesser adjustment
shall be carried forward and shall be made at the time and together with the
next subsequent adjustment which, together with any adjustments so carried
forward, shall amount to not less than $.05 per share. In case at any time the
Company shall issue capital stock by way of dividend on capital stock or
subdivide or combine the outstanding shares of capital stock, said amount of
$.05 per share (as theretofore increased or decreased, if the said amount shall
have been adjusted in accordance with the provisions of this Section 2.7) shall
forthwith be proportionately increased in the case of such a combination or
decreased in the case of such a subdivision or stock dividend so as
appropriately to reflect the same.
2.8 Fractional Shares. No fractional Shares shall be issuable upon
exercise or conversion of the Warrant and the number of Warrant Shares to be
issued shall be rounded down to the nearest whole Share. If a fractional share
interest arises upon any exercise or conversion of the Warrant, the Company
shall eliminate such fractional share interest by paying the Holder an amount
computed by multiplying the fractional interest by the last reported sale price
of the Common Stock on the trading day immediately preceding the date of
exercise.
2.9 Certificate as to Adjustments. Upon each adjustment of the Exercise
Price, the Company, at its expense, shall promptly compute such adjustment, and
furnish the Holder with a certificate of its Chief Financial Officer setting
forth such adjustment, and the corresponding adjustment in the number of Warrant
shares obtainable upon the exercise of this Warrant, and the facts upon which
such adjustments are based. The Company shall, upon written request, furnish the
Holder a certificate setting forth the Exercise Price in effect upon the date
thereof and the series of adjustments leading to such Exercise Price.
2.10 Certain Events. If any event occurs of the type contemplated by
the provisions of this Article 2 but not expressly provided for by such
provisions (including, without limitation, the granting of stock appreciation
rights, phantom stock rights or other rights with equity features), then the
Company's Board of Directors shall make an appropriate adjustment in the number
of Warrant Shares obtainable upon exercise of this Warrant and in the Exercise
Price so as to protect the rights of the Holder of this Warrant; provided that
no such adjustment shall decrease the number of Warrant Shares obtainable as
otherwise determined pursuant to this Article 2.
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<PAGE> 9
2.11 Purchase Rights. If at any time the Company grants, issues or
sells any rights to purchase stock, warrants, securities or other property pro
rata to the record holders of any class of stock (the "Purchase Rights") then
the Holder of this Warrant shall be entitled to obtain, upon the same terms on
which the holders of Common Stock are to receive such Purchase Rights, the
aggregate Purchase Rights which such Holder could have acquired if such Holder
had held the number of Warrant Shares acquirable upon complete exercise of this
Warrant immediately before the date on which a record is taken for the grant,
issuance or sale of such Purchase Rights, or, if no such record is taken, the
date as of which the record holders of Common Stock are to be determined for the
grant, issue or sale of such Purchase Rights.
ARTICLE 3
REPRESENTATIONS AND COVENANTS OF THE COMPANY
The Company hereby represents and warrants to the Holder as follows:
3.1 Title to Warrant Shares. All Warrant Shares which may be issued
upon the exercise of the rights represented by this Warrant, and all securities,
if any, issuable upon conversion of the Warrant Shares, shall, upon issuance be
duly authorized, validly issued, fully paid and nonassessable, and free of any
liens and encumbrances.
3.2 Reservation of Shares. During the period which this Warrant may be
exercised, the Company will at all times have authorized and reserved for
issuance a sufficient number of shares of Common Stock to cover such exercise.
3.3 No Impairment. The Company shall not, by amendment of its
Certificate of Incorporation or through a reorganization, transfer of assets,
consolidation, merger, dissolution, issue, or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed under this Warrant by the Company, but
shall at all times in good faith assist in carrying out all the provisions of
this Warrant and in taking all such action as may be necessary or appropriate to
protect the Holder's rights under this Warrant against impairment. If the
Company takes any action affecting the Shares or its Common Stock other than as
provided for above that adversely affects the Holder's rights under this
Warrant, then the Company shall make appropriate adjustment to the Exercise
Price and/or the number of Warrant Shares to carry out the intent of Article 2
as set forth in Section 2.1.
3.4 Notice of Certain Events. If the Company proposes at any time to
(a) declare any dividend or distribution upon its Common Stock, whether in cash,
property, stock or other securities and whether or not a regular cash dividend;
(b) offer for subscription pro rata to the holders of any class or series of
stock any additional shares of stock of any class or series or other rights; (c)
effect any reclassification or recapitalization of Common Stock; or (d) merge or
consolidate with or into any other corporation, or sell, lease, license, or
convey all or substantially all of its assets, or to liquidate, dissolve or wind
up, then, in connection with each such event, the Company shall give the Holder:
(1) at least twenty (20) days prior written notice of the date on which a record
will be taken for such dividend, distribution, or subscription rights (and
specifying the date on which the holders of Common Stock will be entitled
thereto) or for determining rights to vote, if any, in respect of the matters
referred to in (c) and (d) above; and (2) in the case of the matters referred to
in (c) and (d) above at least twenty (20) days prior written notice of the date
when the same will take place (and specifying the date on which the holders of
Common Stock will be
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entitled to exchange their Common Stock for securities or other property
deliverable upon the occurrence of such event).
3.5 Registration under the Securities Act of 1933.
3.5.1 Piggyback Rights. In the event that the Company files a
registration statement under the Securities Act of 1933, as amended
(the "Act") which relates to an offering of securities of the Company
by the Company or any holder of securities (except in connection with
an offering to or by employees), such registration statement and the
prospectus included therein shall also, at the written request to the
Company by the Holder, include and relate to, and meet the requirements
of the Act with respect to, the public offering of such Warrant Shares
as the Holder indicates it intends to exercise and offer under the
registration statement for sale and sell, so as to permit the public
sale thereof in compliance with the Act, and any related qualifications
under blue sky laws or other compliance or any underwriting involved
therein shall also relate thereto. The Company shall use its best
efforts to effect such registration, any such qualification, any such
compliance and any such underwriting as soon as practicable. The
Company shall give prompt written notice to the Holder of its intention
to file a registration statement under the Act relating to an offering
of the aforesaid securities of the Company, but in no event less than
twenty-five (25) days prior to the filing of such registration
statement, and the written request provided for in the first sentence
of this Section shall be made by the Holder ten (10) or more days prior
to the date specified in the notice as the date on which it is intended
to file such registration statement. Neither the delivery of such
notice by the Company nor of such request pursuant to this Section
3.5.1 by the Holder shall in any way obligate the Company to file any
such registration statement and, notwithstanding the filing of such
registration statement, the Company may, at any time prior to the
effective date thereof, determine not to offer the securities to which
such registration statement relates, without liability to the Holder,
except that the Company shall pay such expenses as are contemplated to
be paid by it under Section 3.5.3 and by the Holder pursuant to Section
3.5.3(d). Provided, that, anything above in this Section 3.5.1 to the
contrary notwithstanding, the inclusion of Warrant Shares in any such
registration will require the approval of the underwriters, if any, but
which approval shall not be unreasonably withheld, and such inclusion
shall be conditioned upon the provision by the Holder to the Company of
all information regarding the Holder reasonably required to be included
in the registration statement under applicable law and the rules and
regulations promulgated by the Securities and Exchange Commission (the
"SEC") pursuant to the Act. The "piggy-back" registration rights
granted hereunder shall terminate five (5) years from the date hereof.
3.5.2 Demand Registration Rights. (a) In addition, upon written
notice at any time before the Expiration Date, upon written request
from a holder or holders of fifty percent (50%) or more of the
securities issued or issuable upon exercise of this Warrant, the
Company, as promptly as possible after the receipt of such notice,
shall file a new registration statement under the Act with respect to
the Warrant Shares covered by such notice and use its best efforts to
effect such registration, all qualifications under blue sky laws and
all other compliance as soon as practicable. Within ten (10) days after
receiving any such notice, the Company shall give notice to any other
Holders of the Warrant Shares issued or issuable pursuant to this
Warrant, advising that the Company is proceeding with such registration
statement to include therein Warrant Shares of such Holders. The
Company shall not be obligated to any such other Holder unless such
other Holder shall accept such offer by notice in writing to the
Company within ten (10) days thereafter.
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The Company shall be required to effect two (2) registrations of
Warrant Shares pursuant to this Section 3.5.2. The Holder agrees to
become subject to a customary lock-up agreement, for a reasonable
period of time, if required by the underwriter of a public offering by
the Company during the period in which the Holder is entitled to
registration of the Warrant Shares under this Section 3.5.2; provided,
however, that the Expiration Date shall be extended by the effective
period of any such lock-up agreement. The Company may postpone, one
time, for up to ninety (90) days the registration of Warrant Shares
pursuant to this Section 3.5.2 if its Board of Directors determines in
good faith that such registration would have a material adverse effect
on a significant transaction proposed by the Company; provided,
however, that the Expiration Date shall be extended by the period of
any such postponement. The distribution of Warrant Shares covered by
the request of a Holder pursuant to this Section 3.5.2 shall be
effected by means of the method of distribution selected by such
Holder. If such distribution is effected by means of an underwriting,
the Company shall enter into an underwriting agreement in customary
form with a managing underwriter of nationally recognized standing
selected for such underwriting by the Holder and approved by the
Company, which approval shall not be unreasonably withheld.
Notwithstanding any other provision of this Section 3.5.2, if the
managing underwriter advises the Holder in writing that marketing
factors require limitation of the number of shares to be underwritten,
then the underwriters may exclude shares requested to be included in
such registration. The number of shares to be included in the
registration and underwriting shall be allocated first among the
Holders who requested registration pursuant to this Section 3.5.2 and
then among other Holders who have requested registration of securities
in such registration and underwriting in proportion as nearly as
practicable to the respective amounts of securities of the Company held
by such Holders at the time of filing the registration statement. No
securities excluded from the underwriting by reason of the managing
underwriter's marketing limitation shall be included in such
registration. If any Holder disapproves of the terms of the
underwriting, such Holder may elect to withdraw therefrom by written
notice to the Company, the managing underwriter and the Holder
requesting such registration pursuant to this Section 3.5.2 and the
securities so withdrawn shall also be withdrawn from registration. If
the distribution of the Warrant Shares is being effected by means of an
underwriting and if the managing underwriter has not limited the number
of securities to be underwritten, the Company may include securities
for its own account in such registration if the managing underwriter so
agrees and may include securities for the account of holders of
securities other than Holders of the Warrant Shares issued or issuable
upon exercise of this Warrant. The inclusion of such securities by the
Company or such other holders shall be on the same terms as the
registration of Warrant Shares held by the Holders requesting
registration pursuant to this Section 3.5.2. In the event that the
underwriters exclude some of the securities to be registered, the
securities to be sold for the account of the Company and any other
holders shall be excluded in their entirety prior to the exclusion of
any Warrant Shares issued or issuable pursuant to this Warrant.
(b) If the Company is a registrant for purposes of the Act
which is entitled to use Form S-3 (or any successor form to Form S-3)
to register securities for any registration requested pursuant to
Section 3.5.2, at the request of a holder pursuant to Section 3.5.2,
the Company shall use its best efforts to cause the shares to be
registered on Form S-3.
(c) A holder requesting registration pursuant to Section 3.5.2
shall have the right to cancel a proposed registration pursuant to
Section 3.5.2 when, in its discretion, market conditions are so
unfavorable as to be seriously detrimental to an offering pursuant to
such registration. For
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the avoidance of doubt, such cancellation of a registration shall not
be counted as one of the two (2) registrations pursuant to Section
3.5.2, subject to the condition that the canceling Holder shall
promptly reimburse the Company for its expenses reasonably incurred in
connection with the cancelled registration, unless such registration
was cancelled after having been deferred, postponed or interrupted by
the Company pursuant to Section 3.5.2, in which case, such expense
reimbursement shall not be required.
3.5.3 Agreements Related to Registrations. In each instance in
which pursuant to Sections 3.5.1 and 3.5.2 of this Section, the Company
shall take any action to permit a public offering or sale or other
distribution of the Warrant Shares, the Company shall:
(a) Supply to the Holders of Warrant Shares intending
to make a public distribution of their Warrant Shares a
reasonable number of copies of the preliminary, final and
other prospectus in conformity with requirements of the Act
and the rules and regulations promulgated thereunder and such
other documents as the Holders shall reasonably request.
(b) In regard to a registration under Section 3.5.2
only, cooperate in taking such action as may be necessary to
register or qualify the Warrant Shares under such other
securities acts or blue sky laws of such jurisdictions as the
Holders shall reasonably request and to do any and all other
acts and things which may be necessary or advisable to enable
the Holders of such Warrant Shares to consummate such proposed
sale or other disposition of the Warrant Shares in any such
jurisdiction.
(c) Keep effective all such registrations under the
Act and cooperate in taking such action as may be necessary to
facilitate a public sale or other disposition of such Warrant
Shares by such Holders.
(d) Pay all expenses of any registration under
Section 3.5.2. Each registration under Section 3.5.1 shall be
at the Company's expense, except for the direct, incremental
costs attributable to the "piggy-backed" Warrant Shares, which
shall be paid by the Holders thereof. The Company shall not be
required to pay any underwriting discount or commission or
applicable transfer taxes relating to the disposition of the
Warrant Shares.
(e) Indemnify and hold harmless each Holder with
respect to which registration, qualification or compliance has
been effected pursuant to this Agreement and any underwriter,
within the meaning of the Act who may purchase from or sell
for any Holder any Warrant Shares, and each of their
respective officers, directors, partners and such Holder's
legal counsel and independent accountants, if any, and such
person controlling such persons, within the meaning of the
Act, from and against any and all losses, claims, damages,
expenses and liabilities (including, but not limited to, legal
fees and expenses and any and all expenses whatsoever
reasonably incurred in investigating, preparing, defending or
settling any claim (including, but not limited to, legal fees
and expenses)) arising from or based on (i) any untrue
statement (or alleged untrue statement) of
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a material fact contained in any registration statement
furnished pursuant to clause (a) of this Section, or any
prospectus included therein or any amendment or supplement
thereto, (ii) any omission (or alleged omission) to state
therein a material fact required to be stated therein or
necessary to make the statements therein not misleading
(unless such untrue statement (or alleged untrue statement) or
omission (or alleged omission) was based upon and in
conformity with information furnished in writing, or required
to be furnished, to the Company by the Holder or underwriter
expressly for use therein), or (iii) any violation by the
Company of any rule or regulation promulgated under the Act or
any state securities law applicable to the Company and
relating to action or inaction by the Company in connection
with any such registration, qualification or compliance.
(f) Each Holder which has securities included in any
registration pursuant to this Agreement shall indemnify and
hold harmless the Company and any underwriter, within the
meaning of the Act, and each of their respective officers,
directors, partners, legal counsel and independent
accountants, and each person controlling such persons within
the meaning of the Act, from and against any and all losses,
claims, damages, expenses and liabilities (including, but not
limited to, legal fees and expenses and any and all expenses
whatsoever reasonably incurred in investigating, preparing,
defending or settling any claim (including, but not limited
to, legal fees and expenses)) arising from or based on (i) any
untrue statement (or alleged untrue statement) of a material
fact contained in any registration statement furnished
pursuant to clause (a) of this Section or any prospectus
included therein or any amendment or supplement thereto, or
(ii) any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to
make the statements therein not misleading, provided, that the
indemnity by such Holder shall be limited to liability based
upon information furnished in writing, or required to be
furnished, to the Company by such Holder expressly for use
therein. The indemnity agreement of the Company herein shall
not inure to the benefit of any such underwriter (or to the
benefit of any person who controls such underwriter) on
account of any losses, claims, damages, liabilities (or
actions or proceedings in respect thereof) arising from the
sale of any of such Warrant Shares by such underwriter to any
person if such underwriter failed to send or give a copy of
the prospectus furnished pursuant to clause (a) of this
Section, to such person with or prior to the written
confirmation of the sale involved. The obligation of any
Holder pursuant to this Section 3.5.3(f) shall be limited to
an amount equal to the net proceeds to such Holder from
securities sold in such registration pursuant to this
Agreement.
(g) Each party entitled to indemnification hereunder
(the "Indemnifying Party") shall give notice to the party
required to provide indemnification (the "Indemnifying Party")
promptly after such Indemnified Party has actual knowledge of
any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any
such claim or any litigation resulting therefrom, provided
that counsel for the Indemnifying Party, who shall conduct the
defense of such claim or litigation, shall be approved by the
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Indemnified Party (whose approval shall not be unreasonably
withheld). The Indemnified Party may participate in such
defense at such party's expense; provided, however, that the
Indemnifying Party shall bear the expense of such defense of
the Indemnified Party if representation of both parties by the
same counsel would be inappropriate due to actual or potential
conflicts of interest. The failure of any Indemnified Party to
give notice as provided herein shall not relieve the
Indemnifying Party of its obligations under this Agreement,
unless and to the extent such failure is prejudicial to the
ability of the Indemnifying Party to defend the action. No
Indemnifying Party, in the defense of any such claim or
litigation shall, except with the consent of each Indemnified
Party, consent to entry of any judgment or enter into any
settlement which does not include as an unconditional term
thereof the giving by the claimant or plaintiff to such
Indemnified Party of a release from all liability in respect
of such claim or litigation.
(h) If the indemnification provided for in paragraphs
(e) and (f) above is unavailable or insufficient to hold
harmless an Indemnified Party, then each Indemnifying Party
shall contribute to the amount paid or payable by such
Indemnified Party as a result of the expenses, claims, losses,
damages or liabilities (or actions or proceedings in respect
thereof) referred to in such paragraphs in such proportion as
is appropriate to reflect the relative fault of the Company,
on the one hand, and the holders of securities registered
pursuant hereto, on the other hand, in connection with the
statement or omissions which resulted in such losses, claims,
damages, expenses and liabilities, as well as any other
relevant equitable considerations. The relative fault shall be
determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates
to information supplied by the Company or any such holder and
the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such untrue statement or
omission. The Company and the Holder agree that it would not
be just and equitable if contributions pursuant to this
paragraph (h) were to be determined by pro rata allocation or
by any other method of allocation which does not take account
of the equitable consideration referred to in this paragraph.
No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such
fraudulent misrepresentation.
(i) In addition, in connection with any registration
requested pursuant hereto, the Company shall:
(1) prepare and file with the SEC pursuant
to the Act such amendments and supplements to such
registration statement and prospectus included
therein as may be necessary to effect and maintain
the effectiveness of such registration statement for
a period of 180 days or such longer period as may be
required in order to complete the distribution of the
securities covered thereby and furnish to the Holders
of such securities copies of any such supplement or
amendment prior to it being used and/or filed with
the SEC and comply with the
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provisions of the Act with respect to the disposition
of all securities to be included in such registration
statement.
(2) provide the Holders, any underwriters in
connection therewith, one counsel for such
underwriters and one counsel for the Holders the
opportunity to participate in the preparation of such
registration statement and each amendment and
supplement thereto.
(3) for a reasonable period prior to the
filing of the registration statement and throughout
the period specified in paragraph (1) above, make
available for inspection by the parties specified in
paragraph (2) above such financial and other
information and books and records of the Company, and
cause the officers, directors, employees and
representatives of the Company to respond to such
inquiries as shall be reasonably necessary to conduct
a reasonable investigation of the Company within the
meaning of the Act.
(4) promptly notify the holders of
securities included in such registration statement
and the managing underwriter in connection therewith
(and confirm such advice in writing) (A) 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 such registration statement or any
post-effective amendment, when the same has become
effective, (B) of any comments 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, (C) 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, (D) of the receipt by
the Company of any notification with respect to the
suspension of the qualification of the securities for
sale in any jurisdiction or the initiation of any
proceeding for such purpose, or (E) if it shall be
the case, at any time when a prospectus is required
to be delivered under the Act, that such registration
statement, prospectus, or any document incorporated
by reference, in any of the foregoing contains an
untrue statement of a material fact or omits to state
a material fact required to be stated therein or
necessary to make the statements therein not
misleading in light of the circumstances then
existing, in which case such Holders of securities
covered by such registration statement shall suspend
sales of such securities until they have been advised
by the Company that an appropriate prospectus
amendment or supplement or post-effective amendment
has been filed; provided, however, that in such
instance the Company shall use its best efforts to
promptly file such prospectus amendment or supplement
or post-effective amendment and the period during
which such holders shall be so required to suspend
sales hereunder shall not exceed 30 days.
(5) use its best efforts to obtain the
withdrawal of any order suspending the effectiveness
of such registration statement or any post-effective
amendment thereto at the earliest practicable date.
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<PAGE> 16
(6) enter into one or more underwriting
agreements, engagement letters, agency agreements,
"best efforts" underwriting agreements, lock-up
agreements or similar agreements, as appropriate, and
take such other actions in connection therewith as
the Holders of securities registered pursuant hereto
shall reasonably request in order to expedite or
facilitate the disposition of such securities.
(7) whether or not an agreement of the type
referred to in the preceding paragraph is entered
into and whether or not any portion of the offering
contemplated by such registration statement is an
underwritten offering, (A) make such representations
and warranties to the Holders of securities
registered pursuant hereto and any underwriters
thereof, in form, substance and scope as are
customarily made in connection with any offering of
equity securities pursuant to any appropriate
agreement and/or to a registration statement filed on
the form applicable to such registration statement,
(B) obtain an opinion of counsel to the Company in
customary form and covering such matters of the type
customarily covered by such an opinion as the
managing underwriters and Holders of securities
registered pursuant hereto may reasonably request,
(C) obtain a "cold" comfort letter or letters from
the independent certified public accountants of the
Company addressed to the Holders and the
underwriters, if any, dated the effective date of
such registration statement , the effective date of
any prospectus supplement to the prospectus included
in such registration statement or post-effective
amendment to such registration statement and the date
of any consummation of the sale of securities
pursuant hereto, such letter or letters to be in
customary form and covering such matters of the type
customarily covered by letters of such type, (D)
deliver such documents and certificates as may
reasonably be requested by the holders of securities
covered by such registration statement and the
managing underwriter, if any, and (E) undertake such
obligations relating to expense reimbursement,
indemnification and contribution as are provided
herein.
(8) otherwise use its best efforts to comply
with all applicable rules and regulations of the SEC
and otherwise take all actions as may reasonably be
necessary to accomplish the intentions and purposes
of this Section 3.5.
3.6 Additional Covenants. The Company and Holder understand that the
possibility exists that in connection with the exercise (including certain
partial exercises) of this Warrant, each of the Company and Holder may be
required to make certain filings under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 ("HSR"). The Company covenants that it 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 exercises of the Warrant hereunder as required on its
part under HSR (each an "HSR Warrant Consent"), in the event the Company is
notified by the Holder that the Holder has been advised by its counsel of the
necessity of making such filings. The Company agrees and covenants that it shall
use good faith commercially reasonable efforts to obtain the HSR Warrant Consent
to allow the Holder to exercise the Warrant, and shall inform the Holder of all
material developments in the Company's efforts to obtain the HSR Warrant
Consent, and that simultaneously with the transmittal to third parties or to
governmental
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<PAGE> 17
agencies, it shall provide the Holder with copies of all correspondence, filings
or other written documentation related to efforts to obtain the HSR Warrant
Consent. If, notwithstanding the Company's satisfaction of its obligations
above, the Company fails to obtain the HSR Warrant Consent, then the Company
shall issue Warrant Shares in the maximum number of shares permissible without
obtaining HSR consent and in lieu of issuing the remaining Warrant Shares in
Common Stock (meaning those that cannot be issued without HSR Consent), the
Company shall issue an equivalent number of shares of a new class of non-voting
common stock of the Company ("Non-Voting Stock") which shall be identical in all
respects to the Common Stock, except that shares of Non-Voting Stock shall not
have the right to vote on any matters presented to the Company's stockholders,
unless otherwise required by law; and by their terms the Non-Voting Stock shall
automatically, without notice or any other further action on the part of either
the Company or the Holder, be converted into shares of Common Stock if they are
transferred by the Holder. Thus, if HSR Warrant Consent shall not have been
obtained, the Holder shall continue to have the right to exercise this Warrant,
as otherwise allowed in accordance with the terms hereof; provided, that upon
such exercise, in lieu of receiving Warrant Shares, the Holder shall receive an
equal number of shares of Non-Voting Stock, to the extent of the affected
Warrant Shares (i.e., if a portion of the Warrant Shares can then be issued
without HSR Warrant Consent, the Non-Voting Stock shall be issued only with
respect to the remainder of the Warrant Shares then exercised as evidenced by
this Warrant). The Amendment of the Restated Certificate of Incorporation of the
Company adopted pursuant to Section 3.4 of the Purchase Agreement and which is
attached thereto as Exhibit B-1 authorized a number of shares of Non-Voting
Stock equal to or greater than the number of Warrant Shares.
The intent of this Section 3.6 is to place the Holder in the position
most nearly identical to the position that the Holder would have been in upon
such exercise if either the HSR Warrant Consent was not necessary or had been
obtained. The Company covenants that, at the cost and expense of the Holder, it
will use commercially reasonable efforts and continue to take all reasonable
steps to attempt to secure for the Holder the Warrant Shares or equivalents
which deliver to the Holder the voting rights and economic benefits incident to
the shares of Common Stock, which efforts shall include, but not be limited to,
appealing any decision of the Federal Trade Commission and/or Justice Department
which denies consent to the exercise in question if, in the opinion of counsel
to the Holder, there is a reasonable basis for such appeal. In the event the
Company is unable to issue the Non-Voting Stock as contemplated herein, the
Company covenants that it will use commercially reasonable efforts to secure for
the Holder the benefits set forth herein.
ARTICLE 4
MISCELLANEOUS
4.1 Term. This Warrant is exercisable, in whole or in part, at any time
and from time to time on or before the Expiration Date set forth above.
4.2 Legends. This Warrant shall be imprinted with a legend in
substantially the following form:
NEITHER THIS SECURITY NOR THE SECURITIES ISSUABLE UPON THE EXERCISE HEREOF HAVE
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE
SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF
UNDER SUCH ACT OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO THE COMPANY AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT
REQUIRED.
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<PAGE> 18
4.3 Compliance with Securities Laws on Transfer. This Warrant may not
be transferred or assigned by the Company. This Warrant may not be transferred
or assigned by the Holder in whole or in part without compliance with applicable
federal and state securities laws by the transferor and the transferee
(including, without limitation, the delivery of investment representation
letters and legal opinions reasonably satisfactory to the Company, as reasonably
requested by the Company). The Company shall not require the Holder to provide
an opinion of counsel if the transfer is to (a) an Affiliate of the Holder; (b)
the respective successors of the Holder in a merger or consolidation; (c) the
purchaser of all or substantially all of the assets of Holder; (d) the
shareholders of the Holder in the event the Holder is liquidated or dissolved;
or (e) any other person or entity with respect to whom such transfer has been
approved by the Company. If requested by the Company, and if the transfer is
other than a circumstance described above, the Holder shall provide a reasonable
opinion of counsel in connection with the transfer of the Warrant Shares
pursuant to Rule 144.
4.4 Transfer Procedure. Subject to the provisions of Section 4.3, the
Holder may transfer all or part of this Warrant or the Warrant Shares issuable
upon exercise of this Warrant (or the securities issuable, directly or
indirectly, upon conversion of the Warrant Shares, if any).
4.5 Notices. All notices and other communications from the Company to
the Holder, or vice versa, shall be deemed delivered and effective when given
personally or mailed by first-class registered or certified mail, postage
prepaid, at the applicable address set forth in Appendix 3 or as may have been
thereafter furnished to the Company or the Holder, as the case may be, in
writing by the Company or such the Holder from time to time.
4.6 Waiver. This Warrant and any term hereof may be changed, waived,
discharged or terminated only by an instrument in writing signed by the party
against which enforcement of such change, waiver, discharge or termination is
sought.
4.7 Attorneys Fees. In the event of any dispute between the parties
concerning the terms and provisions of this Warrant, the party prevailing in
such dispute shall be entitled to collect from the other party all costs
incurred in such dispute, including reasonable attorney's fees.
4.8 Governing Law; Jurisdiction and Venue. This Warrant 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
Company acknowledges and agrees that the state and federal courts sitting in the
State of Delaware shall have jurisdiction in any matter arising out of this
Warrant, and the Company hereby consents to such jurisdiction and agrees that
the venue of any such matter shall also be proper in such state and federal
courts sitting in the State of Delaware.
Dated November 17, 1999
SOURCE MEDIA, INC.
By: /s/ Stephen W. Palley
------------------------------
Name: Stephen W. Palley
Title: President and Chief
Executive Officer
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<PAGE> 1
EXHIBIT 10.15
EMPLOYMENT AGREEMENT, dated as of June 17,
1999, by and between IT NETWORK, INC., a
Delaware corporation ("Company"), and
HOWARD GROSS (the "Employee").
Company desires to engage Employee to perform services for Company, and
Employee desires to perform such services, on the terms and conditions set forth
below:
NOW, THEREFORE, the parties agree as follows:
1. EMPLOYMENT. The Company hereby employs Employee as its President and
Chief Operating Officer, and Employee hereby accepts such employment, upon the
terms and conditions hereinafter set forth.
2. TERM. The term (the "Term") of employment of Employee pursuant to this
Agreement shall commence on the date hereof and shall terminate on the second
anniversary of the date hereof. The Term shall automatically be renewed for
successive one year periods unless either party gives the other written notice
to the contrary at least 30 days prior to the end of the Term or any such
renewal thereof.
3. DUTIES AND SERVICES. Employee shall devote his full time and best
efforts to the business and affairs of the Company, and perform, in a competent
manner, such executive and managerial functions and duties commensurate with his
position as President and Chief Operating Officer of the Company, as the Board
of Directors of the Company (the "Board") may reasonably prescribe from time to
time. Such functions and duties shall include responsibility for and the
authority to make all personnel decisions for the Company, subject to approval
of the Chief Executive Officer of Source Media, Inc., the ultimate parent
company of the Company ("Source Media"), or the Board. The Employee shall report
directly to the Chief Executive Officer of Source Media and the Board. Employee
agrees to serve as a member of the Board if elected or appointed and to serve as
a director and officer of any corporation which is a subsidiary of the Company
if elected by the stockholders or the board of directors of such subsidiary. The
parties acknowledge that it is anticipated that the Employee will spend Monday
through Thursday of each week at the Company's offices in Dallas, Texas until
approximately four months from the date hereof. Thereafter, the Employee may
reduce the time spent at the Company's principal place of business by half if
reasonably practical to do so. The Company will not require Employee to relocate
his home from Acton, MA.
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4. COMPENSATION.
A. BASE SALARY. For all services to be rendered by Employee hereunder,
the Company shall pay Employee an annual base salary of $180,000. The Company
shall pay Employee's salary in accordance with the Company's standard payroll
practices as in effect from time to time, with appropriate deductions required
by applicable laws, rules and regulations.
B. DISCRETIONARY BONUS. On an annual basis, the Board shall consider a
bonus payment to Employee based on his performance, and the Company's results of
operations during each calendar year or portion thereof, during his employment
with the Company. The total bonus shall be up to twenty-five percent (25%) of
the Employee's then annual base salary. Such annual bonus shall be based equally
upon Employee's performance and upon the achievement of certain amounts of the
Company's earnings before interest, taxes, depreciation and amortization as
agreed to in writing between the Employee and the Company in advance of each
year. The timing of the bonus payment shall be in the sole and absolute
discretion of the Board of Directors.
C. STOCK OPTION PARTICIPATION. Employee shall receive a ten-year option
to purchase 125,000 shares of the common stock, par value $.001 per share, of
Source Media, Inc., the ultimate parent company of the Company, pursuant to the
Stock Option Agreement in the form attached hereto as Exhibit A. Additional
stock options may be granted by the board of directors of Source Media from time
to time.
5. EXPENSES. The Company shall reimburse Employee for all reasonable,
ordinary and necessary expenses incurred on behalf of the Company by Employee.
The Company acknowledges that such expenses may include, without limitation,
reasonable costs associated with (A) travel to and from the Company's offices in
Dallas, Texas, (B) operating costs of Employee's office in Acton, MA, generally
consisting of expenses related to telephone line and ISP access charges,
operating supplies and a cellular phone plan, (C) the apartment furnished to
Employee by the Company pursuant to Section 6(B) including the cost of utilities
and a cleaning service, (D) first class upgrade stickers for business air
travel, (E) automobile expenses in and around Dallas, Texas and (F) meal
expenses not to exceed the lesser of the amount set forth in the Company's
guidelines or $75.00 per week. Employee shall submit to the Company an expense
report and receipts or other verification of expenses to be reimbursed in
accordance with the Company's standard policies.
6. BENEFITS.
A. INSURANCE AND RETIREMENT PLANS. Employee shall be entitled to such
insurance and retirement plan benefits as are generally available to other
senior management employees of the Company, pursuant to Company policy in effect
from time to time, such as health insurance, disability and life insurance, and
the right to participate in any retirement plans maintained by the Company. The
Employee may, in lieu of participating in the Company's PPO medical plan, elect
reimbursement by the Company for the cost of a disability policy (or other
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<PAGE> 3
benefits Employee may choose) in an amount not to exceed the lesser of (i) the
full cost to the Company of family coverage under the Company's PPO medical plan
and (ii) $10,000.
B. ACCOMMODATIONS. The Company shall rent during the Term a furnished
apartment for the Employee in the Dallas, Texas area. Such apartment shall be
selected by the Employee in his reasonable discretion subject to approval by the
Chief Executive Officer of Source Media or the Board.
7. VACATION AND PERSONAL DAYS. Employee shall be entitled to twenty (20)
business days of paid vacation during each calendar year (pro-rated for periods
shorter than a calendar year). Vacation days shall be taken in accordance with
the Company's published guidelines.
8. TERMINATION PROVISIONS.
A. TERMINATION FOR CAUSE. Notwithstanding the provisions of Section 2
above, the Company, on two days prior written notice, may terminate the
employment of Employee for any of the following reasons (for "cause"), without
the payment of any compensation to Employee, except accrued salary and vacation
pay due for the period prior to the date of termination of employment:
(i) Employee shall be convicted of a felony;
(ii) Commission of theft from or fraud against the Company or any
willful misconduct by the Employee that is materially injurious to the financial
condition or business reputation of the Company, including by reason of material
breach by the Employee of the provisions of this Agreement.
B. TERMINATION BY COMPANY OTHER THAN FOR CAUSE, DEATH OR DISABILITY.
(i) If the employment of Employee is terminated by the Company other
than for cause, death or disability, the Company shall pay to Employee as
severance compensation, in equal monthly installments, (a) the base salary
payments that Employee would have earned if he had continued his employment
until the end of the initial Term, and (b) an amount equal to any accrued and
unpaid vacation days on the date of termination of employment. Such payments
shall cease in the event Employee obtains other employment at compensation
greater than or equal to Employee's compensation (including bonuses) from the
Company, following termination of employment. In the event Employee obtains
other employment at lesser compensation than specified above, then the Company
shall pay Employee the difference between said compensation and the compensation
otherwise payable under this section.
(ii) Until the date Employee obtains other employment and receives
activated coverage as specified below, or the end of the Term, whichever occurs
first, the Company
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will continue life, medical, dental and disability coverage substantially
identical to the coverage maintained by the Company for Employee and his
dependents prior to termination of his employment, except to the extent such
coverage may be changed in its application to all Company employees on a
nondiscriminatory basis.
C. TERMINATION ON ACCOUNT OF DISABILITY OR DEATH.
(i) In the event Employee shall, during the term of this Agreement,
become physically or mentally disabled so that he is unable, or can reasonably
be expected to be unable, to perform his duties hereunder for a period of
seventy-five (75) consecutive days, or ninety (90) non-consecutive days within
any twelve (12) month period, the Company shall have the right to terminate
Employee's employment, provided that (a) the Company provides the Employee with
not less than five (5) days prior written notice of the termination of his
employment and (b) the Company makes the payments to Employee referred to in
clause (ii) below. Any determination of disability shall be made by a physician
selected by the Company and reasonably acceptable to the Employee.
(ii) In the event the Company terminates the Employee's employment
for disability as set forth in clause (i) above ("Disability Termination"),
Employee shall be entitled to receive, in monthly installments, the base salary
Employee would have received in the following six months had his employment
continued for six months past the date of Disability Termination less any
amounts Employee receives from insurance payments under any Company-provided
insurance plan on account of such disability. All payments made pursuant to this
paragraph shall be made in accordance with the Company's standard payroll
practices as in effect from time to time, with appropriate deductions required
by applicable laws, rules and regulations. In addition, the Company, at its
expense, for a period of six months following the date of Disability
Termination, will continue medical and dental insurance coverage substantially
identical to the coverage maintained by the Company for Employee and his
dependents prior to termination of employment, except to the extent such
coverage may be changed in its application to all Company employees on a
non-discriminatory basis.
(iii) In the event of the death of Employee, the Company shall pay
the estate of the Employee or his legal representative the accrued salary and
vacation pay due for the period prior to the date of Employee's death.
D. TERMINATION BY THE EMPLOYEE.
(i) Notwithstanding the provisions of Section 2 above, the Employee
will be considered to have resigned his employment for "good reason" if the
Company, without the express written consent of the Employee, materially
breaches this Agreement.
(ii) In the event that the Employee resigns from his employment for
good reason, the Company shall be obligated to provide the Employee with the
severance payments and
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<PAGE> 5
insurance coverage as required if the Company had terminated the Employee other
than for cause pursuant to Section 8(B) above.
(iii) In the event that the Employee resigns from his employment
without good reason, the Company shall be obligated to provide the Employee with
the payments as required if the Company had terminated the Employee for cause
pursuant to Section 8(A) above.
9. REPRESENTATIONS AND WARRANTIES. Employee represents and warrants that
Employee is not subject to or a party to any agreement, contract, covenant,
order or other restriction which in any way prohibits, restricts or impairs
Employee's ability to enter into this Agreement and carry out his duties and
obligations hereunder. Each party hereto represents and warrants to the other
that (A) it has the full legal right and power and all authority and approvals
required to enter into, execute and deliver this Agreement and to perform fully
all of his or its obligations hereunder; and (B) this Agreement has been duly
executed and delivered by it and constitutes a valid and binding obligation of
such party, enforceable in accordance with its terms.
10. NON-COMPETITION AND SECRECY.
A. NO COMPETING EMPLOYMENT. For so long as Employee is employed by the
Company and for a period of the lesser of (i) twelve (12) months after
termination of employment and (ii) the expiration of the Term, Employee shall
not, directly or indirectly, own an interest in, manage, operate, join, control,
lend money, or render financial or other assistance to or participate in or be
connected with, as an officer, employee, partner, stockholder, consultant or in
a similar capacity, any sole proprietorship, partnership, firm, corporation or
other business organization or entity that competes with the Company in any
business in which it is engaged during the Term or at the time of the Employee's
termination; provided, however, that nothing in this Section 10(A) shall
prohibit Employee from (i) making a non-controlling and passive investment in a
corporation or other entity whose shares are publicly traded or (ii) engaging in
any activity referred to above in any geographic area in which the Company is
not engaged in business during the Term or at the time of the Employee's
termination. The foregoing restriction shall not apply in the event that the
Employee is terminated without cause or resigns his employment for good reason.
B. NO INTERFERENCE. For the period ending twelve (12) months after the
later of (i) the termination of the Employee's employment and (ii) the
expiration of the Term, Employee shall not, whether for his own account or for
the account of any other individual, partnership, firm, corporation or other
business organization (other than the Company), intentionally solicit, endeavor
to entice away from the Company, or otherwise interfere with the relationship of
the Company with, any person who is employed by the Company at the time of the
termination of the Employee's employment.
C. SECRECY. Employee recognizes that the services to be performed by
him hereunder are special, unique and extraordinary in that, by reason of his
employment hereunder, he may acquire confidential information and trade secrets
concerning the operation of the Company or
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<PAGE> 6
any affiliate thereof, the use or disclosure of which could cause the Company
substantial loss and damages which could not be readily calculated and for which
no remedy at law would be adequate. Accordingly, Employee covenants and agrees
with the Company that he will not at any time, except in performance of
Employee's obligations to the Company hereunder or with the prior written
consent of the Company, directly or indirectly, disclose any secret or
confidential information that he may learn or has learned by reason of his
association with the Company. The term "confidential information" includes,
without limitation, information not previously disclosed to the public or to the
trade with respect to the products, facilities, applications and methods, trade
secrets and other intellectual property, systems, procedures, manuals,
confidential reports, product price lists, customer lists, technical
information, financial information (including the revenues, costs or profits
associated with any of its products), business plans, prospects or opportunities
but shall exclude any information already in the public domain. Notwithstanding
anything to the contrary herein contained, Employee's obligation to maintain the
secrecy and confidentiality of the confidential information under this Section
10 shall not apply to any such confidential information which is disclosed
through any means other than as a result of any act by Employee constituting a
breach of this Agreement or which is required to be disclosed under applicable
law.
D. EXCLUSIVE PROPERTY. Employee hereby agrees to keep all such records
in connection with Employee's employment as the Company may from time to time
direct, and all such records shall be the sole and exclusive property of the
Company. Upon termination of the Employee's employment, the Employee shall
return to the Company all confidential and/or proprietary information that
exists in written or other physical form (and all copies thereof) under the
Employee's control.
E. INJUNCTIVE RELIEF. Without intending to limit the remedies available
to the Company, Employee acknowledges that a breach of any of the covenants
contained in this Section 10 may result in material irreparable injury to the
Company for which there is no adequate remedy at law, that it will not be
possible to measure damages for such injuries precisely and that, in the event
of such a breach or threat thereof, the Company shall be entitled to seek to
obtain a temporary restraining order and/or a preliminary injunction restraining
Employee from engaging in activities prohibited by this Section 10 or such other
relief as may be required to specifically enforce any of the covenants in this
Section 10.
11. INDEMNIFICATION. The Company shall indemnify the Employee and hold the
Employee harmless from and against any claim, loss, damages, expense, liability
or cause of a action (whether now pending or subsequently commenced), including,
without limitation, liability in connection with suits by shareholders,
debtholders, prospective joint venturers or strategic partners, or current or
former employees, arising from or out of the Employee's consulting work for the
Company prior to the date hereof and during the term of the Employee's
employment pursuant to this Agreement, to the maximum extent permitted by
applicable law and the Company's charter and bylaws provided that such
activities were undertaken in good faith and for the benefit of the Company. If
for any reason the foregoing indemnification is unavailable or insufficient to
hold the Employee harmless, then the Company shall contribute to the amount paid
or payable by the
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Employee as a result of such claim, loss, damages, expense, liability or cause
of action in such proportion as is equitable.
12. SECTION HEADINGS. The titles to the Sections of this Agreement are
solely for the convenience of the parties and shall not be used to explain,
modify, simplify, or aid in the interpretations of the provisions of this
Agreement.
13. NOTICES. All notices, demands and requests provided or permitted to be
given pursuant to this Agreement, shall be given in writing, sent by certified
mail, return receipt requested, and addressed as follows or to such other
address so designated in the appropriate manner by the parties. All notices
shall be deemed effective when mailed.
<TABLE>
<S> <C>
Company: IT Network, Inc.
c/o Source Media, Inc.
5400 LBJ Parkway
Suite 680
Dallas, Texas 75240
Attention: Board of Directors
With a copy to:
Robert L. Winikoff, Esq.
Cooperman Levitt Winikoff Lester & Newman, P.C.
800 Third Avenue
New York, New York 10022
Employee: Howard Gross
5 Duston Lane
Acton, MA 01720
</TABLE>
14. ASSIGNMENT AND ASSUMPTION. The rights of each party under this
Agreement are personal to that party and may not be assigned, delegated or
transferred to any other person, firm, corporation, or other entity without the
prior written consent of the other party, except that the Company may transfer
its rights under this Agreement to any affiliate or other entity which succeeds,
by contract or operation of law, to all or substantially all of the business of
the Company and agrees in writing to assume the Company's obligations under this
Agreement, and provided such transfer does not materially change the provisions
of section 10 of this Agreement.
15. GOVERNING LAW. This Agreement shall be governed by, construed and
enforced in accordance with the laws of the State of New York without giving
effect to the conflicts of law principles of the laws of said state. The Company
shall reimburse the Employee for all reasonable
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fees and disbursements incurred by the Employee in connection with any dispute
over the enforcement of the Employee's rights under this Agreement, but only if
the Employee substantially prevails in such dispute.
16. ENTIRE AGREEMENT. This Agreement, and the stock option agreement
evidencing the stock option referred to in Section 4(C), shall constitute the
entire agreement between the parties and any prior written or oral understanding
or representation of any kind, or any oral communications shall not be binding
upon either party except to the extent incorporated in this Agreement. This
Agreement supersedes any and all prior agreements between the parties.
17. MODIFICATION OF AGREEMENT. This Agreement can be modified only in
writing and shall be binding only if executed with and under the same formality
by the parties hereto or their duly authorized representatives.
18. NO WAIVER. The failure of either party to this Agreement to insist upon
the performance of any of the terms and conditions of this Agreement, or the
waiver of any breach of any of the terms and conditions of this Agreement, shall
not be construed as thereafter waiving any such terms and conditions, but each
same shall continue and remain in full force and effect as if no such
forbearance or waiver had occurred.
19. EFFECT OF PARTIAL INVALIDITY. The invalidity or unenforceability of any
provision or covenant of this Agreement shall not be deemed to affect the
validity or enforceability of any other provision or covenant. In the event that
any provision or covenant of this Agreement is held invalid or unenforceable,
the same shall be deemed automatically modified to the minimum extent necessary
to make such provision or covenant enforceable and the parties agree that the
remaining provisions shall be deemed to be and to remain in full force and
effect.
20. COUNTERPARTS. This Agreement may be executed in two or more
counterparts and all counterparts so executed shall constitute one and the same
agreement.
8
<PAGE> 9
IN WITNESS WHEREOF, the parties hereto have executed this Employment
Agreement as of the date first above written.
IT NETWORK, INC.
By: /s/ Stephen W. Palley
----------------------
Name: Stephen W. Palley
Title: Chief Executive Officer
/s/ Howard Gross
---------------------
Howard Gross
9
<PAGE> 1
EXHIBIT 10.16
March 29, 1999
[Name]
[Address]
Re: Consulting Services, Termination and Release of Employment
Dear ______:
This will confirm that we have agreed to the following in connection with
your resignation as a director, officer and employee of Source Media, Inc., and
each of its direct and indirect subsidiaries (collectively, the "Company"):
1. Resignation; Vacation. You have advised us of, and you hereby confirm,
your resignation as a director, officer and employee of the Company effective as
of the later of (i) the date of execution of definitive documents relating to
the transactions substantially upon the terms contemplated by the Letter of
Intent dated February 11, 1999 between the Company, Prevue Ventures, Inc. and
United Video Satellite Group, Inc., and (ii) May 1, 1999, but in no event later
than May 28, 1999 (the "Effective Date"). Accordingly, effective as of the
Effective Date, you shall no longer be a director or a member of any committee
thereof, an officer or an employee of the Company and, therefore, you are not
entitled after the Effective Date to any salary or other benefits from the
Company, except as otherwise specifically provided herein.
2. Consulting Obligations. The Company desires to retain your services as a
consultant after the Effective Date, and hereby engages you for a period (the
"Consulting Period") commencing on the Effective Date through and including
January 31, 2000 as a consultant of the Company to consult with and advise the
directors, officers and employees of the Company from time to time, as and when
requested upon reasonable prior notice, with respect to any matters relating to
the Company's business, provided that the amount of consulting time to be
devoted by you shall not unreasonably interfere with your ability to secure or
maintain alternative full-time employment, or with other business or personal
activities, during the Consulting Period.
3. Consulting Payments. In consideration of your agreement to act as a
consultant, the Company hereby agrees to pay you during the Consulting Period at
a rate equal to your
<PAGE> 2
[Name]
Page 2
March 29, 1999
current base salary, at the same payment intervals and otherwise in accordance
with the Company's standard practices as in effect from time to time. The
Company shall reimburse you for all out-of-pocket costs and expenses incurred by
you which relate to your consulting services.
4. Health Insurance. The Company shall continue your current health care
benefits through the date which is the second anniversary of the Effective Date.
If the Company is unable to provide such health care benefits to you at any time
during such two-year period, the Company shall reimburse you for costs incurred
by you in obtaining health care benefit comparable to those currently provided
to you by the Company.
5. Stock Options. Notwithstanding the provisions of any agreement between
you and the Company, any and all options for stock of the Company which you
currently hold shall become exercisable in full as of the Effective Date, and
may be exercised at any time prior to the expiration of the related "Option
Period" stated in such agreement notwithstanding any termination or other
cessation of your employment or other engagement by the Company. An additional
option to purchase 16,666 shares of the Company's Common Stock is hereby granted
to you pursuant to the Stock Option Agreement in the form attached as Exhibit A.
The Company agrees that the foregoing previously and newly granted options will
be fully and irrevocably vested as of the Effective Date and that,
notwithstanding any option or other agreement to the contrary (including without
limitation the provisions of any stock option agreements or stock option plans),
such options shall not be subject to termination or cancellation (neither shall
you forfeit such options nor shall the Company be entitled to recoup the
economic value thereof) except in the event of a material violation of
paragraphs 2 and 9 of this letter agreement; provided, however, that any
previously granted options shall not be subject to termination or cancellation
(nor shall you forfeit such options nor shall the Company be entitled to recoup
the economic value thereof) in the event of a material violation of paragraph 2
of this Agreement. You shall not be deemed to be in material violation of either
paragraph 2 or 9 of this Agreement unless (a) you have first received written
notice of such material violation (specifying in detail the specific basis for
the Company's belief that you have engaged in such a material violation) and (b)
you have not cured such violation within thirty (30) days after receiving such
written notice of material violation; provided, however, that the Company shall
not send you such written notice of material violation unless the Board of
Directors shall have first voted approval of such written notice at a meeting
which you (and your counsel, if you so desire) shall be permitted to attend and
be heard on the subject of such material violation. The Company represents that
the newly granted options described above, as well as the provisions of this
paragraph, have been approved by the Compensation Committee of the Board of
Directors of the Company and/or such other Committee(s) as may be necessary to
approve the newly granted options or the provisions of this paragraph.
6. Release. In consideration of your continued engagement by the Company as
a consultant and the aforesaid payments and benefits to be granted to you, you
hereby release and forever discharge the Company, its affiliates, officers,
directors, agents, employees, successors and assigns from any and all claims,
demands, actions, liabilities, damages or rights of any kind
<PAGE> 3
[Name]
Page 3
March 29, 1999
whether known or unknown that you have, have ever had, or may have through the
date of this letter agreement including but not limited to those arising out of
or related to your employment or resignation from employment with the Company;
provided, that the foregoing shall not apply to any claims for indemnification,
claims arising out of this letter agreement, or claims for reimbursement of
expenses incurred prior to the date hereof, or claims for any vested benefits
under any employee benefit plan of the Company. You further understand and agree
that you will not institute or authorize any other party governmental or
otherwise, to institute any administrative or legal proceeding seeking
compensation or damages on your behalf against the Company or any of its
officers, directors, agents, employees, successors or assigns relating to or
arising out of any aspect of your employment or your resignation therefrom. The
Company releases and forever discharges you from any and all claims, demands,
actions, liabilities, damages or rights of any kind whether known or unknown
that the Company has, has ever had, or may have through the date of this letter
agreement, provided that the foregoing shall not apply to any claims that may be
the result of your gross negligence or willful misconduct in connection with
your employment by the Company (provided that the Company represents that it is
presently unaware of the existence of any such claims). This release is intended
to extend to and include, but not be limited to, any claims arising under Title
VII of the 1964 Civil Rights Act, 42 U.S.C. Section 2000e, et seq., the Age
Discrimination Employment Act, 24 U.S.C. Section 621, et seq., the Americans
with Disabilities Act, 42 U.S.C. Section 12101, et seq., and any other
applicable federal or state law, as well as any common law, contract, quasi
contract or tort claims.
7. Independent Contractor Status; Return of Property. Effective beginning
on the Effective Date and through the Consulting Period, you shall be deemed for
all purposes herein an independent contractor for the Company and nothing herein
shall create, or shall be intended to create, an employment relationship between
you and the Company. Accordingly, you shall have no authority to, and shall not,
speak about or on behalf of the Company. Furthermore, you hereby acknowledge
that all records, files, data, documents and/or equipment or other matter (in
whatever form) and all copies thereof relating to the business of the Company
which you have prepared, used or came into contact with shall be and remain the
sole property of the Company and shall not be either duplicated and/or removed
from its place or places of business. You shall be permitted to remove only your
personal effects from the Company's premises.
8. Nondisparagement; Cooperation in Litigation; Indemnification;
Confidentiality; References; Press Release. You hereby agree you will not make
any statements, public or otherwise, relating to the Company or its affiliates,
including, without limitation, to the financial press and financial analysts or
by means of electronic communication (i.e., over the Internet or similar mediums
for communication), you will not engage in any conduct or make any statements
which are critical of the Company or its affiliates, you will not disclose any
information about the Company or its affiliates which is confidential or which
could be deemed confidential or private or sensitive in nature. You will
cooperate fully and assist the Company to the best of your abilities (upon
reasonable notice and not requiring an amount of time inconsistent with your
ability to secure or maintain alternative employment or to engage in other
<PAGE> 4
[Name]
Page 4
March 29, 1999
business or personal activities) in connection with any pending or subsequent
legal matter or proceedings involving, directly or indirectly, your role or
actions as director, officer or employee of the Company. The Company agrees (to
the fullest extent possible under existing law) to indemnify you and hold you
harmless, and to provide you with a defense at the Company's expense, against
any and all claims brought against you in any way related to or arising out of
the execution of your duties and responsibilities on behalf of the Company under
this Consulting Agreement, exclusive of claims arising out of your gross
negligence or wilful misconduct in the performance of your duties hereunder.
Both the Company and you acknowledge and agree that all the terms of this
Agreement are important and are to be kept confidential, and shall not be
disclosed except as required by law. When requested to do so by you, the Company
shall give a reference to prospective employers in the form attached hereto as
Exhibit B. The Company shall obtain your approval of any press release to be
issued relating to the subject matter of this letter, which approval shall not
be unreasonably withheld.
9. Post-Employment Restrictions. During the Consulting Period, you will
not, directly or indirectly:
a. engage in direct competition with the business of the company or the
joint venture referenced in paragraph 1 hereof (the "Joint Venture") as it
exists as of the Effective Date or at any time during the Consulting Period; or
b. induce any employees, consultants or other paid consultants of the
Company or the Joint Venture to cease their employment or other relationship
with the Company or the Joint Venture; or
c. adversely affect the relationship of the Company or the Joint
Venture with any of its customers, associates, consultants or employees.
10. Miscellaneous. If a dispute concerning this Agreement shall arise, such
dispute will be resolved by applying the laws of the State of New York without
regard to its conflict of law provisions, and any cause of action for breach of
this Agreement shall be brought in any state or federal court located in the
State of New York, you having hereby waived any claim that this is not a
convenient forum. This Agreement constitutes the entire understanding between
the parties and no waiver or modification of the terms hereof shall be valid
unless in writing signed by the party to be charged and only to the extent
therein set forth. Your rights and obligations hereunder are personal in nature
and this Agreement may not be assigned by you to any other party.
<PAGE> 5
[Name]
Page 5
March 29, 1999
If the foregoing confirms your understanding and Agreement, please
countersign the enclosed copy of this letter and deliver same to the
undersigned.
Very truly yours,
SOURCE MEDIA, INC.
By:
---------------------
Stephen W. Palley
Chief Executive Officer
AGREED TO AND ACCEPTED BY:
[Signature]
[Name]
<PAGE> 1
EXHIBIT 21.1
<TABLE>
<CAPTION>
Subsidiary Jurisdiction of Incorporation/Formation
- ---------- ---------------------------------------
<S> <C>
Cableshare B.V. Netherlands
Cable Share International Inc. Barbados
Cableshare (U.S.) Limited Illinois
Interactive Channel, Inc. Delaware
Interactive Channel Technologies Inc. Ontario, Canada
IT Network, Inc. Delaware
1229501 Ontario Inc. Ontario, Canada
997758 Ontario Inc. Ontario, Canada
SMI Holdings, Inc. Texas
SourceSuite LLC (1) Delaware
</TABLE>
(1) The Company directly owns 50% of the membership interests and acts as the
manager of SourceSuite LLC.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
pertaining to the 1989, 1991 and 1993 stock option plans and the 1995
performance equity plan, (Form S-8 No. 33-00142), (Form S-8 No. 33-00144),
Employee Stock Purchase Plan (Form S-8 No. 333-30197), 1995 Nonqualified Stock
Option Plan for Non-Employee Directors and certain nonqualified stock options
(Form S-8 No. 333-31439), Senior PIK Preferred Stock (Form S-4 No. 333-42017),
and Registration of shares underlying certain warrants (Form S-3 No. 333-50853)
of our reports dated March 3, 2000, with respect to the consolidated financial
statements of Source Media, Inc. and SourceSuite LLC included in the Annual
Report (Form 10-K) for the year ended December 31, 1999.
/s/ ERNST & YOUNG LLP
Dallas, Texas
March 29, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 10,910
<SECURITIES> 8,497
<RECEIVABLES> 3,101
<ALLOWANCES> 605
<INVENTORY> 0
<CURRENT-ASSETS> 23,576
<PP&E> 10,391
<DEPRECIATION> 7,957
<TOTAL-ASSETS> 58,016
<CURRENT-LIABILITIES> 9,168
<BONDS> 96,250
18,467
0
<COMMON> 16
<OTHER-SE> (68,888)
<TOTAL-LIABILITY-AND-EQUITY> 58,016
<SALES> 20,970
<TOTAL-REVENUES> 20,970
<CGS> 14,987
<TOTAL-COSTS> 14,987
<OTHER-EXPENSES> 31,005
<LOSS-PROVISION> 250
<INTEREST-EXPENSE> 12,819
<INCOME-PRETAX> (38,181)
<INCOME-TAX> 0
<INCOME-CONTINUING> (38,181)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (40,019)
<EPS-BASIC> (2.93)
<EPS-DILUTED> (2.93)
</TABLE>
