-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AKzTkoTGA9nLuiL+aCJkXsXqzUAjqq/dEhI085j5j3S7pHwNWZPz8T3OYoxphqVZ z697OurrvwJDpEczAKIfUA== 0000950134-97-008457.txt : 19971117 0000950134-97-008457.hdr.sgml : 19971117 ACCESSION NUMBER: 0000950134-97-008457 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19971030 ITEM INFORMATION: ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19971113 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOURCE MEDIA INC CENTRAL INDEX KEY: 0000900029 STANDARD INDUSTRIAL CLASSIFICATION: TELEGRAPH & OTHER MESSAGE COMMUNICATIONS [4822] IRS NUMBER: 133700438 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 000-21894 FILM NUMBER: 97717608 BUSINESS ADDRESS: STREET 1: 8140 WALNUT HILL LANE STE 1000 CITY: DALLAS STATE: TX ZIP: 75231 BUSINESS PHONE: 9146695811 MAIL ADDRESS: STREET 1: 8140 WALNUT HILL LANE STREET 2: STE 1000 CITY: DALLAS STATE: TX ZIP: 75231 FORMER COMPANY: FORMER CONFORMED NAME: HB COMMUNICATIONS ACQUISITION CORP DATE OF NAME CHANGE: 19950703 8-K 1 FORM 8-K, DATED 10/30/97 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported): OCTOBER 30, 1997 SOURCE MEDIA, INC. (Exact name of registrant as specified in is charter) DELAWARE 0-21894 13-3700438 (State or other (Commission (IRS Employer jurisdiction of File Number) Identification No.) incorporation) 5400 LBJ FREEWAY, SUITE 680 DALLAS, TEXAS 75240 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (972) 701-5400 2 Item 2 Acquisition or Disposition of Assets (a) BRITE VOICE ASSET ACQUISITION. On October 30, 1997, the Company, through a subsidiary, acquired certain of the electronic publishing assets of Brite Voice, Inc. ("Brite") pursuant to the terms of an Asset Purchase Agreement included as Exhibits 2.1 and 2.2 hereto. These assets consisted primarily of contract rights and equipment used in the Company's voice information services business. The purchase price for these assets was approximately $35.6 million in cash. VNN ASSET ACQUISITION. On October 30, 1997, the Company, through a subsidiary, acquired the electronic publishing assets of Voice News Network, Inc. ("VNN") pursuant to the terms of an Asset Purchase Agreement included as Exhibit 2.3 hereto. These assets consisted primarily of contract rights and equipment used in the Company's voice information services business. The purchase price for these assets was $9.0 million in cash. Both of these acquisitions were funded with cash acquired in a private placement described below, which was made in reliance upon Rule 506 of Regulation D and Rule 144A under the Securities Act of 1933, as amended (the "Securities Act"). 2 3 Item 5 Other Events THE OFFERING Issuer..................... Source Media, Inc. Use of Proceeds............ The net proceeds from the Offering were approximately $113.6 million. Of the net proceeds, the Company used or will use (i) approximately $35.6 million to finance the Brite acquisition, (ii) $9.0 million to finance the VNN acquisition, (iii) approximately $22.3 million to retire existing debt, (iv) approximately $22.3 million to fund the interest escrow account, (v) approximately $6.4 million to pay fees and expenses and (vi) approximately $24.4 million for general corporate purposes, including working capital. THE NOTES Securities Offered......... $100,000,000 aggregate principal amount of 12% Senior Secured Notes due 2004. Maturity Date.............. November 1, 2004. Interest Payment Dates..... May 1 and November 1 of each year, commencing on May 1, 1998. Optional Redemption........ Except as described below and under "Change of Control", 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 the redemption prices set forth herein, 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 received from 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 million of the aggregate principal amount of the Notes remain outstanding immediately after each such redemption. Change of Control.......... Upon the occurrence of a Change of 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 repurchase. Ranking.................... The Notes are senior secured obligations of the Company and rank pari passu in right of payment with all existing and future Senior Indebtedness of the Company and rank senior in right of payment to all existing and future subordinated obligations of the Company. Escrow and Disbursement Agreement................ The Company placed approximately $22.3 million of the net proceeds realized from the sale of the Notes, representing funds sufficient to pay the first four interest payments on the Notes, into an interest escrow account to be held by the escrow agent for the benefit of the holders of the Notes. Until disbursed in accordance with the Escrow and Disbursement Agreement, the interest escrow account is designed to secure a portion of the Company's obligations under the Notes. Funds will be disbursed from the interest escrow account only to pay interest on the Notes and, upon certain repurchases or redemptions of the Notes, to pay principal of and premium, if any, thereon. Pending such disbursement, all funds contained in the interest escrow account will be invested in cash equivalents. 3 4 Security................... The collateral securing the Notes consists of substantially all the assets of the Company, all the capital stock of the subsidiary guarantors and the interest escrow account. The collateral securing the Guarantees consists of substantially all of the assets of the subsidiary guarantors. Guarantees................. The Notes are unconditionally guaranteed, jointly and severally, by each of the Subsidiary guarantors (which are all of the Company's subsidiaries). The Guarantees are senior obligations of the subsidiary guarantors and are secured by substantially all of the assets of 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 contain 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. Restrictive Covenants...... The indenture under which the Notes are issued (the "Indenture") contains certain covenants that, among other things, limit (i) the incurrence of additional indebtedness by the Company and its subsidiaries, (ii) the payment of dividends on, and redemption of, capital stock of the Company and the redemption of certain subordinated obligations of the Company, (iii) investments, including investments over a certain amount in Interactive Channel by the Company or any restricted subsidiary, (iv) sales of assets and subsidiary stock, (v) transactions with affiliates and (vi) consolidations, mergers and transfers of all or substantially all of the assets of the Company. The Indenture also prohibits certain distributions from subsidiaries. However, all the limitations and prohibitions are subject to a number of important qualifications and exceptions. Exchange Offer and Registration Rights...... The Company must use its best efforts to (i) file, within 45 days after the date of original issuance of the Notes (the "Issue Date") (such date of filing, the "Filing Date"), a registration statement (the "Exchange Offer Registration Statement") with respect to an offer to exchange the Notes (the "Exchange Offer") for a series of notes of the Company with terms substantially identical to the Notes (the "Exchange Notes"), (ii) cause such Exchange Offer Registration Statement to be declared effective within 120 days after the Filing Date and (iii) consummate the Exchange Offer within 180 days after the Filing Date. Such Exchange Notes, if issued, will bear the same rate of interest as the Notes. In the event that the Company does not comply with certain covenants set forth in an Exchange and Registration Rights Agreement between the Company and the initial purchasers, the Company will be obligated to pay certain liquidated damages to the holders of the Notes. 4 5 Transfer Restrictions; Absence of a Public Market for the Notes..... The Notes have not been registered under the Securities Act and are subject to restrictions on transferability and resale. The Notes are new securities and there is currently no established market for the Notes. If issued, the Exchange Notes will generally be freely transferable (subject to the restrictions discussed elsewhere herein) but will be new securities for which there will not initially be a market. The Notes have been designated for trading in the PORTAL market. The initial purchasers have advised the Company that they may make a market in the Notes. However, the initial purchasers are not obligated to do so, and any market making with respect to the Notes may be discontinued at any time without notice. The Company does not intend to apply for a listing of the Notes, or, if issued, the Exchange Notes, on any securities exchange or on any automated dealer quotation system. THE UNITS Securities Offered......... 800 Units each consisting of 1,000 shares of 13 1/2% Senior PIK Preferred Stock with a liquidation preference of $25.00 per share and 558.75 Warrants to purchase one share of Common Stock each. In the aggregate, the Warrants represent the right to purchase 447,000 shares of Common Stock, or 3% of the Company's Common Stock on a fully diluted basis. Issue Price................ $25,000 per Unit. Separability............... The Preferred Stock and the Warrants are detachable and were immediately separated upon sale by the Initial Purchasers (the "Separability Date"). Allocation of Issue Price...................... The Company intends to allocate $18,089 of the issue price of a Unit to the Preferred Stock and $6,911 of such issue price to the Warrants. PREFERRED STOCK Shares Offered............. 800,000 Liquidation Preference..... $25.00 per share, plus accumulated and unpaid dividends Optional Redemption........ 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 Preferred Stock with cash proceeds from one or more equity offerings at a redemption price equal to 113.50% of the liquidation preference thereof, plus accumulated and unpaid dividends to 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 the redemption prices set forth herein, together with all accumulated and unpaid dividends to the date of redemption. Mandatory Redemption....... The Company is required, subject to certain conditions, to redeem all of the Preferred Stock outstanding on November 1, 2007 at a redemption price equal to 100% of the liquidation preference thereof, plus accumulated and unpaid dividends to the date of redemption. Dividends.................. At a rate equal to 13 1/2% per annum of the liquidation preference per share, payable quarterly beginning February 1, 1998 and accumulating from the Preferred Stock Issue Date (as defined). The Company, at its option, may pay dividends on any Dividend Payment Date occurring on or before November 1, 2002 either in cash or by the issuance of additional Preferred Stock with a liquidation preference equal to the amount of such dividends; thereafter, dividends will be paid in cash. The indenture limits the amount of cash dividends that may be paid on the preferred stock of the Company, including the Preferred Stock. Dividend Payment Dates..... February 1, May 1, August 1 and November 1 of each year (each, a "Dividend Payment Date"). Voting..................... The Preferred Stock is non-voting, except as otherwise required by law and except in certain circumstances described herein, including 5 6 (i) amending certain rights of the holders of the Preferred Stock and (ii) the issuance of any class of equity securities that ranks on a parity with or senior to the Preferred Stock. In addition, if the Company (i) after November 1, 2002 fails to pay cash dividends in any dividend period, (ii) fails to make a mandatory redemption or an offer to purchase upon a Change of Control, or (iii) fails to comply with certain covenants or make certain payments on its indebtedness, holders of a majority of the shares of the Preferred Stock, voting as a class, will be entitled to elect two directors to the Company's board of directors. Ranking.................... The Preferred Stock, with respect to dividend rights and rights on liquidation, winding-up and dissolution of the Company, ranks senior to all classes of common stock and to all other classes of preferred stock of the Company subject to certain exceptions. Change of Control.......... Upon the occurrence of a Change of Control, the Company is required to make an offer to repurchase the Preferred Stock at a price equal to 101% of the liquidation preference thereof, plus accumulated and unpaid dividends to the date of repurchase. Restrictive Covenants...... The Certificate of Designation contains certain restrictive provisions that, among other things, limit (i) the incurrence of additional indebtedness by the Company and its subsidiaries, (ii) the issuance of preferred stock of the Company's subsidiaries, (iii) payment of dividends on, and redemption of, capital stock of the Company and the redemption of certain subordinated obligations of the Company, (iv) investments, including investments over a certain amount in Interactive Channel by the Company or any restricted subsidiary, (v) transactions with affiliates and (vi) consolidations, mergers and transfers of all or substantially all of the assets of the Company. However, all of the limitations and prohibitions are subject to a number of important qualifications and exceptions. Exchange Offer and Registration Rights........ The Company must use its best efforts to (i) file, within 45 days after the date of original issuance of the Preferred Stock (the "Preferred Stock Issue Date") (such date of filing, the "Preferred Stock Filing Date"), a registration statement (the "Preferred Stock Exchange Offer Registration Statement") with respect to an offer to exchange the Preferred Stock (the "Preferred Stock Exchange Offer") for a series of preferred stock of the Company with terms substantially identical to the Preferred Stock (the "Exchange Preferred Stock"), (ii) cause such Preferred Stock Exchange Offer Registration Statement to be declared effective within 120 days after the Preferred Stock Filing Date and (iii) consummate the Preferred Stock Exchange Offer within 180 days after the Preferred Stock Filing Date. Such Exchange Preferred Stock, if issued, will bear the rate of interest specified on the cover page hereof for the Preferred Stock. In the event that the Company does not comply with certain covenants set forth in the Preferred Stock Exchange and Registration Rights Agreement (as defined) to be executed by the Company and the initial purchasers, the Company will be obligated to pay certain liquidated damages to the holders of the Preferred Stock. 6 7 Transfer Restrictions; Absence of a Public Market for the Preferred Stock.................... The Preferred Stock has not been registered under the Securities Act and is subject to restrictions on transferability and resale. The Preferred Stock is a new security and there is currently no established market for the Preferred Stock. If issued, the Exchange Preferred Stock will generally be freely transferable (subject to the restrictions discussed elsewhere herein) but will be a new security for which there will not initially be a market. WARRANTS Total Number of Warrants... Warrants, which entitle the holders thereof to acquire an aggregate of 447,000 shares of Common Stock (the "Warrant Shares"), representing approximately 3% of the Company's Common Stock to be outstanding on a fully-diluted basis upon the consummation of the Offering. Expiration Date............ November 1, 2007. Exercise................... Each Warrant entitles the holder to acquire, on or after the next business day after the sale of the Units (the "Exercise Date") and prior to November 1, 2007, one share of Common Stock at a price equal to $0.01 per share, subject to adjustment from time to time upon the occurrence of certain changes in Common Stock, certain Common Stock distributions, certain issuances of options or convertible securities, certain dividends and distributions and certain other increases in the number of shares of Common Stock. Rights as Shareholders..... Holders of Warrants do not, by virtue of being such holders, have any rights of stockholders of the Company. Registration Rights........ Within six months of the date of issuance, the Company will file and use its best efforts to cause to become effective a shelf registration statement covering resales of the Warrant Shares, and shall keep such shelf registration statement effective for a minimum period of two years from issuance of the Warrants. Transfer Restrictions...... The Warrants may not be sold in reliance upon Rule 144A of the Securities Act. The Warrant Shares for which they are exercisable have not been registered under the Securities Act and are subject to certain restrictions on transfer and may not be offered or sold except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act. 7 8 Item 7 Financial Statements and Exhibits (a) Historical Financial Statements. (i) Historical Financial Statements of Electronic Publishing Division of Brite Voice Systems, Inc. Report of Independent Public Accountants Statements of Assets, Liabilities and Divisional Equity at December 31, 1996 and 1995 Statements of Revenues and Expenses for the Years Ended December 31, 1996 and 1995 Statements of Changes in Divisional Equity For the Years Ended December 31, 1996 and 1995 Statements of Cash Flows For the Years Ended December 31, 1996 and 1995 Notes to Financial Statements Statements of Assets, Liabilities and Divisional Equity at December 31, 1996 and June 30, 1997 (unaudited) Statements of Revenues and Expenses for the Six Months Ended June 30, 1997 and 1996 (unaudited) Statements of Changes in Divisional Equity For the Year Ended December 31, 1996 and Six Months Ended June 30, 1997 (unaudited) Statements of Cash Flows For the Six Months Ended June 30, 1997 and 1996 (unaudited) Condensed Notes to Financial Statements (ii) Historical Financial Statements of Voice News Network, Inc. Report of Independent Accountants Balance Sheet at December 31, 1996 Statement of Operations For the year ended December 29, 1996 Statement of Cash Flows For the year ended December 29, 1996 Statement of Owner's Equity For the year ended December 29, 1996 Notes to Financial Statements Balance Sheet at June 29, 1997 and June 30, 1996 (unaudited) Statement of Operations For the six months ended June 29, 1997 and June 30, 1996 (unaudited) Statement of Cash Flows For the six months ended June 29, 1997 and June 30, 1996 (unaudited) Notes to Financial Statements
8 9 (b) Unaudited Pro Forma Condensed Consolidated Financial Statements. Unaudited Pro Forma Condensed Consolidated Balance Sheet as of June 30, 1997 Unaudited Pro Forma Condensed Consolidated Statement of Operations For the Year Ended December 31, 1996 Unaudited Pro Forma Condensed Consolidated Statement of Operations For the Six Months Ended June 30, 1997 Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements (c) Exhibits. Exhibit 2.1 - Asset Purchase Agreement dated September 23, 1997 between IT Network, Inc. and Brite Voice Systems, Inc. Exhibit 2.2 - Amendment dated October 7, 1997 between IT Network, Inc. and Brite Voice Systems, Inc. to Asset Purchase Agreement dated September 23, 1997 between IT Network, Inc. and Brite Voice Systems, Inc. Exhibit 2.3 + Asset Purchase Agreement dated September 30, 1997 between Source Media, Inc. and IT Network, Inc. and Voice News Network, Inc. Exhibit 4.1 - Indenture dated as of October 30, 1997 between Source Media, Inc. and U.S. Trust Company of Texas, N.A. Exhibit 4.2 - Certificate of Designation for Senior PIK Preferred Stock Exhibit 4.3 - Warrant Agreement dated as of October 30, 1997 between Source Media, Inc. And ChaseMellon Shareholder Services Exhibit 4.4 - Unit Agreement dated as of October 30, 1997 between Source Media, Inc. and ChaseMellon Shareholder Services Exhibit 10.1 - Exchange and Registration Rights Agreement for Senior Secured Notes dated as of October 30, 1997 between Source Media, Inc. and certain of its subsidiaries and NatWest Capital Markets Limited and Prudential Securities Incorporated Exhibit 10.2 - Preferred Stock Registration Rights Agreement dated as of October 30, 1997 between Source Media, Inc. and NatWest Capital Markets Limited and Prudential Securities Incorporated. Exhibit 10.3 - Common Stock Registration Rights Agreement dated as of October 30, 1997 by and among Source Media, Inc. and NatWest Capital Markets Limited on Prudential Securities Incorporated.
9 10 Exhibit 23.1 - Consent of Arthur Andersen LLP Exhibit 23.2 - Consent of Price Waterhouse LLP
+ To be filed by amendment. 10 11 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Date: November 12, 1997 SOURCE MEDIA, INC. By: /s/ MICHAEL G. PATE ----------------------------------------- Michael G. Pate, Chief Financial Officer 11 12 SOURCE MEDIA, INC. INDEX TO FINANCIAL STATEMENTS AND PRO FORMA FINANCIAL INFORMATION
DESCRIPTION PAGE ----------- ---- Item 7.(a)(i) Historical Financial Statements of Electronic Publishing Division of Brite Voice Systems, Inc. Report of Independent Public Accounts F-3 Statements of Assets,Liabilities and Divisional Equity at December 31, 1996 and 1995 F-4 Statements of Revenues and Expenses for the Years Ended December 31, 1996 and 1995 F-5 Statements of Changes in Divisional Equity For the Years Ended December 31, 1996 and 1995 F-6 Statements of Cash Flows For the Years Ended December 31, 1996 and 1995 F-7 Notes to Financial Statements F-8 Statements of Assets, Liabilities and Divisional Equity at December 31, 1996 and June 30, 1997 (unaudited) F-11 Statements of Revenues and Expenses for the Six Months Ended June 30, 1997 and 1996 (unaudited) F-12 Statements of Changes in Divisional Equity For the Year Ended December 31, 1996 and Six Months Ended June 30, 1997 (unaudited) F-13 Statements of Cash Flows For the Six Months Ended June 30, 1997 and 1996 (unaudited) F-14 Condensed Notes to Financial Statements F-15 Item 7.(a)(ii) Historical Financial Statements of Voice News Network, Inc. Report of Independent Accountants F-16 Balance Sheet at December 31, 1996 F-17 Statement of Operations For the year ended December 29, 1996 F-18 Statement of Cash Flows For the year ended December 29, 1996 F-19 Statement of Owner's Equity For the year ended December 29, 1996 F-20 Notes to Financial Statements F-21 Balance Sheet at June 29, 1997 and June 30, 1996 (unaudited) F-24
F-1 13
Description Page ----------- ---- Statement of Operations For the six months ended June 29, 1997 and June 30, 1996 (unaudited) F-25 Statement of Cash Flows For the six months ended June 29, 1997 and June 30, 1996 (unaudited) F-26 Notes to Financial Statements F-27 Item 7(b) Unaudited Pro Form Condensed Consolidated Financial Statements F-28 Unaudited Pro Forma Condensed Consolidated Balance Sheet as of June 30, 1997 F-29 Unaudited Pro Forma Condensed Consolidated Statement of Operations For the Year Ended December 31, 1996 F-30 Unaudited Pro Forma Condensed Consolidated Statement of Operations For the Six Months Ended June 30, 1997 F-31 Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements F-32
F-2 14 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors Brite Voice Systems, Inc.: We have audited the accompanying statements of assets, liabilities and divisional equity of the Electronic Publishing Division of Brite Voice Systems, Inc. (the Division -- Note 2), as of December 31, 1996 and 1995, and the related statements of revenues and expenses, changes in divisional equity, and cash flows for the years then ended. These statements are the responsibility of the Division's management. Our responsibility is to express an opinion on these statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the statements referred to above present fairly, in all material respects, the assets and liabilities of the Electronic Publishing Division of Brite Voice Systems, Inc., as of December 31, 1996 and 1995, and its revenues and expenses, changes in divisional equity and cash flows for the years then ended in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP Kansas City, Missouri, September 10, 1997 F-3 15 ELECTRONIC PUBLISHING DIVISION OF BRITE VOICE SYSTEMS, INC. STATEMENTS OF ASSETS, LIABILITIES AND DIVISIONAL EQUITY DECEMBER 31, 1996 AND 1995 ASSETS
1996 1995 ----------- ---------- CURRENT ASSETS: Accounts receivable, less allowance for doubtful accounts of $214,671 and $164,263 for 1996 and 1995............. $ 3,085,364 $2,522,993 Prepaid expenses and other................................ -- 3,700 ----------- ---------- Total current assets.............................. 3,085,364 2,526,693 PROPERTY AND EQUIPMENT: Furniture and equipment................................... 1,427,482 1,338,202 Less-Accumulated depreciation............................. (1,053,584) (768,316) ----------- ---------- Total property and equipment...................... 373,898 569,886 GOODWILL.................................................... 338,291 -- ----------- ---------- Total assets...................................... $ 3,797,553 $3,096,579 =========== ========== LIABILITIES AND DIVISIONAL EQUITY CURRENT LIABILITIES: Accounts payable.......................................... $ 317,502 $ 77,497 Accrued salaries and wages................................ 89,959 72,186 Deferred revenue.......................................... 12,001 46,360 Customer deposits......................................... 24,830 26,150 ----------- ---------- Total current liabilities......................... 444,292 222,193 ----------- ---------- COMMITMENTS AND CONTINGENCIES DIVISIONAL EQUITY........................................... 3,353,261 2,874,386 ----------- ---------- Total liabilities and divisional equity........... $ 3,797,553 $3,096,579 =========== ==========
The accompanying notes are an integral part of these financial statements. F-4 16 ELECTRONIC PUBLISHING DIVISION OF BRITE VOICE SYSTEMS, INC. STATEMENTS OF REVENUES AND EXPENSES FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995 ---------- ---------- NET REVENUES................................................ $9,412,006 $7,273,221 COSTS AND EXPENSES: Costs of sales/services................................... 4,685,011 3,148,626 Sales and marketing....................................... 250,638 396,635 General and administrative................................ 163,750 141,385 Allocation of general overhead............................ 1,377,614 1,084,161 ---------- ---------- 6,477,013 4,770,807 ---------- ---------- REVENUES IN EXCESS OF EXPENSES.............................. $2,934,993 $2,502,414 ========== ==========
The accompanying notes are an integral part of these financial statements. F-5 17 ELECTRONIC PUBLISHING DIVISION OF BRITE VOICE SYSTEMS, INC. STATEMENTS OF CHANGES IN DIVISIONAL EQUITY FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995 ----------- ----------- BALANCE, beginning of year.................................. $ 2,874,386 $ 2,487,948 Revenues in excess of expenses............................ 2,934,993 2,502,414 Cash transfers to parent, net............................. (2,456,118) (2,115,976) ----------- ----------- BALANCE, end of year........................................ $ 3,353,261 $ 2,874,386 =========== ===========
The accompanying notes are an integral part of these financial statements. F-6 18 ELECTRONIC PUBLISHING DIVISION OF BRITE VOICE SYSTEMS, INC. STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995 ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Revenues in excess of expenses............................ $2,934,993 $2,502,414 Items not requiring cash -- Depreciation and amortization.......................... 306,794 295,629 Loss on disposal of fixed assets....................... 4 491 Changes in -- Accounts receivable.................................... (562,371) (492,831) Accounts payable and accrued expenses.................. 257,778 47,376 Other current assets and liabilities................... (31,979) (40,540) ---------- ---------- Net cash provided by operating activities......... 2,905,219 2,312,539 ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment........................ (110,810) (196,563) Increase in other assets.................................. (338,291) -- ---------- ---------- Net cash used in investing activities............. (449,101) (196,563) ---------- ---------- NET CASH TRANSFERS TO PARENT................................ $2,456,118 $2,115,976 ========== ==========
The accompanying notes are an integral part of these financial statements. F-7 19 ELECTRONIC PUBLISHING DIVISION OF BRITE VOICE SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 1. SALE OF THE BUSINESS: Brite Voice Systems, Inc., has entered into an agreement in principle to sell the net assets of its Electronic Publishing Division to Source Media, Inc. (SMI), for approximately $35,000,000, subject to post-closing adjustments, as agreed. Closing of the transaction is contingent on many factors including, among other things, the success of SMI obtaining funds to close the transaction and any waiting periods imposed by the Hart Scott Rodino Antitrust Improvements Act of 1976. 2. ORGANIZATION: Basis of Presentation The accompanying financial statements include the accounts of certain products sold and delivered by the Electronic Publishing Division (the Division) of Brite Voice Systems, Inc. (the Parent), the Parent company of the Division. These financial statements reflect the assets, liabilities, revenues and expenses related to: (i) the management of audiotex systems installed on the premises of newspaper and yellow pages publishers, including daily programming changes and the production of monthly reports reflecting system usage, messages played and advertisements heard; (ii) the creation and transmission by satellite of a wide variety of general information suitable for dissemination in any location for access by telephone callers through audiotex systems owned or operated by newspaper and yellow pages publishers, broadcasters and network operators; (iii) the creation and provision to yellow pages publishers over the Internet of a variety of information; (iv) the sale of advertising sponsorships to various categories of audiotex information made available through yellow pages publishers' audiotex systems, including creation of printed material designed for inclusion in the publishers' directories, and (v) advertiser management services provided on behalf of yellow pages publishers whereby advertising entities are contacted from an outbound call center for periodic updating of their audiotex sponsorships and advertisements. These financial statements reflect the revenues and expenses of the Division, including direct and indirect expenses of the Division that are paid by the Parent and charged directly to the Division. Allocation of the general overhead from the Parent includes charges for marketing, general corporate management, accounting and payroll services, legal services and certain communication functions. In addition, the taxable income of the Division is included in the consolidated tax return of the Parent. No income tax expense or related current or deferred tax assets or liabilities have been allocated to the Division by the Parent as the Division is not an income tax reporting entity nor does it have a tax sharing agreement with the Parent. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Property and Equipment Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets which range from three to ten years. Goodwill Goodwill of $338,291 at December 31, 1996 (none at December 31, 1995), represents the cost in excess of net tangible assets acquired in a business combination accounted for as a purchase, and is being amortized over five years. (See Note 4.) F-8 20 ELECTRONIC PUBLISHING DIVISION OF BRITE VOICE SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Divisional Equity The Parent utilizes a centralized cash management system for certain of its operations, including the Division. Cash distributed to or advanced from the Parent has been reflected as a decrease or increase in divisional equity in the accompanying statements. Revenue Recognition Revenues are generally recognized when the services are provided. Billings in advance of the service being provided are recorded as deferred revenues in the accompanying financial statements. Credit Risk The Division extends unsecured credit to customers throughout the United States and Canada and in certain foreign countries. 4. ACQUISITIONS: On December 13, 1996, the Parent issued 15,000 shares of its common stock and paid $195,000 in cash for certain assets of Harrison & Associates, L.L.C. The terms of the Asset Purchase Agreement provide for additional consideration of up to 55,000 shares of the Parent's common stock provided certain operating results are achieved. The contingent consideration has not been recorded as of December 31, 1996, as there is no assurance that the operating results will be achieved. Had the acquisition occurred on January 1 of 1996 and 1995, revenues and division net income would not differ materially from the amounts included in the accompanying statements of revenue and expenses. In the event that the transaction contemplated with SMI is consummated, the Parent will be required to issue the remainder of the shares reserved for issuance under the Asset Purchase Agreement. 5. EMPLOYEE BENEFITS: The Parent sponsors various benefit programs which cover substantially all of its employees, including those of the Division. Benefits under these programs include medical, dental, vision and pharmaceutical coverage, life and accidental death and dismemberment insurance, vacation and sick pay programs, and a 401(k) plan, under which the Parent contributes a percentage of employee contributions at rates determined by the Board of Directors of the Parent. Expenses related to these programs are allocated to all of the Parent's operations, including the Division, based on a percentage of base salary. The Division recorded expenses of $422,803 and $331,283 for the years ended December 31, 1996 and 1995, respectively, relating to these programs. Management of the Parent believes that the expenses charged to the Division are not materially different from the costs that would have been incurred had the Division borne such expenses on a direct basis. 6. COMMITMENTS AND CONTINGENCIES: The Parent leases office space under noncancellable agreements expiring at various times in future years. The Division is not a party to any of these agreements, but is allocated expenses based on the costs incurred by the Parent for rent, utilities, maintenance, property taxes and insurance. The Division was allocated $350,238 and $267,996 for the years ended December 31, 1996 and 1995, respectively. The facilities allocation is based on the number of employees employed by the Division, and the management of the Parent believes that the F-9 21 ELECTRONIC PUBLISHING DIVISION OF BRITE VOICE SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) expenses charged to the Division are not materially different from the costs that would have been incurred had the Division borne such expenses on a direct basis. The Division is subject to claims and litigation from time to time arising in the normal operation of its business. Management believes that the ultimate resolution of any pending claim will not be material to the results of operations or the financial position of the Division. 7. SIGNIFICANT CUSTOMERS: For the years ended December 31, 1996 and 1995, one customer and its affiliates accounted for revenues of $2,624,161 and $1,528,775, respectively. F-10 22 ELECTRONIC PUBLISHING DIVISION OF BRITE VOICE SYSTEMS, INC. STATEMENTS OF ASSETS, LIABILITIES AND DIVISIONAL EQUITY (UNAUDITED) ASSETS
JUNE 30, DECEMBER 31, 1997 1996 ----------- ------------ CURRENT ASSETS: Accounts receivable, less allowance for doubtful accounts of $271,289 and $214,671 for 1997 and 1996, respectively........................................... $ 2,767,316 $ 3,085,364 Prepaid expenses and other................................ 9,800 -- ----------- ----------- Total current assets.............................. 2,777,116 3,085,364 PROPERTY AND EQUIPMENT: Furniture and equipment................................... 1,402,616 1,427,482 Less- Accumulated depreciation............................ (1,120,014) (1,053,584) ----------- ----------- Total property and equipment 282,602 373,898 GOODWILL 303,321 338,291 ----------- ----------- Total Assets...................................... $ 3,363,039 $ 3,797,553 =========== =========== LIABILITIES AND DIVISIONAL EQUITY CURRENT LIABILITIES: Accounts payable.......................................... $ 201,157 $ 317,502 Accrued salaries and wages................................ 118,805 89,959 Deferred revenue.......................................... 49,980 12,001 Customer deposits......................................... 21,930 24,830 ----------- ----------- Total current liabilities......................... 391,872 444,292 ----------- ----------- COMMITMENT AND CONTINGENCIES DIVISIONAL EQUITY 2,971,167 3,353,261 ----------- ----------- Total liabilities and divisional equity........... $ 3,363,039 $ 3,797,553 =========== ===========
The accompanying notes are an integral part of these financial statements. F-11 23 ELECTRONIC PUBLISHING DIVISION OF BRITE VOICE SYSTEMS, INC. STATEMENTS OF REVENUES AND EXPENSES FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
1997 1996 ---------- ---------- NET REVENUES................................................ $6,402,667 $4,496,092 COSTS AND EXPENSES Costs of sales/services................................... 3,161,011 2,198,651 Sales and marketing....................................... 680,818 94,294 General and administrative................................ 74,320 81,875 Allocation of general overhead............................ 1,028,525 688,807 ---------- ---------- 4,944,674 3,063,627 ---------- ---------- REVENUES IN EXCESS OF EXPENSES.............................. $1,457,993 $1,432,465 ========== ==========
The accompanying notes are an integral part of these financial statements. F-12 24 ELECTRONIC PUBLISHING DIVISION OF BRITE VOICE SYSTEMS, INC. STATEMENTS OF CHANGES IN DIVISIONAL EQUITY (UNAUDITED) BALANCE, December 31, 1995.................................. $ 2,874,386 Revenues in excess of expenses............................ 2,934,993 Cash transfers to parent, net............................. (2,456,118) ----------- BALANCE, December 31, 1996.................................. 3,353,261 Revenues in excess of expenses............................ 1,457,993 Cash transfers to parent, net............................. (1,840,087) ----------- BALANCE, June 30, 1997...................................... $ 2,971,167 ===========
The accompanying notes are an integral part of these financial statements. F-13 25 ELECTRONIC PUBLISHING DIVISION OF BRITE VOICE SYSTEMS, INC. STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
1997 1996 ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Revenues in excess of expenses............................ $1,457,993 $1,432,465 Items not requiring cash- Depreciation and amortization.......................... 158,030 158,288 Loss on disposal of fixed assets....................... 13,704 -- Changes in- Accounts receivable.................................... 318,048 (911,519) Accounts payable and accrued expenses.................. (87,499) 6,548 Other current assets and liabilities................... 25,279 (37,480) ---------- ---------- Net cash provided by operating activities......... 1,885,555 648,302 ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment........................ (45,468) (108,191) ---------- ---------- Net cash used in investing activities............. (45,468) (108,191) ---------- ---------- NET CASH TRANSFERS TO PARENT................................ $1,840,087 $ 540,111 ========== ==========
The accompanying notes are an integral part of these financial statements. F-14 26 ELECTRONIC PUBLISHING DIVISION OF BRITE VOICE SYSTEMS, INC. CONDENSED NOTES TO FINANCIAL STATEMENTS JUNE 30, 1997 In the opinion of management, the accompanying unaudited financial statements contain all adjustments necessary to present fairly the statements of assets, liabilities and divisional equity as of June 30, 1997, and the statements of revenues and expenses, changes in divisional equity, and cash flows for the six months ended June 30, 1997 and 1996. Such adjustments made to the financial statements are of a normal, recurring nature. Although management believes that the disclosures are adequate to make the information presented not misleading, certain information and footnote disclosures, including significant accounting policies, normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). These financial statements should be read in conjunction with the audited financial statements of Electronic Publishing Division of Brite Voice Systems, Inc. for the year ended December 31, 1996. The revenues and expenses for the six months ended June 30, 1997 are not necessarily indicative of the results to be expected for the full year. On September 23, 1997, Brite Voice Systems, Inc., entered into an agreement in principal to sell the net assets of its Electronic Publishing Division to Source Media, Inc. (SMI), for approximately $35,000,000, subject to post-closing adjustments, as agreed. Closing of the transaction is contingent on many factors including, among other things, the success of SMI obtaining funds to close the transaction and any waiting periods imposed by the Hart Scott Rodino Antitrust Improvements Act of 1976. F-15 27 REPORT OF INDEPENDENT ACCOUNTANTS October 1, 1997 To the Board of Directors and Shareholders of Tribune Company In our opinion, the accompanying balance sheet and the related statement of operations, of cash flows and of owner's equity present fairly, in all material respects, the financial position of Voice News Network, Inc. at December 29, 1996, and the results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. /s/ PRICE WATERHOUSE LLP - ------------------------------------ Price Waterhouse LLP Chicago, Illinois F-16 28 VOICE NEWS NETWORK, INC. (WHOLLY OWNED BY TRIBUNE COMPANY) BALANCE SHEET ASSETS
DECEMBER 29, 1996 ------------ Current assets: Accounts receivable (net of allowance for doubtful accounts of $33,704)................................... $299,117 Deferred income taxes..................................... 25,737 Other current assets...................................... 16,897 -------- Total current assets.............................. 341,751 -------- Properties: Leasehold improvements.................................... 57,319 Furniture and equipment................................... 732,160 Construction in progress.................................. 160,769 -------- 950,248 Accumulated depreciation.................................... (386,167) -------- Net properties.................................... 564,081 -------- Total assets...................................... $905,832 ======== LIABILITIES AND OWNER'S EQUITY Current liabilities: Accounts payable.......................................... $ 81,613 Accrued compensation...................................... 61,999 Subscriber deposits....................................... 16,025 -------- Total current liabilities......................... 159,637 Deferred income taxes....................................... 59,748 Commitments and contingencies (Note 5)...................... -------- Total liabilities................................. 219,385 -------- Owner's equity............................................ 686,447 -------- Total liabilities and owner's equity.............. $905,832 ========
The accompanying notes are an integral part of these financial statements. F-17 29 VOICE NEWS NETWORK, INC. (WHOLLY OWNED BY TRIBUNE COMPANY) STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 29, 1996 ------------ Operating revenues.......................................... $2,424,875 Operating expenses: Cost of sales............................................. 1,592,334 General and administrative................................ 271,613 ---------- Total operating expenses.......................... 1,863,947 ---------- Operating income............................................ 560,928 Provision for income taxes.................................. 222,969 ---------- Net income.................................................. $ 337,959 ==========
The accompanying notes are an integral part of these financial statements. F-18 30 VOICE NEWS NETWORK, INC. (WHOLLY OWNED BY TRIBUNE COMPANY) STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 29, 1996 ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................................ $ 337,959 Adjustments to reconcile net income to cash provided by operating activities: Depreciation........................................... 148,228 Deferred income taxes.................................. (10,381) Changes in assets and liabilities: Accounts receivable, net............................. (103,640) Other current assets................................. (5,567) Accounts payable..................................... 12,068 Accrued compensation................................. 21,094 Other liabilities.................................... 3,888 --------- Net cash provided by operating activities................. 403,649 --------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures...................................... (205,717) --------- Net cash used for investing activities.................... (205,717) --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net distribution to owner................................. (197,932) --------- Net cash used for financing activities.................... (197,932) --------- Net increase in cash and cash equivalents................... -- Cash and cash equivalents, beginning of period.............. -- --------- Cash and cash equivalents, end of period.................... $ -- =========
The accompanying notes are an integral part of these financial statements. F-19 31 VOICE NEWS NETWORK, INC. (WHOLLY OWNED BY TRIBUNE COMPANY) STATEMENT OF OWNER'S EQUITY
FOR THE YEAR ENDED DECEMBER 29, 1996 ------------ Owner's equity at January 1, 1996........................... $ 546,420 Net income.................................................. 337,959 Net cash distributions to owner............................. (197,932) --------- Owner's equity at December 29, 1996......................... $ 686,447 =========
The accompanying notes are an integral part of these financial statements. F-20 32 VOICE NEWS NETWORK, INC. (WHOLLY OWNED BY TRIBUNE COMPANY) NOTES TO FINANCIAL STATEMENTS DECEMBER 29, 1996 NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION Voice News Network (VNN or the Company) is owned and operated by Tribune Media Services, a wholly owned subsidiary of Tribune Company (Tribune). VNN produces and distributes, via satellite or telephone line transmission, daily audiotex programs containing news, entertainment and consumer information to its subscribers, primarily newspaper and other media companies. VNN's subscribers generally sell and attach voice advertisements at the beginning and end of the audiotex messages and provide customers access to these programs through local phone service. Audiotex programs are provided to subscribers based primarily on annual service agreements. Certain corporate general and administrative expenses of Tribune have been allocated to the Company (Notes 3 and 4) on various bases which, in the opinion of management, are reasonable. However, such expenses are not necessarily indicative of, and it is not practicable for management to estimate, the nature and level of expenses which might have been incurred had the Company operated as a stand-alone company. NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Revenue Recognition Revenue is recognized on a straight line basis over each subscriber's service agreement term. Properties Properties (including transmission equipment, office and studio equipment and leasehold improvements) are stated at cost. Depreciation is computed using the straight-line method over the properties' estimated useful lives, which range from three to ten years. Expenditures for maintenance and repairs are charged to expense as incurred. Income Taxes The Company's operations are included in Tribune's consolidated United States federal and state income tax returns. Based on Tribune's tax-sharing policy, the Company computes taxes as if it were filing separate tax returns. Income taxes are provided based on the liability method of accounting pursuant to Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." The liability method measures the expected tax impact of future taxable income or deductions resulting from differences in the tax and financial reporting bases of assets and liabilities reflected in the balance sheet and the expected tax impact of carryforwards for tax purposes. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires the use of management's estimates. Actual results could differ from those estimates. Statement of Cash Flows Information related to cash paid for taxes has been omitted since these costs are charged to the Company by Tribune. Fiscal Year The Company's fiscal year ends on the last Sunday in December. The 1996 fiscal year included 52 weeks. F-21 33 VOICE NEWS NETWORK, INC. (WHOLLY OWNED BY TRIBUNE COMPANY) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE 3 -- RELATED PARTY TRANSACTIONS VNN is dependent on Tribune for financing. The Company participates in Tribune's centralized cash management program with respect to accounts receivable, accounts payable, payroll and employee benefits. All disbursements and receipts related to the cash management program are recorded as owner contributions/distributions in the accompanying financial statements. Interest is not recorded on these balances. Tribune also provides the Company with certain information systems, insurance and administrative services. Charges for these services are based on allocations of Tribune's actual direct and indirect costs using varying allocation bases as appropriate (e.g., payroll, headcount, etc.) designed to estimate the actual cost incurred by Tribune to render these services to the Company. This allocation process is consistent with the methodology used by Tribune to allocate the cost of similar services provided to its other business units. The allocated costs of these services are included in the accompanying statement of operations and totaled $82,792 in 1996. Tribune Media Services leases certain office space from Tribune Properties, Inc., a wholly owned subsidiary of Tribune. Tribune Media Services allocates a portion of the lease expense to VNN. The 1996 expense related to allocated office lease expense included in the statement of operations is $57,959. Certain Tribune subsidiaries are VNN subscribers. Revenues from these related parties totaled $61,827 in 1996. Treasury, legal and tax services provided by Tribune are not allocated to the Company because these costs are not significant. NOTE 4 -- EMPLOYEE BENEFIT PLANS VNN participates in several Tribune-sponsored benefit plans, including an employee stock ownership plan with annual allocations based on payroll, an employee share purchase plan and a qualified savings incentive plan. The savings incentive plan provides for uniform employer contributions to eligible employees of $.25 for each $1.00 contributed by participants up to 4 percent of the participants' compensation. VNN also participates in certain Tribune-sponsored medical and life insurance plans and certain VNN employees are participants in various Tribune incentive and deferred compensation plans. The total 1996 expense related to these employee benefits included in the statement of operations is $90,393. NOTE 5 -- COMMITMENTS AND CONTINGENCIES The Company has entered into a contract with a satellite uplink provider through November, 1998. Future commitments under this non-cancelable contract are $30,000 and $27,500 in 1997 and 1998, respectively. The Company is involved in litigation from time to time incidental to the conduct of its business; however, the Company is not currently a party to any lawsuit or proceeding which, in the opinion of management, is likely to have a material adverse effect on the financial position or results of operations of the Company. NOTE 6 -- FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of the current assets and liabilities approximate fair value because of the short maturity of these instruments. F-22 34 VOICE NEWS NETWORK, INC. (WHOLLY OWNED BY TRIBUNE COMPANY) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE 7 -- INCOME TAXES The provision for income taxes (all currently payable) for the year ended December 29, 1996 was $208,261. The provision for income taxes approximates 39.8% of pre-tax income and is higher than Tribune's federal statutory tax rate of 35% due to state income taxes. Significant components of VNN's net deferred tax liability as of December 26, 1996 are as follows: Accounts receivable................................ $13,396 Accrued employee compensation...................... 12,341 ------- Deferred tax assets.............................. 25,737 Net properties..................................... 59,748 ------- Deferred tax liabilities......................... 59,748 ------- Net deferred tax liability....................... $34,011 =======
NOTE 8 -- SUBSEQUENT EVENT -- PROPOSED SALE OF VNN On October 1, 1997, the Company entered into an agreement with Source Media, Inc. (Source) whereby Source will acquire VNN for approximately $9 million. F-23 35 VOICE NEWS NETWORK, INC. (WHOLLY OWNED BY TRIBUNE COMPANY) BALANCE SHEETS
ASSETS JUNE 29, JUNE 30, 1997 1996 (UNAUDITED) (UNAUDITED) ----------- ----------- Current assets: Accounts receivable (net of allowance for doubtful accounts of $42,705 and $26,889)....................... $ 291,011 $ 224,357 Deferred income taxes..................................... 26,704 20,022 Other current assets...................................... 18,863 9,025 --------- --------- Total current assets.............................. 336,578 253,404 --------- --------- Properties: Leasehold improvements.................................... 57,319 57,319 Furniture and equipment................................... 806,172 709,171 Construction in progress.................................. 129,710 101,791 --------- --------- 993,201 868,281 Accumulated depreciation.................................. (459,996) (310,372) --------- --------- Net properties.................................... 533,205 557,909 --------- --------- Total assets...................................... $ 869,783 $ 811,313 ========= ========= LIABILITIES AND OWNER'S EQUITY Current liabilities: Accounts payable.......................................... $ 60,381 $ 28,210 Accrued compensation...................................... 34,353 34,617 Subscriber deposits....................................... 14,235 14,355 --------- --------- Total current liabilities......................... 108,969 77,182 Deferred income taxes..................................... 57,771 59,094 Commitments and contingencies............................. -- -- --------- --------- Total liabilities................................. 166,740 136,276 --------- --------- Owner's equity............................................ 703,043 675,037 --------- --------- Total liabilities and owner's equity.............. $ 869,783 $ 811,313 ========= =========
The accompanying notes are an integral part of these financial statements. F-24 36 VOICE NEWS NETWORK, INC. (WHOLLY OWNED BY TRIBUNE COMPANY) STATEMENT OF OPERATIONS
FOR THE SIX FOR THE SIX MONTHS ENDED MONTHS ENDED JUNE 29, 1997 JUNE 30, 1996 ------------- ------------- (UNAUDITED) (UNAUDITED) Operating revenues.......................................... $1,314,825 $1,167,275 Operating expenses: Cost of sales............................................. 765,417 780,429 General and administrative................................ 158,202 102,721 ---------- ---------- Total operating expenses.......................... 923,619 883,150 ---------- ---------- Operating income............................................ 391,206 284,125 Provision for income taxes.................................. 155,504 112,940 ---------- ---------- Net income.................................................. $ 235,702 $ 171,185 ========== ==========
The accompanying notes are an integral part of these financial statements. F-25 37 VOICE NEWS NETWORK, INC. (WHOLLY OWNED BY TRIBUNE COMPANY) STATEMENT OF CASH FLOWS
FOR THE SIX FOR THE SIX MONTHS ENDED MONTHS ENDED JUNE 29, 1997 JUNE 30, 1996 (UNAUDITED) (UNAUDITED) ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................................ $ 235,702 $ 171,185 Adjustments to reconcile net income to cash provided by operating activities: Depreciation........................................... 80,308 72,344 Deferred income taxes.................................. (2,944) (5,320) Changes in assets and liabilities: Accounts receivable, net............................. 8,106 (28,880) Other current assets................................. (1,966) 2,305 Accounts payable..................................... (21,232) (41,335) Accrued compensation................................. (27,646) (6,288) Other liabilities.................................... (1,790) 2,218 --------- --------- Net cash provided by operating activities................. 268,538 166,229 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures...................................... (49,432) (123,661) --------- --------- Net cash used for investing activities.................... (49,432) (123,661) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net distribution to owner................................. (219,106) (42,568) --------- --------- Net cash used for financing activities.................... (219,106) (42,568) --------- --------- Net increase in cash and cash equivalents................... -- -- Cash and cash equivalents, beginning of period.............. -- -- --------- --------- Cash and cash equivalents, end of period.................... $ -- $ -- ========= =========
The accompanying notes are an integral part of these financial statements. F-26 38 VOICE NEWS NETWORK, INC. (WHOLLY OWNED BY TRIBUNE COMPANY) NOTES TO FINANCIAL STATEMENTS NOTE 1 -- ORGANIZATION Voice News Network, Inc. (VNN or the Company) is owned and operated by Tribune Media Services, a wholly owned subsidiary of Tribune Company (Tribune). VNN produces and distributes, via satellite or telephone line transmission, daily audiotex programs containing news, entertainment and consumer information to its subscribers, primarily newspaper and other media companies. VNN's subscribers generally sell and attach voice advertisements at the beginning and end of the audiotex messages and provide customers access to these programs through local phone service. Audiotex programs are provided to subscribers based primarily on annual service agreements. Certain corporate general and administrative expenses of Tribune have been allocated to the Company on various bases which, in the opinion of management, are reasonable. However, such expenses are not necessarily indicative of, and it is not practicable for management to estimate, the nature and level of expenses which might have been incurred had the Company operated as a stand-alone company. NOTE 2 -- BASIS OF PRESENTATION Unaudited interim financial period -- The accompanying financial information as of June 29, 1997 and June 30, 1996 and for the six months ended June 29, 1997 and June 30, 1996 is unaudited. The interim financial statements have been prepared on the same basis as the annual financial statements. In the opinion of management, such interim financial information reflects adjustments consisting only of normal and recurring adjustments necessary for a fair presentation of such financial information. The unaudited results of operations for the interim periods ended June 29, 1997 and June 30, 1996 are not necessarily indicative of the results of operations to be expected for any other period or for the full year. NOTE 3 -- SUBSEQUENT EVENT -- PROPOSED SALE OF VNN On October 1, 1997, the Company entered into an agreement with Source Media, Inc. (Source) whereby Source will acquire VNN for approximately $9 million. F-27 39 UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The following Unaudited Pro Forma Condensed Consolidated Financial Statements as of and for the six-month period ended June 30, 1997 have been derived from the unaudited consolidated financial statements of the Company and the unaudited financial statements of Brite and VNN. The Unaudited Pro Forma Condensed Consolidated Statements of Operations for the year ended December 31, 1996 are based on the historical audited consolidated financial statements of the Company and the audited financial statements of Brite and VNN. The Unaudited Pro Forma Condensed Consolidated Financial Statements give effect to the Transactions (as defined below) and the application of the net proceeds therefrom and the January 14, 1997 purchase by the Company of all of the outstanding shares of Interactive Channel Technologies Inc. ("ICT") held by the minority shareholders of ICT (the "ICT Purchase"), as described in the accompanying Notes to the Unaudited Pro Forma Condensed Consolidated Financial Statements. The Unaudited Pro Forma Condensed Consolidated Balance Sheet as of June 30, 1997 was prepared as though the acquisition of certain electronic publishing assets of Brite and VNN (the "Acquisitions") and related offering of Senior Secured Notes and units of Senior PIK Preferred Stock and Warrants (the "Offering" and, together with the Acquisitions, the "Transactions") occurred on such date. The Unaudited Pro Forma Condensed Consolidated Statements of Operations for the six-month period ended June 30, Transactions and the ICT Purchase had occurred as of January 1, 1996 and give effect to the elimination of certain costs of sales and selling, general and administrative expenses. The Unaudited Pro Forma Condensed Consolidated Financial Statements reflect pro forma adjustments that are based upon available information and factually supportable assumptions that the Company believes are reasonable and do not necessarily reflect the results of operations or the financial position of the Company that actually would have resulted had the Transactions or ICT Purchase to which pro forma effect is given, been consummated as of the date or for the periods indicated. In preparing the Unaudited Pro Forma Condensed Consolidated Financial Statements, the Company believes it has utilized reasonable methods to conform the basis of presentation. The Acquisitions will be accounted for by the purchase method of accounting, under which the purchase prices of Brite and VNN will be allocated to the tangible and intangible assets and liabilities of Brite and VNN, respectively, based upon their respective fair values. The Unaudited Pro Forma Condensed Consolidated Financial Statements have been prepared based upon certain assumptions made by management regarding the Transactions and a preliminary estimate of the purchase price allocation. Actual accounting adjustments for the Transactions may differ from the pro forma adjustments based on the balances of the assets and liabilities of Brite and VNN and the final purchase price allocation. F-28 40 UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1997 (IN THOUSANDS)
ASSETS HISTORICAL PRO FORMA ------------------------ ADJUSTING PRO FORMA SOURCE BRITE VNN ENTRIES SOURCE -------- ------ ---- --------- --------- Current assets: Cash and cash equivalents............... $ 8,627 $ -- $ -- $25,357(1) $ 33,984 Restricted cash and restricted cash equivalents.......................... -- -- -- 11,504(2) 11,504 Accounts receivable..................... 1,305 2,767 291 (3,058)(3) 1,305 Deferred expenses....................... 803 -- 27 (27)(3) 803 Prepaid expenses and other current assets............................... 800 10 19 (29)(3) 800 -------- ------ ---- ------- -------- Total current assets............ 11,535 2,777 337 33,747 48,396 Noncurrent portion of restricted cash and restricted cash equivalents............. -- -- -- 10,840(2) 10,840 Property and equipment, net............... 5,987 283 533 550(4) 7,353 Intangible assets, net.................... 11,626 303 -- 43,881(4) 55,810 Other non-current assets.................. 1,029 -- -- 4,221(5) 5,250 -------- ------ ---- ------- -------- Total assets.................... $ 30,177 $3,363 $870 $93,239 $127,649 ======== ====== ==== ======= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Trade accounts payable.................. $ 986 $ 201 $ 60 $ (261)(6) $ 986 Accrued payroll......................... 371 119 35 (154)(6) 371 Other accrued liabilities............... 2,019 22 14 (708)(7) 1,347 Amounts payable related to acquisitions......................... 750 -- -- 1,000(8) 1,750 Unearned income......................... 3,178 50 -- (50)(6) 3,178 Current portion of capital lease obligations.......................... 22 -- -- -- 22 -------- ------ ---- ------- -------- Total current liabilities....... 7,326 392 109 (173) 7,654 Other non-current liabilities............. -- -- 58 (58)(6) -- Long-term debt, net of discount........... 18,280 -- -- 81,720(9) 100,000 Capital lease obligations................. 12 -- -- -- 12 Minority interests in consolidated subsidiaries, net of note receivable and accrued interest from minority stockholder............................. 3,144 -- -- -- 3,144 Senior PIK Preferred Stock................ -- -- -- 13,321(10) 13,321 Stockholders' equity: Common stock............................ 12 -- -- -- 12 Less treasury stock, at cost............ (3,758) -- -- -- (3,758) Capital in excess of par value.......... 73,333 -- -- 5,529(10) 78,862 Retained earnings (accumulated deficit)............................. (68,027) 2,971 703 (7,100)(11) (71,453) Foreign currency translation............ (40) -- -- -- (40) Notes receivable and accrued interest from stockholders.................... (105) -- -- -- (105) -------- ------ ---- ------- -------- Total stockholders' equity...... 1,415 2,971 703 (1,571) 3,518 -------- ------ ---- ------- -------- Total liabilities and stockholders' equity.......... $ 30,177 $3,363 $870 $93,239 $127,649 ======== ====== ==== ======= ========
See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements F-29 41 UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 (IN THOUSANDS)
HISTORICAL PRO FORMA ---------------------------- ADJUSTING PRO FORMA SOURCE BRITE VNN ENTRIES SOURCE ---------- ------ ------ --------- --------- STATEMENT OF OPERATIONS DATA: Monetary revenues.................... $ 8,575 $9,412 $2,425 $ 250(12) $ 20,662 Nonmonetary revenues................. 9,944 -- -- -- 9,944 ---------- ------ ------ -------- -------- Total revenues............... 18,519 9,412 2,425 250 30,606 Monetary cost of sales............... 3,485 4,685 1,592 (1,137)(13) 8,625 Nonmonetary cost of sales............ 9,944 -- -- -- 9,944 ---------- ------ ------ -------- -------- Total cost of sales.......... 13,429 4,685 1,592 (1,137) 18,569 Gross profit......................... 5,090 4,727 833 1,387 12,037 Selling, general and administrative expenses........................... 11,747 1,792 272 (1,759)(14) 12,052 Amortization of intangible assets.... 1,031 -- -- 11,105(15) 12,136 Research and development expenses.... 6,332 -- -- -- 6,332 ---------- ------ ------ -------- -------- Operating income (loss).............. (14,020) 2,935 561 (7,959) (18,483) Interest (income) expense, net....... (175) -- -- 12,160(16) 11,985 Other (income) expense, net.......... 10 -- -- (46)(17) (36) ---------- ------ ------ -------- -------- Income (loss) before income taxes.... (13,855) 2,935 561 (20,073) (30,432) Provision for income taxes........... -- -- 223 (223)(18) -- ---------- ------ ------ -------- -------- Net income (loss).................... (13,855) 2,935 338 (19,850) (30,432) Preferred stock dividends............ -- -- -- 3,392(19) 3,392 ---------- ------ ------ -------- -------- Net income (loss) attributable to common stockholders............... $ (13,855) $2,935 $ 338 $(23,242) $(33,824) ========== ====== ====== ======== ======== Net loss per common share.... $ (1.39) $ (3.40) ========== ======== Weighted average common shares outstanding ....................... 9,935,455 ==========
See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements F-30 42 UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1997 (IN THOUSANDS)
HISTORICAL PRO FORMA ------------------------------ ADJUSTING PRO FORMA SOURCE BRITE VNN ENTRIES SOURCE ----------- ------- ------ --------- --------- STATEMENT OF OPERATIONS DATA: Monetary revenues...................... $ 5,336 $ 6,403 $1,315 $ 125(12) $ 13,179 Nonmonetary revenues................... 3,411 -- -- -- 3,411 ----------- ------- ------ ------- --------- Total revenues................. 8,747 6,403 1,315 125 16,590 Monetary cost of sales................. 2,902 3,161 765 (494)(13) 6,334 Nonmonetary cost of sales.............. 3,411 -- -- -- 3,411 ----------- ------- ------ ------- --------- Total cost of sales............ 6,313 3,161 765 (494) 9,745 Gross profit........................... 2,434 3,242 550 619 6,845 Selling, general and administrative expenses............................. 9,074 1,784 158 (1,289)(14) 9,727 Amortization of intangible assets...... 1,844 -- -- 4,418(15) 6,262 Research and development expenses...... 1,844 -- -- -- 1,844 ----------- ------- ------ ------- --------- Operating income (loss)................ (10,328) 1,458 392 (2,510) (10,988) Interest (income) expense, net......... 825 -- -- 5,409(16) 6,234 Other (income) expense, net............ (58) -- -- -- (58) ----------- ------- ------ ------- --------- Income (loss) before income taxes...... (11,095) 1,458 392 (7,919) (17,164) Provision for income taxes............. -- -- 156 (156)(18) -- ----------- ------- ------ ------- --------- Net income (loss).............. (11,095) 1,458 236 (7,763) (17,164) Preferred stock dividends.............. -- -- -- 1,852(19) 1,852 ----------- ------- ------ ------- --------- Net income (loss) attributable to common stockholders....... $ (11,095) $ 1,458 $ 236 $(9,615) $ (19,016) =========== ======= ====== ======= ========= Net loss per common share...... $ (0.99) $ (1.69) =========== ========= Weighted average common shares outstanding.......................... 11,220,586 ===========
See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements F-31 43 NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS On January 14, 1997, the Company acquired all of the outstanding shares of ICT held by minority shareholders in exchange for approximately 1,390,000 shares of the Company's common stock, making ICT 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 certain employees and directors of ICT in exchange for their outstanding options to purchase ICT common shares, and incurred cash expenses related to the transaction of approximately $795,000. The aggregate purchase price for the acquisition of the ICT minority interest was approximately $11.3 million, and the acquisition was accounted for by the purchase method of accounting. On October 30, 1997, the Company acquired certain of the electronic publishing assets of Brite. The purchase price of the Brite acquisition was approximately $35.6 million in cash. The Brite acquisition was accounted for by the purchase method of accounting. On October 30, 1997, the Company acquired the electronic publishing assets of VNN. The purchase price of the VNN acquisition was $9.0 million in cash. The VNN acquisition was accounted for by the purchase method of accounting. The Unaudited Pro Forma Condensed Consolidated Balance Sheet gives effect to the following unaudited pro forma adjustments: (1) Represents the (i) receipt of gross proceeds of $120.0 million from the Offering, (ii) payment of $6.4 million issuance costs related to the Offering, (iii) payment of approximately $44.6 million as the purchase price in the Acquisitions, (iv) payment of approximately $21.3 million in connection with the repayment of the Company's senior secured notes plus accrued interest thereon and (v) deposit of approximately $22.3 million into the interest escrow account for the first four interest payments on the Notes. (2) Represents the establishment of the interest escrow account to service the first four interest payments of the Notes. (3) Represents the elimination of Brite and VNN accounts receivable, deferred expenses and prepaid expenses, which were not included in the purchased assets of Brite and VNN. (4) Represents the elimination of Brite's historical intangible assets of $303,000 plus management's estimated value of property and equipment, contract rights and goodwill based on a preliminary allocation of the purchase price of the Acquisitions in accordance with the purchase method of accounting as follows: Initial purchase price...................................... $44,550,000 Estimated fees and expenses associated with exiting activities, terminating employees and relocating certain employees of the acquired companies....................... 1,000,000 ----------- Total purchase price.............................. $45,550,000 ===========
The Company is currently in the process of obtaining an independent appraisal of the allocation of the purchase price. The preliminary allocation is as follows:
AMORTIZATION DESCRIPTION BRITE VNN PERIOD ----------- ----------- ---------- ------------ Property and equipment........................ $ 833,000 $ 533,000 3 years Contract rights............................... 16,000,000 3,400,000 5 years Goodwill...................................... 19,515,000 5,269,000 5 years
(5) Represents the (i) write-off of the Company's historical deferred financing fees of approximately $1.0 million which will be charged to earnings as an extraordinary item upon the early repayment of its F-32 44 historical debt as part of the Transactions plus (ii) the recording of deferred financing fees and expenses associated with the Notes in the amount of approximately $5.3 million. (6) Represents the elimination of Brite and VNN accounts payable, accrued payroll, unearned income and other non-current liabilities which were not assumed in the purchase of Brite and VNN. (7) Represents the (i) payment of approximately $672,000 in accrued interest associated with the Company's senior secured notes, which was repaid as part of the Transactions plus (ii) the elimination of Brite and VNN accrued liabilities which were not assumed in the purchase of Brite and VNN. (8) Represents the accrual of $1.0 million of estimated costs associated with exiting activities, terminating employees and relocating certain employees of the acquired companies. (9) Represents the (i) repayment of approximately $20.7 million of the Company's senior secured notes, net of approximately $2.4 million of note discount, as a result of the Offering and (ii) addition of $100.0 million in Notes pursuant to the Offering. (10) Represents the issuance of $20.0 million in Preferred Stock pursuant to the Offering, net of (i) warrants with an approximate value of $5.5 million which was recorded against capital in excess of par value and (ii) financing fees and expenses of approximately $1.2 million associated with the Units. (11) Represents the (i) write-off of approximately $2.4 million of note discount charged to earnings as an extraordinary item in connection with the repayment of approximately $20.7 million of the Company's senior secured notes, (ii) write-off of approximately $1.0 million of the Company's historical deferred financing charges and (iii) elimination of Brite and VNN historical retained earnings which were not assumed as part of the Brite acquisition. The Unaudited Pro Forma Condensed Consolidated Statements of Operations give effect to the following unaudited pro forma adjustments: (12) Represents rental revenues associated with certain voice information services equipment purchased as part of the Transactions which are not included in the historical revenues of Brite. (13) Represents the (i) elimination of certain historical expenses totaling $989,000 and $427,000 for the year ended December 31, 1996 and the six months ended June 30, 1997, respectively, associated with subscriptions to certain wire services and programming transmission which are non-recurring due to the termination of the related agreements upon closing of the Transactions, and (ii) the elimination of certain historical expenses associated with the allocation of general corporate overhead to VNN by Tribune Media Services, Inc. totaling $148,000 and $67,000 for the year ended December 31, 1996 and the six months ended June 30, 1997, respectively, which are non-recurring subsequent to the Transactions. (14) Represents the elimination of certain historical expenses associated with (i) allocation of general corporate overhead to Brite by Brite Voice Systems, Inc., and to VNN by Tribune Media Services, Inc., totaling $1,359,000 and $1,018,000 for the year ended December 31, 1996 and the six months ended June 30, 1997, respectively, which is non-recurring subsequent to the Transactions, and (ii) rent, advertising and trade promotional expenses totaling $400,000 and $271,000 for the year ended December 31, 1996 and the six months ended June 30, 1997, respectively, which are non-recurring because these costs relate to functions which will either be provided by existing Company personnel or are not required by the Company due to the termination of related agreements or obligations upon closing of the Transactions. (15) Represents (i) the amortization of intangible assets resulting from the Acquisitions totaling $8,837,000 and $4,418,000 for the year ended December 31, 1996 and the six months ended June 30, 1997, respectively, and (ii) the amortization of intangible assets (patents) resulting from the ICT Purchase F-33 45 totaling $2,268,000 for the year ended December 31, 1996. The estimated value of the patents, $11.3 million, will be amortized over a five-year period on the straight-line method. (16) Represents pro forma interest expense and amortization of deferred financing costs as shown below based upon pro forma debt levels and the applicable interest rates. The table below presents pro forma interest expense, noted with the respective interest rates, and pro forma amortization of deferred financing costs:
YEAR ENDED SIX MONTHS ENDED DECEMBER 31, 1996 JUNE 30, 1997 ----------------- ---------------- (DOLLARS IN THOUSANDS) Senior Secured Notes (12%)............................. $12,000 $6,000 Reduction of interest expense on current notes outstanding (13%).................................... (590) (966) Pro forma amortization of deferred financing costs..... 750 375 ------- ------- Total pro forma interest expense adjustments................................ $12,160 $5,409 ======= =======
Pro forma interest expense does not include approximately $935,000 and $215,000 of interest income for the year ended December 31, 1996 and the six months ended June 30, 1997, respectively, which would have been realized on the net excess proceeds of the Offering assuming the Transactions had taken place on January 1, 1996. (17) Represents the elimination of minority interest in the gains or losses of consolidated subsidiaries resulting from the ICT Purchase. (18) Represents the elimination of income tax provision due to the Company's net operating loss carryforwards, which are available to reduce income tax provisions. No income tax provision related to Brite is included as the Electronic Publishing Division is not an income tax reporting entity nor does it have a tax sharing agreement with its parent company, Brite Voice Systems, Inc. (19) Represents (i) preferred stock dividends on the Preferred Stock at a rate equal to 13.5% per annum per share, payable quarterly, (ii) amortization of discount related to warrants associated with the Units, and (iii) amortization of approximately $1.1 million in financing costs associated with the issuance of the Units. (20) EBITDA should not be considered in isolation from or as a substitute for net income, cash flows from operating activities or other consolidated income or cash flows statement data prepared in accordance with generally accepted accounting principles or as a measure of profitability or liquidity. (21) the ratio of earnings to cover combined fixed charges and preferred stock dividends is not a meaningful figure due to the fact that in the periods presented fixed charges, which include interest expense, and preferred stock dividends, exceeded earnings by an amount equal to the net loss. The Unaudited Pro Forma Condensed Consolidated Statements of Operations give effect to the following unaudited further adjustments: (22) Represents (i) the elimination of certain employee expenses totaling $1.8 million and $1.0 million for the year ended December 31, 1996 and the six months ended June 30, 1997, respectively, as these costs relate to functions that will either be provided by existing Company personnel or will not be required by the Company subsequent to the Acquisitions and (ii) the elimination of additional wire service fees totaling $195,000 and $133,000 for the year ended December 31, 1996 and the six months ended June 30, 1997, respectively, reflecting the Company's selection of those contracts containing the most favorable economic terms. F-34 46 INDEX TO EXHIBITS
Exhibit Number Exhibit - ------ ------- Exhibit 2.1 - Asset Purchase Agreement dated September 23, 1997 between IT Network, Inc. and Brite Voice Systems, Inc. Exhibit 2.2 - Amendment dated October 7, 1997 between IT Network, Inc. and Brite Voice Systems, Inc. to Asset Purchase Agreement dated September 23, 1997 between IT Network, Inc. and Brite Voice Systems, Inc. Exhibit 2.3+ - Asset Purchase Agreement dated September 30, 1997 between Source Media, Inc. and IT Network, Inc. and Voice News Network, Inc. Exhibit 4.1 - Indenture dated as of October 30, 1997 between Source Media, Inc. and U.S. Trust Company of Texas, N.A. Exhibit 4.2 - Certificate of Designation for Senior PIK Preferred Stock Exhibit 4.3 - Warrant Agreement dated as of October 30, 1997 between Source Media, Inc. And ChaseMellon Shareholder Services Exhibit 4.4 - Unit Agreement dated as of October 30, 1997 between Source Media, Inc. and ChaseMellon Shareholder Services Exhibit 10.1 - Exchange and Registration Rights Agreement for Senior Secured Notes dated as of October 30, 1997 between Source Media, Inc. and certain of its subsidiaries and NatWest Capital Markets Limited and Prudential Securities Incorporated Exhibit 10.2 - Preferred Stock Registration Rights Agreement dated as of October 30, 1997 between Source Media, Inc. and NatWest Capital Markets Limited and Prudential Securities Incorporated. Exhibit 10.3 - Common Stock Registration Rights Agreement dated as of October 30, 1997 by and among Source Media, Inc. and NatWest Capital Markets Limited on Prudential Securities Incorporated. Exhibit 23.1 - Consent of Arthur Andersen LLP Exhibit 23.2 - Consent of Price Waterhouse LLP
+ To be filed by amendment. EX-2.1 2 ASSET PURCHASE AGMT: IT NETWORK/BRITE VOICE SYS 1 EXHIBIT 2.1 ================================================================================ ASSET PURCHASE AGREEMENT BETWEEN IT NETWORK, INC. AND BRITE VOICE SYSTEMS, INC. SEPTEMBER 23, 1997 ================================================================================ 2 TABLE OF CONTENTS
Page ---- ARTICLE I -- TERMS OF THE TRANSACTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.1 Certain Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.2 Certain Additional Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1.3 Assets to be Transferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 1.4 Excluded Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 1.5 Instruments of Conveyance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 1.6 Purchase Price and Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 1.7 Allocation of Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 1.8 Liabilities Assumed by Buyer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 1.9 Liabilities Not Assumed by Buyer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 ARTICLE II -- DEPOSIT SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 2.1 The Deposit Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 2.2 Disposition of Deposit Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 2.3 Certain Sales Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 ARTICLE III -- CLOSING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 3.1 Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 3.2 Deliveries by Seller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 3.3 Deliveries by Buyer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 ARTICLE IV -- REPRESENTATIONS AND WARRANTIES OF SELLER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 4.1 Corporate Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 4.2 Qualification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 4.3 Authority Relative to This Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 4.4 Noncontravention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 4.5 Governmental Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 4.6 Title to Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 4.7 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 4.8 Absence of Certain Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 4.9 Tax Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 4.10 Compliance With Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 4.11 Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 4.12 Sufficiency and Condition of Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 4.13 Intellectual Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 4.14 Permits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 4.15 Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 4.16 Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 4.17 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 4.18 Brokerage Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 4.19 Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 4.20 Representations and Warranties on Closing Date . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
-i- 3 ARTICLE V -- REPRESENTATIONS AND WARRANTIES OF BUYER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 5.1 Corporate Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 5.2 Authority Relative to This Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 5.3 Noncontravention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 5.4 Governmental Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 5.5 Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 5.6 Brokerage Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 5.7 Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 5.8 Representations and Warranties on Closing Date . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 ARTICLE VI -- CONDUCT OF BUSINESS PENDING CLOSING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 6.1 Conduct and Preservation of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 6.2 Restrictions on Certain Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 ARTICLE VII -- ADDITIONAL AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 7.1 Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 7.2 Access to Information; Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 7.3 Acquisition Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 7.4 Third Party Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 7.5 Reasonable Best Efforts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 7.6 HSR Act Notification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 7.7 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 7.8 Noncompetition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 7.9 Employee and Employee Benefit Plan Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 7.10 Transfer of Certain Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 7.11 Amendment of Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 7.12 Notification of Certain Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 7.13 Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 7.14 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 7.15 Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 7.16 Adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 ARTICLE VIII -- CONDITIONS TO OBLIGATIONS OF SELLER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 8.1 Representations and Warranties True . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 8.2 Covenants and Agreements Performed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 8.3 HSR Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 8.4 Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 8.5 Closing Deliveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 ARTICLE IX -- CONDITIONS TO OBLIGATIONS OF BUYER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 9.1 Representations and Warranties True . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 9.2 Covenants and Agreements Performed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 9.3 HSR Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 9.4 Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
-ii- 4 9.5 Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 9.6 No Material Adverse Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 9.7 Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 9.8 Closing Deliveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 ARTICLE X -- TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 10.1 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 10.2 Extensions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 10.3 Effect of Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 ARTICLE XI -- SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . 31 11.1 Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 11.2 Indemnification by Seller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 11.3 Indemnification by Buyer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 11.4 Procedure for Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 ARTICLE XII -- MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 12.1 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 12.2 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 12.3 Binding Effect; Assignment; No Third Party Benefit . . . . . . . . . . . . . . . . . . . . . . . . . 35 12.4 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 12.5 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 12.6 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 12.7 Descriptive Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 12.8 Gender . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 12.9 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 12.10 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 12.11 Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 12.12 Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 12.13 Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 12.14 Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 12.15 Remedies Not Exclusive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
-iii- 5 INDEX OF SCHEDULES AND EXHIBITS Schedules
Number Name - ------ ---- 1.1(a) Contracts 1.1(b) Permitted Encumbrances 1.3(a) Furniture and Equipment; Computer Equipment 1.3(c) Intellectual Property 1.3(g) Prepaid Revenues 1.7 Allocation of Purchase Price 1.9 Liabilities Not Assumed by Buyer 4.4 Noncontravention 4.5 Government Approvals - Seller 4.6 Title to Assets 4.7 Financial Statements 4.8 Absence of Certain Changes 4.9 Tax Matters 4.11 Legal Proceedings 4.12 Sufficiency and Condition of Assets 4.13 Intellectual Property 4.14 Permits 4.15 Agreements 4.16 Employees 4.17 Insurance 5.4 Government Approvals - Buyer Exhibits -------- 1.1(a) Lease and Services Agreement 1.1(b) Reseller Agreement 1.5 Bill of Sale 3.2(k) Legal Opinion 3.3(b) Assignment and Assumption Agreement
-iv- 6 ASSET PURCHASE AGREEMENT ASSET PURCHASE AGREEMENT (this "Agreement"), dated as of September 23, 1997, between IT Network, Inc., a Texas corporation ("Buyer") and Brite Voice Systems, Inc., a Kansas corporation ("Seller"). WHEREAS, Seller desires to sell to Buyer, and Buyer desires to purchase from Seller, the Assets (as hereinafter defined), which are all the assets relating to the Business (as hereinafter defined), upon the terms and subject to the conditions herein set forth; NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements herein contained, and intending to be legally bound hereby, Seller and Buyer hereby agree as follows: ARTICLE I TERMS OF THE TRANSACTION 1.1 Certain Defined Terms. As used in this Agreement, each of the following terms has the meaning given it below: "Affiliate" means, with respect to any person, any other person that, directly or indirectly, through one or more intermediaries, controls, is controlled by or is under common control with, such person. For the purposes of this definition, "control", when used with respect to any person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such person, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Ancillary Documents" means each agreement, instrument and document (other than this Agreement) executed or to be executed by Seller or Buyer in connection with the transactions contemplated by this Agreement. "Applicable Law" means any statute, law, rule or regulation or any judgment, order, writ, injunction or decree of any Governmental Entity to which a specified person or property is subject. "Business" shall mean Seller's electronic publishing business consisting of: (i) the management of audiotex systems installed on the premises of newspaper and yellow pages publishers, including daily programming changes and the production of monthly reports reflecting system usage, messages played and advertisements heard; (ii) the creation and provision by satellite transmission of a wide variety of general information suitable for dissemination in any location for access by telephone callers through audiotex systems owned or operated by newspaper and yellow pages publishers, broadcasters and network -1- 7 operators and consisting of the information described in Seller's BDR, CityLine, and Telco Information Services, Consumer Tips and Consumer Notes Catalogs and the associated Guides, copies of which have been provided to Buyer; (iii) the creation and provision to yellow pages publishers over the Internet of a variety of information described in Seller's Internet Network Catalog, a copy of which has been provided to Buyer; (iv) the sale of advertising sponsorships to various categories of audiotex information made available through yellow pages publishers' audiotex systems, including creation of printed material designed for inclusion in the publishers' directories; and (v) advertiser management services provided on behalf of yellow pages publishers whereby advertising entities are contacted from an outbound call center for periodic updating of their audiotex sponsorships and advertisements. "Business Day" means a day on which national banks are generally open for business in New York City. "Code" means the Internal Revenue Code of 1986, as amended. "Common Stock" means the common stock, par value $.001 per share, of Parent. "Contracts " means all advertising sales, audio feed and services contracts and agreements as listed or described on Schedule 1.1(a) and any additional agreements or contracts entered into by Seller in connection with the Business from the date of this Agreement to the Closing. "Encumbrances" means liens, charges, pledges, options, mortgages, deeds of trust, security interests, claims, restrictions, easements and other encumbrances of every type and description, whether imposed by law, agreement, understanding or otherwise. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Governmental Entity" means any court or tribunal in any jurisdiction (domestic or foreign) or any federal, state, municipal or other governmental body, agency, authority, department, commission, board, bureau or instrumentality (domestic or foreign). "HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. "Intellectual Property" means patents, trademarks, service marks, trade names, service names, brand names, copyrights, trade secrets, know-how, inventions, computer software (including documentation and object and source codes) and similar rights, and all registrations, applications, licenses and rights with respect to any of the foregoing. -2- 8 "IRS" means the Internal Revenue Service. "Lease and Services Agreement" means the lease and services agreement covering the real property and providing for the telephone and long distance services described in and containing the terms set forth in the lease and services agreement attached hereto as Exhibit 1.1(a). "Material Adverse Effect" means a material adverse effect on the business, assets, results of operations, condition (financial or otherwise) or prospects of the Business or the ownership or operation of the Assets or any material portion thereof or on the ability of Seller to perform on a timely basis any material obligation of Seller under this Agreement or any agreement, instrument or document entered into or delivered in connection herewith. "Parent" means Source Media, Inc., a Delaware corporation, the owner of all the outstanding capital stock of Buyer. "Permits" means licenses, permits, franchises, consents, approvals, variances, exemptions and other authorizations of or from Governmental Entities. "Permitted Encumbrances" means (i) Encumbrances created by Buyer and (ii) the Encumbrances set forth on Schedule 1.1(b); provided, however, that at the Closing "Permitted Encumbrances" shall not include a lien of record against the Assets. "Person" means any individual, corporation, partnership, joint venture, association, joint-stock company, trust, enterprise, unincorporated organization or Governmental Entity. "Proceedings" means all proceedings, actions, claims, suits, investigations and inquiries by or before any arbitrator or Governmental Entity. "Reasonable Best Efforts" means a party's reasonable best efforts in accordance with reasonable commercial practice and without the incurrence of unreasonable expense. "Reseller Agreement " means the Reseller Agreement attached hereto as Exhibit 1.1(b). "Securities Act" means the Securities Act of 1933, as amended. "Taxes" means any income taxes or similar assessments or any sales, excise, occupation, use, ad valorem, property, production, severance, transportation, employment, payroll, franchise or other tax imposed by any United States federal, state or local (or any foreign or provincial) taxing authority, including any interest, penalties or additions attributable thereto. -3- 9 "Tax Return" means any return or report, including any related or supporting information, with respect to Taxes. "to the best knowledge" (or similar references to a party's knowledge) means the knowledge of or receipt of notice (oral or written) by such party or any of such party's officers or other employees having responsibility over the relevant subject matter, as such knowledge has or should have been obtained in the normal conduct of the business of such party or in connection with the preparation of the Schedules to this Agreement and the furnishing of information as contemplated by this Agreement. 1.2 Certain Additional Defined Terms. In addition to such terms as are defined in the opening paragraph of and the recitals to this Agreement and in Section 1.1, the following terms are used in this Agreement as defined in the Sections set forth opposite such terms:
Defined Term Section Reference ------------ ----------------- Acquired Business Balance Sheet 4.7 Acquired Business Statement of Cash Flows 4.7 Acquired Business Statement of Operations 4.7 Acquisition Proposal 7.3 Assets 1.3 Assumed Liabilities 1.8 Buyer Claims 11.2 Buyer Representatives 7.2 Buyer's Notice 11.4 Closing 3.1 Closing Date 3.1 Confidential Information 7.2 Consent Required Contract 7.11 Damages 11.2 Deposit Shares 2.1 Employees 4.16 Employment Arrangements 7.9 Escrow Agent 2.1 Escrow Agreement 2.1 Financial Statements 4.7 GAAP 4.7 Purchase Price 1.6 Registration Rights Agreement 2.1 Retained Employees 7.9 Seller Claims 11.3 Survival Date 11.1 Termination Date 10.1 Transfer 1.3
-4- 10 1.3 Assets to be Transferred. At the Closing, and on the terms and subject to the conditions set forth in this Agreement, Seller shall sell, assign, transfer, deliver and convey (collectively, "Transfer"), or cause to be Transferred, to Buyer, and Buyer shall purchase from Seller, all the following assets and properties (together with any additions thereto which are related to the operation of the Business or replacements thereof between the date hereof and the Closing): (a) All furniture, equipment, machinery, materials, apparatus, spare parts, supplies and other tangible personal property listed or described on Schedule 1.3(a); (b) Seller's computer equipment and hardware, central processing units, terminals, disk drives, tape drives, electronic memory units, printers, keyboards, screens, peripherals (and other input/output devices), modems and other communication controllers, and any and all parts and appurtenances thereto listed or described on Schedule 1.3(a). Within ten days after the date of this Agreement, the parties shall jointly conduct and prepare an itemized inventory of the assets described in Section 1.3(a) and this Section 1.3(b), which inventory shall be set forth as an amendment to Schedule 1.3(a) and constitute the final and binding listing of such assets to be delivered at Closing; provided, however, that to the extent the parties are unable to agree as to any particular item or items, such dispute shall be submitted to Paul Yecies whose determination with respect thereto shall be final and binding. The parties agree that any such submission shall be made within 10 days after preparation of the inventory and that each party shall be entitled to simultaneously submit to the arbitrator a written statement in support of its submission. The parties shall jointly request the arbitrator to render a decision as to the disputed items within 15 days of his receipt of the statements with respect to the disputed items. (c) All Intellectual Property listed or described on Schedule 1.3(c), and all rights to recover for infringement thereon arising subsequent to the Closing. (d) All right, title and interest of Seller in and to the Contracts, to the extent the same exist on the Closing Date, and all rights, including rights of refund and offset, privileges, deposits, claims, causes of action and options in favor of Seller relating or pertaining to the Contracts accruing on or after the Closing Date. (e) All books, records, papers and instruments of Seller relating to the purchase of materials, supplies and services, the sale of services, and dealings with customers, vendors and suppliers of the Business, including computerized books and records and other computerized storage media and the software (including documentation and object and source codes) used in connection therewith (provided that Seller may retain copies of the foregoing and all the Contracts, subject to Sections 7.2(c) and 7.8). (f) All customer lists and customer data, vendor lists and vendor data, supplier lists and supplier data and sales and promotional material and other sales-related material relating to, or used in connection with the operation of, the Business. -5- 11 (g) An amount of cash equal to prepaid or deferred revenues relating to services that will be performed by Buyer after the Closing in connection with the Assets and the Business as set forth on Schedule 1.3(g), including without limitation all deposits relating to the Business and pertaining to the Contracts. Within 15 days after the Closing Date, Seller shall provide to Buyer any necessary adjustments to Schedule 1.3(g) to update the prepaid or deferred revenues to reflect changes, if any, occurring from the date through which such amounts are calculated in Schedule 1.3(g) to the Closing Date. (h) All rights, claims and causes of action of Seller against third parties (including Seller's predecessors in title to the Assets) in respect of the Business or the Assets arising subsequent to Closing, including without limitation insurance claims, unliquidated rights and rights of recovery. All the assets and properties being Transferred to Buyer pursuant to this Agreement are collectively referred to herein as the "Assets". 1.4 Excluded Assets. Except for the Assets, all assets and properties of Seller shall be excluded from the assets to be Transferred to Buyer hereunder. 1.5 Instruments of Conveyance. In order to effectuate the Transfer of the Assets contemplated by Section 1.3, at the Closing, Seller shall execute and deliver, or cause to be executed and delivered, to Buyer, dated the Closing Date, all such general warranty bills of sale (which shall be substantially in the form of Exhibit 1.5) and other documents or instruments of assignment, transfer or conveyance as Buyer shall reasonably deem necessary or appropriate to vest in or confirm to Buyer good and marketable title to the Assets, free and clear of all Encumbrances other than the Permitted Encumbrances. 1.6 Purchase Price and Payment. In consideration of the Transfer by Seller to Buyer of the Assets, Buyer shall pay to Seller at the Closing the aggregate purchase price of $35,000,000 in cash (the "Purchase Price"). The Purchase Price shall be paid to Seller in immediately available funds by confirmed wire transfer to a bank account to be designated by Seller (such designation to occur no later than the fifth business day prior to the Closing). 1.7 Allocation of Purchase Price. The Purchase Price shall be allocated among the Assets as set forth on Schedule 1.7. Seller and Buyer shall report the transactions contemplated hereby on all Tax Returns (including information returns and supplements thereto required to be filed by the parties under Section 1060 of the Code) in a manner consistent with such allocation. 1.8 Liabilities Assumed by Buyer. As further consideration for the Transfer of the Assets to Buyer, Buyer agrees, upon the terms and subject to the conditions set forth herein, to assume, at the Closing, and thereafter to pay, perform and discharge, all liabilities and obligations of Seller under the Contracts, but only to the extent that such liabilities and obligations arise and relate to periods beginning on or after the Closing Date (collectively, the "Assumed Liabilities"). -6- 12 1.9 Liabilities Not Assumed by Buyer. Buyer shall not assume or take title to the Assets subject to, or in any way be liable or responsible for, any liabilities or obligations of Seller (whether or not referred to in any Schedule or Exhibit hereto), except as specifically provided in Section 1.8, it being expressly acknowledged that it is the intention of the parties hereto that all liabilities and obligations that Seller has or may have in the future (whether accrued, absolute, contingent, unliquidated or otherwise, whether or not known to Seller, and whether due or to become due), other than the Assumed Liabilities, shall be and remain the liabilities and obligations of Seller. Without limiting the generality of the foregoing, Buyer shall not assume or take title to the Assets subject to, or in any way be liable or responsible for: (a) Any liabilities and obligations of Seller in respect of any claims, Proceedings or other matters described on Schedule 1.9; (b) Any liabilities and obligations of Seller relating to the excluded assets described in Section 1.4; (c) Any liability or obligation of Seller under any mortgage, deed of trust, security agreement or financing statement, or any note, bond or other instrument or obligation secured thereby; (d) Any liability or obligation of Seller in respect of any express or implied representation, warranty, agreement or guaranty made (or claimed to have been made) by Seller, or imposed (or asserted to be imposed) by operation of law, in respect of any service rendered or products produced, distributed or sold by Seller in connection with the Business on or prior to the Closing Date; (e) Any liability or obligation of Seller existing at the Closing Date under any contracts or agreements included in the Assets which results from the breach, default or wrongful action or inaction of Seller; (f) Subject to Section 7.9, any liability or obligation of Seller resulting from or relating to the employment relationship between Seller and any of Seller's present or former employees or the termination of any such employment relationship, including without limitation severance pay, accrued vacation and other similar benefits, if any, and any claims filed or which may be filed by or on behalf of any such present or former employee relating to the employment or termination of employment of any such employee by Seller, including without limitation any claim for wrongful discharge, breach of contract, unfair labor practice, employment discrimination, unemployment compensation or workers' compensation; (g) Subject to Section 7.9, any liability or obligation of Seller in respect of any agreement, trust, plan, fund or other arrangement under which benefits or employment is provided for any of Seller's present or former employees; (h) Any income Tax liabilities or deficiencies, whether federal, state or local of Seller; -7- 13 (i) Any ad valorem property Taxes to the extent applicable to periods ending on or prior to the Closing Date; and (j) Any environmental liability arising under, or obligation imposed by, any Applicable Law pertaining to health, safety or the environment that relates to the occupancy, ownership, operation, control or use of the Business or Assets prior to the Closing Date or that is connected to the real property on which the Business is located as of the Closing Date. ARTICLE II DEPOSIT SHARES 2.1 The Deposit Shares. Simultaneously with the execution of this Agreement, Buyer, Seller and Texas Bank & Trust, N.A. (the "Escrow Agent") have executed and delivered the escrow agreement dated of even date herewith among Parent, Seller and the Escrow Agent (the "Escrow Agreement"), and Buyer has delivered to the Escrow Agent (i) a certificate representing 250,000 shares of the Common Stock registered in the name of Seller (together with any additional shares that may be deposited pursuant to Section 10.2, the "Deposit Shares") and (ii) the registration rights agreement of even date herewith between Parent and Seller (the "Registration Rights Agreement"). Buyer and Seller agree that the Escrow Agent shall hold and deliver the certificate representing the Deposit Shares and the Registration Rights Agreement in accordance with the terms and conditions set forth in the Escrow Agreement. 2.2 Disposition of Deposit Shares. (a) If the Closing does not occur on or before the Termination Date by reason of Buyer's default under the terms of this Agreement, Seller shall be entitled to receive the Deposit Shares and the Registration Rights Agreement without right on the part of Buyer to a return thereof. Buyer shall be deemed in default for the purpose of this Section 2.2 (and for no other purpose) if Buyer (i) shall have insufficient funds to pay the Purchase Price or (ii) elects to terminate this Agreement due to a material adverse change in the cash flow of the Business based solely on the status of the Contracts, taken as a whole, on the Termination Date, in each case when the Seller (A) has performed all covenants and agreements of Seller hereunder and (B) has shown itself able and willing to satisfy each of the conditions set forth in Article IX on the Termination Date. Notwithstanding anything to the contrary contained in this Agreement, if the Closing does not occur on or before the Termination Date by reason of Buyer's default under the terms of Section 2.2(a), Seller's sole and exclusive remedy against Buyer and its Affiliates shall be to retain the Deposit Shares which the parties stipulate shall be liquidated damages. (b) In the event the Closing shall occur or the Closing shall not occur and Seller shall not be entitled to receive the Deposit Shares pursuant to Section 2.2(a), the certificate representing the Deposit Shares and the Registration Rights Agreement shall be returned to Buyer in the manner specified in the Escrow Agreement. -8- 14 2.3 Certain Sales Restrictions. (a) Seller agrees (subject to any requirement of law that the disposition of its property remains within its control) that it will not, directly or indirectly, sell, assign, transfer, pledge, encumber or otherwise dispose of any Deposit Shares except: (i) In accordance with the registration rights set forth in the Registration Rights Agreement; (ii) In compliance with Rule 144 under the Securities Act; provided, however, that Seller shall provide Parent with copies of all filings made with the Securities and Exchange Commission with respect to sales of Deposit Shares under Rule 144; (iii) Pursuant to a no-action letter or other interpretive statement or release of the Securities and Exchange Commission to the effect that the proposed sale or other disposition of the Deposit Shares may be effected without registration under the Securities Act; or (iv) Pursuant to an applicable exemption (other than Rule 144 under the Securities Act) under the Securities Act; provided, that Seller shall have furnished Parent with an opinion of counsel, which opinion shall be reasonably acceptable to Parent, to the effect that such disposition does not require registration of such Deposit Shares under the Securities Act. (b) Notwithstanding Section 2.3(a), Seller may sell or otherwise dispose of any of the Deposit Shares (i) pursuant to a tender offer or an exchange offer approved by the Board of Directors of Parent or (ii) as a result of or in connection with consummation of a merger, consolidation or sale of all or substantially all the assets of Parent. ARTICLE III CLOSING 3.1 Closing. The closing of the transactions contemplated hereby (the "Closing") shall take place (i) at the offices of Thompson & Knight, P.C., 1700 Pacific Avenue, Dallas, Texas, at 10:00 a.m., local time, on the fifth Business Day after the satisfaction of all the conditions set forth in Articles VIII and IX or (ii) at such other time or place or on such other date as the parties hereto shall agree. The date on which the Closing is required to take place is herein referred to as the "Closing Date". All Closing transactions shall be deemed to have occurred simultaneously. 3.2 Deliveries by Seller. At the Closing, Seller shall make the following deliveries or such deliveries in substitution therefor as are satisfactory to Buyer: -9- 15 (a) Seller shall cause the Escrow Agent to deliver to Buyer the certificate or certificates representing the Deposit Shares and the Registration Rights Agreement in the manner specified in the Escrow Agreement. (b) Seller shall deliver to Buyer the instruments of conveyance referred to in Section 1.5. (c) Seller shall deliver to Buyer a certificate of an officer thereof certifying (i) that attached to such certificate are true and correct copies of the resolutions adopted by its Board of Directors authorizing the execution, delivery and performance of this Agreement and the Ancillary Documents by Seller, and that such resolutions are in full force and effect as of the Closing and (ii) the incumbency and signatures of their respective officers who have executed this Agreement and the other certificates, instruments and documents delivered at the Closing on behalf of Seller. (d) Seller shall deliver possession of the Assets to Buyer. (e) Seller shall deliver to Buyer executed copies of all consents and approvals of third parties required to be obtained by or on the part of Seller for the consummation of the transactions contemplated hereby, it being agreed that Seller shall have no obligation to attempt to obtain any consents or approvals under the Contracts. (f) Seller shall deliver to Buyer all books and records of Seller relating to the Assets or the operation of the Business referred to in Section 1.3(e). (g) Seller shall deliver to Buyer a Certificate from the Secretary of State of Kansas as to the legal existence and good standing of Seller under the laws of such state. (h) Seller shall deliver to Buyer a certificate executed on behalf of Seller by the president of Seller, dated the Closing Date, representing and certifying, in such detail as Buyer may reasonably request, that the conditions set forth in this Article IX have been fulfilled. (i) Seller shall have executed and delivered to Buyer the Lease and Services Agreement. (j) Seller shall deliver to Buyer such other certificates, instrument and documents as may be reasonably requested by, and in form and substance reasonably satisfactory to, Buyer in order to effect the transactions contemplated by this Agreement to occur at the Closing. (k) Seller shall cause to be delivered to Buyer the opinion of Triplett, Woolf & Garretson, LLC, counsel to Seller, in substantially the form attached as Exhibit 3.2(k). -10- 16 3.3 Deliveries by Buyer. At the Closing, Buyer shall make the following deliveries or such deliveries in substitution therefor as are satisfactory to Seller: (a) Buyer shall deliver to Seller the Purchase Price. (b) Buyer shall deliver to Seller an instrument of assignment and assumption substantially in the form of Exhibit 3.3(b). (c) Buyer shall deliver to Seller a certificate of an officer thereof certifying (i) that attached to such certificate are true and correct copies of the resolutions adopted by its Board of Directors authorizing the execution, delivery and performance of this Agreement and the Ancillary Documents by Buyer, and that such resolutions are in full force and effect as of the Closing and (ii) the incumbency and signatures of their respective officers who have executed this Agreement and the other certificates, instruments and documents delivered at the Closing on behalf of Seller. (d) Buyer shall deliver to Seller certificates from the Secretary of State of Texas and the Comptroller of Public Accounts of the State of Texas as to the legal existence and good standing, respectively, of Buyer under the laws of such state. (e) Buyer shall deliver to Seller a certificate executed on behalf of Buyer by the president or a vice president of Buyer, dated the Closing Date, representing and certifying, in such detail as Seller may reasonably request, that the conditions set forth in Article VIII have been fulfilled. (f) Buyer shall have executed and delivered to Seller the Lease and Services Agreement. (g) Buyer shall deliver to Seller such other certificates, instruments and documents as may be reasonably requested by, and in form and substance reasonably satisfactory to, Seller in order to effect the transactions contemplated by this Agreement to occur at the Closing. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF SELLER Seller represents and warrants to Buyer that: 4.1 Corporate Organization. Seller is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, and has all requisite corporate power and corporate authority to own, lease and operate the Assets and to carry on the Business as now being conducted. No actions or proceedings to dissolve Seller are pending. -11- 17 4.2 Qualification. Seller is duly qualified or licensed to do business as a foreign corporation and is in good standing in all of the jurisdictions in which it owns, leases or operates the Assets or in which such qualification or licensing is required for the conduct of the Business. 4.3 Authority Relative to This Agreement. Seller has full corporate power and corporate authority to execute, deliver and perform this Agreement and the Ancillary Documents to which it is a party and to consummate the transactions contemplated hereby and thereby. The execution, delivery and performance by Seller of this Agreement and the Ancillary Documents to which it is a party, and the consummation by it of the transactions contemplated hereby and thereby, have been or by Closing will have been duly authorized by all necessary corporate action of Seller. This Agreement has been duly executed and delivered by Seller and constitutes, and each Ancillary Document executed or to be executed by Seller has been, or when executed will be, duly executed and delivered by Seller and constitutes, or when executed and delivered will constitute, a valid and binding obligation of Seller, enforceable against Seller in accordance with their respective terms. 4.4 Noncontravention. Except as set forth on Schedule 4.4, the execution, delivery and performance by Seller of this Agreement and the Ancillary Documents to which it is a party and the consummation by it of the transactions contemplated hereby and thereby do not and will not (i) conflict with or result in a violation of any provision of the charter or bylaws of Seller, (ii) conflict with or result in a violation of any provision of, or constitute (with or without the giving of notice or the passage of time or both) a default under, or give rise (with or without the giving of notice or the passage of time or both) to any right of termination, cancellation or acceleration under, or require any consent, approval, authorization or waiver of, or notice to, any party to, any bond, debenture, note, mortgage, indenture, lease, contract, agreement or other instrument or obligation to which Seller is a party or by which Seller, the Business or any of the Assets may be bound or any Permit held by Seller for use in connection with the Business, (iii) result in the creation or imposition of any Encumbrance upon any of the Assets or (iv) to the best knowledge of Seller, assuming compliance with the matters referred to in Section 4.5, violate any Applicable Law binding upon Seller, the Business or any of the Assets. Notwithstanding anything to the contrary in this Agreement, this Section 4.4 is not intended to make any representation or warranty of the kind made in this Section 4.4 with respect to any of the Contracts. 4.5 Governmental Approvals. No consent, approval, order or authorization of, or declaration, filing or registration with, any Governmental Entity is required to be obtained or made by Seller in connection with the execution, delivery or performance by Seller of this Agreement and the Ancillary Documents to which it is a party or the consummation by it of the transactions contemplated hereby or thereby, other than (i) compliance with any applicable requirements of the HSR Act or (ii) as set forth on Schedule 4.5. 4.6 Title to Assets. Seller is the owner of, and has good and marketable title to, all the Assets, free and clear of all Encumbrances other than the Permitted Encumbrances. Upon Seller's Transfer of the Assets to Buyer pursuant to this Agreement, Buyer will have good and marketable title to all the Assets, free and clear of all Encumbrances other than the Permitted -12- 18 Encumbrances. Except as disclosed on Schedule 4.6, no financing statement (or other instrument sufficient or effective as a financing statement) under the Uniform Commercial Code with respect to any of the Assets has been filed and is effective in any jurisdiction, and Seller has not signed any such financing statement (or other instrument) or any mortgage or security agreement authorizing any secured party thereunder to file any such financing statement (or other instrument). 4.7 Financial Statements. Seller has delivered to Buyer accurate and complete copies of (i) an audited balance sheet for the Assets and the Business (an "Acquired Business Balance Sheet") as of December 31, 1996 and 1995, an audited statement of operations for the Assets and the Business (an "Acquired Business Statement of Operations") for the years ended December 31, 1996 and 1995, and an audited statement of cash flows for the Assets and the Business (the "Acquired Business Statement of Cash Flows") for the years ended December 31, 1996 and 1995, together with the manually signed accountants' report of Arthur Andersen & Co. covering such financial statements, and (ii) an unaudited Acquired Business Balance Sheet as of June 30, 1997, an unaudited Acquired Business Statement of Operations for the six month periods ended June 30, 1997 and 1996 and an unaudited Acquired Business Statement of Cash Flows for the six month periods ended June 30, 1997 and 1996 (collectively, the "Financial Statements"). The Financial Statements (i) have been prepared from the books and records of Seller in conformity with Regulation S-X under the Securities Act and generally accepted accounting principles ("GAAP") applied on a basis consistent with preceding years throughout the periods involved and (ii) accurately, completely, and fairly present the financial position of the Business as of the respective dates thereof and its results of operations and cash flows for the respective periods then ended. Except as disclosed on Schedule 4.7, the statements of income included in the Financial Statements do not contain any material items of special or nonrecurring income, and the balance sheets included in the Financial Statements do not reflect any write-up or revaluation increasing the book value of any assets, nor have there been any transactions since the respective dates thereof giving rise to special or nonrecurring income or any such write-up or revaluation. 4.8 Absence of Certain Changes. Except as disclosed on Schedule 4.8, since December 31, 1996, (i) there has not been any material adverse change in the business, assets, results of operations, condition (financial or otherwise) or prospects of the Business or the ownership or operation of the Assets or any material portion thereof, which has resulted or is reasonably likely to result in a Material Adverse Effect, (ii) the Business has been conducted only in the ordinary course consistent with past practice, (iii) Seller has not, in respect of the Business, incurred any material liability, engaged in any material transaction, or entered into any material agreement outside the ordinary course of business consistent with past practice, (iv) Seller has not suffered any material loss, damage, destruction or other casualty to any of the Assets which are tangible assets (whether or not covered by insurance) and (v) Seller has not, in respect of the Business, taken any of the actions set forth in Section 6.2 except as permitted thereunder. -13- 19 4.9 Tax Matters. Except as disclosed on Schedule 4.9: (a) Seller has (and as of the Closing Date will have) duly filed all federal, state, local, and foreign Tax Returns required to be filed by or with respect to it with the IRS or other applicable Taxing authority in connection with the Assets or the operation of the Business, and no extensions with respect to such Tax Returns have (or as of the Closing Date will have) been requested or granted; (b) Seller has (and as of the Closing Date will have) paid, or adequately reserved, all Taxes due, or claimed by any Taxing authority to be due, from or with respect to it relating to the Assets or the operation of the Business, except Taxes that are being contested in good faith by appropriate legal proceedings and for which adequate reserves have been set aside as disclosed on Schedule 4.9; (c) There has been no issue raised or adjustment proposed (and none is pending) by the IRS or any other Taxing authority in connection with any Tax Returns relating to the Assets or the operation of the Business; (d) Seller has (and as of the Closing Date will have) made all deposits required with respect to Taxes relating to the Assets or the operation of the Business; and (e) No waiver or extension of any statute of limitations as to any federal, state, local, or foreign Tax matter relating to the Assets or the operation of the Business has been given by or requested from Seller. 4.10 Compliance With Laws. Seller has complied with all Applicable Laws relating to the ownership or operation of the Assets or the operation of the Business, except for noncompliance with such Applicable Laws that, individually or in the aggregate, does not and will not have a Material Adverse Effect, and Seller has not received any written notice, which has not been dismissed or otherwise disposed of, that Seller has not so complied. Seller is not charged or, to the best knowledge of Seller, threatened with, or, to the best knowledge of Seller, under investigation with respect to, any violation of any Applicable Law relating to any aspect of the ownership or operation of the Assets or the operation of the Business. 4.11 Legal Proceedings. Except as set forth on Schedule 4.11, there are no Proceedings pending or, to the best knowledge of Seller, threatened against or involving Seller relating to the Assets or the operation of the Business. Except as set forth on Schedule 4.11, no judgment, order, writ, injunction or decree of any Governmental Entity has been issued or entered against Seller or any of its Affiliates which continues to be in effect with respect to or affecting the Assets or the operation of the Business. There are no Proceedings pending or, to the best knowledge of Seller, threatened seeking to restrain, prohibit or obtain damages or other relief in connection with this Agreement or the transactions contemplated hereby. 4.12 Sufficiency and Condition of Assets. Except as set forth on Schedule 4.12, the Assets (i) constitute all the assets and property used or held for use in connection with the -14- 20 operation of the Business and (ii) except for contemplated additions of inventory in the ordinary course of the Business, constitute all the assets and properties, the use or benefit of which are reasonably necessary for the operation of the Business as currently conducted. All the Assets that are tangible assets are (i) in good operating condition and repair, normal wear and tear excepted, and have been maintained in accordance with standard industry practice, (ii) suitable for the purposes used, (iii) owned or otherwise validly used by Seller in conformity with Applicable Laws and Seller has not received any notice to the contrary and (iv) in Seller's possession or under its control. Notwithstanding anything to the contrary herein, this Section 4.12 is not intended to make any representation as to the sufficiency, adequacy, enforceability, assignability or status of any of the Contracts. Seller makes no representation or warranty of the kind made in this Section 4.12 with respect to any of the Contracts. 4.13 Intellectual Property. (a) Set forth on Schedule 4.13 is a list of all Intellectual Property relating to or used or held for use in connection with the Assets or operation of the Business. Schedule 4.13 specifies, as applicable: (i) the nature of such Intellectual Property; (ii) the owner of such Intellectual Property; (iii) the jurisdictions by or in which such Intellectual Property has been issued or registered or in which an application for such issuance or registration has been filed, including the respective registration or application numbers; and (iv) all licenses, sublicenses, and other agreements to which Seller is a party and pursuant to which Seller or any other Person is authorized to use such Intellectual Property, including the identity of all parties thereto, a description of the nature and subject matter thereof, the applicable royalty, and the term thereof. (b) The listed Intellectual Property constitutes all Intellectual Property necessary for the operation of the Business as conducted by Seller. Seller has good and marketable title to or is validly licensed to use all such Intellectual Property, free from any restrictions that may reasonably be expected to materially interfere with the use thereof. Each item of such Intellectual Property is in full force and effect, Seller is in compliance with all its obligations with respect thereto, and, to the best knowledge of Seller, no event has occurred which permits, or upon the giving of notice or the passage of time or otherwise would permit, the revocation or termination of any thereof. There are no Proceedings pending or, to the best knowledge of Seller, threatened against Seller asserting that the use by Seller of any of such Intellectual Property infringes the rights of any other Person or seeking revocation, termination, or concurrent use of any of such Intellectual Property, and there is, to the best knowledge of Seller, no basis for any such Proceeding. To the best knowledge of Seller, none of such Intellectual Property is being infringed upon by any other Person. None of such Intellectual Property is subject to any outstanding judgment, order, writ, injunction, or decree of any Governmental Entity, or any agreement, arrangement, or understanding, written or oral, restricting the scope or use thereof. To the best knowledge of Seller, the conduct of the Business at any time prior to the Closing Date did not, infringe upon or otherwise misappropriate any Intellectual Property of any other Person. 4.14 Permits. Set forth on Schedule 4.14 is a list of all Permits held by Seller which relate to the Assets or the Business. Such Permits constitute all the Permits necessary or required for the ownership and operation of the Assets as such Assets are currently owned and -15- 21 operated by Seller and the conduct of the Business as it is currently being conducted by Seller. Each of such Permits is in full force and effect, Seller is in compliance with all its obligations with respect thereto and, to the best knowledge of Seller, no event has occurred that permits, or with or without the giving of notice or the passage of time or both would permit, the revocation or termination of any thereof. Except as disclosed on Schedule 4.14, no notice has been issued by any Governmental Entity and no Proceeding is pending or, to the best knowledge of Seller, threatened with respect to any alleged failure by Seller to have any Permit the absence of which would have a Material Adverse Effect. 4.15 Agreements. To Seller's knowledge, after the exercise of due care and investigation, Seller has delivered to Buyer accurate and complete copies of written Contracts and a written summary of the principal terms of Contracts which are oral. Except as set forth on Schedule 4.15, to the best knowledge of Seller, (i) no other party to any Contract is in breach of or in default under such Contract nor has any assertion been made by Seller of any such breach or default, (ii) no other party to any such Contract has advised Seller of any plan or intention of the other party (A) to exercise any right of offset with respect to or to cancel any such Contract prior to the scheduled termination date (either prior to or following the Closing) except as permitted in the Contracts or (B) to refuse, if requested, to allow such agreements to be assigned to Buyer, (iii) no facts or circumstances justify the exercise by any other party to any Contract of any right to cancel or terminate such Contract, except as permitted in such Contract and (iv) Seller does not currently contemplate, or have a reason to believe any other Person currently contemplates, any amendment or change to any Contract which amendment or change would have a Material Adverse Effect. The foregoing representations are made as of the date of this Agreement and Buyer acknowledges that, subject to the performance by Seller of its obligations under Article VI, no change with respect to any Contract, including but not limited to changes in the terms thereof, revenue derived therefrom or termination of any such Contract, shall give rise to any right of Buyer to assert a claim for Damages against Seller. 4.16 Employees. Set forth on Schedule 4.16 is a list of the name, social security number and dates of employment by Seller of each employee of the Business (the "Employees"), together with a description of the position of each such employee and the total amounts of salary, bonuses and other compensation paid or payable by Seller to each such employee for the current fiscal year and the immediately preceding fiscal year. Also set forth on Schedule 4.16 for each Employee is the amount of severance pay to which such Employee would be entitled from Seller assuming termination of his or her employment by Seller on October 31, 1997, and the amount of accrued vacation pay of such employee as of August 31, 1997. 4.17 Insurance. Seller maintains, and there are currently in full force and effect, policies of insurance with respect to the Assets and the Business as are listed on Schedule 4.17. All premiums due and payable with respect to such policies have been timely paid. No notice of cancellation of, or indication of an intention not to renew, any such policy has been received by Seller. During the past three years, no application by Seller for insurance with respect to any of the Assets or operations of the Business has been denied for any reason. -16- 22 4.18 Brokerage Fees. Neither Seller nor any of its Affiliates has retained any financial advisor, broker, agent or finder or paid or agreed to pay any financial advisor, broker, agent or finder on account of this Agreement or any transaction contemplated hereby. Seller shall indemnify and hold harmless Buyer from and against any and all losses, claims, damages and liabilities (including legal and other expenses reasonably incurred in connection with investigating or defending any claims or actions) with respect to any finder's fee, brokerage commission or similar payment in connection with any transaction contemplated hereby asserted by any Person on the basis of any act or statement made or alleged to have been made by Seller or any of its Affiliates. 4.19 Disclosure. No representation or warranty made by Seller in this Agreement, and no statement of Seller contained in any document, certificate, or other writing furnished or to be furnished by Seller pursuant hereto or in connection herewith, contains or will contain, at the time of delivery, any untrue statement of a material fact or omits or will omit, at the time of delivery, to state any fact necessary in order to make the statements contained therein, in light of the circumstances under which they are made, not misleading. Seller knows of no matter that has not been disclosed to Buyer pursuant to this Agreement that has or will have a Material Adverse Effect. Seller has made available to Buyer accurate and complete copies of all agreements, documents and other writings referred to or listed in this Article IV or any Schedule hereto. 4.20 Representations and Warranties on Closing Date. The representations and warranties made in this Article IV will be true and correct on and as of the Closing Date with the same force and effect as if such representations and warranties had been made on and as of the Closing Date, except that any such representations and warranties which expressly relate only to an earlier date shall be true and correct on the Closing Date as of such earlier date. ARTICLE V REPRESENTATIONS AND WARRANTIES OF BUYER Buyer represents and warrants to Seller that: 5.1 Corporate Organization. Buyer is a corporation duly organized, validly existing, and in good standing under the laws of the jurisdiction of its incorporation and has all requisite corporate power and corporate authority to own, lease and operate its properties and to carry on its business as now being conducted. No actions or proceedings to dissolve Buyer are pending. 5.2 Authority Relative to This Agreement. Buyer has full corporate power and corporate authority to execute, deliver and perform this Agreement and the Ancillary Documents to which it is a party and to consummate the transactions contemplated hereby and thereby. The execution, delivery and performance by Buyer of this Agreement and the Ancillary Documents to which it is a party, and the consummation by it of the transactions contemplated hereby and thereby, have been duly authorized by all necessary corporate action of Buyer. This Agreement -17- 23 has been duly executed and delivered by Buyer and constitutes, and each Ancillary Document executed or to be executed by Buyer has been, or when executed will be, duly executed and delivered by Buyer and constitutes, or when executed and delivered will constitute, a valid and legally binding obligation of Buyer, enforceable against Buyer in accordance with their respective terms. 5.3 Noncontravention. The execution, delivery and performance by Buyer of this Agreement and the Ancillary Documents to which it is a party and the consummation by it of the transactions contemplated hereby and thereby do not and will not (i) conflict with or result in a violation of any provision of the charter or bylaws of Buyer, (ii) conflict with or result in a violation of any provision of, or constitute (with or without the giving of notice or the passage of time or both) a default under, any material bond, debenture, note, mortgage, indenture, lease, contract, agreement or other instrument or obligation to which Buyer is a party or by which Buyer or any of its properties may be bound or (iii) to the best knowledge of Buyer, assuming compliance with the matters referred to in Section 5.4, violate any Applicable Law binding upon Buyer. 5.4 Governmental Approvals. No consent, approval, order, or authorization of, or declaration, filing, or registration with, any Governmental Entity is required to be obtained or made by Buyer in connection with the execution, delivery, or performance by Buyer of this Agreement and the Ancillary Documents to which it is a party or the consummation by it of the transactions contemplated hereby or thereby, other than (i) compliance with any applicable requirements of the HSR Act and (ii) as set forth on Schedule 5.4. 5.5 Legal Proceedings. There are no Proceedings pending or, to the best knowledge of Buyer, threatened seeking to restrain, prohibit or obtain damages or other relief in connection with this Agreement or the transactions contemplated hereby. 5.6 Brokerage Fees. Neither Buyer nor any of its Affiliates has retained any financial advisor, broker, agent or finder or paid or agreed to pay any financial advisor, broker agent or finder on account of this Agreement or any transaction contemplated hereby. Buyer shall indemnify and hold harmless Seller from and against any and all losses, claims, damages and liabilities (including legal and other expenses reasonably incurred in connection with investigating or defending any claims or actions) with respect to any finder's fee, brokerage commission or similar payment in connection with any transaction contemplated hereby asserted by any Person on the basis of any act or statement made or alleged to have been made by Buyer or any of its Affiliates. 5.7 Disclosure. No representation or warranty made by Buyer in this Agreement, and no statement of Buyer contained in any document, certificate or other writing furnished or to be furnished by Buyer pursuant hereto or in connection herewith, contains or will contain, at the time of delivery, any untrue statement of a material fact or omits, or will omit, at the time of delivery, to state any fact necessary in order to make the statements contained therein, in the light of the circumstances under which they are made, not misleading in any material respect. -18- 24 5.8 Representations and Warranties on Closing Date. The representations and warranties made in this Article V will be true and correct on and as of the Closing Date with the same force and effect as if such representations and warranties had been made on and as of the Closing Date, except that any such representations and warranties which expressly relate only to an earlier date shall be true and correct on the Closing Date as of such earlier date. ARTICLE VI CONDUCT OF BUSINESS PENDING CLOSING Seller hereby covenants and agrees with Buyer as follows: 6.1 Conduct and Preservation of Business. Except as expressly provided in this Agreement or as consented to by Buyer in accordance with Section 6.2, during the period from the date hereof to the Closing, Seller (i) shall conduct the Business only in the ordinary course consistent with past practice and in compliance with all Applicable Laws, (ii) shall use its Reasonable Best Efforts to preserve, maintain and protect the Assets and (iii) shall use its Reasonable Best Efforts to preserve intact the business organization of the Business, to keep available the services of the employees of the Business and to maintain existing relationships with licensors, licensees, suppliers, contractors, distributors, customers and others having business relationships with the Business. 6.2 Restrictions on Certain Actions. Except as otherwise expressly provided in this Agreement, prior to the Closing, Seller shall not, without the prior consent of Buyer: (a) Make any material change in the ongoing operations of the Assets or the Business; (b) Mortgage or pledge any of the Assets or create or suffer to exist any Encumbrance thereupon, other than the Permitted Encumbrances; (c) Sell, lease, Transfer or otherwise dispose of, directly or indirectly, any of the Assets; (d) Enter into any contract, agreement, commitment, arrangement or transaction relating to the Business, except in the ordinary course of the Business consistent with past practice; (e) Amend, modify or change any existing contract or agreement relating to the Business, other than in the ordinary course of the Business consistent with past practice; (f) Waive, release, grant or Transfer any rights of value relating to the Business, other than in the ordinary course of the Business consistent with past practice; -19- 25 (g) Delay payment of any account payable or other liability of Seller relating to the Business beyond its due date or the date when such liability would have been paid in the ordinary course of the Business consistent with past practice; (h) Permit any current insurance or reinsurance policies to be canceled or terminated or any of the coverages thereunder to lapse if such policy covers Assets or insures risks, contingencies or liabilities of the Business, unless simultaneously with such cancellation, termination or lapse, replacement policies providing coverage equal to or greater than the coverage cancelled, terminated or lapsed are in full force and effect and written copies thereof have been provided to Buyer; (i) Take any action which would or might make any of the representations or warranties of Seller contained in this Agreement untrue or inaccurate as of any time from the date of this Agreement to the Closing or would or might result in any of the conditions set forth in this Agreement not being satisfied; or (j) Authorize or propose, or agree in writing or otherwise to take, any of the actions described in this Section. ARTICLE VII ADDITIONAL AGREEMENTS 7.1 Accounts Receivable. In the event that, subsequent to the Closing Date, Buyer shall receive any payment with respect to the accounts receivable relating to the Assets or the Business and pertaining to periods ending before the Closing Date, Buyer shall within one week after receipt pay over and deliver such payment to Seller. Likewise, in the event that, subsequent to the Closing Date, Seller shall receive any payment with respect to the accounts receivable relating to the Assets or the Business and pertaining to periods ending on or after the Closing Date, Seller shall, within one week after receipt pay over and deliver such payment to Buyer. Amounts collected from customers shall be applied in payment of the invoice designated by such customer, or in the absence of such designation, in the order that the accounts receivable of such customer arose. 7.2 Access to Information; Confidentiality. (a) Between the date hereof and the Closing, Seller (i) shall give Buyer and its authorized representatives reasonable access to all employees, all offices and other facilities, and all books and records, including work papers and other materials prepared by Seller's independent public accountants, of Seller relating to the Assets or the Business, (ii) shall permit Buyer and its authorized representatives to make such inspections as they may reasonably require and (iii) shall cause Seller's officers and employees to furnish Buyer and its authorized representatives with such financial and operating data and other information with respect to the Assets and the Business as Buyer may from time to time reasonably request; provided, however, that no investigation pursuant to this Section shall affect any representation or warranty of Seller contained in this -20- 26 Agreement or in any agreement, instrument or document delivered pursuant hereto or in connection herewith. (b) Buyer agrees that all Confidential Information (as defined below) shall be kept confidential by Buyer, shall not be disclosed by Buyer in any manner whatsoever; provided, however, that (i) any of such Confidential Information may be disclosed to such directors, officers, employees and authorized representatives (including without limitation attorneys, accountants, consultants, investment bankers and financial advisors) of Buyer (collectively, for purposes of this Section, "Buyer Representatives") as need to know such information for the purpose of evaluating the transactions contemplated hereby (it being understood that such Buyer Representatives shall be informed by Buyer of the confidential nature of such information and shall be required to treat such information confidentially), (ii) any disclosure of Confidential Information may be made to the extent to which Seller consents in writing, (iii) Confidential Information may be disclosed by Buyer or any Buyer Representative to the extent that Buyer or such Buyer Representative is legally compelled to do so, provided that, prior to making such disclosure, Buyer or such Buyer Representative, as the case may be, advises and consults with Seller regarding such disclosure and provided further that Buyer or such Buyer Representative, as the case may be, discloses only that portion of the Confidential Information as is legally required and (iv) any of such Confidential Information may be disclosed to any banks or other financial institutions or other prospective investors that may provide the funds necessary to consummate the transactions contemplated hereby if such banks or other financial institutions or other prospective investors agree in writing to be bound by the provisions of this Section 7.2. Buyer agrees that none of the Confidential Information will be used for any purpose other than in connection with the transactions contemplated hereby and the Financing. The term "Confidential Information", as used herein, means all information (irrespective of the form of communication) obtained by or on behalf of Buyer from Seller or its representatives pursuant to this Section and all similar information obtained from Seller or its representatives by or on behalf of Buyer prior to the date of this Agreement, other than information that (i) was or becomes generally available to the public other than as a result of disclosure by Buyer or any Buyer Representative, (ii) was or becomes available to Buyer on a nonconfidential basis prior to disclosure to Buyer by Seller or its representatives or (iii) was or becomes available to Buyer from a source other than Seller and its representatives, provided that such source is not known by Buyer to be bound by a confidentiality agreement with Seller. (c) If this Agreement is terminated, Buyer shall promptly return, and shall use its Reasonable Best Efforts to cause all Buyer Representatives to promptly return, all Confidential Information to Seller without retaining any copies thereof, provided that such portion of the Confidential Information as consists of notes, compilations, analyses, reports, studies or other documents prepared by Buyer or Buyer Representatives shall be destroyed. Buyer acknowledges and agrees that irreparable damage would occur in the event any confidential information regarding the Assets or the Business were disclosed to or utilized on behalf of any Person that is in competition with the Business. Accordingly, Buyer covenants and agrees that prior to the Closing Date, or for a period of 10 years following the Termination Date if the Closing does not occur, it will not, directly or indirectly, without the prior written consent -21- 27 of Seller, use or disclose any of such confidential information, except to Buyer Representatives; provided, however, that confidential information shall not be deemed to include information that (i) was or becomes generally available to the public other than as a result of disclosure by Buyer or its Affiliates or (ii) was or becomes available to Buyer on a nonconfidential basis from a source other than Seller, provided that such source is not known by Buyer to be bound by a requirement of confidentiality with respect to such confidential information. Notwithstanding the foregoing provisions of Section 7.2(d), Buyer and its Affiliates may disclose any confidential information to the extent that such Person is legally compelled to do so, provided that, prior to making such disclosure, such Person advises and consults with Seller regarding such disclosure and provided further that such Person discloses only that portion of such confidential information as is legally required. Seller acknowledges and agrees that irreparable damage would occur in the event any confidential information regarding the Assets or the Business were disclosed to or utilized on behalf of any Person that is in competition with the Business. Accordingly, Seller covenants and agrees that it will not, prior to the Termination Date and, if the Closing occurs, for a period of 10 years following the Closing, directly or indirectly, without the prior written consent of Buyer, use or disclose any of such confidential information, except to Buyer Representatives; provided, however, that confidential information shall not be deemed to include information that (i) was or becomes generally available to the public other than as a result of disclosure by Seller or its Affiliates or (ii) was or becomes available to Seller on a nonconfidential basis from a source other than Buyer, provided that such source is not known by Seller to be bound by a requirement of confidentiality with respect to such confidential information. Notwithstanding the foregoing provisions of this paragraph, Seller and its Affiliates may disclose any confidential information to the extent that (i) such Person is legally compelled to do so or (ii) such disclosure is necessary to fulfill Seller's obligations under the Contracts; provided that, prior to making any such disclosure, such Person advises and consults with Buyer regarding such disclosure and provided further that such Person discloses only that portion of such confidential information as is legally required or is necessary to fulfill such contractual obligations. 7.3 Acquisition Proposals. From and after the date of this Agreement until the earlier of the Closing or the termination of this Agreement, neither Seller nor any Affiliate, director, officer, employee or representative of Seller shall, directly or indirectly, (i) solicit, initiate or knowingly encourage any Acquisition Proposal or (ii) engage in discussions or negotiations with, or disclose any nonpublic information relating to the Assets or the Business to, any Person that is considering making or has made an Acquisition Proposal. Seller shall immediately cease and cause to be terminated any existing activities, discussions or negotiations with any Persons conducted heretofore with respect to any Acquisition Proposal and shall promptly request each such Person who has heretofore entered into a confidentiality agreement in connection with an Acquisition Proposal to return to Seller all confidential information heretofore furnished to such Person by or on behalf of Seller. If Seller or its Affiliates shall hereafter receive any Acquisition Proposal, Seller shall immediately communicate the terms of such proposal to Buyer. The term "Acquisition Proposal", as used in this Section 7.3, means any offer or proposal for, or any indication of interest in, the acquisition of the Assets or the Business -22- 28 or any portion thereof, other than the transactions contemplated or expressly permitted by this Agreement. 7.4 Third Party Consents. Seller shall use its Reasonable Best Efforts to obtain all consents, approvals, orders, authorizations and waivers of, and to effect all declarations, filings and registrations with, all third parties (including Governmental Entities) that are necessary, required or deemed by Buyer to be desirable to enable Seller to Transfer the Assets to Buyer as contemplated by this Agreement and to otherwise consummate the transactions contemplated hereby; provided, that Seller shall not be obligated to obtain any consents to assignment for the Contracts. All costs and expenses of Seller in obtaining or effecting any and all of the consents, approvals, orders, authorizations, waivers, declarations, filings and registrations referred to in this Section 7.4 shall be borne by Seller. 7.5 Reasonable Best Efforts. Each party hereto agrees that it will not voluntarily undertake any course of action inconsistent with the provisions or intent of this Agreement and will use its Reasonable Best Efforts to take, or cause to be taken, all action and to do, or cause to be done, all things reasonably necessary, proper or advisable under Applicable Laws to consummate the transactions contemplated by this Agreement. Seller shall cooperate with and assist Buyer and its authorized representatives in order to provide an efficient and orderly Transfer of the control and management of the Assets and the Business to Buyer and to avoid any undue interruption in the ongoing operations of the Assets and the Business following the Closing. 7.6 HSR Act Notification. To the extent required by the HSR Act, each of the parties hereto shall (i) file or cause to be filed, as promptly as practicable but in no event later than 10 days after the execution and delivery of this Agreement, with the Federal Trade Commission and the United States Department of Justice, all reports and other documents required to be filed by such party under the HSR Act concerning the transactions contemplated hereby and (ii) promptly comply with or cause to be complied with any requests by the Federal Trade Commission or the United States Department of Justice for additional information concerning such transactions, in each case so that the waiting period applicable to this Agreement and the transactions contemplated hereby under the HSR Act shall expire as soon as practicable after the execution and delivery of this Agreement. Each party hereto agrees to request, and to cooperate with the other party or parties in requesting, early termination of any applicable waiting period under the HSR Act. 7.7 Financial Statements. (a) Seller shall prepare, or cause the preparation of, in accordance with GAAP, and deliver to Buyer within 30 days following the Closing, such additional audited and unaudited Acquired Business Balance Sheets, Acquired Business Statements of Operations and Acquired Business Statements of Cash Flows as may be required to enable Parent to complete and file its Form 8-K under the Exchange Act relating to the transactions contemplated by this Agreement, together with, in the case of any audited Acquired Business Balance Sheet, Acquired Business Statements of Operations and Acquired Business Statements of Cash Flows, the manually signed accountants' report of Arthur Andersen L.L.P. covering such audited financial statements. -23- 29 (b) Seller shall authorize Arthur Andersen L.L.P. to execute and deliver to Parent such consents as Parent may request relating to the inclusion of the reports of Arthur Andersen L.L.P. in any filing made by Parent under the Securities Act or the Exchange Act. Seller shall also authorize Arthur Andersen L.L.P. to deliver to Parent, Parent's board of directors and any investment bank retained by Buyer or Parent in connection with any financing engaged in relating to the transactions contemplated by this Agreement one or more comfort letters in such form and covering such items as are customary in transactions of this nature. (c) The costs and expenses of Arthur Andersen L.L.P. relating to the audit of the Financial Statements and the audited financial statements referred to in Section 7.7(a) shall be borne by Buyer. 7.8 Noncompetition. (a) Seller acknowledges that in consideration of the payment of the Purchase Price, Buyer is acquiring the goodwill of the Business, including complete ownership and control of the Assets. Therefore, Seller agrees that for a period commencing upon the Closing Date and ending upon the third anniversary thereof, unless otherwise extended pursuant to the terms of this Section 7.8, Seller will not, directly or indirectly, either as an employer, consultant, agent, principal, partner, stockholder, or in any other capacity, engage or participate in a business that is substantially similar to that of the Business within the United States or Canada. Seller represents to Buyer that the enforcement of the restriction contained in this Section 7.8(a) would not be unduly burdensome to Seller. (b) Buyer agrees that for a period commencing upon the Closing Date and ending upon the third anniversary thereof, unless otherwise extended pursuant to the terms of this Section 7.8, Buyer will not, directly or indirectly, either as an employer, consultant, agent, principal, partner, stockholder, or in any other capacity, engage or participate in the business of manufacturing, supplying or distributing computer equipment to or for customers of the Business as of the date of the Closing for use in storing, recording or placing audiotex information in connection with the Electronic Publishing Business within the United States or Canada. "Electronic Publishing Business" shall mean the business of providing computer stored audio information to end users. Notwithstanding the foregoing, this Section 7.8(b) shall not apply to (i) Buyer's activities pursuant to the Reseller Agreement, (ii) Buyer's activities authorized in writing by Seller, (iii) Buyer's sale or distribution of equipment existing in Buyer's inventory on the Closing Date, or (iv) Buyer's development, manufacture, supply or distribution of equipment used in television programming services or interactive cable television systems. Buyer represents to Seller that the enforcement of the restriction contained in this Section 7.8(b) would not be unduly burdensome to Buyer. (c) The parties agree that a breach or violation of the applicable covenant not to compete by it shall entitle the other party, as a matter of right, to an injunction issued by any court of competent jurisdiction, restraining any further or continued breach or violation of such covenant. Such right to an injunction shall be cumulative and in addition to, and not in lieu of, any other remedies to which a party may show itself justly entitled. Further, during any period -24- 30 in which a party is in breach of such covenant not to compete, the time period during which such covenant shall be enforceable against such party shall be extended for an amount of time that such party is in breach hereof. (d) In addition to the restrictions set forth in Section 7.8(a), Seller shall not, (i) for a period commencing upon the Closing Date and ending upon the third anniversary thereof, either directly or indirectly, make known to any Person the names and addresses of any of the customers of the Business (as customers of the Business and not of the other businesses of Seller) or contacts of Seller or any other information pertaining to such customers or contacts or (ii) for the six-month period commencing upon the Closing Date, recruit or hire or attempt to recruit or hire, directly or by assisting others, any employee of Buyer. (e) The parties agree that the limitations contained in this Section 7.8 with respect to time, geographical area and scope of activity are reasonable. However, if any court shall determine that the time, geographical area or scope of activity of any restriction contained in this Section 7.8 is unenforceable, it is the intention of the parties that such restrictive covenant set forth herein shall not thereby be terminated but shall be deemed amended to the extent required to render it valid and enforceable. (f) The covenants of Seller contained in this Section 7.8 may be assigned by Buyer to any Person to whom the Assets are Transferred substantially as an entirety, it being the intention of the parties hereto that such covenants shall inure to the benefit of any successor to the Assets, with the same force and effect as if such covenants had been made directly to such successor or successors. (g) The covenants of Buyer contained in this Section 7.8 may be assigned by Seller to any Person to whom the business described in Section 7.8(b) is Transferred substantially as an entirety, it being the intention of the parties hereto that such covenants shall inure to the benefit of any successor to such business, with the same force and effect as if such covenants had been made directly to such successor or successors. 7.9 Employee and Employee Benefit Plan Matters. (a) On or before fourteen (14) days prior to the Closing Date, Buyer shall deliver to Seller a list of the Employees which Buyer intends to hire (the "Retained Employees"). Seller will cooperate with Buyer in its efforts to employ the Retained Employees. At the direction of Buyer, using releases reasonably acceptable to Seller and prepared by Buyer, Seller will seek to obtain releases of all claims held by Retained Employees against Seller relating to termination of employment with Seller. Buyer agrees with Seller that subject to the receipt of such a release from each Retained Employee, Buyer will offer to employ such Retained Employee and, if such offer is accepted, will employ such Retained Employee immediately after the Closing Date. Seller's employment of all Retained Employees who accept employment with Buyer will be terminated by Seller on the Closing Date. Seller shall be responsible for the payment to the Employees of all salaries, wages, benefits and other sums due and/or accrued through the Closing Date. Buyer agrees to promptly reimburse Seller for any and all liabilities for severance and -25- 31 accrued vacation incurred by Seller arising out of the termination in connection with the Closing of employment for any Employee; provided, that Buyer's obligation to reimburse Seller under this Section 7.9(a) shall be limited to the amount reflected on Schedule 4.16, as of the Closing Date, for any such Employees. (b) Seller acknowledges and understands that Buyer is not hereby, and at no time hereafter will be, adopting, accepting, accepting the transfer of account balances of or assuming any employee benefit plan (including any 401(k) plan) or collective bargaining agreement of Seller relating to any of its employees or any other agreement, trust, plan, fund or other arrangement of Seller that provides for employee benefits or perquisites (collectively, "Employment Arrangements"), and Buyer shall have no liability or obligation whatsoever under any Employment Arrangement to Seller or to any employees of Seller, whether or not any of such employees are offered employment by or become employees of Buyer. Buyer is not obligated to replace any of the Employment Arrangements for any employees of Seller who become employees of Buyer, nor is Buyer obligated to provide such Persons with any similar agreements, plans or arrangements. (c) Seller will comply after the Closing Date with the requirements of Sections 601 through 608 of ERISA and Section 4980B of the Code with respect to any employee or former employee of Seller (and any dependent or former dependent thereof) whose employment with Seller terminates in connection with Buyer's purchase of the Business. (d) At the request of Buyer, Seller promptly will make such notifications to the Employees under the Worker Adjustment and Retraining Notification Act, 29 U.S.C. Section 2101 et seq. ("WARN Act") as Buyer may from time to time direct. Any request by Buyer hereunder shall include the notice to be given and specific instructions as to when and how such notice is to be given, and Seller shall have no obligation to take any other action with respect thereto. 7.10 Transfer of Certain Contracts. In the event that prior to the Closing the consent to the Transfer of any contract which by its terms requires the consent of any other contracting party thereto (each, a "Consent Required Contract") has not been obtained from such other contracting party, the terms of this Section 7.10 shall govern the Transfer of the benefits of each such contract. Notwithstanding any provision contained in this Agreement to the contrary, the parties hereto acknowledge and agree that at the Closing Seller shall not Transfer or cause to be Transferred to Buyer any Consent Required Contract the consent to which has not been obtained prior to the Closing Date. With respect to each such unassigned Consent Required Contract, after the Closing Date Seller shall, at the direction of Buyer, continue to deal with the other contracting party or parties to such Consent Required Contract as the prime contracting party, but Buyer shall be entitled to the benefits of such Consent Required Contract accruing after the Closing Date to the extent that Seller may provide Buyer with such benefits without violating the terms of such Consent Required Contract. To the extent permitted under such Consent -26- 32 Required Contract, Buyer agrees to perform at its sole expense all the obligations of Seller to be performed under such Consent Required Contract provided that Buyer receives any payments received by Seller relating to such Consent Required Contract for services provided after the Closing Date; and to the extent such performance by Buyer is not permitted under such Consent Required Contract, Buyer agrees to make available to Seller such services as are necessary to enable Seller to perform Seller's obligations under such Consent Required Contract and to reimburse Seller for all costs after the Closing Date related to such services performed by Seller. 7.11 Amendment of Schedules. Seller agrees that, with respect to the representations and warranties of Seller contained in this Agreement, Seller shall have the continuing obligation until the Closing to supplement or amend promptly the Schedules hereto with respect to any matter hereafter arising or discovered which, if existing or known at the date of this Agreement, would have been required to be set forth or described in the Schedules. For all purposes of this Agreement, including without limitation for purposes of determining whether the condition set forth in Section 8.1 has been fulfilled, the Schedules hereto shall be deemed to include only that information contained therein on the date of this Agreement and shall be deemed to exclude all information contained in any supplement or amendment thereto; provided, however, Seller may amend Schedule 1.1(a) until the Closing in order to add any agreements which Seller unintentionally omitted from such schedule in good faith. 7.12 Notification of Certain Matters. Seller shall give prompt notice to Buyer of (i) the occurrence or nonoccurrence of any event the occurrence or nonoccurrence of which would cause any representation or warranty contained in Article IV to be untrue or inaccurate at or prior to the Closing, (ii) any failure of Seller to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by Seller hereunder and (iii) any notice or other communication from any Person alleging that the consent or approval of such Person is or may be required in connection with the transactions contemplated by this Agreement (other than those consents and approvals as stated in Sections 4.4 and 4.5). Buyer shall give prompt notice to Seller of (i) the occurrence or nonoccurrence of any event the occurrence or nonoccurrence of which would cause any representation or warranty contained in Article V to be untrue or inaccurate at or prior to the Closing and (ii) any failure of Buyer to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by Buyer hereunder. In addition, prior to Closing Buyer shall notify Seller of the discovery of any fact which would cause any representation or warranty contained in Article IV to be untrue or inaccurate. The delivery of any notice pursuant to this Section shall not be deemed to (i) modify the representations or warranties hereunder of the party delivering such notice, (ii) modify the conditions set forth in Articles VIII and IX or (iii) limit or otherwise affect the remedies available hereunder to the party receiving such notice. 7.13 Fees and Expenses. Except as otherwise expressly provided in this Agreement, all fees and expenses, including fees and expenses of counsel, financial advisors and accountants, incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such fee or expense, whether or not the Closing shall have occurred. The fees and expenses of the arbitrator under Section 1.3(b) shall be split between the parties. 7.14 Taxes. -27- 33 (a) All sales and use Taxes resulting from the consummation of the transactions contemplated hereby shall be borne by Seller, and the parties shall cooperate in obtaining all available exemptions from such Taxes. All other registration, Transfer, recording and deed and stamp Taxes and fees incurred in connection with the consummation of the transactions contemplated hereby shall be borne by Seller; provided, however, that ad valorem taxes on the Assets shall be prorated as between Buyer and Seller as of the Closing Date. Seller shall file all necessary documentation with respect to, and make all payments of, such Taxes and fees when due. (b) All real and personal property Taxes imposed on or with respect to the Assets for the year in which the Closing occurs shall be prorated as between Seller and Buyer based on the number of days in such year before and after the Closing Date. Seller shall be liable for such Taxes prorated for the period up to and including the Closing Date, and Buyer shall be liable for such Taxes prorated for the period subsequent to the Closing Date. Seller shall be responsible for the actual payment of such Taxes to the appropriate Governmental Entity that become due and payable prior to the Closing Date. Buyer shall likewise be responsible for the actual payment of such Taxes becoming due and payable subsequent to the Closing Date. The parties shall file all necessary documentation with respect to, and make all payments of, such Taxes on a timely basis. 7.15 Financing. Buyer shall use its reasonable business efforts to obtain the funds necessary to pay the Purchase Price. 7.16 Adjustment. If any adjustment is made after the Closing Date under the terms of Section 1.3(g), then the parties agree to make such payment, as is necessary to implement such adjustment, within 30 days after Buyer's acceptance of such adjustment. ARTICLE VIII CONDITIONS TO OBLIGATIONS OF SELLER The obligations of Seller to consummate the transactions contemplated by this Agreement shall be subject to the fulfillment on or prior to the Closing Date of each of the following conditions: 8.1 Representations and Warranties True. All the representations and warranties of Buyer contained in this Agreement, and in any agreement, instrument or document delivered pursuant hereto or in connection herewith on or prior to the Closing Date, shall be true and correct as of the date made and (having been deemed to have been made again on and as of the Closing Date in the same language) shall be true and correct on and as of the Closing Date, except as affected by transactions permitted by this Agreement and except to the extent that any such representation or warranty shall have been true and correct as of such specified date. -28- 34 8.2 Covenants and Agreements Performed. Buyer shall have performed and complied with in all material respects all covenants and agreements required by this Agreement to be performed or complied with by it on or prior to the Closing Date. 8.3 HSR Act. All waiting periods (and any extensions thereof) applicable to this Agreement and the transactions contemplated hereby under the HSR Act shall have expired or been terminated. 8.4 Legal Proceedings. No Proceeding shall, on the Closing Date, be pending or threatened seeking to restrain, prohibit or obtain damages or other relief in connection with this Agreement or the consummation of the transactions contemplated hereby. 8.5 Closing Deliveries. Seller shall have received from Buyer the deliveries specified in Section 3.3. ARTICLE IX CONDITIONS TO OBLIGATIONS OF BUYER The obligations of Buyer to consummate the transactions contemplated by this Agreement shall be subject to the fulfillment on or prior to the Closing Date of each of the following conditions: 9.1 Representations and Warranties True. All the representations and warranties of Seller contained in this Agreement, and in any agreement, instrument or document delivered pursuant hereto or in connection herewith on or prior to the Closing Date, shall be true and correct as of the date made and (having been deemed to have been made again on and as of the Closing Date in the same language) shall be true and correct on and as of the Closing Date, except as affected by transactions permitted by this Agreement and except to the extent that any such representation or warranty is made as of a specified date, in which case such representation or warranty shall have been true and correct as of such specified date; provided, however, that the condition in this Section 9.1 shall relate only to matters which, when considered individually or in the aggregate, constitute a material breach of such representations and warranties. 9.2 Covenants and Agreements Performed. Seller shall have performed and complied with in all material respects all covenants and agreements required by this Agreement to be performed or complied with by it on or prior to the Closing Date. 9.3 HSR Act. All waiting periods (and any extensions thereof) applicable to this Agreement and the transactions contemplated hereby under the HSR Act shall have expired or been terminated. 9.4 Legal Proceedings. No Proceeding shall, on the Closing Date, be pending or threatened seeking to restrain, prohibit or obtain damages or other relief in connection with this Agreement or the consummation of the transactions contemplated hereby. -29- 35 9.5 Consents. All consents and approvals of all Persons necessary for the consummation of the transactions contemplated hereby under any lease, contract, agreement or other instrument or obligation of Seller (other than any Contract), or any Applicable Law shall have been received and delivered to Buyer, all notices to any Person required by any of the foregoing to be given in respect of such transactions shall have been duly given, and all necessary action shall have been taken to Transfer to Buyer the contracts and any other material agreements between Seller and third parties. 9.6 No Material Adverse Effect. Since the date of this Agreement, there shall not have been any material adverse change in the business, assets, results of operations, condition (financial or otherwise) or prospects of the Business or the ownership or operation of the Assets or any material portion thereof which has resulted or is reasonably likely to result in a Material Adverse Effect. 9.7 Financing. The proceeds of the financing necessary to consummate the transactions contemplated hereby shall have been received by Buyer. 9.8 Closing Deliveries. Buyer shall have received from Seller the deliveries specified in Section 3.2. ARTICLE X TERMINATION 10.1 Termination. This Agreement may be terminated and the transactions contemplated hereby abandoned at any time prior to the Closing in the following manner: (a) By mutual written consent of Seller and Buyer; or (b) By either Seller or Buyer, if the Closing shall not have occurred on or before November 21, 1997 (subject to extension by Buyer under Section 10.2) (as so extended, the "Termination Date"), unless such failure to close shall be due to a breach of this Agreement by the party seeking to terminate this Agreement pursuant to this clause (b); or (c) By either Seller or Buyer, if there shall be any statute, rule or regulation that makes consummation of the transactions contemplated hereby illegal or otherwise prohibited or a Governmental Entity shall have issued an order, decree or ruling or taken any other action permanently restraining, enjoining or otherwise prohibiting the consummation of the transactions contemplated hereby, and such order, decree, ruling or action shall have become final and nonappealable. 10.2 Extensions. Buyer may extend the date specified in Section 10.1(b) by up to 120 days by delivering a certificate representing 25,000 shares of Common Stock to the Escrow Agent for each 30 day extension. Shares delivered to the Escrow Agent pursuant to this Section 10.2 shall become Deposit Shares and shall be treated as such in accordance with Article II. -30- 36 Buyer shall give Seller written notice of its intention to extend the date in Section 10.1(b) and deposit the additional Deposit Shares not less than two Business Days before the then applicable Termination Date. 10.3 Effect of Termination. In the event of the termination of this Agreement pursuant to Section 10.1 by Seller or Buyer, written notice thereof shall be given to the other party specifying the provision hereof pursuant to which such termination is made, and this Agreement shall become void and have no effect, except that the agreements contained in this Section and in Sections 7.2, 7.7(c) and 7.13 shall survive the termination hereof. Nothing contained in this Section 10.3 shall relieve any party from liability for damages actually incurred as a result of any breach of this Agreement; provided, however, if Seller receives the Deposit Shares, the Deposit Shares shall be considered payment of damages to the extent of the value of the Deposit Shares. ARTICLE XI SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION 11.1 Survival. The representations and warranties of the parties contained in this Agreement or in any certificate, instrument or document delivered pursuant hereto shall survive the Closing, regardless of any investigation made by or on behalf of any party, until the one year anniversary of the Closing Date ("Survival Date"). From and after the Survival Date, no party hereto or any shareholder, director, officer, employee or Affiliate of such party shall be under any liability whatsoever pursuant to this Article XI with respect to any representation or warranty to which such Survival Date relates, unless before the Survival Date for such representation or warranty it shall have received from the party seeking indemnification written notice of the existence of the claim for or in respect of which indemnification in respect of such representation or warranty is sought. The provisions of this Section shall have no effect upon any other obligation of the parties hereto under this Agreement, whether to be performed before, at or after the Closing. 11.2 Indemnification by Seller. Subject to the terms and conditions of this Article XI, Seller shall indemnify, defend and hold harmless Buyer from and against any and all claims, actions, causes of action, demands, assessments, losses, damages, liabilities, judgments, settlements, penalties, costs and expenses (including reasonable attorneys' fees and expenses), of any nature whatsoever (collectively, "Damages"), asserted against, resulting to, imposed upon, or incurred by Buyer, directly or indirectly, by reason of or resulting from: (a) Any inaccuracy in or breach of any representation or warranty of Seller contained in this Agreement or in any certificate, instrument or document delivered pursuant hereto; (b) Any breach by Seller of any of its covenants or agreements contained in this Agreement or in any certificate, instrument or document delivered pursuant hereto, if such breach is not cured to Buyer's satisfaction within 10 Business Days of the notice specifying such breach; -31- 37 (c) Any liability or obligation of Seller or any of its Affiliates (whether accrued, absolute, contingent, unliquidated or otherwise, whether or not known to Seller and whether due or to become due) other than the Assumed Liabilities; (d) The ownership, management or use of the Assets prior to the Closing Date; (e) The operation of the Business prior to the Closing Date; (f) Any products distributed or sold by Seller in connection with the Business on or prior to the Closing Date; (g) Any acts or omissions of Seller prior to the Closing Date or any events or occurrences involving the Assets, the operation of the Business or the employees or former employees of Seller or its Affiliates taking place prior to the Closing Date (collectively, the "Buyer Claims"). The indemnity obligations of Seller under this Section 11.2 shall not be affected by the disclosure of a matter on any Schedule to this Agreement or the fact that the Damages arose or were incurred without an inaccuracy in or breach of any representation or warranty of Seller contained in this Agreement. Notwithstanding the foregoing, no indemnification shall be required to be made by Seller pursuant to subsections (a) and (b) of this Section 11.2 with respect to any Buyer Claims unless and until the aggregate amount of Damages incurred by Seller with respect to all such Buyer Claims (whether asserted, resulting, imposed or incurred before, on or after the Closing Date) exceeds one percent of the Purchase Price, it being agreed and understood that, if such amount is exceeded, Seller shall be liable to the full extent of such Damages, including those not in excess of one percent of the Purchase Price. Notwithstanding the foregoing, Buyer shall be entitled to recover all Damages, without limitation, due to an inaccuracy or breach of the representation and warranty of Seller contained in the first sentence of Section 4.12. 11.3 Indemnification by Buyer. Subject to the terms and conditions of this Article XI, Buyer shall indemnify and hold harmless Seller from and against any and all Damages asserted against, resulting to, imposed upon or incurred by Seller, directly or indirectly, by reason of or resulting from: (a) Any inaccuracy in or breach of any representation or warranty of Buyer contained in this Agreement or in any certificate, instrument or document delivered pursuant hereto; (b) Any breach by Buyer of any of its covenants or agreements contained in this Agreement or in any certificate, instrument or document delivered pursuant hereto; (c) The Assumed Liabilities; -32- 38 (d) The ownership, management or use by Buyer of the Assets from and after the Closing Date, except to the extent Buyer is indemnified by Seller with respect to such matters in Section 11.2; (e) The operation of the Business prior to the Closing Date; (f) Any products distributed or sold by Buyer from and after the Closing Date; (g) Any acts or omissions of Buyer after the Closing Date or any events or occurrences involving the Assets, the operation of the Business or the employees of Buyer or its Affiliates taking place after the Closing Date, except to the extent Buyer is indemnified by Seller with respect to such matters pursuant to Section 11.2; and (h) Subject to Seller's fulfillment of its obligations under Section 7.9(d), any Damages to Seller that arises under the WARN Act as a result of the termination of the Employees on the Closing Date (collectively, "Seller Claims"). The indemnity obligations of Buyer under this Section 11.2 shall not be affected by the disclosure of a matter on any Schedule to this Agreement or the fact that the Damages arose or were incurred without an inaccuracy in or breach of any representation or warranty of Buyer contained in this Agreement. Notwithstanding the foregoing, no indemnification shall be required to be made by Buyer pursuant to subsections (a) and (b) of this Section 11.3 with respect to any Seller Claims unless and until the aggregate amount of Damages incurred by Buyer with respect to all such Seller Claims (whether asserted, resulting, imposed, or incurred before, on, or after the Closing Date) exceeds one percent of the Purchase Price, it being agreed and understood that, if such amount is exceeded, Buyer shall be liable to the full extent of such Damages, including those not in excess of one percent of the Purchase Price. 11.4 Procedure for Indemnification. Promptly after receipt by an indemnified party under Section 11.2 or 11.3 of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against an indemnifying party under such Section, give written notice to the indemnifying party of the commencement thereof, but the failure so to notify the indemnifying party shall not relieve it of any liability that it may have to any indemnified party except to the extent the indemnifying party demonstrates that the defense of such action is prejudiced thereby. In case any such action shall be brought against an indemnified party and it shall give written notice to the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it may wish, to assume the defense thereof with counsel reasonably satisfactory to such indemnified party. If the indemnifying party elects to assume the defense of such action, the indemnified party shall have the right to employ separate counsel at its own expense and to participate in the defense thereof. If the indemnifying party elects not to assume (or fails to assume) the defense of such action, the indemnified party shall be entitled to assume the defense of such action with counsel of its own choice, at the expense of the indemnifying party. If the action is asserted against both the indemnifying party and the indemnified party and there is a conflict of interests that renders it inappropriate for the same counsel to represent both the indemnifying party and the indemnified party, the indemnifying party shall be responsible for paying for separate counsel for the indemnified -33- 39 party; provided, however, that if there is more than one indemnified party, the indemnifying party shall not be responsible for paying for more than one separate firm of attorneys to represent the indemnified parties, regardless of the number of indemnified parties. If the indemnifying party elects to assume the defense of such action, (a) no compromise or settlement thereof may be effected by the indemnifying party without the indemnified party's written consent (which shall not be unreasonably withheld) unless the sole relief provided is monetary damages that are paid in full by the indemnifying party and (b) the indemnifying party shall have no liability with respect to any compromise or settlement thereof effected without its written consent (which shall not be unreasonably withheld). ARTICLE XII MISCELLANEOUS 12.1 Notices. All notices, requests, demands and other communications required or permitted to be given or made hereunder by any party hereto shall be in writing and shall be deemed to have been duly given or made if delivered personally, or transmitted by first class registered or certified mail, postage prepaid, return receipt requested, or sent by prepaid overnight delivery service, or sent by cable, telegram, telefax or telex, to the parties at the following addresses (or at such other addresses as shall be specified by the parties by like notice): If to Buyer or Parent: 8140 Walnut Hill Lane Suite 1000 Dallas, Texas 75231 Attention: Mike Pate and Maryann Walsh Fax: (214) 890-9099 with a copy to: Thompson & Knight, P.C. 1700 Pacific Avenue, Suite 3300 Dallas, Texas 75201 Attention: Michael Bengtson Fax: (214) 969-1751 -34- 40 If to Seller: 250 International Parkway Suite 300 Heathrow, Florida 32746 Attention: President and Chief Financial Officer Fax: (407) 357-1410 with a copy to: Triplett, Woolf & Garretson, LLC Centre City Plaza 151 North Main, Suite 800 Wichita, Kansas 67202-1409 Attention: Thomas P. Garretson Fax: (316) 265-6165 12.2 Entire Agreement. This Agreement, together with the Schedules, Exhibits, Annexes and other writings referred to herein or delivered pursuant hereto, constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings, both written and oral, between the parties with respect to the subject matter hereof. 12.3 Binding Effect; Assignment; No Third Party Benefit. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. Except as otherwise expressly provided in this Agreement, neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by either of the parties hereto without the prior written consent of the other party, except that Buyer may assign to any wholly owned subsidiary or Affiliate of Buyer any of Buyer's rights, interests or obligations hereunder, upon notice to Seller, provided that no such assignment shall relieve Buyer of its obligations hereunder. Except as expressly provided in this Agreement, nothing in this Agreement, express or implied, is intended to or shall confer upon any Person (including any Employee) other than the parties hereto, and their respective successors and permitted assigns, any rights, benefits or remedies of any nature whatsoever under or by reason of this Agreement. 12.4 Severability. If any provision of this Agreement is held to be unenforceable, this Agreement shall be considered divisible and such provision shall be deemed inoperative to the extent it is deemed unenforceable, and in all other respects this Agreement shall remain in full force and effect; provided, however, that if any such provision may be made enforceable by limitation thereof, then such provision shall be deemed to be so limited and shall be enforceable to the maximum extent permitted by Applicable Law. 12.5 Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Kansas, without regard to the principles of conflicts of laws thereof. -35- 41 12.6 Further Assurances. From time to time following the Closing, at the request of either party hereto and without further consideration, the other party hereto shall execute and deliver to such requesting party such instruments and documents and take such other action (but without incurring any material financial obligation) as such requesting party may reasonably request in order to consummate more fully and effectively the transactions contemplated hereby. 12.7 Descriptive Headings. The descriptive headings herein are inserted for convenience of reference only, do not constitute a part of this Agreement, and shall not affect in any manner the meaning or interpretation of this Agreement. 12.8 Gender. Pronouns in masculine, feminine and neuter genders shall be construed to include any other gender, and words in the singular form shall be construed to include the plural and vice versa, unless the context otherwise requires. 12.9 References. All references in this Agreement to Articles, Sections and other subdivisions refer to the Articles, Sections and other subdivisions of this Agreement unless expressly provided otherwise. The words "this Agreement", "herein", "hereof ", "hereby", "hereunder" and words of similar import refer to this Agreement as a whole and not to any particular subdivision unless expressly so limited. Whenever the words "include", "includes" and "including" are used in this Agreement, such words shall be deemed to be followed by the words "without limitation". Each reference herein to a Schedule refers to the item identified separately in writing by the parties hereto as the described Schedule to this Agreement. All Schedules are hereby incorporated in and made a part of this Agreement as if set forth in full herein. 12.10 Counterparts. This Agreement may be executed by the parties hereto in any number of counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same agreement. Each counterpart may consist of a number of copies hereof each signed by less than all, but together signed by all, the parties hereto. 12.11 Disclosure. The disclosures in the Schedules to this Agreement, and those in any supplements thereto, shall relate only to the representations and warranties in the Section of this Agreement to which they expressly relate and to no other representation or warranty in this Agreement. In the event of any inconsistency between the statements in the body of this Agreement and those in the Schedules (other than an exception expressly set forth as such in the Schedules in relation to a specifically identified representation or warranty), those in this Agreement shall control. 12.12 Survival. Except for any covenant or agreement that by its terms expressly terminates as of a specific date, the covenants and agreements of the parties hereto contained in this Agreement shall survive the Closing without contractual limitation. -36- 42 12.13 Amendment. This Agreement may not be amended except by an instrument in writing signed by or on behalf of Buyer and Seller. 12.14 Waiver. Each of Seller and Buyer may (i) waive any inaccuracies in the representations and warranties of the other contained herein or in any document, certificate or writing delivered pursuant hereto or (ii) waive compliance by the other with any of the other's agreements or fulfillment of any conditions to its own obligations contained herein. Any agreement on the part of a party hereto to any such waiver shall be valid only if set forth in an instrument in writing signed by or on behalf of such party. No failure or delay by a party hereto in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. 12.15 Remedies Not Exclusive. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law. The rights and remedies of any party based upon, arising out of or otherwise in respect of any inaccuracy in or breach of any representation, warranty, covenant or agreement contained in this Agreement shall in no way be limited by the fact that the act, omission, occurrence or other state of facts upon which any claim of any such inaccuracy or breach is based may also be the subject matter of any other representation, warranty, covenant or agreement contained in this Agreement (or in any other agreement between the parties) as to which there is no inaccuracy or breach. IN WITNESS WHEREOF, the parties have executed this Agreement, or caused this Agreement to be executed by their duly authorized representatives, all as of the day and year first above written. IT NETWORK, INC By: /s/ DAN D. MAITLAND -------------------------------------- Dan D. Maitland Executive Vice President BRITE VOICE SYSTEMS, INC. By: /s/ DONALD R. WALSH -------------------------------------- Donald R. Walsh Executive Vice President -37- EX-2.2 3 ADMT TO ASSET PURCHASE AGMT DATED 09/23/97 1 EXHIBIT 2.2 AMENDMENT TO ASSET PURCHASE AGREEMENT AMENDMENT TO ASSET PURCHASE AGREEMENT ("Amendment"), dated as of October 7, 1997, between IT Network, Inc. a Texas corporation ("Buyer") and Brite Voice System, Inc., a Kansas corporation ("Seller"). WHEREAS, Seller and Buyer have entered into an Asset Purchase Agreement dated as of September 23, 1997 (the "Agreement") and the parties desire to enter into this Amendment for the purpose of clarifying the Agreement; NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements herein contained, and intending to be legally bound hereby, Seller and Buyer agree as follows: 1. Amendment. The terms of the Agreement shall remain unchanged and in full force and effect, unless expressly amended by this Amendment. 2. Definition Clarification. The definition of the term "Business" as set forth in Section 1.1 of the Agreement is amended to include the following sentence at the end thereof: "Such term shall not include either the sale of advertising sponsorships to various categories of CityLine audiotex information made available through audiotex systems owned or leased to CityLine customers or the management of such audiotex systems and advertisers for such CityLine customers. 3. Schedule 1.1(a). 3.1 The list of written contracts attached to Schedule 1.1(a) is amended by adding under the category "Suppliers" at page 14 thereof, the following contracts:
Customer Name Type Agreement Date - ------------- -------------- ---- ACCU Weather Agreement January 6, 1995 BPI Entertainment News Wire Letter Amendment October 1, 1997 Commodity Quotations, Inc. Comstock Service Marketing November 6, 1990 Representative Agreement The Western Information Network Amendment to Letter Agreement January 9, 1997
2 3.2 Schedule 1.1(a) is amended by adding new paragraphs 5 and 6 at page 1 thereof as follows: "5. Seller has an oral agreement with BPI Entertainment News Wire for the use of BPI's Billboard Charts. Seller currently pays BPI Entertainment News Wire a monthly fee of $560.00. 6. Seller has an oral agreement with Network Music for the use of music in connection with audiotex information. Seller currently pays Network Music a monthly fee of $172.50." 3.3 Schedule 1.1(a) shall be deemed amended as of the date of the Agreement, as if said Schedule had originally contained references to the foregoing contracts. IN WITNESS WHEREOF, the parties have executed this Amendment, or caused this Amendment to be executed by their duly authorized representatives, as of the day and year first above written. IT NETWORK, INC. By: /s/ Dan D. Maitland ----------------------------------------- Dan D. Maitland Executive Vice President BRITE VOICE SYSTEMS, INC. By: /s/ Donald R. Walsh ----------------------------------------- Donald R. Walsh Executive Vice President 2 EX-4.1 4 INDENTURE DATED 10/30/97 1 EXHIBIT 4.1 ================================================================================ _________________________________ SOURCE MEDIA, INC. as Issuer, and U.S. TRUST COMPANY OF TEXAS, N.A. as Trustee $100,000,000 12% SENIOR SECURED NOTES DUE 2004, SERIES A 12% SENIOR SECURED NOTES DUE 2004, SERIES B ____________________ INDENTURE Dated as of October 30, 1997 ____________________ ================================================================================ 2 CROSS-REFERENCE TABLE*
Trust Indenture Act Section Indenture Section 310(a)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.10 (a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.10 (a)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. (a)(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. (a)(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.10 (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.10 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. 311(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.11 (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.11 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. 312(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.05 (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.03 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.03 313(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.06 (b)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.06 (b)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.06 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.06 (d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.06 314(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.04 (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. (c)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.05 (c)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.05 (c)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. (d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. (e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.05 (f) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. 315(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.01 (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.05 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.01 (d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.05;7.01 (e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.11 316(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.01 (a)(1)(A) . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.02
(i) 3 (a)(1)(B) . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.04 (a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.07 (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.19 317(a)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.08 (a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.09 (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.04 318(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.01 (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.01
_______________________ *This Cross-Reference Table is not part of the Indenture. N.A. means not applicable. (ii) 4 TABLE OF CONTENTS
Page ---- ARTICLE 1 DEFINITIONS AND INCORPORATION BY REFERENCE . . . . . . . . . . . . . . . . . . . . . . . . . 1 SECTION 1.01. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 SECTION 1.02. OTHER DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 SECTION 1.03. INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT . . . . . . . . . . . . . . . . . . . 24 SECTION 1.04. RULES OF CONSTRUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 ARTICLE 2 THE SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 SECTION 2.01. FORM AND DATING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 SECTION 2.02. EXECUTION AND AUTHENTICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 SECTION 2.03. REGISTRAR AND PAYING AGENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 SECTION 2.04. PAYING AGENT TO HOLD MONEY IN TRUST . . . . . . . . . . . . . . . . . . . . . . . . . . 27 SECTION 2.05. SECURITYHOLDER LISTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 SECTION 2.06. TRANSFER AND EXCHANGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 SECTION 2.07. REPLACEMENT SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 SECTION 2.08. OUTSTANDING SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 SECTION 2.09. TREASURY SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 SECTION 2.10. TEMPORARY SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 SECTION 2.11. CANCELLATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 SECTION 2.12. DEFAULTED INTEREST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 SECTION 2.13. CUSIP NUMBER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 SECTION 2.14. DEPOSIT OF MONEYS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 SECTION 2.15. RESTRICTIVE LEGENDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 SECTION 2.16. BOOK-ENTRY PROVISIONS FOR GLOBAL SECURITY . . . . . . . . . . . . . . . . . . . . . . . 34 SECTION 2.17. SPECIAL TRANSFER PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 SECTION 2.18. PERSONS DEEMED OWNERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 SECTION 2.19. RECORD DATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 ARTICLE 3 REDEMPTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 SECTION 3.01. NOTICES TO TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 SECTION 3.02. SELECTION OF SECURITIES TO BE REDEEMED . . . . . . . . . . . . . . . . . . . . . . . . . 38 SECTION 3.03. NOTICE OF REDEMPTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 SECTION 3.04. EFFECT OF NOTICE OF REDEMPTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 SECTION 3.05. DEPOSIT OF REDEMPTION PRICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
(iii) 5 SECTION 3.06. SECURITIES REDEEMED IN PART . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 SECTION 3.07. OPTIONAL REDEMPTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 SECTION 3.08. MANDATORY REDEMPTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 SECTION 3.09. OFFER TO PURCHASE BY APPLICATION OF EXCESS PROCEEDS . . . . . . . . . . . . . . . . . . 41 ARTICLE 4 COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 SECTION 4.01. PAYMENT OF SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 SECTION 4.02. MAINTENANCE OF OFFICE OR AGENCY . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 SECTION 4.03. SEC REPORTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 SECTION 4.04. COMPLIANCE CERTIFICATES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 SECTION 4.05. TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 SECTION 4.06. STAY, EXTENSION AND USURY LAWS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 SECTION 4.07. LIMITATION ON RESTRICTED PAYMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 SECTION 4.08. LIMITATION ON RESTRICTIONS ON DISTRIBUTIONS FROM RESTRICTED SUBSIDIARIES . . . . . . . . 50 SECTION 4.09. LIMITATION ON INDEBTEDNESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 SECTION 4.10. LIMITATION ON SALES OF ASSETS AND SUBSIDIARY STOCK . . . . . . . . . . . . . . . . . . . 54 SECTION 4.11. LIMITATION ON AFFILIATE TRANSACTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . 56 SECTION 4.12. LIMITATION ON LIENS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 SECTION 4.13. CORPORATE EXISTENCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 SECTION 4.14. CHANGE OF CONTROL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 SECTION 4.15. LIMITATION ON ISSUANCES OF CAPITAL STOCK OF RESTRICTED SUBSIDIARIES . . . . . . . . . . 59 SECTION 4.16. CONDUCT OF BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 SECTION 4.17. LIMITATION ON SALE/ LEASEBACK TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . 60 SECTION 4.18. LIMITATION ON DESIGNATIONS OF UNRESTRICTED SUBSIDIARIES. . . . . . . . . . . . . . . . . 60 SECTION 4.19. FURTHER INSTRUMENTS AND ACTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 ARTICLE 5 SUCCESSORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 SECTION 5.01. LIMITATIONS ON MERGER, CONSOLIDATION OR SALE OF ASSETS . . . . . . . . . . . . . . . . . 62 SECTION 5.02. SUCCESSOR CORPORATION SUBSTITUTED . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 ARTICLE 6 DEFAULTS AND REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 SECTION 6.01. EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
(iv) 6 SECTION 6.02. ACCELERATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 SECTION 6.03. OTHER REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 SECTION 6.04. WAIVER OF PAST DEFAULTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 SECTION 6.05. CONTROL BY MAJORITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 SECTION 6.06. LIMITATION ON SUITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 SECTION 6.07. RIGHTS OF SECURITYHOLDERS TO RECEIVE PAYMENT . . . . . . . . . . . . . . . . . . . . . . 67 SECTION 6.08. COLLECTION SUIT BY TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 SECTION 6.09. TRUSTEE MAY FILE PROOFS OF CLAIM . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 SECTION 6.10. PRIORITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 SECTION 6.11. UNDERTAKING FOR COSTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 ARTICLE 7 TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 SECTION 7.01. DUTIES OF TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 SECTION 7.02. RIGHTS OF TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 SECTION 7.03. INDIVIDUAL RIGHTS OF TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 SECTION 7.04. TRUSTEE'S DISCLAIMER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 SECTION 7.05. NOTICE OF DEFAULTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 SECTION 7.06. REPORTS BY TRUSTEE TO SECURITYHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . 73 SECTION 7.07. COMPENSATION AND INDEMNITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 SECTION 7.08. REPLACEMENT OF TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 SECTION 7.09. SUCCESSOR TRUSTEE BY MERGER, ETC. . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 SECTION 7.10. ELIGIBILITY; DISQUALIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 SECTION 7.11. PREFERENTIAL COLLECTION OF CLAIMS AGAINST THE COMPANY . . . . . . . . . . . . . . . . . 76 ARTICLE 8 DISCHARGE OF INDENTURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 SECTION 8.01. DISCHARGE OF LIABILITY ON SECURITIES; DEFEASANCE . . . . . . . . . . . . . . . . . . . . 76 SECTION 8.02. CONDITIONS TO DEFEASANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 SECTION 8.03. APPLICATION OF TRUST MONEY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 SECTION 8.04. REPAYMENT TO THE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 SECTION 8.05. INDEMNITY FOR GOVERNMENT OBLIGATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 80 SECTION 8.06. REINSTATEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 ARTICLE 9 AMENDMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 SECTION 9.01. WITHOUT CONSENT OF SECURITYHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 SECTION 9.02. WITH CONSENT OF SECURITYHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 SECTION 9.03. COMPLIANCE WITH TRUST INDENTURE ACT . . . . . . . . . . . . . . . . . . . . . . . . . . 84
(v) 7 SECTION 9.04. REVOCATION AND EFFECT OF CONSENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 SECTION 9.05. NOTATION ON OR EXCHANGE OF SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . 84 SECTION 9.06. TRUSTEE TO SIGN AMENDMENTS, ETC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 ARTICLE 10 MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 SECTION 10.01. TRUST INDENTURE ACT CONTROLS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 SECTION 10.02. NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 SECTION 10.03. COMMUNICATION BY SECURITYHOLDERS WITH OTHER SECURITYHOLDERS . . . . . . . . . . . . . . 87 SECTION 10.04. CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT . . . . . . . . . . . . . . . . . . 87 SECTION 10.05. STATEMENTS REQUIRED IN CERTIFICATE OR OPINION . . . . . . . . . . . . . . . . . . . . . 87 SECTION 10.06. RULES BY TRUSTEE AND AGENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 SECTION 10.07. LEGAL HOLIDAYS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 SECTION 10.08. NO RECOURSE AGAINST OTHERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 SECTION 10.09. DUPLICATE ORIGINALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 SECTION 10.10. GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 SECTION 10.11. NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS . . . . . . . . . . . . . . . . . . . . . 89 SECTION 10.12. SUCCESSORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 SECTION 10.13. SEVERABILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 SECTION 10.14. COUNTERPART ORIGINALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 SECTION 10.15. TABLE OF CONTENTS, HEADINGS, ETC. . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
EXHIBIT A - FORM OF INITIAL SECURITY EXHIBIT B - FORM OF EXCHANGE SECURITY EXHIBIT C - FORM OF CERTIFICATE TO BE DELIVERED IN CONNECTION WITH TRANSFERS TO NON-QIB ACCREDITED INVESTORS EXHIBIT D - FORM OF CERTIFICATE TO BE DELIVERED IN CONNECTION WITH TRANSFERS PURSUANT TO REGULATION S
(vi) 8 INDENTURE, dated as of October 30, 1997, among Source Media, Inc., a Delaware corporation (the "Company"), 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 (the "Trustee"). The Company has duly authorized the creation of an issue of 12% Senior Secured Notes due 2004, Series A (the "Initial Securities") and 12% Senior Secured Notes due 2004, Series B (the "Exchange Securities") and, to provide therefor, the Company has duly authorized the execution and delivery of this Indenture. All things necessary to make the Securities (as defined), when duly issued and executed by the Company, and authenticated and delivered hereunder, the valid obligations of the Company, and to make this Indenture a valid and binding agreement of the Company, have been done. The Company and the Trustee agree as follows for the benefit of each other and for the equal and ratable benefit of the Holders of the Securities: ARTICLE 1 DEFINITIONS AND INCORPORATION BY REFERENCE SECTION 1.01. DEFINITIONS. "Acquisitions" means the September 1997 acquisitions by the Company of certain of the electronic publishing assets of Brite Voice, Inc. for approximately $35.6 million and of certain of the assets of Voice News Network, Inc. for approximately $9.0 million. "Additional Assets" means (i) any property or assets (other than Indebtedness and Capital Stock) in a Permitted Business; (ii) the Capital Stock of a Person that becomes a Restricted Subsidiary as a result of the acquisition of such Capital Stock by the Company or a Restricted Subsidiary of the Company; (iii) Capital Stock constituting a minority interest in any Person that at such time is a Restricted Subsidiary of the Company; or (iv) Permitted Investments of the type and in the amounts described in clause (viii) of the definition thereof; provided, however, that, in the case of clauses (ii) and (iii), such Restricted Subsidiary is primarily engaged in a Permitted Business. "Adjusted Consolidated Net Income" means, for any period, Consolidated Net Income minus (plus) the net income (loss) of Interactive Channel, Inc. for such period, 9 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 Company), plus an amount equal to the amortization of intangible assets relating to the Acquisition. "Adjusted Net Assets" of a Subsidiary Guarantor at any date shall mean the lesser of the amount by which (x) the fair value of the property of such Subsidiary Guarantor exceeds the total amount of liabilities, including, without limitation, the probable liability of such Subsidiary Guarantor with respect to its contingent liabilities (after giving effect to all other fixed and contingent liabilities incurred or assumed on such date), but excluding liabilities under the Subsidiary Guarantee, of such Subsidiary Guarantor at such date and (y) the present fair salable value of the assets of such Subsidiary Guarantor at such date exceeds the amount that will be required to pay the probable liability of such Subsidiary Guarantor on its debts (after giving effect to all other fixed and contingent liabilities Incurred or assumed on such date and after giving effect to any collection from any Subsidiary by such Subsidiary Guarantor in respect of the obligations of such Subsidiary under the Subsidiary Guarantee), excluding debt in respect of the Subsidiary Guarantee, as they become absolute and matured. "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. "Agent" means any Registrar, Paying Agent or co-registrar. "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 or 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 -2- 10 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 Section 5.01. 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. "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 Securities, 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. "Bankruptcy Code" means Title 11, U.S. Code or any similar Federal, state or foreign law for the relief of debtors. "Board of Directors" means, with respect to any Person, the Board of Directors of such Person or any committee of the Board of Directors of such Person duly authorized, with respect to any particular matter, to exercise the power of the Board of Directors of such Person. "Board Resolution" means, with respect to any Person, a copy of a resolution certified by the Secretary or an Assistant Secretary of such Person to have been duly adopted by the Board of Directors of such Person and to be in full force and effect on the date of such certification, and delivered to the Trustee. "Business Day" means a day that is not a Legal Holiday. "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 -3- 11 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. "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. "Cash Equivalents" means (i) United States dollars, (ii) securities issued or directly and fully Guaranteed or insured by the United States government or any agency or instrumentality thereof, (iii) certificates of deposit, time deposits and eurodollar time deposits with maturities of one year or less from the date of acquisition, bankers' acceptances with maturities not exceeding one year and overnight bank deposits, in each case with any commercial bank having capital and surplus in excess of $500 million, (iv) repurchase obligations for underlying securities of the types described in clauses (ii) and (iii) entered into with any financial institution meeting the qualifications specified in clause (iii) above, (v) commercial paper rated A-1 or the equivalent thereof by Moody's or S&P and in each case maturing within one year after the date of acquisition, (vi) investment funds investing 95% of their assets in securities of the types described in clauses (i)-(v) above, (vii) readily marketable direct obligations issued by any state of the United States of America or any political subdivision thereof having one of the two highest rating categories obtainable from either Moody's or S&P and (viii) Indebtedness or Preferred Stock issued by Persons with a rating of "A" or higher from S&P or "A2" or higher from Moody's. "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 Company and its Subsidiaries; or (ii) a majority of the Board of Directors of the Company or of any direct or indirect holding company thereof shall consist of Persons who are not Continuing Directors of the Company; 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 Company or of any direct or indirect holding company thereof. -4- 12 "Commission" means the U.S. Securities and Exchange Commission or its successor. "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. "Company" means Source Media, Inc., a Delaware corporation, until a successor replaces it in accordance with Article 5 hereof and thereafter means the successor. "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 Securities) 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 Securities), in each case for such period. Notwithstanding the foregoing, the income tax expense, depreciation expense and amortization expense of a Subsidiary of the Company 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 Company 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 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 -5- 13 Indebtedness (as determined in good faith by the Board of Directors of the Company) 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 Company 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 Company 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 Company or any of its Restricted Subsidiaries repaid, repurchased, defeased or otherwise discharged with respect to the Company 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 Company is sold, the Consolidated Interest Expense for such period directly attributable to the Indebtedness of such Restricted Subsidiary to the extent the Company 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 Company or any of its Restricted Subsidiaries (by merger or otherwise) shall have made an Investment in any Restricted Subsidiary of the Company (or any Person which becomes a Restricted Subsidiary of the Company 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 Company or was merged with or into the Company or any Restricted Subsidiary of the Company since the beginning of such period) shall have made any Asset Disposition, Investment or acquisition of assets that would have required an adjustment pursuant to clause (3) or (4) above if made by the Company or a Restricted Subsidiary of the Company during such period, Consolidated Cash Flow and Consolidated Interest Expense for such period shall be calculated after giving pro forma effect thereto -6- 14 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 Company. 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 Company 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 owed with respect to letters of credit and bankers' acceptance financing, (vi) interest actually paid by the Company 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, (viii) 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 Company) in connection with Indebtedness Incurred by such plan or trust and (ix) cash and Disqualified Stock dividends in respect of all Preferred Stock of Subsidiaries and Disqualified Stock of the Company held by Persons other than the Company 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 Company, 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 Company 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 Company 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 Company 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 Company (other than restrictions in effect on the Issue Date with respect -7- 15 to a Restricted Subsidiary of the Company and other than restrictions that are created or exist in compliance with Section 4.08, (iii) any gain or loss realized upon the sale or other disposition of any assets of the Company 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 Company 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 Company 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 Section 4.07 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 Company or a Restricted Subsidiary to the extent such dividends, repayments or transfers increase the amount of Restricted Payments permitted under such covenant pursuant to clause (a) (3) (D) thereof. "Consolidated Net Worth" means, the total of the amounts shown on the balance sheet of the Company 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 Company 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 Company 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 this Indenture 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. "Corporate Trust Office of the Trustee" shall be at the address of the Trustee specified in Section 10.02 or such other address as to which the Trustee may give notice to the Company. -8- 16 "Currency Agreement" means in respect of a Person any foreign exchange contract, currency swap agreement or other similar agreement as to which such Person is a party or a beneficiary. "Default" means any event which is, or after notice or passage of time or both would be, an Event of Default. "Depository" means The Depository Trust Company, its nominees and successors. "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 (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 Stated Maturity of the Securities, 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 Stated Maturity of the Securities. "Equity Offering" means an offering for cash by the Company of its common stock, or options, warrants or rights with respect to its common stock. "Escrow Agent" means U.S. Trust Company of New York, and any successors or assignors thereto. "Escrow And Disbursement Agreement" means the Escrow And Disbursement Agreement, dated as of October 30, 1997, among the Trustee, the Escrow Agent and the Company. "Exchange Act" means the Securities Exchange Act of 1934, as amended, or any successor statute or statutes thereto. "Exchange Offer" means the registration by the Company under the Securities Act pursuant to a registration statement of the offer by the Company to each Securityholder of the Initial Securities to exchange all the Initial Securities held by such Securityholder for the Exchange Securities in an aggregate principal amount equal to the aggregate principal amount of the Initial Securities held by such Securityholder, all in accordance with the terms and conditions of the Registration Rights Agreement. -9- 17 "Exchange Securities" has the meaning set forth in the preamble to this Indenture. "Existing Indebtedness" means Indebtedness of the Company 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 Securities and Units. "fair market value" means, with respect to any asset or property, the price which could be negotiated in an arm's-length, free market transaction, for cash, between a willing seller and a willing and able buyer, neither of whom is under undue pressure or compulsion to complete the transaction. Fair market value shall be determined by the Board of Directors of the Company acting reasonably and in good faith and shall be evidenced by a Board Resolution of the Board of Directors of the Company delivered to the Trustee. "GAAP" means generally accepted accounting principles in the United States of America as in effect as of the date of this Indenture, 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 Indenture shall be computed in conformity with GAAP. "Guarantee" 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. "Guarantor Senior Indebtedness" means, with respect to a Subsidiary Guarantor, whether outstanding on the Issue Date or thereafter issued, all Guarantees by such Subsidiary Guarantor of Senior Indebtedness of the Company and all other Indebtedness of such Subsidiary Guarantor, 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 of such Subsidiary Guarantor in respect of such Indebtedness are not superior in right of payment to the obligations of such Subsidiary -10- 18 Guarantor under the Subsidiary Guaranty; provided, however, that Guarantor Senior Indebtedness shall not include (1) any obligations of such Subsidiary Guarantor to the Company or any other Subsidiary of the Company, (2) any liability for Federal, state, local or other taxes owed or owing by such Subsidiary Guarantor, (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 such Subsidiary Guarantor that is expressly subordinate or junior in right of payment to any other Indebtedness, Guarantee or obligation of such Subsidiary Guarantor, including any Guarantor Senior Subordinated Indebtedness and Guarantor Subordinated Obligations of such Subsidiary Guarantor. "Guarantor Subordinated Obligation" means, with respect to a Subsidiary Guarantor, any Indebtedness of such Subsidiary Guarantor (whether outstanding on the Issue Date or thereafter incurred) which is subordinate or junior in right of payment to the obligations of such Subsidiary Guarantor under the Subsidiary Guarantee pursuant to a written agreement. "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, (viii) the -11- 19 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 Company, any Preferred Stock of such Restricted Subsidiary to the extent such obligation arises on or before the Stated Maturity of the Securities (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 Indenture, 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 Company 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 this Indenture, as amended or supplemented from time to time. "Initial Purchasers" means NatWest Capital Markets Limited and Prudential Securities, Inc. "Initial Securities" has the meaning set forth in the preamble to this Indenture. "Institutional Accredited Investor" means an institution that is an "accredited investor" as that term is defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act. "Interest Escrow Account" means the account held by the Escrow Agent for the benefit of the Trustee in accordance with the Escrow and Disbursement Agreement. -12- 20 "Interest Payment Date" means the Stated Maturity of an installment of interest on the Securities which shall be each May 1, and November 1 of each year, commencing May 1, 1998. "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 Inc. and any of their Wholly-Owned Subsidiaries. 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 an 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. "Issue Date" means the date on which the Initial Securities are originally issued. "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). -13- 21 "Maturity Date" means November 1, 2004. "Moody's" means Moody's Investors Service, Inc. "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 Company or any Restricted Subsidiary of the Company after such Asset Disposition and (v) any 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 Company 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. "Non-Recourse Debt" means Indebtedness (i) as to which neither the Company 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, general partner or otherwise) and (ii) no default with respect to which (including any rights that the holders -14- 22 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 Company 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. "Non-U.S. Person" means a Person who is not a U.S. person, as defined in Regulation S of the Securities Act. "Note Register" means the register of names and addresses of the holders of the Securities maintained by the Registrar. "Obligations" means any principal, premium, interest, penalties, fees, indemnifications, reimbursements, damages and other liabilities payable under the documentation governing any Indebtedness. "Offering Memorandum" means the Offering Memorandum dated October 30, 1997, pursuant to which the Initial Securities were offered, and any supplements thereto. "Officer" means as to any Person the Chairman of the Board, the Chief Executive Officer, the Chief Operating Officer, the President, the Chief Financial Officer, or any Vice-President, the Treasurer or the Secretary of such Person. "Officers' Certificate" shall mean a certificate signed by two Officers of the Company, at least one of whom shall be the principal executive, financial or accounting officer of the Company. "Offshore Physical Securities" has the meaning provided in Section 2.01. "Opinion of Counsel" means a written opinion from legal counsel who is acceptable to the Trustee and which complies, if applicable, with the provisions of Section 10.04 hereof. The counsel may be an employee of or counsel to the Company or the Trustee. "Permitted Business" means any business which is the same as or related, ancillary or complementary to any of the businesses of the Company and its Restricted Subsidiaries on the date of the Indenture, as reasonably determined by the Company's Board of Directors; provided, that, an 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." -15- 23 "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, that (A) 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; and (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. -16- 24 "Permitted Liens" means: (i) Liens imposed by law, such as carriers', warehousemen's and mechanics' Liens, in each case for sums not yet due from the Company or any Restricted Subsidiary or being contested in good faith by appropriate proceedings by the Company or any Restricted Subsidiary, as the case may be, or other Liens arising out of judgments or awards against the Company or any Restricted Subsidiary with respect to which the Company or such Restricted Subsidiary, as the case may be, will then be prosecuting an appeal or other proceedings for review; (ii) Liens for property taxes or other taxes, assessments or governmental charges of the Company or any Restricted Subsidiary not yet due or payable or subject to penalties for nonpayment or which are being contested by the Company or such Restricted Subsidiary, as the case may be, in good faith by appropriate proceedings; (iii) Liens in favor of issuers of performance bonds and surety bonds issued pursuant to clause (vii) under Section 4.09; (iv) survey exceptions, encumbrances, easements or, reservations of, or rights of others for, licenses, rights-of-way, sewers, electric lines, telegraph and telephone lines and other similar purposes or zoning or other restrictions as to the use of real property of the Company or any Restricted Subsidiary incidental to the ordinary course of conduct of the business of the Company or such Restricted Subsidiary or as to the ownership of properties of the Company or any Restricted Subsidiary, which, in either case, were not incurred in connection with Indebtedness and which do not in the aggregate materially adversely affect the value of said properties or materially impair their use in the operation of the business of the Company or any Restricted Subsidiary; (v) Liens outstanding immediately after the Issue Date as set forth in a schedule to this Indenture; (vi) Liens on property, assets or shares of stock of any Restricted Subsidiary at the time such Restricted Subsidiary became a Subsidiary of the Company; provided, however, that (A) if any such Lien has been Incurred in anticipation of such transaction, such property, assets or shares of stock subject to such Lien will have a fair market value at the date of the acquisition thereof not in excess of the lesser of (1) the aggregate purchase price paid or owed by the Company in connection with the acquisition of such Restricted Subsidiary and (2) the fair market value of all property and assets of such Restricted Subsidiary and (B) any such Lien will not extend to any other assets owned by the Company or any Restricted Subsidiary; (vii) Liens on property or assets at the time the Company or any Restricted Subsidiary acquired such assets, including any acquisition by means of a merger or consolidation with or into the Company or such Restricted Subsidiary; provided, however, that (A) if any such Lien is Incurred in anticipation of such transaction, such property or assets subject to such Lien will have a fair market value at the date of the acquisition thereof not in excess of the lesser of (1) the aggregate purchase price paid or owed by the Company or such Restricted Subsidiary in connection with the acquisition thereof and of any other property and assets acquired simultaneously therewith and (2) the fair market value of all such property and assets acquired by the Company or such Restricted Subsidiary and (B) any such Lien will not extend to any other property or assets owned by the Company or any Restricted Subsidiary; (viii) Liens securing Indebtedness or other obligations of a Restricted Subsidiary owing to the Company or a Wholly-Owned Subsidiary; (ix) Liens to secure any extension, renewal, -17- 25 refinancing, replacement or refunding (or successive extensions, renewals, refinancings, replacements or refundings), in whole or in part, of any Indebtedness secured by Liens referred to in any of clauses (v), (vi) and (vii); provided, however, that any such Lien will be limited to all or part of the same property or assets that secured the original Lien (plus improvements on such property) and the aggregate principal amount of Indebtedness that is secured by such Lien will not be increased to an amount greater than the sum of (A) the outstanding principal amount, or, if greater, the committed amount, of the Indebtedness described under clauses (v), (vi) and (vii) at the time the original Lien became a Permitted Lien under this Indenture and (B) an amount necessary to pay any premiums, fees and other expenses Incurred by the Company in connection with such refinancing, refunding, extension, renewal or replacement; (x) Liens on property or assets of the Company securing Interest Rate Agreements and Currency,Agreements so long as the related Indebtedness is, and is permitted under Section 4.09, secured by a Lien on the same property securing the relevant Interest Rate Agreement or Currency Agreement; (xi) Liens on property or assets of the Company or any Restricted Subsidiary securing Indebtedness (1) under purchase money obligation or Capital Lease Obligations permitted under Section 4.09 or (2) under Sale/Leaseback Transactions permitted under Section 4.17; provided, that (A) the amount of Indebtedness Incurred in any specific case does not, at the time such Indebtedness is Incurred, exceed the lesser of the cost or fair market value of the property or asset acquired or constructed in connection with such purchase money obligation or Capital Lease Obligation or subject to such Sale/Leaseback Transaction, as the case may be, (B) such Lien will attach to such property or asset upon acquisition of such property or asset and or upon commencement of such Sale/Leaseback Transaction, as the case may be, and (C) no property or asset of the Company or any Restricted Subsidiary (other than the property or asset acquired or contracted in connection with such purchase money Obligation or Capital Lease Obligation or subject to such Sale/Leaseback Transaction, as the case may be) are subject to any Lien securing such Indebtedness; (xii) Liens granted to the Trustee on the assets of the Company securing the Company's obligations under this Indenture; (xiii) Liens granted to the Trustee on the assets of the Subsidiary Guarantors securing the Subsidiary Guarantors' Obligations under the Guarantees; and (xv) Liens on the Interest Escrow Account securing the Company's obligations under this Indenture. "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. "Physical Securities" has the meaning provided in Section 2.01. "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 -18- 26 liquidation or dissolution of such corporation, over shares of Capital Stock of any other class of such corporation. "Private Placement Legend" has the meaning provided in Section 2.15. "Public Market" exists at any time with respect to the common stock of the Company if (a) the common stock of the Company 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 (b) at least 15% of the total issued and outstanding common stock of the Company, has been distributed prior to such time by means of an effective registration statement under the Securities Act. "Qualified Capital Stock" shall mean any Capital Stock which is not Disqualified Stock. "Qualified Institutional Buyer" or "QIB" shall have the meaning specified in Rule 144A under the Securities Act. "Record Date" means the record dates specified in the Securities, whether or not a Legal Holiday. "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 Indenture or Incurred in compliance with this Indenture (including Indebtedness of the Company that refinances Indebtedness of any Restricted Subsidiary and Indebtedness of any Restricted Subsidiary that refinances Indebtedness 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 Securities 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 Securities 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 Securities 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. -19- 27 "Registrar" means U.S. Trust Company of Texas, N.A., as registrar under this Indenture, or any successor thereto appointed pursuant to the Indenture. "Registration Rights Agreement" means the Registration Rights Agreement dated October 30, 1997 among the Company and the Initial Purchasers for the benefit of themselves and the Securityholders, as the same may be amended or modified from time to time in accordance with the terms thereof. "Regulation S" means Regulation S under the Securities Act. "Responsible Officer" when used with respect to the Trustee, means any officer within the corporate trust department of the Trustee (or any successor group of the Trustee) with direct responsibility for the administration of this Indenture and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of his knowledge of and familiarity with the particular subject. "Restricted Investment" means any Investment other than a Permitted Investment. "Restricted Payment" has the meaning provided in Section 4.07(a). "Restricted Security" has the meaning assigned to such term in Rule 144(a)(3) under the Securities Act. "Restricted Subsidiary" means any Subsidiary of the Company other than Unrestricted Subsidiary. "S&P" and "Standard and Poor's" means Standard & Poor's Rating Group, a division of McGraw Hill Corporation, or any successor organization thereto. "Sale/Leaseback Transaction" means an arrangement relating to property now owned or hereafter acquired whereby the Company or a Restricted Subsidiary transfers such property to a Person and the Company or a Subsidiary leases it from such Person. "Secured Indebtedness" means any Indebtedness of a Subsidiary Guarantor secured by a Lien. "Securities" means the Initial Securities and the Exchange Securities treated as a single class of securities, as amended or supplemented from time to time in accordance with the terms hereof, that are issued pursuant to this Indenture. -20- 28 "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations of the Commission promulgated thereunder. "Securityholder" or "Holder" means a registered holder of one or more Securities. "Senior Indebtedness" means, whether outstanding on the Issue Date or thereafter issued, all Indebtedness of the Company, 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 Company to any Subsidiary, (2) any liability for Federal, state, foreign, local or other taxes owed or owing by the Company, (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 Company that is expressly subordinate or junior in right of payment to any other Indebtedness, Guarantee or obligation of the Company, including any Subordinated Obligations. "Senior PIK Preferred Stock" means the 13 1/2% senior preferred stock of the Company with a liquidation preference of $25 per share. "Significant Subsidiary" means any Restricted Subsidiary that would be a "Significant Subsidiary" of the Company within the meaning of Rule 1-02 under Regulation S-X promulgated by the Commission. "Source Media, Inc." has the meaning set forth in the preamble to this Indenture. "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 Obligation" means any Indebtedness of the Company (whether outstanding on the Issue Date or thereafter Incurred) which is subordinate or junior in right of payment to the Securities pursuant to a written agreement. "Subsidiary" of any Person means any corporation, association, partnership or other business entity 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) -21- 29 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 Company. "Subsidiary Guarantee" means the Guarantee of the Securities by a Subsidiary Guarantor. "Subsidiary Guarantor" means each Subsidiary of the Company in existence on the Issue Date and each Subsidiary (other than Unrestricted Subsidiaries) created or acquired by the Company after the Issue Date. "Temporary Cash Investments" means any of the following: (i) any Investment in direct obligations of the United States of America or any agency thereof or obligations Guaranteed by the United States of America or any agency thereof, (ii) Investments in time deposit accounts, certificates of deposit and money market deposits maturing within 180 days of the date of acquisition thereof issued by a bank or trust company which is organized under the laws of the United States of America, any state thereof or any foreign country recognized by the United States of America having capital surplus and undivided profits aggregating in excess of $250 million (or the foreign currency equivalent thereof) and whose long-term debt, or whose parent holding company's long-term debt, is rated "A" (or such similar equivalent rating) or higher by at least one nationally recognized statistical rating organization (as defined in Rule 436 under the Securities Act), (iii) repurchase obligations with a term of not more than 30 days for underlying securities of the types described in clause (i) above entered into with a bank meeting the qualifications described in clause (ii) above, (iv) Investments in commercial paper, maturing not more than 180 days after the date of acquisition, issued by a corporation (other than an Affiliate of the Company) organized and in existence under the laws of the United States of America or any foreign country recognized by the United States of America with a rating at the time as of which any investment therein is made of "P-1" (or higher) according to Moody's or "A-1" (or higher) according to S&P, (v) Investments in securities with maturities of six months or less from the date of acquisition issued or fully guaranteed by any state, commonwealth or territory of the United States of America, or by any political subdivision or taxing authority thereof, and rated at least "A" by S&P or "A" by Moody's and (vi) Investments in mutual funds whose investment guidelines restrict such funds' investments to those satisfying the provisions of clauses (i) through (v) above. "TIA" means the Trust Indenture Act of 1939 (15 U.S.C. Sections 77aaa-77bbbb) and the rules and regulations thereunder as in effect on the date on which this Indenture is qualified under the TIA, except as provided in Section 9.03 hereof; provided, however, that, in the event the Trust Indenture Act of 1939 is amended after such date, "TIA" means, to the extent required by any such amendment, the Trust Indenture Act of 1939 as so amended. -22- 30 "Trustee" means U.S. Trust Company of Texas, N.A., a banking corporation organized and existing under the laws of the State of Texas, until a successor replaces it in accordance with Article 7 and thereafter means the successor serving hereunder. "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 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 Company that at the time of determination shall be designated an Unrestricted Subsidiary by the Board of Directors in the manner provided below and (ii) any Subsidiary of an Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of the Company (including any newly acquired or newly formed Subsidiary of the Company) 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 Company or any Restricted Subsidiary of the Company that is not a Subsidiary of the Subsidiary to be so designated; provided, however, that each Subsidiary to be so designated and each of its Subsidiaries has not at the time of such designation, and does not thereafter create, Incur, issue, assume, guarantee or otherwise becomes liable with respect to any Indebtedness other than Non-Recourse Indebtedness 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 Section 4.07. The Board of Directors may designate any Unrestricted Subsidiary to be a Restricted Subsidiary subject to the limitations contained in Section 4.18. "U.S. Government Obligations" means direct obligations (or certificates representing an ownership interest in such obligations) of the United States of America (including any agency or instrumentality thereof) for the payment of which the full faith and credit of the United States of America is pledged and which are not callable or redeemable at the issuer's option. "U.S. Physical Securities" has the meaning provided in Section 2.01. "Voting Stock" with respect to any Person means all classes of Capital Stock of such Person then outstanding and normally entitled to vote in elections of directors of such Person. "Wholly-Owned Subsidiary" means a Restricted Subsidiary of the Company, at least 99% of the Capital Stock of which (other than directors' qualifying shares) is owned by the Company or another Wholly-Owned Subsidiary, and shall include Interactive -23- 31 Channel Technologies Inc. notwithstanding the ownership by Maureen E. Pocock of 1,535,821 Class Y Shares of 997758 Ontario Inc., which owns 1,623,409 Class A Shares and 843,818 Class B Shares of Interactive Channel Technologies Inc. SECTION 1.02. OTHER DEFINITIONS.
Defined in Term Section "actual knowledge" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.02 "Affiliate Transaction" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.11 "Agent Members" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.16 "Asset Disposition Offer" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.09 "Bankruptcy Law" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.01 "covenant defeasance option" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.01 "Custodian" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.01 "Declaration" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.02 "Default Amount" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.02 "Event of Default" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.01 "Net Available Cash" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.10 "judgment default provision" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.01 "legal defeasance option" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.01 "Legal Holiday" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.07 "Notice of Default" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.01 "Offer Amount" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.09 "Offer Period" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.09 "Paying Agent" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.03 "Registrar" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.03 "Successor Company" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.01
SECTION 1.03. INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT. Whenever this Indenture refers to a provision of the TIA, the provision is incorporated by reference in and made a part of this Indenture. The following TIA terms used in this Indenture have the following meanings: "indenture securities" means the Securities and the Subsidiary Guarantees; "indenture security holder" means a Securityholder; -24- 32 "indenture to be qualified" means this Indenture; "indenture trustee" or "institutional trustee" means the Trustee; "obligor" on the Securities means the Company, the Subsidiary Guarantors and any successor obligor upon the Securities. All other terms used in this Indenture that are defined by the TIA, defined by TIA reference to another statute or defined by Commission rule under the TIA have the meanings so assigned to them. SECTION 1.04. RULES OF CONSTRUCTION. Unless the context otherwise requires: (i) a term has the meaning assigned to it; (ii) an accounting term not otherwise defined has the meaning assigned to it in accordance with GAAP; (iii) "or" is not exclusive; (iv) words in the singular include the plural, and in the plural include the singular; and (v) provisions apply to successive events and transactions. ARTICLE 2 THE SECURITIES SECTION 2.01. FORM AND DATING. The Initial Securities and the Trustee's certificate of authentication thereon shall be substantially in the form of Exhibit A hereto. The Exchange Securities and the Trustee's certificate of authentication thereon shall be substantially in the form of Exhibit B hereto. The Securities may have notations, legends or endorsements required by law, stock exchange rule or Depository rule or usage. The Company and the Trustee shall approve the form of the Securities and any notation, legend or endorsement on them. Each Security shall be dated the date of its authentication. -25- 33 The terms and provisions contained in the forms of the Securities, annexed hereto as Exhibits A and B, shall constitute, and are hereby expressly made, a part of this Indenture and, to the extent applicable, the Company and the Trustee, by their execution and delivery of this Indenture, expressly agree to such terms and provisions and to be bound thereby. Securities offered and sold in reliance on Rule 144A shall be issued initially in the form of one or more permanent global notes in registered form, in substantially the form set forth in Exhibit A (the "Global Note"), deposited with the Trustee, as custodian for the Depository, duly executed by the Company and authenticated by the Trustee as hereinafter provided. The aggregate principal amount of the Global Note may from time to time be increased or decreased by adjustments made on the records of the Trustee, as custodian for the Depository, as hereinafter provided. Securities offered and sold in offshore transactions in reliance on Regulation S shall be issued in the form of permanent certificated Securities in registered form in substantially the form set forth in Exhibit A (the "Offshore Physical Securities"). Securities offered and sold in reliance on any other exemption from registration under the Securities Act other than as described in the preceding paragraph shall be issued, and Securities offered and sold in reliance on Rule 144A may be issued, in the form of permanent certificated Securities in registered form, in substantially the form set forth in Exhibit A (the "U.S. Physical Securities"). The Offshore Physical Securities and the U.S. Physical Securities are sometimes collectively herein referred to as the "Physical Securities". SECTION 2.02. EXECUTION AND AUTHENTICATION. (a) Two Officers of the Company (each of whom shall, in each case, have been duly authorized by all requisite corporate actions) shall sign the Securities for the Company by manual or facsimile signature. If an Officer whose signature is on a Security no longer holds that office at the time the Security is authenticated, the Security shall nevertheless be valid. (b) A Security shall not be valid until authenticated by the manual signature of the Trustee. The signature of the Trustee shall be conclusive evidence that the Security has been authenticated under this Indenture. (c) The Trustee shall authenticate (i) Initial Securities for original issue in the aggregate principal amount not to exceed $100,000,000, and (ii) Exchange Securities from time to time for issue only in exchange for a like principal amount of Initial Securities, in each case upon receipt of a written order of the Company signed by two Officers. -26- 34 (d) The Trustee may appoint an authenticating agent acceptable to the Company to authenticate Securities. Unless limited by the terms of such appointment, an authenticating agent may authenticate Securities whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such agent. An authenticating agent has the same rights as an Agent to deal with the Company or an Affiliate. SECTION 2.03. REGISTRAR AND PAYING AGENT. (a) The Company shall maintain an office or agency (which shall be located in the [Borough of Manhattan in the City of New York, State of New York]) where (i) Securities may be presented for registration of transfer or for exchange ("Registrar"), (ii) Securities may be presented for payment ("Paying Agent") and (iii) notices and demands to or upon the Company in respect of the Securities and this Indenture may be served. The Registrar shall keep a register of the Securities and of their transfer and exchange. The Company may appoint one or more co-registrars and one or more additional paying agents. The term "Paying Agent" includes any additional paying agent. The Company may change any Paying Agent, Registrar or co-registrar without prior notice to any Securityholder. The Company shall notify the Trustee and the Trustee shall notify the Securityholders of the name and address of any Agent not a party to this Indenture. If the Company fails to appoint or maintain another entity as Registrar or Paying Agent, the Trustee shall act as such. The Company or any Subsidiary Guarantor may act as Paying Agent, Registrar or co-registrar. The Company shall enter into an appropriate agency agreement with any Agent not a party to this Indenture, which shall incorporate the provisions of the TIA. The agreement shall implement the provisions of this Indenture that relate to such Agent. The Company shall notify the Trustee of the name and address of any such Agent. If the Company fails to maintain a Registrar or Paying Agent, or fails to give the foregoing notice, the Trustee shall act as such, and shall be entitled to appropriate compensation in accordance with Section 7.07 hereof. (b) The Company initially appoints the Trustee as Registrar, Paying Agent and agent for service of notices and demands in connection with the Securities. SECTION 2.04. PAYING AGENT TO HOLD MONEY IN TRUST. The Company, the Subsidiary Guarantors or any other obligor on the Securities shall require each Paying Agent other than the Trustee to agree in writing that the Paying Agent shall hold in trust for the benefit of the Securityholders and the Trustee all money held by the Paying Agent for the payment of principal of, premium, if any, and interest on the Securities, and shall notify the Trustee of any Default by the Company, any of the Subsidiary Guarantors or any other obligor on the Securities in making any such payment. While any such Default continues, the Trustee may require a Paying Agent to -27- 35 pay all money held by it to the Trustee. The Company, the Subsidiary Guarantors or any other obligor on the Securities at any time may require a Paying Agent to pay all money held by it to the Trustee. Upon payment over to the Trustee, the Paying Agent (if other than the Company or a Subsidiary Guarantor) shall have no further liability for the money delivered to the Trustee. If the Company, the Subsidiary Guarantors or any other obligor on the Securities acts as Paying Agent, it shall segregate and hold in a separate trust fund for the benefit of the Securityholders all money held by it as Paying Agent. SECTION 2.05. SECURITYHOLDER LISTS. The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of Securityholders and shall otherwise comply with TIA Section 312(a). If the Trustee is not the Registrar, the Company, the Subsidiary Guarantors or any other obligor on the Securities shall furnish to the Trustee at least seven Business Days before each Interest Payment Date and at such other times as the Trustee may request in writing a list in such form and as of such date as the Trustee may reasonably require of the names and addresses of Securityholders, including the aggregate principal amount of the Securities held by each thereof, and the Company, the Subsidiary Guarantors or any other obligor on the Securities shall otherwise comply with TIA Section 312(a). SECTION 2.06. TRANSFER AND EXCHANGE. (a) Where Securities are presented to the Registrar or a co-registrar with a request to register the transfer thereof or exchange them for an equal principal amount of Securities of other denominations, the Registrar shall register the transfer or make the exchange if its requirements for such transactions are met; provided, that any Security presented or surrendered for registration of transfer or exchange shall be duly endorsed or accompanied by a written instruction of transfer in form satisfactory to the Registrar and the Trustee duly executed by the Securityholder thereof or his attorney duly authorized in writing. To permit registrations of transfer and exchanges, the Company shall issue and the Trustee shall authenticate Securities at the Registrar's request. (b) Neither the Registrar, nor the Company shall be required (i) to issue, to register the transfer of or to exchange Securities during a period beginning at the opening of business on a Business Day 15 days before the day of any selection of Securities for redemption under Section 3.02 hereof and ending at the close of business on the day of selection, (ii) to register the transfer of or exchange any Security so selected for redemption in whole or in part, except the unredeemed portion of any Security being redeemed in part or (iii) to register the transfer or exchange of a Security between the Record Date and the next succeeding Interest Payment Date. -28- 36 (c) No service charge by the Company shall be made for any registration of a transfer or exchange (except as otherwise expressly permitted herein), but the Company may require payment by the Securityholder of a sum sufficient to cover any transfer tax or similar governmental charge payable in connection therewith (other than such transfer tax or similar governmental charge payable upon exchanges pursuant to Section 2.10, 3.06 or 9.05 hereof). (d) Any Holder of the Global Note shall, by acceptance of such Global Note, agree that transfers of beneficial interests in such Global Note may be effected only through a book entry system maintained by the Holder of such Global Note (or its agent), and that ownership of a beneficial interest in the Global Note shall be required to be reflected in a book entry. SECTION 2.07. REPLACEMENT SECURITIES. (a) If any mutilated Security is surrendered to the Trustee, or the Company and the Trustee receives evidence to its satisfaction of the destruction, loss or theft of any Security, the Company shall issue and the Trustee, upon receipt by it of the written order of the Company signed by two Officers of the Company, shall authenticate a replacement Security if the Trustee's requirements for replacements of Securities are met. If required by the Trustee or the Company, an indemnity bond must be supplied by the Holder that is sufficient in the judgment of the Trustee and the Company to protect the Company, the Subsidiary Guarantors, the Trustee, any Agent or any authenticating agent from any loss which any of them may suffer if a Security is replaced. The Company and the Trustee may charge a Securityholder for reasonable out-of-pocket expenses in replacing a Security. (b) Every replacement Security is an obligation of the Company and each of the Subsidiary Guarantors. SECTION 2.08. OUTSTANDING SECURITIES. (a) The Securities outstanding at any time are all the Securities authenticated by the Trustee except for those cancelled by the Company or by the Trustee, those delivered to the Trustee for cancellation and those described in this Section as not outstanding. (b) If a Security is replaced pursuant to Section 2.07 hereof, it ceases to be outstanding unless the Trustee receives proof satisfactory to it that the replaced Security is held by a bona fide purchaser. -29- 37 (c) If the principal amount of any Security is considered paid under Section 4.01 hereof, it ceases to be outstanding and interest on it ceases to accrue. (d) Subject to Section 2.09 hereof, a Security does not cease to be outstanding because the Company or an Affiliate of the Company or a Subsidiary Guarantor holds the Security. SECTION 2.09. TREASURY SECURITIES. In determining whether the Holders of the required principal amount of Securities have concurred in any direction, waiver or consent, Securities owned by the Company, the Subsidiary Guarantors, or any of their respective Affiliates shall be considered as though not outstanding, except that for purposes of determining whether the Trustee shall be protected in relying on any such direction, waiver or consent, only Securities which a Responsible Officer of the Trustee has actual knowledge are so owned shall be so disregarded. SECTION 2.10. TEMPORARY SECURITIES. Until definitive Securities are ready for delivery, the Company may prepare and the Trustee shall authenticate temporary Securities upon written order of the Company signed by two Officers of the Company. Temporary Securities shall be substantially in the form of definitive Securities but may have variations that the Company, the Subsidiary Guarantors and the Trustee consider appropriate for temporary Securities. Without unreasonable delay, the Company shall prepare and the Trustee, upon receipt of the written order of the Company signed by two Officers of the Company, shall authenticate definitive Securities in exchange for temporary Securities. Until such exchange, temporary Securities shall be entitled to the same rights, benefits and privileges as definitive Securities. SECTION 2.11. CANCELLATION. The Company at any time may deliver Securities to the Trustee for cancellation. The Registrar and Paying Agent shall forward to the Trustee any Securities surrendered to them for registration of transfer, exchange or payment. The Trustee (or its Agent) shall cancel all Securities, if not already cancelled, surrendered for registration of transfer, exchange, payment, replacement or cancellation and shall destroy cancelled Securities (subject to the record retention requirement of the Exchange Act), and deliver certification of their destruction to the Company, unless by a written order, signed by two Officers of the Company, the Company shall direct that cancelled Securities be returned to it. The Company may not issue new Securities to replace Securities that it has redeemed or paid or that have been delivered to the Trustee for cancellation. If the Company acquires any of the Securities, such acquisition shall not operate as a redemption or -30- 38 satisfaction of the indebtedness represented by such Securities unless or until the same are surrendered to the Trustee (or its Agent) for cancellation pursuant to this Section. SECTION 2.12. DEFAULTED INTEREST. If the Company defaults in a payment of interest on the Securities, it shall pay the defaulted interest in any lawful manner plus, to the extent lawful, interest payable on the defaulted interest, to the Persons who are Securityholders on a subsequent special record date, which date shall be at the earliest practicable date but in all events at least five Business Days prior to the payment date, in each case at the rate provided in the Securities and in Section 4.01 hereof. The Company shall, with the consent of the Trustee, fix or cause to be fixed each such special record date and payment date. At least 15 days before the special record date, the Company (or, upon the written request of the Company, the Trustee, in the name of and at the expense of the Company) shall mail to Securityholders a notice that states the special record date, the related payment date and the amount of such interest to be paid. SECTION 2.13. CUSIP NUMBER. The Company in issuing the Securities may use a "CUSIP" number, and if so, the Trustee shall use the CUSIP number in notices of redemption or exchange as a convenience to Securityholders; provided that no representation shall be deemed to be made by the Trustee as to the correctness or accuracy of the CUSIP number printed in the notice or on the Securities, and that reliance may be placed only on the other identification numbers printed on the Securities. The Company shall promptly notify the Trustee of any change in the CUSIP number. SECTION 2.14. DEPOSIT OF MONEYS. Prior to 10:00 a.m. New York City time on each Interest Payment Date and Maturity Date, the Company shall have deposited with the Paying Agent in immediately available funds money sufficient to make cash payments, if any, due on such Interest Payment Date or Maturity Date, as the case may be, in a timely manner which permits the Paying Agent to remit payment to the Securityholders on such Interest Payment Date or Maturity Date, as the case may be. SECTION 2.15. RESTRICTIVE LEGENDS. Each Global Note and Physical Security that constitutes a Restricted Security shall bear the following legend (the "Private Placement Legend") unless otherwise agreed by the Company and the Securityholder thereof: -31- 39 THIS NOTE OR ITS PREDECESSORS HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND ACCORDINGLY, MAY NOT BE OFFERED, SOLD OR PLEDGED OR OTHERWISE TRANSFERRED WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, UNITED STATES PERSONS OR A BENEFICIAL INTEREST HEREIN EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. BY ITS ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) OR (B) IT IS AN INSTITUTIONAL "ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(a)(1), (2), (3) or (7) OF REGULATION D UNDER THE SECURITIES ACT) (AN "INSTITUTIONAL ACCREDITED INVESTOR") OR (C) IT IS NOT A U.S. PERSON, IS NOT ACQUIRING THIS NOTE FOR THE ACCOUNT OR BENEFIT OF A U.S. PERSON AND IS ACQUIRING THIS NOTE IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH REGULATION S UNDER THE SECURITIES ACT, (2) AGREES THAT IT WILL NOT, WITHIN THE TIME PERIOD REFERRED TO IN RULE 144(k) UNDER THE SECURITIES ACT AS IN EFFECT WITH RESPECT TO SUCH TRANSFER, RESELL OR OTHERWISE TRANSFER THIS NOTE EXCEPT (A) TO SOURCE MEDIA, INC. OR ANY SUBSIDIARY THEREOF, (B) INSIDE THE UNITED STATES TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A UNDER THE SECURITIES ACT, (C) INSIDE THE UNITED STATES TO AN INSTITUTIONAL ACCREDITED INVESTOR THAT, PRIOR TO SUCH TRANSFER, FURNISHES TO THE TRUSTEE A SIGNED LETTER CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS RELATING TO THE RESTRICTIONS ON TRANSFER OF THIS NOTE (THE FORM OF WHICH LETTER CAN BE OBTAINED FROM THE TRUSTEE), AND IF SUCH TRANSFER IS IN RESPECT OF AN AGGREGATE PRINCIPAL AMOUNT OF NOTES AT THE TIME OF TRANSFER OF LESS THAN $250,000, AN OPINION OF COUNSEL ACCEPTABLE TO SOURCE MEDIA, INC. THAT SUCH TRANSFER IS IN COMPLIANCE WITH THE SECURITIES ACT, (D) OUTSIDE THE UNITED STATES IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH RULE 904 UNDER THE SECURITIES ACT, (E) PURSUANT TO THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT (IF AVAILABLE), (F) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR (G) IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE -32- 40 REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (BASED UPON AN OPINION OF COUNSEL ACCEPTABLE TO SOURCE MEDIA, INC.) AND, IN EACH CASE, IN ACCORDANCE WITH APPLICABLE STATES SECURITIES LAWS AND (3) AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THIS NOTE IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION," "UNITED STATES" AND "U.S. PERSON" HAVE THE MEANINGS GIVEN TO THEM BY RULE 902 OF REGULATION S UNDER THE SECURITIES ACT. THE INDENTURE CONTAINS A PROVISION REQUIRING THE TRUSTEE TO REFUSE TO REGISTER ANY TRANSFER OF THIS NOTE IN VIOLATION OF THE FOREGOING RESTRICTIONS; Each Global Note shall also bear the following legend on the face thereof: UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR NOTES IN DEFINITIVE FORM, THIS NOTE MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITARY TO A NOMINEE OF THE DEPOSITARY, OR BY ANY SUCH NOMINEE OF THE DEPOSITARY, OR BY THE DEPOSITARY OR NOMINEE OF SUCH SUCCESSOR DEPOSITARY OR ANY SUCH NOMINEE TO A SUCCESSOR DEPOSITARY OR A NOMINEE OF SUCH SUCCESSOR DEPOSITARY. TRANSFERS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF CEDE & CO. OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN THE INDENTURE. UNLESS THIS NOTE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT HEREON IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY -33- 41 PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. SECTION 2.16. BOOK-ENTRY PROVISIONS FOR GLOBAL SECURITY. (a) The Global Note initially shall (i) be registered in the name of the Depository or the nominee of such Depository, (ii) be delivered to the Trustee as custodian for such Depository and (iii) bear legends as set forth in Section 2.15. Members of, or participants in, the Depository ("Agent Members") shall have no rights under this Indenture with respect to any Global Note held on their behalf by the Depository, or the Trustee as its custodian, or under the Global Note, and the Depository may be treated by the Company, the Trustee and any agent of the Company or the Trustee as the absolute owner of the Global Note for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Trustee or any agent of the Company or the Trustee from giving effect to any written certification, proxy or other authorization furnished by the Depository or impair, as between the Depository and its Agent Members, the operation of customary practices governing the exercise of the rights of a Holder of any Note. (b) Transfers of the Global Note shall be limited to transfers in whole, but not in part, to the Depository, its successors or their respective nominees. Interest of beneficial owners in the Global Note may be transferred or exchanged for Physical Securities in accordance with the rules and procedures of the Depository and the provisions of Section 2.17. In addition, Physical Securities shall be transferred to all beneficial owners in exchange for their beneficial interests in the Global Note if (i) the Depository notifies the Company that it is unwilling or unable to continue as Depository for the Global Note and a successor depository is not appointed by the Company within 90 days of such notice or (ii) an Event of Default has occurred and is continuing and the Registrar has received a written request from the Depository to issue Physical Securities. (c) In connection with any transfer or exchange of a portion of the beneficial interest in the Global Note to beneficial owners pursuant to paragraph (b) above, the Registrar shall (if one or more Physical Securities are to be issued) reflect on its books and records the date and a decrease in the principal amount of the beneficial interest in the Global Note to be transferred, and the Company shall execute, and the Trustee shall authenticate and deliver, one or more Physical Securities of like tenor and amount. (d) In connection with the transfer of the entire Global Note to beneficial owners pursuant to paragraph (b), the Global Note shall be deemed to be surrendered to the Trustee for cancellation, and the Company shall execute, and the Trustee shall authenticate and deliver, to each beneficial owner identified by the Depository in exchange -34- 42 for its beneficial interest in the Global Note, an equal aggregate principal amount of Physical Securities of authorized denominations. (e) Any Physical Security constituting a Restricted Security delivered in exchange for an interest in the Global Note pursuant to paragraph (b) or (c) above shall, except as otherwise provided by paragraphs (a)(i)(x) and (c) of Section 2.17, bear the legend regarding transfer restrictions applicable to the Physical Securities set forth in Section 2.15. (f) The Holder of the Global Note may grant proxies and otherwise authorize any Person, including Agent Members and Persons that may hold interests through Agent Members, to take any action which a Securityholder is entitled to take under this Indenture or the Securities. SECTION 2.17. SPECIAL TRANSFER PROVISIONS. (a) Transfers to Non-QIB Institutional Accredited Investors and Non-U.S. Persons. The following provisions shall apply with respect to the registration of any proposed transfer of a Security constituting a Restricted Security to any Institutional Accredited Investor which is not a QIB or to any Non-U.S. Person: (i) the Registrar shall register the transfer of any Security constituting a Restricted Security, whether or not such Security bears the Private Placement Legend, if (x) the requested transfer is after November 1, 1999 or (y) (1) in the case of a transfer to an Institutional Accredited Investor which is not a QIB (excluding Non-U.S.Persons), the proposed transferee has delivered to the Registrar a certificate substantially in the form of Exhibit C hereto or (2) in the case of a transfer to a Non-U.S. Person, the proposed transferor has delivered to the Registrar a certificate substantially in the form of Exhibit D hereto; and (ii) if the proposed transferor is an Agent Member holding a beneficial interest in the Global Note, upon receipt by the Registrar of (x) the certificate, if any, required by paragraph (i) above and (y) instructions given in accordance with the Depository's and the Registrar's procedures, whereupon (a) the Registrar shall reflect on its books and records the date and (if the transfer does not involve a transfer of outstanding Physical Securities) a decrease in the principal amount of the Global Note in an amount equal to the principal amount of the beneficial interest in the Global Note to be transferred, and (b) the Company shall execute and the Trustee shall authenticate and deliver one or more Physical Securities of like tenor and amount. -35- 43 (b) Transfers to QIBs. The following provisions shall apply with respect to the registration of any proposed transfer of a Security constituting a Restricted Security to a QIB (excluding transfers to Non-U.S. Persons): (i) the Registrar shall register the transfer if such transfer is being made by a proposed transferor who has checked the box provided for on the form of Security stating, or has otherwise advised the Company and the Registrar in writing, that the sale has been effected in compliance with the provisions of Rule 144A to a transferee who has signed the certification provided for on the form of Security stating, or has otherwise advised the Company and the Registrar in writing, that it is purchasing the Security for its own account or an account with respect to which it exercises sole investment discretion and that any such account is a QIB within the meaning of Rule 144A, and it is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Company as it has requested pursuant to Rule 144A or has determined not to request such information and that it is aware that the transferor is relying upon its foregoing representations in order to claim the exemption from registration provided by Rule 144A; and (ii) if the proposed transferee is an Agent Member and the Securities to be transferred consist of Physical Securities which after transfer are to be evidenced by an interest in the Global Note, upon receipt by the Registrar of instructions given in accordance with the Depository's and the Registrar's procedures, the Registrar shall reflect on its books and records the date and an increase in the principal amount of the Global Note in an amount equal to the principal amount of the Physical Securities to be transferred, and the Trustee shall cancel the Physical Securities so transferred. (c) Private Placement Legend. Upon the registration of the transfer, exchange or replacement of Securities not bearing the Private Placement Legend, the Registrar shall deliver Securities that do not bear the Private Placement Legend. Upon the registration of the transfer, exchange or replacement of Securities bearing the Private Placement Legend, the Registrar shall deliver only Securities that bear the Private Placement Legend unless (i) the circumstance contemplated by paragraph (a)(i)(x) of this Section 2.17 exists or (ii) there is delivered to the Registrar an Opinion of Counsel reasonably satisfactory to the Company and the Trustee to the effect that neither such legend nor the related restrictions on transfer are required in order to maintain compliance with the provisions of the Securities Act. -36- 44 (d) General. By its acceptance of any Security bearing the Private Placement Legend, each Holder of such a Security acknowledges the restrictions on transfer of such Security set forth in this Indenture and in the Private Placement Legend and agrees that it will transfer such Security only as provided in this Indenture. The Registrar shall retain for at least two years copies of all letters, notices and other written communications received pursuant to Section 2.16 or this Section 2.17. The Company shall have the right to inspect and make copies of all such letters, notices or other written communications at any reasonable time upon the giving of reasonable written notice to the Registrar. SECTION 2.18. PERSONS DEEMED OWNERS. Prior to due presentment of a Security for registration of transfer and subject to Section 2.12, the Company, the Trustee, any Paying Agent, any Registrar and any co-registrar and Agent of the foregoing may deem and treat the Person in whose name any Security shall be registered upon the register of Securities kept by the Registrar as the absolute owner of such Security (whether or not such Security shall be overdue and notwithstanding any notation of the ownership or other writing thereon made by anyone other than the Company, any Registrar or any co-registrar) for the purpose of receiving payments of principal of or interest on such Security and for all other purposes; and none of the Company, the Trustee, any Paying Agent, any Registrar or any co-registrar or any Agent of the foregoing shall be affected by any notice to the contrary. SECTION 2.19. RECORD DATE. The record date for purposes of determining the identity of Securityholders entitled to vote or consent to any action by vote or consent authorized or permitted under this Indenture shall be the later of (i) 30 days prior to the first solicitation of such consent or (ii) the date of the most recent list of Holders furnished to the Trustee, if applicable, pursuant to Section 2.05 hereto. ARTICLE 3 REDEMPTION SECTION 3.01. NOTICES TO TRUSTEE. (a) If the Company elects to redeem Securities pursuant to the optional redemption provisions of Section 3.07 hereof, it shall furnish to the Trustee, at least 30 days (unless a shorter period is acceptable to the Trustee) but not more than 60 days before -37- 45 a redemption date, an Officers' Certificate setting forth (i) the Section of this Indenture pursuant to which the redemption shall occur, (ii) the redemption date, (iii) the principal amount of Securities to be redeemed, (iv) the redemption price and accrued and unpaid interest and (v) whether it requests the Trustee to give notice of such redemption. (b) If the Company is required to make an offer to redeem Securities pursuant to the provisions of Sections 3.09 or 4.14 hereof, it shall furnish to the Trustee at least 30 days but not more than 60 days before a redemption date, an Officers' Certificate setting forth (i) the Section of this Indenture pursuant to which the redemption shall occur, (ii) the redemption date, (iii) the principal amount of Securities to be redeemed, (iv) the redemption price and accrued and unpaid interest, (v) whether it requests the Trustee to give notice of such redemption and (vi) further setting forth a statement to the effect that (a) the Company or one of its Subsidiaries has effected an Asset Disposition and the conditions set forth in Section 4.10 have been satisfied or (b) a Change of Control has occurred and the conditions set forth in Section 4.14 have been satisfied, as applicable. SECTION 3.02. SELECTION OF SECURITIES TO BE REDEEMED. (a) If less than all of the Securities are to be redeemed, the Trustee shall select the Securities to be redeemed among the Securityholders on a pro rata basis, by lot or in accordance with any other method the Trustee considers fair and appropriate (and in such manner as complies with applicable legal and stock exchange requirements, if any); provided, however, that if a partial redemption is made with the proceeds of an Equity Offering, selection of the Securities or portion thereof for redemption shall be made by the Trustee only on a pro rata basis, unless such method is otherwise prohibited. In the event of partial redemption by lot, the particular Securities to be redeemed shall be selected, unless otherwise provided herein, not less than 30 nor more than 60 days prior to the redemption date by the Trustee from the outstanding Securities not previously called for redemption. (b) The Trustee shall promptly notify the Company in writing of the Securities selected for redemption and, in the case of any Security selected for partial redemption, the principal amount thereof to be redeemed. Securities may be redeemed in part in multiples of $1,000 principal amount only. Except as provided in the preceding sentence, provisions of this Indenture that apply to Securities called for redemption also apply to portions of Securities called for redemption. (c) In the event the Company is required to make an offer to redeem Securities pursuant to Sections 3.09 and 4.10 hereof and the amount of the Excess Proceeds from the Asset Disposition are not evenly divisible by $1,000, the Trustee shall promptly refund to the Company any remaining Excess Proceeds. -38- 46 SECTION 3.03. NOTICE OF REDEMPTION. (a) Subject to the provisions of Section 3.09 hereof, at least 30 days (unless a shorter period is acceptable to the Trustee) but not more than 60 days before a redemption date, the Company shall mail or cause to be mailed a notice of redemption by first class mail, postage prepaid to each Holder whose Securities are to be redeemed at the last address for such Holder then shown on the registry books. The notice shall identify the Securities to be redeemed and shall state: (i) the redemption date; (ii) the redemption price; (iii) if any Security is being redeemed in part, the portion of the principal amount of such Security to be redeemed and that, after the redemption date upon surrender of such Security, a new Security or Securities in principal amount equal to the unredeemed portion shall be issued; (iv) the name and address of the Paying Agent; (v) that Securities called for redemption must be surrendered to the Paying Agent to collect the redemption price; (vi) that, unless the Company defaults in making such redemption payment, interest on Securities called for redemption ceases to accrue on and after the redemption date; (vii) the paragraph of the Securities and/or Section of this Indenture pursuant to which the Securities called for redemption are being redeemed; and (viii) if fewer than all the Securities are to be redeemed, the identification of the particular Securities (or portion thereof) to be redeemed, as well as the aggregate principal amount of Securities to be redeemed and the aggregate principal amount of Securities to be outstanding after such partial redemption. (b) At the Company's request, the Trustee shall give the notice of redemption in the Company's name and at the Company's expense; provided, however, that the Company shall have delivered to the Trustee at least 45 days (unless a shorter period is acceptable to the Trustee) prior to the proposed redemption date an Officers' Certificate requesting that the Trustee give such notice and setting forth the information to be stated in such notice as provided in the preceding paragraph. -39- 47 SECTION 3.04. EFFECT OF NOTICE OF REDEMPTION. Once notice of redemption is mailed in accordance with Section 3.03 hereof, Securities called for redemption become due and payable on the redemption date at the redemption price plus accrued and unpaid interest, if any. SECTION 3.05. DEPOSIT OF REDEMPTION PRICE. (a) Prior to 10:00 a.m., New York City time, on the redemption date, the Company shall deposit with the Paying Agent (other than the Company or any of its Subsidiaries) money sufficient to pay the redemption price of and accrued interest on all Securities to be redeemed on that date. The Paying Agent shall promptly return to the Company any money deposited with the Paying Agent by the Company in excess of the amounts necessary to pay the redemption price of, and accrued interest on, all Securities to be redeemed. (b) If the Company complies with the provisions of the preceding paragraph, on and after the redemption date, interest ceases to accrue on the Securities or the portions of Securities called for redemption whether or not such Securities are presented for payment, and the only remaining right of the Holders of such Securities shall be to receive payment of the redemption price upon surrender to Paying Agent if the Securities are redeemed. If a Security is redeemed on or after an Interest Record Date but on or prior to the related Interest Payment Date, then any accrued and unpaid interest shall be paid to the Person in whose name such Security was registered at the close of business on such record date. If any Security called for redemption shall not be so paid upon surrender for redemption because of the failure of the Company to comply with the preceding paragraph, interest shall be paid on the unpaid principal, from the redemption date until such principal is paid and, to the extent lawful, on any interest not paid on such unpaid principal, in each case at the rate provided in the Securities and in Section 4.01 hereof. SECTION 3.06. SECURITIES REDEEMED IN PART. Upon surrender of a Security that is redeemed in part, the Company shall issue and upon the Company's written request, the Trustee shall authenticate for the Securityholder at the expense of the Company a new Security equal in principal amount to the unredeemed portion of the Security surrendered. SECTION 3.07. OPTIONAL REDEMPTION. (a) Except as provided in Section 3.07(b), the Company may redeem all or any portion of the Securities at any time on or after November 1, 2001, at a redemption price equal to a percentage of the principal amount thereof, as set forth in the immediately -40- 48 succeeding sentence, plus accrued and unpaid interest to the redemption date. The redemption price as a percentage of the principal amount shall be as follows, if the Securities are redeemed during the period commencing on the dates set forth below, plus in each case, accrued and unpaid interest to the date of redemption:
Period Redemption Price - ------ ---------------- 2001 106.00% 2002 103.00% 2003 and thereafter 100.00%
(b) At any time, or from time to time, on or prior to November 1, 2000, the Company may, at its option, use the net cash proceeds of one or more Equity Offerings by the Company so long as there is a Public Market at the time of such redemption at a redemption price equal to 35% of the principal amount thereof, plus accrued and unpaid interest thereon, if any, to the date of redemption; provided, however, that after any such redemption the aggregate principal amount of the Securities outstanding must equal at least $65 million. In order to effect the foregoing redemption with the proceeds of any Equity Offering, the Company shall make such redemption not more than 60 days after the consummation of any such Equity Offering. SECTION 3.08. MANDATORY REDEMPTION. Except as set forth in Sections 3.09 and 4.14, the Company is not required to make mandatory redemption or sinking fund payments with respect to the Securities. SECTION 3.09. OFFER TO PURCHASE BY APPLICATION OF EXCESS PROCEEDS. (a) In the event that, pursuant to Section 4.10 hereof, the Company shall commence an offer to all Securityholders to purchase Securities (an "Asset Disposition Offer"), it shall follow the procedures specified below: (i) The Asset Disposition Offer shall remain open for a period of 30 Business Days following its commencement and no longer, except to the extent that a longer period is required by applicable law (the "Offer Period"). No later than five Business Days after the termination of the Offer Period (the "Purchase Date"), the Company shall purchase the principal amount of Securities required to be purchased pursuant to Section 4.10 hereof (the "Offer Amount") or, if less than the Offer Amount has been tendered, all Securities tendered in response to the Asset Disposition Offer. -41- 49 (ii) If the Purchase Date is on or after a Record Date and on or before the related Interest Payment Date, any accrued interest shall be paid to the Person under whose name a Security is registered at the close of business on such Record Date, and no additional interest shall be payable to holders who tender Securities pursuant to the Asset Disposition Offer. (iii) Upon the commencement of any Asset Disposition Offer, the Company shall send or cause to be sent in accordance with Section 3.03, a notice to each Securityholder. The notice shall contain all instructions and materials necessary to enable such holders to tender Securities pursuant to the Asset Disposition Offer. The notice, which shall govern the terms of the Asset Disposition Offer, shall state: (1) that the Asset Disposition Offer is being made pursuant to this Section 3.09 and Section 4.10 hereof and the length of time the Asset Disposition Offer shall remain open; (2) the Offer Amount, the purchase price and the Purchase Date; (3) that any Security not tendered or accepted for payment shall continue to accrue interest; (4) that any Security accepted for payment pursuant to the Asset Disposition Offer shall cease to accrue interest after the Purchase Date; (5) that Holders electing to have a Security purchased pursuant to any Asset Disposition Offer shall be required to surrender the Security, with the form entitled "Option of Securityholder to Elect Purchase" on the reverse of the Security completed, to the Company, a depositary, if appointed by the Company, or a Paying Agent at the address specified in the notice at least three days before the Purchase Date; (6) that Holders shall be entitled to withdraw their election if the Company, depositary or Paying Agent, as the case may be, receives, not later than the expiration of the Offer Period, a telegram, telex, facsimile transmission or letter setting forth the name of the Holder, the principal amount of the Security the Holder delivered for purchase and a statement that such Holder is withdrawing his election to have the Security purchased; (7) that, if the aggregate principal amount of Securities surrendered by Holders exceeds the Offer Amount, the Company shall select the Securities to be purchased on a pro rata basis (with such adjustments as -42- 50 may be deemed appropriate by the Company so that only Securities in denominations of $1,000, or integral multiples thereof, shall be purchased); and (8) that Holders whose Securities were purchased only in part shall be issued new Securities equal in principal amount to the unpurchased portion of the Securities surrendered. (iv) On or before the Purchase Date, the Trustee shall, to the extent lawful, accept for payment, on a pro rata basis to the extent necessary, the Offer Amount of Securities or portions thereof tendered pursuant to the Asset Disposition Offer or, if less than the Offer Amount has been tendered, all Securities or portions thereof tendered, and deliver to the Trustee an Officers' Certificate stating that such Securities or portions thereof were accepted for payment by the Company in accordance with the terms of this Section 3.09. The Paying Agent shall promptly (but in any case not later than five days after the Purchase Date) mail or deliver to each tendering Holder an amount equal to the purchase price of the Security tendered by such Holder and accepted by the Company for purchase, and the Company shall promptly issue a new Security, and at the written request of the Company the Trustee shall authenticate and mail or deliver such new Security to such Holder equal in principal amount to any unpurchased portion of the Security surrendered. Any Security not so accepted shall be promptly mailed or delivered by the Company to the Holder thereof. The Company shall publicly announce the results of the Asset Disposition Offer on the Purchase Date. (b) Other than as specifically provided in this Section 3.09, any redemption pursuant to this Section 3.09 shall be made pursuant to the provisions of Sections 3.01 through 3.06 hereof. ARTICLE 4 COVENANTS SECTION 4.01. PAYMENT OF SECURITIES. (a) The Company shall pay the principal of, premium, if any, and interest on the Securities on the dates and in the manner provided in the Securities and in this Indenture. Principal, premium, if any, and interest shall be considered paid on the date due if the Paying Agent, if other than the Company or a Subsidiary, holds as of 10:00 a.m. New York City time on the due date money deposited by the Company in immediately available funds and designated for and sufficient to pay all principal, premium, if any, and -43- 51 interest then due. Such Paying Agent shall return to the Company, no later than five business days following the date of payment, any money (including accrued interest paid by the Company) that exceeds such amount of principal, premium, if any, and interest paid on the Securities. (b) The Company shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue principal at the rate equal to 2% per annum in excess of the then applicable interest rate on the Securities to the extent lawful; it shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue installments of interest (without regard to any applicable grace period) at the same rate to the extent lawful. SECTION 4.02. MAINTENANCE OF OFFICE OR AGENCY. (a) The Company shall maintain in the Borough of Manhattan, in the City of New York, an office or agency (which may be an office of the Trustee or an affiliate of the Trustee, Registrar or co-registrar) where Securities may be surrendered for registration of transfer or exchange and where notices and demands to or upon the Company in respect of the Securities and this Indenture may be served. The Company shall give prior written notice to the Trustee of the location, and any change in the location, of such office or agency. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office of the Trustee. (b) The Company may also from time to time designate one or more other offices or agencies where the Securities may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in the Borough of Manhattan, in the City of New York for such purposes. The Company shall give prior written notice to the Trustee of any such designation or rescission and of any change in the location of any such other office or agency. (c) The Company hereby designates the Corporate Trust Office of the Trustee as one such office or agency of the Company in accordance with Section 2.03. SECTION 4.03. SEC REPORTS. (a) Upon consummation of the Exchange Offer and the issuance of the Exchange Securities, the Company (at its own expense) shall file with the Commission and shall furnish to the Trustee and each Securityholder within 15 days after it files them with -44- 52 the Commission copies of the quarterly and 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) to be filed pursuant to Section 13 or 15(d) of the Exchange Act (without regard to whether the Company is subject to the requirements of such Section 13 or 15(d) of the Exchange Act); provided, that prior to the consummation of the Exchange Offer and the issuance of the Exchange Securities, the Company (at its own expense), will mail to the Trustee and the Securityholders in accordance with paragraph (b) of this Section 4.03 substantially the same information that would have been required by the foregoing documents within 15 days of when any such document would otherwise have been required to be filed with the Commission. Upon qualification of this Indenture under the TIA, the Company shall also comply with the provisions of TIA Section 314(a). (b) At the Company's expense, the Company shall cause an annual report if furnished by it to stockholders generally and each quarterly or other financial report if furnished by it to stockholders generally to be filed with the Trustee and mailed to the Securityholders at their addresses appearing in the register of Securities maintained by the Registrar at the time of such mailing or furnishing to stockholders. (c) The Company shall provide to any Securityholder any information reasonably requested by such Securityholder concerning the Company (including financial statements) necessary in order to permit such Securityholder to sell or transfer Securities in compliance with Rule 144A under the Securities Act. (d) If the Company instructs the Trustee to distribute any of the documents described in Section 4.03(a) to the Securityholders, the Company shall provide the Trustee with a sufficient number of copies of all such documents. SECTION 4.04. COMPLIANCE CERTIFICATES. (a) The Company shall deliver to the Trustee, within 90 days after the end of each fiscal year, an Officers' Certificate signed by its principal executive officer, principal financial officer or principal accounting officer stating that a review of the activities of the Company and its Subsidiaries, as the case may be, during the preceding fiscal year has been made under the supervision of the signing Officers with a view to determining whether each has kept, observed, performed and fulfilled its Obligations under this Indenture, and further stating, as to each such Officer signing such certificate, that to the best of his or her knowledge each has kept, observed, performed and fulfilled each and every covenant contained in this Indenture and is not in default in the performance or observance of any of the terms, provisions and conditions of this Indenture (or, if a Default or Event of Default shall have occurred, describing all such Defaults or Events of Default -45- 53 of which he or she may have knowledge and what action each is taking or proposes to take with respect thereto). (b) So long as not contrary to the then current recommendations of the American Institute of Certified Public Accountants, the year-end financial statements delivered pursuant to Section 4.03 above shall be accompanied by a written statement of (x) the Company's independent public accountants (who shall be a firm of established national reputation) that in making the examination necessary for certification of such financial statements nothing has come to their attention which would lead them to believe that the Company has violated any provisions of Article 4, 5 or 6 of this Indenture insofar as they relate to accounting matters or, if any such violation has occurred, specifying the nature and period of existence thereof, it being understood that such accountants shall not be liable directly or indirectly to any Person for any failure to obtain knowledge of any such violation and (y) if any Restricted Subsidiary's financial statements are not prepared on a consolidated basis with the Company's, such Restricted Subsidiary's or Guarantor's independent public accountants (who shall be a firm of established national reputation) that in making the examination necessary for certification of such financial statements nothing has come to their attention which would lead them to believe that any of the Restricted Subsidiaries is in Default under this Indenture or, if any such Default has occurred, specifying the nature and period of existence thereof, it being understood that such accountants shall not be liable directly or indirectly to any Person for any failure to obtain knowledge of any such violation. (c) The Company shall, so long as any of the Securities are outstanding, deliver to the Trustee, forthwith upon any Officer becoming aware of (i) any Default or Event of Default or (ii) any event of default under any other mortgage, indenture or instrument to which the Company is a party, an Officers' Certificate specifying such Default, Event of Default or event of default and what action the Company is taking or proposes to take with respect thereto. (d) The Company shall also comply with TIA Section 314(a)(4). SECTION 4.05. TAXES. The Company will, and will cause its Restricted Subsidiaries to, pay and discharge when due and pay all taxes, levies, imposts, duties or other governmental charges ("Taxes") imposed on its income or profits or on any of its properties except such Taxes which are being contested in good faith in appropriate proceedings, and for which adequate reserves have been established with GAAP. -46- 54 SECTION 4.06. STAY, EXTENSION AND USURY LAWS. The Company covenants (to the extent that it may lawfully do so) that it shall not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law wherever enacted, now or at any time hereafter in force, that may affect the covenants or the performance of this Indenture (including, but not limited to, the payment of the principal of or interest on the Securities); and the Company and each Subsidiary Guarantor (to the extent that they may lawfully do so) hereby expressly waive all benefit or advantage of any such law, and covenant that they shall not, by resort to any such law, hinder, delay or impede the execution of any power herein granted to the Trustee, but shall suffer and permit the execution of every such power as though no such law has been enacted. SECTION 4.07. LIMITATION ON RESTRICTED PAYMENTS. (a) The Company 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 Company 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 Company 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 Company held by Persons other than a Wholly-Owned Subsidiary of the Company or any Capital Stock of a Restricted Subsidiary of the Company held by any Affiliate of the Company, 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 (other than the purchase, repurchase or other acquisition of 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 Company or such Restricted Subsidiary makes such Restricted Payment: (1) a Default shall have occurred and be continuing (or would result therefrom); or -47- 55 (2) the Company is not able to Incur an additional $1.00 of Indebtedness pursuant to paragraph (a) under Section 4.09; or (3) 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 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 Company 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 Company, (y) an employee stock ownership plan or similar trust of (z) management employees of the Company or any Subsidiary of the Company); 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 Company is reduced on the Company's balance sheet upon the conversion or exchange (other than by a Restricted Subsidiary of the Company) subsequent to the Issue Date of any Indebtedness of the Company convertible or exchangeable for Capital Stock of the Company (less the amount of any cash, or other property, distributed by the Company 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 Company 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 Company or any Restricted Subsidiary of the Company 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 amount 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 Company 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: -48- 56 (1) a Default 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 of such Restricted Payment) (or, in case such Adjusted Consolidated Net Income shall be a deficit, minus 100% of such deficit); and (C) the aggregate net proceeds received by the Company 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 Company made by exchange for, or out of the proceeds of the substantially concurrent sale of, Capital Stock of the Company (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 Company or any Subsidiary of the Company); 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 Company made by exchange for, or out of the proceeds of the substantially concurrent sale of, Subordinated Obligations of the Company in compliance with Section 4.09; 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 to the extent permitted under Section 4.10; 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, that no Default or Event of Default 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, -49- 57 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 Company) for purposes of determining compliance with Section 4.07 shall be issued by an independent investment banking firm of national standing. (e) Not later than the date of making any Restricted Payment, the Company shall deliver to the Trustee an Officer's Certificate stating that such Restricted Payment complies with this Indenture and setting forth in reasonable detail the basis upon which the required calculations were computed, which calculations may be based upon the Company's latest available quarterly financial statements and a copy of any required investment banker's opinion. SECTION 4.08. LIMITATION ON RESTRICTIONS ON DISTRIBUTIONS FROM RESTRICTED SUBSIDIARIES. The Company shall not, and shall not permit any of its Restricted Subsidiaries to, create or permit to exist or become effective any consensual encumbrance or restriction on the ability of any such Restricted Subsidiary to (i) pay dividends or make any other distributions on its Capital Stock or pay any Indebtedness or other obligation owed to the Company, (ii) make any loans or advances to the Company or (iii) transfer any of its property or assets to the Company, except: (a) any encumbrance or restriction pursuant to an agreement in effect at or entered into on the Issue Date; (b) any encumbrance or restriction with respect to such a Restricted Subsidiary pursuant to an agreement relating to any Indebtedness issued by such Restricted Subsidiary on or prior to the date on which such Restricted Subsidiary was acquired by the Company and outstanding on such date (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 Restricted Subsidiary of the Company or was acquired by the Company); (c) any encumbrance or restriction with respect to such a Restricted Subsidiary pursuant to an agreement evidencing Indebtedness Incurred without violation of this Indenture or effecting a refinancing of Indebtedness issued pursuant to an agreement referred to in clauses (a) or (b) or this clause (c) or contained in any amendment to an agreement referred to in clauses (a) or (b) or this clause (c); provided, however, that the encumbrances and restrictions with respect to such Restricted Subsidiary contained in any of such agreement, refinancing agreement or amendment, taken as a whole, are no less favorable to the holders of the Securities in any -50- 58 material respect, as determined in good faith by the Board of Directors of the Company, than encumbrances and restrictions with respect to such Restricted Subsidiary contained in agreements in effect at, or entered into on, the Issue Date; (d) in the case of clause (iii), of this Section 4.08, any encumbrance or restriction (A) that restricts in a customary manner the subletting, assignment or transfer of any property or asset that is a lease, license, conveyance or contract or similar property or asset, (B) by virtue of any transfer of, agreement to transfer, option, or right with respect to, or Lien on, any property or assets of the Company or any Restricted Subsidiary not otherwise prohibited by this Indenture, (C) that is included in a licensing agreement to the extent such restrictions limit the transfer of the property subject to such licensing agreement or (D) arising or agreed to in the ordinary course of business and that does not, individually or in the aggregate, detract from the value of property or assets of the Company or any of its Subsidiaries in any manner material to the Company or any such Restricted Subsidiary; (e) in the case of clause (iii) above, restrictions contained in security agreements, mortgages or similar documents securing Indebtedness of a Restricted Subsidiary to the extent such restrictions restrict the transfer of the property subject to such security agreements; (f) in the case of clause (iii) of this Section 4.08 above, any instrument governing or evidencing Indebtedness of a Person acquired by the Company or any Restricted Subsidiary of the Company at the time of such acquisition, which encumbrance or restriction is not applicable to any Person, or the properties or assets of any Person, other than the Person so acquired; provided, however, that such Indebtedness is not Incurred in connection with or in contemplation of such acquisition; (g) any restriction with respect to such a Restricted Subsidiary imposed pursuant to an agreement entered into for the sale or disposition of all or substantially all of the Capital Stock or assets of such Restricted Subsidiary pending the closing of such sale or disposition; and (h) encumbrances or restrictions arising or existing by reason of applicable law. SECTION 4.09. LIMITATION ON INDEBTEDNESS. (a) The Company shall not, and shall not permit any of its Restricted Subsidiaries to, Incur any Indebtedness; provided, however, that the Company and any of its Restricted Subsidiaries may Incur Indebtedness if (i) no Default or Event of Default shall have occurred and be continuing at the time of such Incurrence or would occur as a consequence of such Incurrence and (ii) on the date thereof the Consolidated Coverage Ratio would be greater than 2.0:1. (b) Notwithstanding the foregoing paragraph (a), the Company and its Restricted Subsidiaries may Incur the following Indebtedness: (i) Indebtedness of the Company 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 -51- 59 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 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 Section 4.17, shall not exceed $5 million at any time outstanding; (iii) Indebtedness of the Company owing to and held by any Wholly-Owned Subsidiary or Indebtedness of a Restricted Subsidiary owing to and held by the Company 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 Company 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 Securities, (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 Company (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 Company); provided, however, that at the time such Restricted Subsidiary is acquired by the Company, the Company 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); -52- 60 (vi) Indebtedness (A) in respect of performance bonds, bankers' acceptances and surety or appeal bonds provided by the Company 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 Company 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 Agreements are entered into for bona fide hedging purposes of the Company or its Restricted Subsidiaries (as determined in good faith by the Board of Directors of the Company) and correspond in terms of notional amount, duration, currencies and interest rates as applicable, to Indebtedness of the Company, or its Restricted Subsidiaries Incurred without violation of this Indenture or to business transactions of the Company 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 credit, surety bonds or performance bonds securing any obligations of the Company or any of its Restricted Subsidiaries pursuant to such agreements, in each case Incurred in connection with the disposition of any business assets or Restricted Subsidiary of the Company (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 Company for the purpose of financing such acquisition) in a principal amount not to exceed the gross proceeds actually received by the Company 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 Company or a Subsidiary Guarantor of Indebtedness Incurred by a Wholly-Owned Subsidiary without violation of this Indenture (so long as the Company or such Subsidiary Guarantor, as the case may be, could have Incurred such Indebtedness directly without violation of this Indenture) and (B) Guarantees by a Restricted Subsidiary of Senior Indebtedness Incurred by the Company without violation of this Indenture -53- 61 (so long as such Restricted Subsidiary could have Incurred such Indebtedness directly without violation of this Indenture); (ix) Indebtedness arising from the honoring by a bank or other financial institution of a check, draft or similar instrument issued by the Company 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 Company or its Restricted Subsidiaries could have Incurred such Indebtedness under the foregoing paragraph (a) without reliance upon this clause (x)). (c) Neither the Company nor any Restricted Subsidiary shall Incur any Indebtedness under paragraph (b) above if the proceeds thereof are used, directly or indirectly, to refinance any Subordinated Obligations of the Company unless such Indebtedness shall be subordinated to the Securities to at least the same extent as such Subordinated Obligations. No Restricted Subsidiary shall Incur any Indebtedness under paragraph (b) above if the proceeds thereof are used, directly or indirectly, to refinance any Guarantor Subordinated Obligation of such Subsidiary Guarantor unless such Indebtedness shall be subordinated to the obligations of such Subsidiary Guarantor under the Subsidiary Guaranty to at least the same extent as such Guarantor Subordinated Obligation. (d) The Company will not permit any Unrestricted Subsidiary to Incur any Indebtedness other than Non- Recourse Debt. SECTION 4.10. LIMITATION ON SALES OF ASSETS AND SUBSIDIARY STOCK. (a) The Company shall not, and shall not permit any of its Restricted Subsidiaries to, make any Asset Disposition unless (i) the Company or such Restricted Subsidiary receives consideration at the time of such Asset Disposition at least equal to the fair market value (as determined in good faith by senior management of the Company or, if the fair market value of such assets exceeds $500,000, by the Company's Board of Directors) (including as to the value of all non-cash consideration), of the shares and assets subject to such Asset Disposition, (ii) at least 80% of the consideration thereof received by the Company or such Restricted Subsidiary is in the form of cash or Cash Equivalents and -54- 62 (iii) an amount equal to 100% of the Net Available Cash from such Asset Disposition is applied by the Company (or such Restricted Subsidiary, as the case may be): (A) first, to the extent the Company or any Restricted Subsidiary elects (or is required by the terms of any Senior Indebtedness), (x) to prepay, repay or purchase Senior Indebtedness or (y) to the investment in or acquisition of Additional Assets within 180 days from the later of the date of such Asset Disposition or the receipt of such Net Available Cash; (B) second, within 180 days from the receipt of such Net Available Cash, to the extent of the balance of such Net Available Cash after application in accordance with clause (A), to make an offer to purchase Securities at 100% of their principal amount plus accrued and unpaid interest, if any, thereon; (C) third, within 180 days after the later of the application of Net Available Cash in accordance with clauses (A) and (B) and the date that is one year from the receipt of such Net Available Cash, to the extent of the balance of such Net Available Cash after application in accordance with clauses (A) and (B), to prepay, repay or repurchase Indebtedness (other than Preferred Stock) of a Wholly-Owned Subsidiary (in each case other than Indebtedness owned to the Company); and (D) fourth, to the extent of the balance of such Net Available Cash after application in accordance with clauses (A), (B) and (C), to (w) the investment in or acquisition of Additional Assets, (x) the making of Temporary Cash Investments, (y) the prepayment, repayment or purchase of Indebtedness of the Company (other than Indebtedness owing to any Subsidiary of the Company) or Indebtedness of any Subsidiary (other than Indebtedness owed to the Company, or any of its Subsidiaries) or (z) any other purpose otherwise permitted under this Indenture, in each case within the later of 45 days after the application of Net Available Cash in accordance with clauses (A), (B) and (C) or the date that is one year from the receipt of such Net Available Cash; provided, however, that, in connection with any prepayment, repayment or purchase of Indebtedness pursuant to clause (A), (B), (C) or (D) above, the Company or such Restricted Subsidiary shall retire such Indebtedness and shall cause the related loan commitment (if any) to be permanently reduced in an amount equal to the principal amount so prepaid, repaid or purchased. Notwithstanding the foregoing provisions the Company and its Restricted Subsidiaries shall not be required to apply any Net Available Cash in accordance herewith except to the extent that the aggregate Net Available Cash from all Asset Dispositions which are not applied in accordance with this covenant at any time exceed $5 million. The Company shall not be required to make an offer for Securities pursuant to this covenant if the Net Available Cash available therefor (after application of the proceeds as provided in clause (A)) is less than $5 million for any particular Asset Disposition (which lesser amounts shall be carried forward for purposes of determining whether an offer is required with respect to the Net Available Cash from any subsequent Asset Disposition). For the purposes of this covenant, the following will be deemed to be cash: (x) the assumption by the transferee of Senior Indebtedness of the Company or Senior Indebtedness of any Restricted Subsidiary and the release of the Company or such Restricted Subsidiary from all liability on such Senior Indebtedness in connection with such -55- 63 Asset Disposition (in which case the Company shall, without further action, be deemed to have applied such assumed Indebtedness in accordance with clause (A) of the preceding paragraph) and (y) securities received by the Company or any Restricted Subsidiary of the Company from the transferee that are promptly (and in any event within 60 days) converted by the Company or such Restricted Subsidiary into cash. (b) In the event of an Asset Disposition that requires the purchase of Securities pursuant to clause (a)(iii)(B), the Company will be required to purchase Securities tendered pursuant to an offer by the Company for the Securities at a purchase price of 101% of their principal amount plus accrued and unpaid interest, if any, to the purchase date in accordance with the procedures (including prorating in the event of oversubscription) set forth in this Indenture. If the aggregate purchase price of the Securities tendered pursuant to the offer is less than the Net Available Cash allotted to the purchase of the Securities, the Company will apply the remaining Net Available Cash in accordance with clauses (a) (iii) (C) or (D) above. (c) The Company will comply, to the extent applicable, with the requirements of Section 14(e) of the Exchange Act and any other securities laws or regulations in connection with the repurchase of Securities pursuant to this Indenture. To the extent that the provisions of any securities laws or regulations conflict with provisions of this covenant, the Company will comply with the applicable securities laws and regulations and will not be deemed to have breached its obligations under this Indenture by virtue thereof. SECTION 4.11. LIMITATION ON AFFILIATE TRANSACTIONS. (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 the 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 -56- 64 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. (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 and (viii) the issuance of Capital Stock of the Company (other than Disqualified Stock). SECTION 4.12. LIMITATION ON LIENS. The Company will not, and will not permit any Restricted Subsidiary to, directly or indirectly, create, incur, assume or suffer to exist any Liens, except for Permitted Liens. SECTION 4.13. CORPORATE EXISTENCE. Subject to Article 5 hereof, the Company shall do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence, and the corporate, partnership or other existence of each Subsidiary, in accordance with the respective organizational documents (as the same may be amended from time to time) of each Subsidiary and the rights (charter and statutory), licenses and franchises of the Company and its Subsidiaries; provided, however, that the Company shall not be required to preserve any such right, license or franchise, or the corporate, partnership or other existence of any Subsidiary, if the Board of Directors of the Company shall determine that the preservation thereof is no longer desirable in the conduct of the business of the -57- 65 Company and its Subsidiaries, taken as a whole, and that the loss thereof is not adverse in any material respect to the Securityholders. SECTION 4.14. CHANGE OF CONTROL. (a) Upon the occurrence of a Change of Control each Securityholder will have the right to require the Company to repurchase all or any part of such Securityholder's Securities at a purchase price in cash equal to 101% of the principal amount thereof plus accrued and unpaid interest, if any, to the date of purchase (the "Change of Control Payment") (subject to the right of Securityholders of record on the relevant record date to receive interest due on the relevant Interest Payment Date). (b) Within 30 days following any Change of Control, the Company shall mail a notice to each Securityholder with a copy to the Trustee or, at the Company's option, by the Trustee (at the Company's expense) stating: (i) that a Change of Control has occurred and that such Securityholder has the right to require the Company to purchase such Securityholder's Securities at a purchase price in cash equal to 101% of the principal amount thereof plus accrued and unpaid interest, if any, to the date of purchase (subject to the right of Securityholders of record on a record date to receive interest on the relevant Interest Payment Date); (ii) the repurchase date (which shall be no earlier than 30 days nor later than 60 days from the date such notice is mailed) (the "Change of Control Payment Date"); and (iii) the procedures determined by the Company, consistent with this Indenture, that a Securityholder must follow in order to have its Securities purchased. The Company will comply, to the extent applicable, with the requirements of Section 14(e) of the Exchange Act and any other securities laws or regulations in connection with the repurchase of Securities pursuant to this covenant. To the extent that the provisions of any securities laws or regulations conflict with provisions of this Indenture, the Company will comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations described in this Indenture by virtue thereof. (c) Securityholders electing to have a Security repurchased will be required to surrender the Security, with the form entitled "Option of Securityholder to Elect Purchase" on the reverse of the Security completed, to the Company at the address -58- 66 specified in the notice at least 10 Business Days prior to the repurchase date. Securityholders will be entitled to withdraw their election if the Trustee or the Company receives not later than three Business Days prior to the repurchase date, a telegram, telex, facsimile transmission or letter setting forth the name of the Securityholder, the principal amount of the Security which was delivered for repurchase by the Securityholder and a statement that such Securityholder is withdrawing his election to have such Security purchased. (d) On the Change of Control Payment Date, the Company will, to the extent lawful, (i) accept for payment all Securities or portions thereof properly tendered pursuant to the Change of Control Offer, (ii) deposit with the Trustee an amount equal to the Change of Control Payment in respect of all Securities or portions thereof so tendered and (iii) deliver or cause to be delivered to the Trustee the Securities so accepted together with an Officers' Certificate stating the aggregate principal amount of Securities or portions thereof being purchased by the Company. The Trustee will promptly mail to each Securityholder so tendered the Change of Control Payment for such Securities, and the Trustee will promptly authenticate and mail (or cause to be transferred by book entry) to each Securityholder a new Security equal in principal amount to any unpurchased portion of the Securities surrendered, if any; provided that each such new Security will be in a principal amount of $1,000 or an integral multiple thereof. Unless the Company defaults in the payment for any Securities properly tendered pursuant to the Change of Control Offer, any Securities accepted for payment pursuant to the Change of Control Offer shall cease to accrue interest after the Change of Control Payment Date. (e) The Company will to the extent applicable comply with any tender offer rules under the Exchange Act which may then be applicable, including Rule 14e-1, in connection with any offer required to be made by the Company to repurchase the Securities as a result of a Change of Control. To the extent that the provisions of any securities laws or regulations conflict with the provisions of this Indenture relative to the Company's obligation to make an offer to repurchase the Securities as a result of a Change of Control, the Company will comply with the applicable securities laws and regulations and will not be deemed to have breached its obligations under such provisions of the Indenture by virtue thereof. SECTION 4.15. LIMITATION ON ISSUANCES OF CAPITAL STOCK OF RESTRICTED SUBSIDIARIES. The Company will not permit any of its Restricted Subsidiaries to issue any Capital Stock to any Person (other than to the Company or a Wholly-Owned Subsidiary of the Company) or permit any Person (other than the Company or a Wholly-Owned Subsidiary of the Company) to own any Capital Stock of a Restricted Subsidiary of the Company, if in either case as a result thereof such Restricted Subsidiary would no longer -59- 67 be a Restricted Subsidiary of the Company; provided, however, that this provision shall not prohibit (x) the Company 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 this Indenture. SECTION 4.16. CONDUCT OF BUSINESS. 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 this Offering Memorandum. The Company will conduct all of its interactive television business through Interactive Channel, Inc., Interactive Channel Technologies, Inc. and any of their Wholly-Owned Subsidiaries. SECTION 4.17. LIMITATION ON SALE/LEASEBACK TRANSACTIONS. The Company 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 (i) the Company or such Restricted Subsidiary, as the case may be, would be entitled to pursuant to this Indenture 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, (ii) 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 Company as evidenced by a resolution of such Board of Directors), (iii) the Net Cash Proceeds of such Sale/Leaseback Transaction are applied in accordance with the provisions described under Section 4.10 and (iv) the Indebtedness Incurred in connection with such Sale/Leaseback Transaction, together with Indebtedness Incurred in accordance with (ii) of paragraph (b) of Section 4.09, does not exceed $5 million at any time outstanding. SECTION 4.18. LIMITATION ON DESIGNATIONS OF UNRESTRICTED SUBSIDIARIES. (a) The Company may designate any Subsidiary of the Company (other than a Subsidiary of the Company which owns Capital Stock of a Restricted Subsidiary) as an "Unrestricted Subsidiary" under the Indenture (a "Designation") only if: (i) no Default shall have occurred and be continuing at the time of or, after giving effect to such Designation; and -60- 68 (ii) the Company would be permitted under this Indenture to make an Investment at the time of Designation (assuming the effectiveness of such Designation) in an amount (the "Designation Amount") equal to the sum of (i) fair market value of the Capital Stock of such Subsidiary owned by the Company and the Restricted Subsidiaries on such date and (ii) the aggregate amount of other Investments of the Company and the Restricted Subsidiaries in such Subsidiary on such date; and (iii) the Company would be permitted to Incur $1.00 of additional Indebtedness (other than Permitted Indebtedness) pursuant to Section 4.09 at the time of Designation (assuming the effectiveness of such Designation). (b) In the event of any such Designation, the Company shall be deemed to have made an Investment constituting a Restricted Payment pursuant to the covenant described under Section 4.07 for all purposes of this Indenture in the Designation Amount. The Company shall not, and shall not permit any Restricted Subsidiary to, at any time (x) provide direct or indirect credit support for or a Guarantee of any Indebtedness of any Unrestricted Subsidiary (including of any undertaking, agreement or instrument evidencing such Indebtedness), (y) be directly or indirectly liable for any Indebtedness of any Unrestricted Subsidiary or (z) be directly or indirectly liable for any Indebtedness which provides that the holder thereof may (upon notice, lapse of time or both) declare a default thereon or cause the payment thereof to be accelerated or payable prior to its final scheduled maturity upon the occurrence of a default with respect to any Indebtedness of any Unrestricted Subsidiary (including any right to take enforcement action against such Unrestricted Subsidiary), except, in the case of clause (x) or (y), to the extent permitted under Section 4.07. The Company may revoke any Designation of a Subsidiary as an Unrestricted Subsidiary (a "Revocation"), whereupon such Subsidiary shall then constitute a Restricted Subsidiary, if: (i) no Default shall have occurred and be continuing at the time of and after giving effect to such Revocation; and (ii) all Liens and Indebtedness of such Unrestricted Subsidiary outstanding immediately following such Revocation would, if incurred at such time, have been permitted to be incurred for all purposes of this Indenture. All Designations and Revocations must be evidenced by Board Resolutions of the Company delivered to the Trustee certifying compliance with the foregoing provisions. -61- 69 SECTION 4.19. FURTHER INSTRUMENTS AND ACTS. The Trustee shall not be bound to ascertain or inquire as to the performance or observance of any covenants, conditions or agreements on the part of the Company, except as otherwise set forth herein, but the Trustee may require of the Company full information and advice as to the performance of the covenants, conditions and agreements contained herein, and upon request of the Trustee, the Company will execute and deliver such further instruments and do such further acts as may be reasonably necessary or proper to carry out more effectively the purposes of this Indenture. ARTICLE 5 SUCCESSORS SECTION 5.01. LIMITATIONS ON MERGER, CONSOLIDATION OR SALE OF ASSETS. The Company 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: (i) the resulting, surviving or transferee Person (the "Successor Company") 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 Company (if not the Company) shall expressly assume, by supplemental indenture, executed and delivered to the Trustee, in form satisfactory to the Trustee, all the obligations of the Company under the Securities and this Indenture; (ii) immediately after giving effect to such transaction (and treating any Indebtedness that becomes an obligation of the Successor Company or any Subsidiary of the Successor Company as a result of such transaction as having been incurred by the Successor Company or such Restricted Subsidiary at the time of such transaction), no Default or Event of Default shall have occurred and be continuing; (iii) immediately after giving effect to such transaction, the Successor Company (A) would have a Consolidated Net Worth equal to or greater than the Consolidated Net Worth of the Company immediately prior to such transaction and (B) would be able to Incur at least an additional $1.00 of Indebtedness pursuant to paragraph (a) of Section 4.09; -62- 70 (iv) there has been delivered to the Trustee an Opinion of Counsel to the effect that holders of the Securities 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 (v) the Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger or transfer and such supplemental indenture (if any) comply with this Indenture. SECTION 5.02. SUCCESSOR CORPORATION SUBSTITUTED. The Successor Company will succeed to, and be substituted for, and may exercise every right and power of, the Company under this Indenture, but, in the case of a lease of all or substantially all its assets, the Company will not be released from the obligation to pay the principal of and interest on the Securities. Notwithstanding clauses (ii) and (iii) of Section 5.01, any Restricted Subsidiary of the Company may consolidate with, merge into or transfer all or part of its properties and assets to the Company. ARTICLE 6 DEFAULTS AND REMEDIES SECTION 6.01. EVENTS OF DEFAULT. (a) An "Event of Default" occurs if: (i) there is a default in any payment of interest on any Security when due, continued for 30 days; (ii) there is a default in the payment of principal of any Security when due at its Stated Maturity, upon optional redemption, upon required repurchase, upon declaration or otherwise; (iii) there is a failure by the Company to comply with its obligations under Section 5.01 hereof; -63- 71 (iv) there is failure by the Company to comply for 30 days after notice with any of its obligations under Sections [4.01, 4.03, 4.04, 4.07, 4.08, 4.09, 4.10, 4.11, 4.12, 4.13, 4.14, 4.15, 4.16, 4.17, 4.18 or 5.01] hereof (in each case, other than a failure to purchase Securities which shall constitute an Event of Default under clause (ii) above); (v) there is a failure by the Company or any Subsidiary Guarantor to comply for 60 days after notice with its other agreements contained in this Indenture; (vi) Indebtedness of the Company or any Restricted Subsidiary is not paid within any applicable grace period after final maturity or is accelerated by the holders thereof because of a default and the total amount of such Indebtedness unpaid or accelerated exceeds $3 million and such default shall not have been cured or such acceleration rescinded after a 10-day period; (vii) any judgment or decree for the payment of money in excess of $3 million (to the extent not covered by insurance) is rendered against the Company or a Significant Subsidiary and such judgment or decree shall remain undischarged or unstayed for a period of 60 days after such judgment becomes final and non- appealable (the"judgment default provision"); (viii) any Subsidiary Guarantee by a Significant Subsidiary ceases to be in full force and effect (except as contemplated by the terms of this Indenture) or any Subsidiary Guarantor that is a Significant Subsidiary denies or disaffirms its obligations under this Indenture or its Subsidiary Guarantee and such Default continues for 10 days; (ix) the Company or any of its Significant Subsidiaries pursuant to or within the meaning of any Bankruptcy Law: (A) commences a voluntary case, (B) consents to the entry of an order for relief against it in an involuntary case, (C) consents to the appointment of a Custodian of it or for all or substantially all of its property, (D) makes a general assignment for the benefit of its creditors, -64- 72 (E) consents to or acquiesces in the institution of a bankruptcy or an insolvency proceeding against it, or (F) takes any corporate action to authorize or effect any of the foregoing; or (x) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that: (A) is for relief against the Company or any of its Significant Subsidiaries in an involuntary case, (B) appoints a Custodian of the Company or any of its Significant Subsidiaries or for all or substantially all of the property of the Company or any of its Significant Subsidiaries, or (C) orders the liquidation of the Company or any of its Significant Subsidiaries, and the order or decree remains unstayed and in effect for 60 consecutive days; or (b) The term "Bankruptcy Law" means Title 11, U.S. Code or any similar Federal or state law for the relief of debtors. The term "Custodian" means any receiver, trustee, assignee, liquidator or similar official under any Bankruptcy Law. (c) A Default under clause (iv) or (v) of Section 6.01(a) hereof is not an Event of Default until the Trustee or the holders of 25% in principal amount of the outstanding Securities notifies the Company or such Subsidiary Guarantor, as the case may be, of the Default and the Company or such Subsidiary Guarantor, as the case may be, does not cure such Default within the time specified in such clause (iv) or (v) after receipt of the notice. The written notice must specify the Default, demand that it be remedied and state that the notice is a "Notice of Default." SECTION 6.02. ACCELERATION. If an Event of Default (other than an Event of Default specified in clause (viii) or (ix) of Section 6.01(a) with respect to the Company or any Subsidiary Guarantor) occurs and is continuing, the Trustee or the Holders of not less than 25% in aggregate principal amount of the then outstanding Securities by notice to the Company, may declare (a "Declaration") the unpaid principal of, and any accrued and unpaid interest on, all the Securities to be due and payable (the "Default Amount"). Upon any such Declaration the Default Amount shall be due and payable immediately. If an Event of Default specified in -65- 73 clause (ix) or (x) of Section 6.01(a) occurs with respect to the Company or any of the Subsidiary Guarantors, the Default Amount shall ipso facto become and be immediately due and payable without any Declaration or other act on the part of the Trustee or any Securityholder. The Holders of a majority in aggregate principal amount of the then outstanding Securities by written notice to the Trustee and to the Company may rescind any Declaration if the rescission would not conflict with any judgment or decree and if all Events of Default then continuing (other than any Events of Default with respect to the nonpayment of principal of or interest on any Security which has become due solely as a result of such Declaration) have been cured, and may waive any Default other than a Default with respect to a covenant or provision that cannot be modified or amended without the consent of each Securityholder pursuant to Section 9.02 hereof. SECTION 6.03. OTHER REMEDIES. (a) If an Event of Default occurs and is continuing, the Trustee and the Securityholders may pursue any available remedy to collect the payment of principal, premium, if any, or interest on the Securities or to enforce the performance of any provision of the Securities or this Indenture. (b) The Trustee may maintain a proceeding even if it does not possess any of the Securities or does not produce any of them in the proceeding. A delay or omission by the Trustee or any Securityholder in exercising any right or remedy accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. All remedies are cumulative to the extent permitted by law. SECTION 6.04. WAIVER OF PAST DEFAULTS. Securityholders of not less than a majority in aggregate principal amount of the then outstanding Securities by notice to the Trustee may, on behalf of all the Securityholders, waive an existing Default or Event of Default and its consequences, except a continuing Default or Event of Default in the payment of the principal, premium, if any, or interest on any Security (other than principal, premium (if any) or interest which has become due solely as a result of a Declaration) or a Default or Event of Default that cannot be modified or amended without the consent of the Holder of each outstanding Security affected. Upon any such waiver, such Default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other Default or impair any right consequent thereon. -66- 74 SECTION 6.05. CONTROL BY MAJORITY. Securityholders of a majority in principal amount of the Securities then outstanding may direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on it. However, the Trustee may refuse to follow any direction that conflicts with law or this Indenture, that the Trustee determines may be unduly prejudicial to the rights of other Securityholders or that may involve the Trustee in personal liability. The Trustee may take any other action deemed proper by the Trustee that is not inconsistent with such direction. SECTION 6.06. LIMITATION ON SUITS. (a) A Securityholder may pursue a remedy with respect to this Indenture or the Securities only if: (i) the Securityholder has previously given to the Trustee written notice of a continuing Event of Default; (ii) the Holders of at least 25% in principal amount of the then outstanding Securities make a written request to the Trustee to pursue the remedy; (iii) such Securityholder or Securityholders offer, and, if requested, provide, to the Trustee indemnity satisfactory to the Trustee against any loss, liability or expense; (iv) the Trustee does not comply with the request within 60 days after receipt of the request and the offer and, if requested, the provision of indemnity; and (v) during such 60-day period the Holders of a majority in principal amount of the then outstanding Securities do not give the Trustee, in the reasonable opinion of such Trustee, a direction inconsistent with the request. (b) A Securityholder may not use this Indenture to prejudice the rights of another Securityholder or to obtain a preference or priority over another Securityholder. SECTION 6.07. RIGHTS OF SECURITYHOLDERS TO RECEIVE PAYMENT. Notwithstanding any other provision of this Indenture, the right of any Securityholder to receive payment of principal, premium, if any, interest on the Security, on or after the respective due dates expressed in the Security, or to bring suit for the -67- 75 enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of the Securityholder. SECTION 6.08. COLLECTION SUIT BY TRUSTEE. If an Event of Default specified in Section 6.01(a)(i) or (ii) or an acceleration pursuant to Section 6.02 occurs and is continuing, the Trustee is authorized to recover judgment in its own name and as trustee of an express trust against the Company or any Subsidiary Guarantor or any other obligor on the Securities for the whole amount of principal, premium, if any, and accrued interest remaining unpaid on the Securities and interest on overdue principal, premium, if any, and, to the extent lawful, interest on overdue installments of interest and such further amount as shall be sufficient to cover the costs and expenses of collection, including any advances made by the Trustee and the reasonable compensation, expenses and disbursements of the Trustee, its agents and counsel. SECTION 6.09. TRUSTEE MAY FILE PROOFS OF CLAIM. The Trustee is authorized to file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel) and the Securityholders allowed in any judicial proceedings relative to the Company or any Subsidiary Guarantor (or any other obligor on the Securities), its creditors or its property and shall be entitled and empowered to collect, receive and distribute any money or other property payable or deliverable on any such claims and any custodian in any such judicial proceeding is hereby authorized by each Securityholder to make such payments to the Trustee, and in the event that the Trustee shall consent to the making of such payments directly to the Securityholders, to pay to the Trustee any amount due to it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 7.07 hereof. To the extent that the payment of any such compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 7.07 hereof out of the estate in any such proceeding, shall be denied for any reason, payment of the same shall be secured by a Lien on, and shall be paid out of, any and all distributions, dividends, money, securities and other properties which the Securityholders may be entitled to receive in such proceeding whether in liquidation or under any plan of reorganization or arrangement or otherwise. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Securityholder any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any Securityholder thereof, or to authorize the Trustee to vote in respect of the claim of any Securityholder in any such proceeding. -68- 76 SECTION 6.10. PRIORITIES. (a) If the Trustee collects any money pursuant to this Article, it shall pay out the money in the following order: (i) First: to the Trustee, its agents and attorneys for amounts due under Section 7.07, including payment of all compensation, expenses and liabilities incurred, and all advances made, by the Trustee and the costs and expenses of collection; (ii) Second: if the Securityholders are forced to proceed against the Company directly without the Trustee, to the Securityholders for their collection costs; (iii) Third: to the Securityholders for amounts due and unpaid on the Securities for principal, premium, if any, and interest, ratably, without preference or priority of any kind, according to the amounts due and payable on the Securities for principal, premium, if any, and interest, respectively; and (iv) Fourth: to the Company or, to the extent the Trustee collects any amount pursuant to a Security Document from any Subsidiary Guarantor, to such Subsidiary Guarantor, or to such party as a court of competent jurisdiction shall direct. (b) The Trustee may fix a record date and payment date for any payment to Securityholders. At least 15 calendar days before such record date, the Company shall mail to each Holder and the Trustee a notice that states the record date, the payment date and the amount to be paid. SECTION 6.11. UNDERTAKING FOR COSTS. In any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as a Trustee, a court in its discretion may require the filing by any party litigant in the suit of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys' fees, against any party litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by the party litigant. This Section does not apply to a suit by the Trustee, a suit by a Securityholder pursuant to Section 6.07 hereof, or a suit by Holders of more than 10% in principal amount of the then outstanding Securities. -69- 77 ARTICLE 7 TRUSTEE SECTION 7.01. DUTIES OF TRUSTEE. (a) If an Event of Default has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise as a prudent person would exercise or use under the circumstances and in the conduct of his own affairs. (b) Except during the continuance of an Event of Default: (i) the Trustee undertakes to perform only those duties as are specifically set forth in this Indenture and the duties of the Trustee shall be determined solely by the express provisions of this Indenture, the Trustee need perform only those duties that are specifically set forth in this Indenture and no others, and no implied covenants or obligations shall be read into this Indenture against the Trustee; and (ii) in the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture, but in the case of any such certificates or opinions which by any provision hereof are specifically required to be furnished to the Trustee, the Trustee shall examine the same to determine whether or not they conform to the requirements of this Indenture. (c) Notwithstanding anything to the contrary herein contained, the Trustee may not be relieved from liabilities for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that: (i) this paragraph does not limit the effect of paragraph (b) of this Section 7.01; (ii) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer, unless it is proved that the Trustee was negligent in ascertaining the pertinent facts; and (iii) the Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 6.05 hereof. -70- 78 (d) Whether or not therein expressly so provided, every provision of this Indenture that in any way relates to the Trustee is subject to paragraphs (a), (b), and (c) of this Section 7.01. (e) No provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder or in the exercise of any of its rights or powers if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. (f) The Trustee shall not be liable for interest on any money received by it except as the Trustee may agree in writing with the Company. Assets held in trust by the Trustee need not be segregated from other funds except to the extent required by law. (g) Every provision of this Indenture relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of Section 7.01 and to the provisions of the TIA. SECTION 7.02. RIGHTS OF TRUSTEE. (a) The Trustee may conclusively rely upon any document believed by it to be genuine and to have been signed or presented by the proper Person. The Trustee need not investigate any fact or matter stated in the document. (b) Before the Trustee acts or refrains from acting, it may require an Officers' Certificate or an Opinion of Counsel or both. The Trustee shall not be liable for any action it takes or omits to take in good faith reliance on such Officers' Certificate or Opinion of Counsel. The Trustee may consult with counsel and the written advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection from liability in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon. (c) The Trustee may act through agents and shall not be responsible for the misconduct or negligence of any agent appointed with due care. (d) The Trustee shall not be liable for any action it takes or omits to take in good faith which it believes to be authorized or within its rights or powers conferred upon it by this Indenture. (e) Unless otherwise specifically provided in this Indenture, any demand, request, direction or notice from the Company shall be sufficient if signed by an Officer of the Company. -71- 79 (f) The permissive rights of the Trustee to do certain things enumerated in this Indenture shall not be construed as a duty and the Trustee shall not be answerable for other than its negligence or wilful default with respect to such permissive rights. (g) Except for an Event of Default under 6.01(a)(i) or (ii) hereof, the Trustee shall not be deemed to have notice of any Default or Event of Default unless specifically notified in writing of such event by the Company or the Securityholders of not less than 25% in aggregate principal amount of Securities outstanding. SECTION 7.03. INDIVIDUAL RIGHTS OF TRUSTEE. The Trustee in its individual or any other capacity may become the owner or pledgee of Securities and may otherwise deal with the Company, any Subsidiary Guarantor or any Affiliate of the Company or any Subsidiary Guarantor with the same rights it would have if it were not Trustee. Any Agent may do the same with like rights. However, the Trustee is subject to Sections 7.10 and 7.11 hereof. SECTION 7.04. TRUSTEE'S DISCLAIMER. The Trustee shall not be responsible for and makes no representation as to the validity or adequacy of this Indenture, the Securities or the Subsidiary Guarantees, it shall not be accountable for the Company's use of the proceeds from the Securities or any money paid to the Company or upon the Company's direction under any provision of this Indenture, it shall not be responsible for the use or application of any money received by any Paying Agent other than the Trustee, and it shall not be responsible for any statement or recital herein or any statement in the Securities or the Subsidiary Guarantees or any other document in connection with the sale of the Securities or pursuant to this Indenture other than its certificate of authentication. SECTION 7.05. NOTICE OF DEFAULTS. If a Default or Event of Default occurs and is continuing and if it is known to the Trustee, the Trustee shall mail to each Securityholder a notice of the Default or Event of Default within 60 days after it occurs. Except in the case of a Default or Event of Default in any payment of principal or interest on any Security, the Trustee may withhold the notice if a committee of its officers in good faith determines that withholding the notice is in the interest of the Securityholders. In addition, the Company is required to deliver to the Trustee, within 90 days after each fiscal year of the Company, a certificate indicating whether the signers thereof know of any Default or Event of Default that occurred during the previous year. The Company shall also deliver to the Trustee, within 30 days after the occurrence thereof, written notice of any events which would constitute a Default or Event of Default. -72- 80 SECTION 7.06. REPORTS BY TRUSTEE TO SECURITYHOLDERS. (a) Within 60 days after each May 15 beginning with the May 15 following the date of this Indenture, and for so long as the Securities remain outstanding, the Trustee shall mail to the Securityholders a brief report dated as of such reporting date that complies with TIA Section 313(a) (but if no event described in TIA Section 313(a) has occurred within the twelve months preceding the reporting date, no report need be transmitted). The Trustee also shall comply with TIA Section 313(b)(2) and (c). (b) A copy of each report at the time of its mailing to the Securityholders shall be filed with the Commission and each stock exchange, if any, on which the Securities are listed, in accordance with and to the extent required by TIA Section 313(d). The Company shall promptly notify the Trustee if and when the Securities are listed on any stock exchange. SECTION 7.07. COMPENSATION AND INDEMNITY. (a) The Company and the each of the Subsidiary Guarantors, jointly and severally, shall pay to the Trustee from time to time reasonable compensation for its acceptance of this Indenture and services hereunder, including extraordinary services such as default administration. The Trustee's compensation shall not be limited by any law on compensation of a trustee of an express trust. The Company and each of the Subsidiary Guarantors, jointly and severally, shall reimburse the Trustee upon request for all reasonable disbursements, advances and expenses incurred or made by it in addition to the compensation for its services. Such expenses shall include the reasonable compensation, disbursements and expenses of the Trustee's agents and counsel. (b) The Company and each of the Subsidiary Guarantors, jointly and severally, shall indemnify the Trustee against any and all losses, liabilities or expenses incurred by it arising out of or in connection with the acceptance or administration of its duties under this Indenture, including the costs and expenses of enforcing this Indenture against the Company (including this Section 7.07) and defending itself against any claim (whether asserted by the Company, any Holder or any other person) or liability in connection with the exercise or performance of any of its powers or duties hereunder, except as set forth below in subparagraph (d). The Trustee shall notify the Company and each of the Subsidiary Guarantors promptly of any claim for which it may seek indemnity. Failure by the Trustee to so notify the Company or any Subsidiary Guarantor shall not relieve the Company or any of the Subsidiary Guarantors of their Obligations hereunder. The Trustee may have separate counsel and the Company and each of the Subsidiary Guarantors, jointly and severally, shall pay the reasonable fees and expenses of such counsel. Neither the Company nor any Subsidiary Guarantor need pay for any settlement made without its consent, which consent shall not be unreasonably withheld. -73- 81 (c) The obligations of the Company and each of the Subsidiary Guarantors under this Section 7.07 shall survive the resignation or removal of the Trustee and the satisfaction and discharge or termination of this Indenture. (d) Notwithstanding subparagraphs (a) or (b) above, neither the Company nor any Subsidiary Guarantor need reimburse any expense or indemnify against any loss or liability incurred by the Trustee through its own negligence, bad faith or willful misconduct. (e) To secure the Company's and each of the Subsidiary Guarantor's payment obligations in this Section, the Trustee shall have a Lien prior to the Securities on all money or property held or collected by the Trustee, except that held in trust to pay principal, premium, if any, and interest on particular Securities. Such Lien shall survive the resignation or removal of the Trustee and the satisfaction and discharge of this Indenture. (f) When the Trustee incurs expenses or renders services after an Event of Default specified in Section 6.01(viii) or (ix) hereof occurs, the expenses and the compensation for such services (including the fees and expenses of its agents and counsel) are intended to constitute expenses of administration under any Bankruptcy Law. SECTION 7.08. REPLACEMENT OF TRUSTEE. (a) A resignation or removal of the Trustee and appointment of a successor Trustee shall become effective only upon the successor Trustee's acceptance of appointment as provided in this Section 7.08. (b) The Trustee may resign at any time and be discharged from the trust hereby created by so notifying the Company. The Securityholders of a majority in principal amount of the then outstanding Securities may remove the Trustee by so notifying the Trustee and the Company. The Company may remove the Trustee if: (i) the Trustee fails to comply with Section 7.10 hereof; (ii) the Trustee is adjudged a bankrupt or an insolvent or an order for relief is entered with respect to the Trustee under any Bankruptcy Law; (iii) a Custodian, receiver or other public officer takes charge of the Trustee or its property; or (iv) the Trustee becomes incapable of acting. -74- 82 (c) If the Trustee resigns or is removed or if a vacancy exists in the office of Trustee for any reason, the Company shall notify each Securityholder of such event and promptly appoint a successor Trustee. Within one year after the successor Trustee takes office, the Holders of a majority in principal amount of the then outstanding Securities may appoint a successor Trustee to replace the successor Trustee appointed by the Company. (d) A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Company. Thereupon, the resignation or removal of the retiring Trustee shall become effective, and the successor Trustee shall have all the rights, powers and duties of the Trustee under this Indenture. The successor Trustee shall mail a notice of its succession to each Securityholder. The retiring Trustee shall promptly transfer all property held by it as Trustee to the successor Trustee, provided all sums owing to the Trustee hereunder have been paid and subject to the Lien provided for in Section 7.07 hereof. Notwithstanding replacement of the Trustee pursuant to this Section 7.08, the Company's and each of the Subsidiary Guarantor's obligations under Section 7.07 hereof shall continue for the benefit of the retiring Trustee. (e) If a successor Trustee does not take office within 60 days after the retiring Trustee resigns or is removed, the retiring Trustee, the Company, any of the Subsidiary Guarantors or the Securityholders of at least 10% in principal amount of the then outstanding Securities may petition any court of competent jurisdiction for the appointment of a successor Trustee. (f) If the Trustee after written request by any Securityholder who has been a Securityholder for at least six months fails to comply with Section 7.10, such Securityholder may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. SECTION 7.09. SUCCESSOR TRUSTEE BY MERGER, ETC. If the Trustee consolidates with, merges or converts into, or transfers all or substantially all of its corporate trust business to another corporation, the resulting, surviving or transferee corporation without any further act shall, if such resulting, surviving or transferee corporation is otherwise eligible hereunder, be the successor Trustee. -75- 83 SECTION 7.10. ELIGIBILITY; DISQUALIFICATION. (a) There shall at all times be a Trustee hereunder which shall be a corporation organized and doing business under the laws of the United States of America or any State or Territory thereof or the District of Columbia authorized under such laws to exercise corporate trustee power, shall be subject to supervision or examination by Federal, State, Territorial, or District of Columbia authority and shall have (or be a part of a holding company with) a combined capital and surplus of at least $100 million as set forth in its most recent published annual report of condition. (b) This Indenture shall always have a Trustee who satisfies the requirements of TIA Section 310(a)(1), (2) and (5). The Trustee shall comply with TIA Section 310(b). The provisions of TIA Section 310 shall also apply to the Company and each of the Subsidiary Guarantors, as obligor of the Securities. SECTION 7.11. PREFERENTIAL COLLECTION OF CLAIMS AGAINST THE COMPANY. The Trustee shall comply with TIA Section 311(a), excluding any creditor relationship listed in TIA Section 311(b). A Trustee who has resigned or been removed shall be subject to TIA Section 311(a) to the extent indicated therein. The provisions of TIA Section 311 shall apply to the Company and each of the Subsidiary Guarantors as obligor on the Securities. ARTICLE 8 DISCHARGE OF INDENTURE SECTION 8.01. DISCHARGE OF LIABILITY ON SECURITIES; DEFEASANCE. (a) When (i) the Company delivers to the Trustee all outstanding Securities (other than Securities replaced pursuant to Section 2.07 hereof) canceled or for cancellation or (ii) all outstanding Securities have become due and payable and the Company irrevocably deposits with the Trustee funds sufficient to pay at maturity all outstanding Securities, including interest thereon (other than Securities replaced pursuant to Section 2.07 hereof), and if in either case the Company pays all other sums payable hereunder by the Company, then this Indenture shall, subject to Sections 8.01(e) and 8.06 hereof, cease to be of further effect. The Trustee shall acknowledge satisfaction and discharge of this Indenture on demand of the Company accompanied by an Officers' Certificate and an Opinion of Counsel reasonably acceptable to the Trustee and at the cost and expense of the Company. -76- 84 (b) Subject to Sections 8.01(e), 8.02 and 8.06 hereof, the Company at any time may terminate (i) all its obligations under the Securities and this Indenture ("legal defeasance option") or (ii) all obligations under [Sections 3.09, 4.04(a), (b) and (c), 4.07, 4.08, 4.09, 4.10, 4.11, 4.12, 4.13, 4.14, 4.15, 4.16, 4.17, 4.18 or 5.01(iii) and the operation of Sections 6.01(a)(iv), 6.01(a)(v) and 6.01(a)(vi) as well as (6.01(a)(ix) and 6.01(a)(x) hereof but only with respect to Significant Subsidiaries) ("covenant defeasance option"). The Company may exercise its legal defeasance option notwithstanding its prior exercise of its covenant defeasance option. (c) If the Company exercises its legal defeasance option, payment of the Securities may not be accelerated because of an Event of Default. If the Company exercises its covenant defeasance option, payment of the Securities may not be accelerated because of an Event of Default specified in Section 6.01(a)(iv), 6.01(a)(vi), 6.01(a)(vii), 6.01(a)(viii) or 6.01(a)(ix) (but only with respect to Significant Subsidiaries which is a Guarantor) or 6.01(a)(ix) hereof (but only with respect to Significant Subsidiaries which is a Guarantor), or because of the failure of the Company or the Subsidiary Guarantors to comply with Sections 5.01(iii) or 5.01(iv). (d) Upon satisfaction of the conditions set forth herein and Section 8.02 and upon request of the Company, the Trustee shall acknowledge in writing the discharge of those obligations that the Company terminates. (e) Notwithstanding clauses (a) and (b) above, the Company's obligations in Sections 2.03, 2.04, 2.05, 2.06, 2.07, 7.07, 7.08, 8.01(d), 8.04, 8.05 and 8.06 hereof shall survive until the Securities have been paid in full. Thereafter, the Company's obligations in Sections 7.07, 8.04 and 8.05 hereof shall survive. SECTION 8.02. CONDITIONS TO DEFEASANCE. (a) The Company may exercise its legal defeasance option or its covenant defeasance option only if: (i) the Company irrevocably deposits in trust with the Trustee money or U.S. Government Obligations in amounts (including interest, but without consideration of any reinvestment of such interest) and maturities sufficient, but in the case of the legal defeasance option only, not more than such amounts (as certified by a nationally recognized firm of independent public accountants), to pay and discharge at their Stated Maturity (or such earlier redemption date as the Company shall have specified to the Trustee) the principal of, premium, if any, interest on all outstanding Securities to maturity or redemption, as the case may be, and to pay all of the sums payable by it hereunder; provided, that the Trustee shall have been irrevocably instructed to apply such money or the proceeds of such U.S. -77- 85 Government Obligations to the payment of said principal, premium, if any, and interest with respect to the Securities; (ii) in the case of the legal defeasance option only, 123 days pass after the deposit is made and during the 123 day period no Default or Event of Default specified in Section 6.01(viii) or (ix) hereof with respect to the Company or any Subsidiary Guarantor occurs which is continuing at the end of the period; (iii) no Default or Event of Default has occurred and is continuing on the date of such deposit and after giving effect thereto; (iv) the deposit does not constitute a default under any other agreement binding on the Company; (v) the Company delivers to the Trustee an Opinion of Counsel to the effect that the trust resulting from the deposit does not constitute, or is qualified as, a regulated investment company under the Investment Company Act of 1940, as amended; (vi) in the case of the legal defeasance option, the Company shall have delivered to the Trustee an Opinion of Counsel stating that (x) the Company has received from, or there has been published by, the Internal Revenue Service a ruling, or (y) since the date of this Indenture there has been a change in the applicable Federal income tax law, in either case to the effect that, and based thereon such Opinion of Counsel shall confirm that, the Securityholders will not recognize income, gain or loss for U.S. Federal income tax purposes as a result of such defeasance and will be subject to U.S. Federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such defeasance had not occurred; (vii) in the case of the covenant defeasance option, the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that the Securityholders will not recognize income, gain or loss for Federal income tax purposes as a result of such covenant defeasance and will be subject to Federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such covenant defeasance had not occurred; and (viii) the Company delivers to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent to the defeasance and discharge of the Securities as contemplated by this Article 8 have been complied with. -78- 86 (b) In order to have money available on a payment date to pay principal, premium, if any, or interest on the Securities, the U.S. Government Obligations deposited pursuant to preceding clause (a) shall be payable as to principal or interest at least one Business Day before such payment date in such amounts as shall provide the necessary money. U.S. Government Obligations shall not be callable at the issuer's option. (c) Before or after a deposit, the Company may make arrangements satisfactory to the Trustee for the redemption of Securities at a future date in accordance with Article 3 hereof. SECTION 8.03. APPLICATION OF TRUST MONEY. The Trustee shall hold in trust money or U.S. Government Obligations deposited with it pursuant to this Article 8. It shall apply the deposited money and the money from U.S. Government Obligations through the Paying Agent and in accordance with this Indenture to the payment of principal, premium, if any, and interest on the Securities. SECTION 8.04. REPAYMENT TO THE COMPANY. (a) The Trustee and the Paying Agent shall promptly pay to the Company upon written request any excess money or securities held by them at any time; provided, however, that the Trustee shall not pay any such excess to the Company unless the amount remaining on deposit with the Trustee, after giving effect to such transfer are sufficient to pay principal, premium, if any, and interest on the outstanding Securities, which amount shall be certified to the Trustee by independent public accountants. (b) The Trustee and the Paying Agent shall pay to the Company upon written request any money held by them for the payment of principal, premium, if any, or interest that remains unclaimed for two years after the date upon which such payment shall have become due; provided, however, that the Company shall have either caused notice of such payment to be mailed to each Securityholder entitled thereto no less than 30 days prior to such repayment or within such period shall have published such notice in a financial newspaper of widespread circulation published in the City of New York. After payment to the Company, Securityholders entitled to the money must look to the Company and the Subsidiary Guarantors for payment as general creditors unless an applicable abandoned property law designates another Person, and all liability of the Trustee and such Paying Agent with respect to such money shall cease. SECTION 8.05. INDEMNITY FOR GOVERNMENT OBLIGATIONS. The Company and the Subsidiary Guarantors, jointly and severally, shall pay and shall indemnify the Trustee against any tax, fee or other charge imposed on or assessed -79- 87 against deposited U.S. Government Obligations or the principal and interest received on such U.S. Government Obligations. SECTION 8.06. REINSTATEMENT. If the Trustee or Paying Agent is unable to apply any money or U.S. Government Obligations in accordance with this Article 8 by reason of any legal proceeding or by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, the Company's and each of the Subsidiary Guarantor's Obligations under this Indenture and the Securities and the Subsidiary Guarantees shall be revived and reinstated as though no deposit had occurred pursuant to this Article 8 until such time as the Trustee or Paying Agent is permitted to apply all such money or U.S. Government Obligations in accordance with this Article 8; provided, however, that if the Company or any Subsidiary Guarantor has made any payment of principal of, premium, if any, or interest on any Securities because of the reinstatement of its Obligations, the Company or any of the Subsidiary Guarantors, as the case may be, shall be subrogated to the rights of the Securityholders to receive such payment from the money or U.S. Government Obligations held by the Trustee or Paying Agent. ARTICLE 9 AMENDMENTS SECTION 9.01. WITHOUT CONSENT OF SECURITYHOLDERS. (a) Notwithstanding Section 9.02 of this Indenture, the Company, the Subsidiary Guarantors and the Trustee may amend or supplement this Indenture or the Securities without the consent of any Securityholder: (i) to cure any ambiguity, omission, defect or inconsistency; (ii) to comply with Article 5 hereof; (iii) to provide for uncertificated Securities in addition to or in place of certificated Securities (provided that the uncertificated Securities are issued in registered form for purposes of Section 163(f) of the Code, or in a manner such that the uncertificated Securities are described in Section 163(f)(2)(B) of the Code); (iv) to add further Guarantees with respect to the Securities; to secure the Securities with additional collateral; -80- 88 (v) to add to the covenants of the Company for the benefit of the Securityholders or to surrender any right or power conferred upon the Company; (vi) to comply with requirements of the Commission in order to effect or maintain the qualification of this Indenture under the TIA; (vii) to make any change that would provide additional rights or benefits to the Holders of the Securities, as evidenced by an Opinion of Counsel delivered to the Trustee or that does not adversely affect the rights of any Securityholder in any respect; or (viii) to evidence or provide for a replacement Trustee under Section 7.08 hereof; provided, that the Company has delivered to the Trustee an Opinion of Counsel stating that any such amendment or supplement complies with the provisions of this Section 9.01. (b) Upon the request of the Company and the Subsidiary Guarantors accompanied by Board Resolutions of their respective Boards of Directors authorizing the execution of any such supplemental indenture, and upon receipt by the Trustee of the documents described in Section 7.02 and Section 9.06 hereof, the Trustee shall join with the Company and the Subsidiary Guarantors in the execution of any supplemental indenture authorized or permitted by the terms of this Indenture and to make any further appropriate agreements and stipulations which may be therein contained, but the Trustee shall not be obligated to enter into such supplemental indenture which affects its own rights, duties or immunities under this Indenture or otherwise. (c) After an amendment or supplement under this Section 9.01 becomes effective, the Company shall mail to all Securityholders a notice briefly describing such amendment or supplement. The failure to give such notice to all Securityholders, or any defect therein, shall not impair or affect the validity of an amendment or supplement under this Section. SECTION 9.02. WITH CONSENT OF SECURITYHOLDERS. (a) Except as provided below in this Section 9.02, the Company and the Trustee may amend or supplement this Indenture or the Securities with the written consent of the Securityholders of not less than a majority in aggregate principal amount of the Securities then outstanding (including consents obtained in connection with a purchase of, or tender offer or exchange offer for the Securities) and subject to Section 6.04 and 6.07 any existing Default or Event of Default and its consequences (other than a Default or Event of Default in the payment of principal premium, if any, or interest, if any, on the -81- 89 Securities except a payment default resulting from an acceleration of the Securities that has been rescinded) or compliance with any provision of this Indenture or the Securities may be waived with the consent of the Holders of a majority in principal amount of the then outstanding Securities (including consents obtained in connection with a purchase of, or tender offer or exchange offer for the Securities). [Furthermore, subject to Sections 6.04 and 6.07 hereof, the Holders of a majority in aggregate principal amount of the Securities then outstanding (including consents obtained in connection with a purchase of, or tender offer or exchange offer for the Securities) may waive compliance in a particular instance by the Company with any provision of this Indenture or the Securities.] However, without the consent of each Securityholder affected, an amendment, supplement or waiver under this Section 9.02 may not (with respect to any Securities held by a non-consenting Holder): (i) reduce the principal amount of Securities whose Holders must consent to an amendment, supplement or waiver; (ii) reduce the stated rate of or extend the stated time for payment of any interest on any Security; (iii) reduce the principal of or extend the Stated Maturity of any Security or alter the redemption provisions (including without limitation Sections 3.07, 3.09, 4.11 and 4.14 hereof) with respect thereto; (iv) reduce the premium payable upon the redemption or repurchase of any Security or change the time at which any Security may be redeemed in accordance with Section 3.07; (v) make any Security payable in money other than that stated in the Security; (vi) make any change in Section 6.04 or 6.07 hereof or in this Section 9.02(a); (vii) waive a Default or Event of Default in the payment of principal of premium, if any, or interest, if any, on, or redemption payment with respect to, any or Security (except a rescission of acceleration of the Securities by the Holders of at least a majority in aggregate principal amount of the Notes and a waiver of the payment default that resulted from such acceleration); (viii) impair the right of any holder to receive payment of principal of and interest on such holder's Securities on or after the due dates therefor or to institute suit for the enforcement of any payment on or with respect to such holder's Securities; -82- 90 (ix) make any change in the amendment provisions which require each consent or in the waiver provisions or requiring any Guaranty hereof or in the provisions of any such Guaranty; (x) release Collateral from the lien of the Escrow Agreement, except in accordance with terms thereof, or amend terms thereof relating to release; or (xi) release any Subsidiary Guarantor from its Subsidiary Guaranty, except as provided herein. (b) Upon the request of the Company and the Subsidiary Guarantors accompanied by Board Resolutions of their respective Boards of Directors authorizing the execution of any such supplemental indenture, and upon the filing with the Trustee of evidence satisfactory to the Trustee of the consent of the Securityholders as aforesaid, and upon receipt by the Trustee of the documents described in Section 7.02 and Section 9.06 hereof, the Trustee shall join with the Company and the Subsidiary Guarantors in the execution of such supplemental indenture unless such supplemental indenture affects the Trustee's own rights, duties or immunities under this Indenture or otherwise, in which case the Trustee may in its discretion, but shall not be obligated to, enter into such supplemental indenture. (c) It shall not be necessary for the consent of the Securityholders under this Section 9.02 to approve the particular form of any proposed amendment, supplement or waiver, but it shall be sufficient if such consent approves the substance thereof. (d) After an amendment, supplement or waiver under this Section 9.02 becomes effective, the Company shall mail to all Securityholders a notice briefly describing the amendment, supplement or waiver. Any failure of the Company to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such amendment, supplement or waiver. SECTION 9.03. COMPLIANCE WITH TRUST INDENTURE ACT. Every amendment or supplement to this Indenture or the Securities shall comply with the TIA as then in effect. SECTION 9.04. REVOCATION AND EFFECT OF CONSENTS. (a) Until an amendment, supplement or waiver becomes effective, a consent to it by a Securityholder is a continuing consent by the Securityholder and every subsequent Securityholder or portion of a Security that evidences the same debt as the consenting Holder's Security, even if notation of the consent is not made on any Security. -83- 91 However, any such Securityholder or subsequent Securityholder may revoke the consent as to its Security if the Trustee receives written notice of revocation before the date the waiver, supplement or amendment becomes effective. An amendment, supplement or waiver becomes effective when approved by the requisite Holders and executed by the Trustee (or, if otherwise provided in such waiver, amendment or supplement, in accordance with its terms) and thereafter binds every Securityholder, unless it makes a change described in any of clauses (i) through (xi) of Section 9.02, in which case, the amendment, supplement or waiver shall bind only each Holder of a Security who has consented to it and every subsequent Holder of a Security or portion of a Security that evidences the same indebtedness as the consenting Holder's Security. (b) The Company may fix a record date for determining which Securityholders must consent to such amendment, supplement or waiver. If the Company fixes a record date, the record date shall be fixed at (i) the later of 30 days prior to the first solicitation of such consent or the date of the most recent list of Securityholders furnished to the Trustee prior to such solicitation pursuant to Section 2.05 hereof, or (ii) such other date as the Company shall designate. If a record date is fixed, then notwithstanding the last sentence of the immediately preceding paragraph, those persons who were Holders at such record date (or their duly designated proxies), and only those persons, shall be entitled to consent to such amendment or waiver or revoke any consent previously given, whether or not such persons continue to be Holders after such record date. No consent shall be valid or effective for more than 890 days after such record date except to the extent that the requisite number of consents to the amendment, supplement or waiver have been obtained within such 90-day period or as set forth in the preceding paragraph of this Section 9.04. SECTION 9.05. NOTATION ON OR EXCHANGE OF SECURITIES. (a) Securities authenticated and delivered after the execution of any supplemental indenture may bear a notation in form approved by the Trustee as to any matter provided for in such amendment, supplement or waiver on any Security thereafter authenticated. The Company in exchange for all Securities may issue and the Trustee shall authenticate new Securities that reflect the amendment, supplement or waiver. (b) Failure to make the appropriate notation or issue a new Security shall not affect the validity and effect of such amendment, supplement or waiver. SECTION 9.06. TRUSTEE TO SIGN AMENDMENTS, ETC. The Trustee shall sign any amendment, waiver or supplemental indenture authorized pursuant to this Article 9 if the amendment, waiver or supplemental indenture does not adversely affect the rights, duties, liabilities or immunities of the Trustee. If it does, the Trustee may, but need not, sign it. In signing or refusing to sign such -84- 92 amendment, waiver or supplemental indenture, the Trustee shall be entitled to receive and, subject to Section 7.01, shall be fully protected in relying upon, in addition to the documents required by Section 7.02, an Officers' Certificate and an Opinion of Counsel as conclusive evidence that such amendment, waiver or supplemental indenture is authorized or permitted by this Indenture, that it is not inconsistent herewith, and that it will be valid and binding upon the Company in accordance with its terms. ARTICLE 10 MISCELLANEOUS SECTION 10.01. TRUST INDENTURE ACT CONTROLS. If any provision of this Indenture limits, qualifies or conflicts with another provision which is required to be included in this Indenture by the TIA, the required provision shall control. Until such time as this Indenture becomes qualified under the TIA, the Company, the Subsidiary Guarantors and the Trustee shall be deemed subject to and governed by the TIA as if the Indenture were so qualified on the date hereof. SECTION 10.02. NOTICES. (a) Any notice or communication by the Company, any Subsidiary Guarantor or the Trustee to the other is duly given if in writing and delivered in person or mailed by first class mail (registered or certified, return receipt requested), confirmed facsimile transmission or overnight air courier guaranteeing next day delivery, to the other's address: If to the Company or any of the Subsidiary Guarantors: Source Media, Inc. 8140 Walnut Hill Lane Suite 100 Dallas, TX 75231 Attention: Chief Financial Officer If to the Trustee: U.S. Trust Company of Texas, N.A. 2001 Ross Avenue Suite 2700 Dallas, TX 75201 -85- 93 Attention: Corporate Trust (b) The Company or the Trustee, by notice to the other, may designate additional or different addresses for subsequent notices or communications. (c) All notices and communications (other than those sent to Securityholders) shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five Business Days after being deposited in the mail, postage prepaid, if mailed; when receipt acknowledged, if by facsimile transmission; and the next Business Day after timely delivery to the courier, if sent by overnight air courier guaranteeing next day delivery. (d) Any notice or communication to a Securityholder shall be mailed by first class mail, postage prepaid, to its address shown on the register kept by the Registrar. Any notice or communication shall also be so mailed to any Person described in TIA Section 313(c), to the extent required by the TIA. Failure to mail a notice or communication to a Securityholder or any defect in it shall not affect its sufficiency with respect to other Securityholders. (e) If a notice or communication is mailed to any Person in the manner provided above within the time prescribed, it is duly given, whether or not the addressee receives it. (f) If the Company mails a notice or communication to Securityholders, it shall mail a copy to the Trustee and each Agent at the same time. SECTION 10.03. COMMUNICATION BY SECURITYHOLDERS WITH OTHER SECURITYHOLDERS. Securityholders may communicate pursuant to TIA Section 312(b) with other Securityholders with respect to their rights under this Indenture or the Securities. The Company, the Subsidiary Guarantors, the Trustee, the Registrar and anyone else shall have the protection of TIA Section 312(c). SECTION 10.04. CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT. Upon any request or application by the Company and/or any of the Subsidiary Guarantors to the Trustee to take any action under this Indenture, the Company and/or any of the Subsidiary Guarantors, as the case may be, shall furnish to the Trustee: (i) an Officer's Certificate in form and substance reasonably satisfactory to the Trustee (which shall include the statements set forth in Section 10.05 hereof) -86- 94 stating that, in the opinion of the signers, all conditions precedent and covenants, if any, provided for in this Indenture relating to the proposed action have been satisfied (except with regard to an authentication order pursuant to Section 2.02(c) hereof, which shall require a certificate of two Officers); and (ii) an Opinion of Counsel in form and substance reasonably satisfactory to the Trustee (which shall include the statements set forth in Section 10.05 hereof) stating that, in the opinion of such counsel, all such conditions precedent and covenants have been satisfied. SECTION 10.05. STATEMENTS REQUIRED IN CERTIFICATE OR OPINION. Each certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture (other than a certificate provided pursuant to TIA Section 314(a)(4)) shall comply with the provisions of TIA Section 314(e), shall comply with the definition of the term "Officers' Certificate" and shall include: (i) a statement that the person making such certificate or opinion has read such covenant or condition; (ii) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (iii) a statement that, in the opinion of such person, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been satisfied; and (iv) a statement as to whether or not, in the opinion of such person, such condition or covenant has been satisfied. SECTION 10.06. RULES BY TRUSTEE AND AGENTS. The Trustee may make reasonable rules for action by or at a meeting of Securityholders. The Registrar or Paying Agent may make reasonable rules and set reasonable requirements for its functions. -87- 95 SECTION 10.07. LEGAL HOLIDAYS. A "Legal Holiday" is a Saturday, a Sunday or a day on which banking institutions in New York City, or at a place of payment are authorized or obligated by law, regulation or executive order to remain closed. If a payment date is a Legal Holiday at a place of payment, payment may be made at that place on the next succeeding day that is not a Legal Holiday, and no interest shall accrue for the intervening period. SECTION 10.08. NO RECOURSE AGAINST OTHERS. No past, present or future director, officer, employee, agent, manager, stockholder or partner of the Company or its predecessors shall have any liability for any Obligations of the Company under the Securities or this Indenture or for any claim based on, in respect of, or by reason of such Obligations or their creation. Each Securityholder by accepting a Security waives and releases all such liability. This waiver and release are part of the consideration for issuance of the Securities. SECTION 10.09. DUPLICATE ORIGINALS. The parties may sign any number of copies of this Indenture. One signed copy is enough to prove this Indenture. SECTION 10.10. GOVERNING LAW. This Indenture and the Securities 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. SECTION 10.11. NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS. This Indenture may not be used to interpret another indenture, loan or debt agreement of any of the Subsidiary Guarantors, the Company or their respective Subsidiaries. Any such indenture, loan or debt agreement may not be used to interpret this Indenture. SECTION 10.12. SUCCESSORS. All agreements of the Company and the Subsidiary Guarantors in this Indenture and the Securities shall bind its successors. All agreements of the Trustee in this Indenture shall bind its successor. -88- 96 SECTION 10.13. SEVERABILITY. In case any provision in this Indenture or in the Securities shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 10.14. COUNTERPART ORIGINALS. This 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. SECTION 10.15. TABLE OF CONTENTS, HEADINGS, ETC. The Table of Contents, Cross-Reference Table and Headings of the Articles and Sections of this Indenture have been inserted for convenience of reference only, are not to be considered a part of this Indenture and shall in no way modify or restrict any of the terms or provisions hereof. -89- 97 IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed as of the date first written above. SIGNATURES SOURCE MEDIA, INC. By /s/ MICHAEL G. PATE ------------------------------------- Name: Michael G. Pate Title: Chief Financial Officer U.S. TRUST COMPANY OF TEXAS, as Trustee By /s/ BILL BARBER ------------------------------------- Name: Bill Barber Title: Vice President -90- 98 EXHIBIT A THIS NOTE OR ITS PREDECESSORS HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND ACCORDINGLY, MAY NOT BE OFFERED, SOLD OR PLEDGED OR OTHERWISE TRANSFERRED WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, UNITED STATES PERSONS OR A BENEFICIAL INTEREST HEREIN EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. BY ITS ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) OR (B) IT IS AN INSTITUTIONAL "ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(a)(1), (2), (3) or (7) OF REGULATION D UNDER THE SECURITIES ACT) (AN "INSTITUTIONAL ACCREDITED INVESTOR") OR (C) IT IS NOT A U.S. PERSON, IS NOT ACQUIRING THIS NOTE FOR THE ACCOUNT OR BENEFIT OF A U.S. PERSON AND IS ACQUIRING THIS NOTE IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH REGULATION S UNDER THE SECURITIES ACT, (2) AGREES THAT IT WILL NOT, WITHIN THE TIME PERIOD REFERRED TO IN RULE 144(k) UNDER THE SECURITIES ACT AS IN EFFECT WITH RESPECT TO SUCH TRANSFER, RESELL OR OTHERWISE TRANSFER THIS NOTE EXCEPT (A) TO SOURCE MEDIA, INC. OR ANY SUBSIDIARY THEREOF, (B) INSIDE THE UNITED STATES TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A UNDER THE SECURITIES ACT, (C) INSIDE THE UNITED STATES TO AN INSTITUTIONAL ACCREDITED INVESTOR THAT, PRIOR TO SUCH TRANSFER, FURNISHES TO THE TRUSTEE A SIGNED LETTER CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS RELATING TO THE RESTRICTIONS ON TRANSFER OF THIS NOTE (THE FORM OF WHICH LETTER CAN BE OBTAINED FROM THE TRUSTEE), AND IF SUCH TRANSFER IS IN RESPECT OF AN AGGREGATE PRINCIPAL AMOUNT OF NOTES AT THE TIME OF 99 EXHIBIT A Page 2 TRANSFER OF LESS THAN $250,000, AN OPINION OF COUNSEL ACCEPTABLE TO SOURCE MEDIA, INC. THAT SUCH TRANSFER IS IN COMPLIANCE WITH THE SECURITIES ACT, (D) OUTSIDE THE UNITED STATES IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH RULE 904 UNDER THE SECURITIES ACT, (E) PURSUANT TO THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT (IF AVAILABLE), (F) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR (G) IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (BASED UPON AN OPINION OF COUNSEL ACCEPTABLE TO SOURCE MEDIA, INC.) AND, IN EACH CASE, IN ACCORDANCE WITH APPLICABLE STATES SECURITIES LAWS AND (3) AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THIS NOTE IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION," "UNITED STATES" AND "U.S. PERSON" HAVE THE MEANINGS GIVEN TO THEM BY RULE 902 OF REGULATION S UNDER THE SECURITIES ACT. THE INDENTURE CONTAINS A PROVISION REQUIRING THE TRUSTEE TO REFUSE TO REGISTER ANY TRANSFER OF THIS NOTE IN VIOLATION OF THE FOREGOING RESTRICTIONS; Each Global Note shall also bear the following legend on the face thereof: UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR NOTES IN DEFINITIVE FORM, THIS NOTE MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITARY TO A NOMINEE OF THE DEPOSITARY, OR BY ANY SUCH NOMINEE OF THE DEPOSITARY, OR BY THE DEPOSITARY OR NOMINEE OF SUCH SUCCESSOR DEPOSITARY OR ANY SUCH NOMINEE TO A SUCCESSOR DEPOSITARY OR A NOMINEE OF SUCH SUCCESSOR DEPOSITARY. TRANSFERS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF CEDE & CO. OR TO A SUCCESSOR THEREOF 100 EXHIBIT A Page 3 OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN THE INDENTURE. UNLESS THIS NOTE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT HEREON IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. 101 EXHIBIT A Page 4 CUSIP No: (Front of Security) No. 1 $___________ SOURCE MEDIA, INC. 12% Senior Notes due 2004, Series A SOURCE MEDIA, INC., a Delaware corporation promises to pay to Cede & Co., as nominee of the Depository Trust Company, or its registered assigns, the principal sum of $100,000,000 on November 1, 2004. Interest Payment Dates: May 1 and November 1, commencing May 1, 1998. Record Dates: April 15 and October 15 (whether or not a Business Day). Additional provisions of this Security are set forth on the other side of this Security. Dated: SOURCE MEDIA, INC. By: ------------------------ By: ------------------------ TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the Securities referred to in the within-mentioned Indenture U.S. TRUST COMPANY OF TEXAS, N.A., as Trustee By: ------------------------------- Authorized Signatory Dated: ------------------- 102 EXHIBIT A Page 5 (Reverse of Security) 12% SENIOR NOTE DUE 2004, Series A Capitalized terms used herein have the meanings assigned to them in the Indenture (as defined below) unless otherwise indicated. 1. Interest. Source Media, Inc., a Delaware corporation (the "Company"), promises to pay interest on the principal amount of this Security at the rate and in the manner specified below. The Company shall pay, in cash, interest on the principal amount of this Security at the rate per annum of 12%. The Company will pay interest semiannually in arrears on May 1 and November 1 of each year (each an "Interest Payment Date"), commencing May 1, 1998, or if any such day is not a Business Day on the next succeeding Business Day. Interest will be computed on the basis of a 360-day year consisting of twelve 30-day months. Interest shall accrue from the most recent Interest Payment Date to which interest has been paid or, if no interest has been paid, from the date of the original issuance of the Securities. To the extent lawful, the Company shall pay interest on overdue principal at the rate of 2% per annum in excess of the then applicable interest rate on the Securities; it shall pay interest on overdue installments of interest (without regard to any applicable grace periods) at the same rate to the extent lawful. The rate of interest payable on this Security shall be subject to the assessment of additional interest (the "Additional Interest") as follows: (i) if the Exchange Offer Registration Statement (as defined below) or Shelf Registration Statement (as defined below) is not filed within 45 days following the Issue Date (the "Filing Date"), Additional Interest shall accrue on the Securities over and above the stated interest at a rate of 0.50% per annum for the first 30 days commencing on the 16th day after the Filing Date, such Additional Interest rate increasing by an additional 0.50% per annum at the beginning of each subsequent 30-day period; (ii) if the Exchange Offer Registration Statement or Shelf Registration Statement is not declared effective within 75 days following the Filing Date, Additional Interest shall accrue on the Securities over and above the stated interest at a rate of 0.50% per annum for the first 30 days commencing on the 76th day after the Filing Date, such Additional Interest rate increasing by an additional 0.50% per annum at the beginning of each subsequent 30-day period; or (iii) if (A) the Company and the Subsidiary Guarantors have not exchanged all Securities validly tendered in accordance with the terms of the Exchange Offer on or prior to 135 days after the Filing Date or (B) the Exchange Offer Registration Statement ceases to be effective at any time prior to the time that the Exchange Offer is consummated or (C) if applicable, the Shelf Registration Statement has been declared effective and such 103 EXHIBIT A Page 6 Shelf Registration Statement ceases to be effective at any time prior to the second anniversary of the Issue Date (unless all the Securities have been sold thereunder), then Additional Interest shall accrue on the Securities over and above the stated interest at a rate of 0.50% per annum for the first 30 days commencing on (x) the 36th day after the Filing Date with respect to the Securities validly tendered and not exchanged by the Company, in the case of (A) above, or (y) the day the Exchange Offer Registration Statement ceases to be effective or usable for its intended purpose in the case of (B) above, or (z) the day such Shelf Registration Statement ceases to be effective in the case of (C) above, such Additional Interest rate increasing by an additional 0.50% per annum at the beginning of each subsequent 30-day period; provided, however, that the Additional Interest rate on the Securities under clauses (i), (ii) and (iii) above may not exceed in the aggregate 2.0% per annum; and provided further, that (1) upon the filing of the Exchange Offer Registration Statement or Shelf Registration Statement (in the case of clause (i) above), (2) upon the effectiveness of the Exchange Offer Registration Statement or Shelf Registration Statement (in the case of (ii) above), or (3) upon the exchange of Exchange Securities for all Securities tendered (in the case of clause (iii)(A) above), or upon the effectiveness of the Exchange Offer Registration Statement which had ceased to remain effective (in the case of clause (iii)(B) above), or upon the effectiveness of the Shelf Registration Statement which had ceased to remain effective (in the case of clause (iii)(C) above), Additional Interest on the Securities as a result of such clause (or the relevant subclause thereof), as the case may be, shall cease to accrue. "Exchange Offer" shall mean the exchange offer by the Company of Initial Securities for Exchange Securities pursuant to Section 2(a) of the Registration Rights Agreement. "Exchange Offer Registration Statement" shall mean an exchange offer registration statement on Form S-4 (or, if applicable, on another appropriate form) and all amendments and supplements to such registration statement, in each case including the Offering Memorandum or prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "Record Date" shall have the meaning provided on the front of this Security. "Shelf Registration Statement" shall mean a "shelf" registration statement of the Company and the Subsidiary Guarantors pursuant to the provisions of the Registration Rights Agreement which covers all of the Initial Securities on an appropriate form under Rule 415 under the Securities Act, or any similar rule that may be adopted by the Commission, and all amendments and supplements to such registration statement, including post-effective amendments, in each case including the Offering Memorandum contained therein, all exhibits thereto and all material incorporated by reference therein. 104 EXHIBIT A Page 7 2. Method of Payment. The Company shall pay interest on the Securities (except defaulted interest) to the Persons who are registered Holders of Securities at the close of business on the Record Date immediately preceding the Interest Payment Date, even if such Securities are cancelled after such Record Date and on or before such Interest Payment Date. Securityholders must surrender Securities to a Paying Agent to collect principal payments. The Company shall pay principal, premium, if any, and interest in money of the United States that at the time of payment is legal tender for payment of public and private debts ("U.S. Legal Tender"). However, the Company may pay principal, premium, if any, and interest by its check payable in such U.S. Legal Tender. The Company may deliver any such interest payment to the Paying Agent or to a Securityholder at the Securityholder's registered address. 3. Paying Agent and Registrar. Initially, the Trustee will act as Paying Agent and Registrar. The Company may change any Paying Agent, Registrar or co-registrar without prior notice to any Securityholder. The Company or any Guarantor of the Company may act in any such capacity, except that none of the Company, its Subsidiaries or their Affiliates shall act (i) as Paying Agent in connection with any redemption, offer to purchase, discharge or defeasance, as otherwise specified in the Indenture, and (ii) as Paying Agent or Registrar if a Default or Event of Default has occurred and is continuing. 4. Indenture. The Company issued the Securities under an Indenture, dated as of October 30, 1997 (the "Indenture"), between the Company and the Trustee. The terms of the Securities include those stated in the Indenture and those made part of the Indenture by reference to the TIA as in effect on the date the Indenture is qualified. The Securities are subject to all such terms, and Securityholders are referred to the Indenture and the TIA for a statement of such terms. The terms of the Indenture shall govern any inconsistencies between the Indenture and the Securities. The Securities are senior Obligations of the Company limited to $100,000,000 in aggregate principal amount. 5.(a) Optional Redemption. Except as indicated in the next succeeding paragraph, the Securities are not redeemable at the Company's option prior to November 1, 2001. Thereafter, the Securities will be redeemable, at the option of the Company, in whole or in part, at the redemption prices (expressed as percentages of the principal amount of the Securities) set forth below, plus accrued interest to the redemption date:
PERIOD REDEMPTION PRICE - ------ ---------------- 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . 106% 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . 103% 2003 and thereafter 100.000%
105 EXHIBIT A Page 8 (b) Optional Redemption Upon Equity Offerings. At any time, or from time to time, on or prior to November 1, 2000, the Company may, at its option, use the Net Cash Proceeds of one or more Equity Offerings by the Company so long as there is a Public Market at the time of such redemption, at a redemption price equal to 35% of the principal amount thereof, plus accrued and unpaid interest thereon, if any, to the date of redemption; provided, however, that after any such redemption, the aggregate principal amount of the Securities outstanding must equal at least $65 million. In order to effect the foregoing redemption with the proceeds of any Equity Offering, the Company shall make such redemption not more than 60 days after the consummation of any such Equity Offering. 6. Mandatory Redemption. The Securities are not subject to mandatory redemption or sinking fund payments. 7. Repurchase at Option of Securityholder. (a) If there is a Change of Control, each Holder of Securities will have the right to require the Company to repurchase all or any part of such Holder's Securities at a repurchase price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of repurchase (subject to the right of Holders of record on the relevant record date to receive interest due on the relevant Interest Payment Date). Within 30 days following any Change of Control, the Company will mail a notice to each Securityholder stating (i) that a Change of Control has occurred and that such Securityholder has the right to require the Company to repurchase all or any part of such Securityholder's Securities at a repurchase price in cash equal to 101% of the principal amount thereof plus accrued and unpaid interest, if any, to the date of repurchase (subject to the right of Holders of record on the relevant Record Date to receive interest due on the relevant Interest Payment Date); (ii) the circumstances and relevant facts regarding such Change of Control (including information with respect to pro forma historical income, cash flow and capitalization after giving effect to such Change of Control); (iii) the repurchase date (which will be no earlier then 30 days nor later than 60 days from the date such notice is mailed); and (iv) the procedures, determined by the Company consistent with the Indenture, that a Securityholder must follow in order to have its Securities repurchased. Securityholders that are subject to an offer to repurchase may elect to have such Securities repurchased by completing the form entitled "Option of Securityholder to Elect Purchase" appearing below. (b) If the Company or a Subsidiary consummates any Asset Disposition, and when the aggregate amount of Net Available Cash from such an Asset Disposition exceeds $3 million, the Company shall be required to offer to purchase the maximum principal amount of Securities, that is in an integral multiple of $1,000, that may be purchased out of the Net Available Cash at 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date fixed for the closing of such offer in accordance with the procedures set forth in the Indenture. If the aggregate principal amount of Securities 106 EXHIBIT A Page 9 surrendered by Holders thereof exceeds the amount of Net Available Cash, the Securities to be redeemed shall be selected on a pro rata basis. Securityholders that are the subject of an offer to purchase will receive an Asset Disposition Offer from the Company prior to any related purchase date and may elect to have such Securities purchased by completing the form entitled "Option of Securityholder to Elect Purchase" appearing below. 8. Notice of Redemption. Notice of redemption shall be mailed at least 30 (unless a shorter period is acceptable to the Trustee) but not more than 60 days before the redemption date to each Holder whose Securities are to be redeemed at its registered address. Securities may be redeemed in part but only in whole multiples of $1,000, unless all of the Securities held by a Securityholder are to be redeemed. On and after the redemption date, interest ceases to accrue on Securities or portions of them called for redemption. 9. Registration Rights. Pursuant to the Registration Rights Agreement, and subject to certain terms and conditions stated therein, the Company will be obligated to consummate an Exchange Offer pursuant to which the Holders of the Initial Securities shall have the right to exchange this Security for Exchange Securities, which have been registered under the Securities Act, in like principal amount and having terms identical in all material respect to the Initial Security. 10. Denominations, Transfer, Exchange. The Securities are in registered form without coupons in denominations of $1,000 and integral multiples of $1,000. The transfer of Securities may be registered and Securities may be exchanged as provided in the Indenture. The Registrar and the Trustee may require a Securityholder among other things, to furnish appropriate endorsements and transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. The Registrar need not exchange or register the transfer of any Security or portion of a Security selected for redemption. Also, it need not exchange or register the transfer of any Securities during a period beginning at the opening of business on a Business Day 15 days before the day of any selection of Securities to be redeemed and ending at the close of business on the day of selection or during the period between a Record Date and the corresponding Interest Payment Date. 11. Persons Deemed Owners. Prior to due presentment to the Trustee for registration of the transfer of this Security, the Trustee, any Agent and the Company may deem and treat the Person in whose name this Security is registered as its absolute owner for the purpose of receiving payment of principal of, premium, if any, and interest on this Security and for all other purposes whatsoever, whether or not this Security is overdue, and neither the Trustee, any Agent nor the Company shall be affected by notice to the contrary. The registered Securityholder shall be treated as its owner for all purposes. 107 EXHIBIT A Page 10 12. Amendments and Waivers. Subject to certain exceptions provided in the Indenture, the Indenture or the Securities may be amended with the consent of the Holders of a majority in principal amount of the then outstanding Securities, and any existing Default or Event of Default (except a payment default) may be waived with the consent of the Holders of a majority in principal amount of the then outstanding Securities. Without the consent of any Securityholder the Indenture or the Securities may be amended to, among other things, cure any ambiguity, defect or inconsistency, to comply with the requirements of the Commission in order to effect or maintain qualification of the Indenture under the TIA or to make any change that does not adversely affect the rights of any Securityholder. 13. Defaults and Remedies. If an Event of Default occurs and is continuing, the Trustee or the Holders of at least 25% in principal amount of the then outstanding Securities may declare the unpaid principal of, and any accrued and unpaid interest on, all the Securities to be due and payable immediately; provided, that in the case of an Event of Default arising from certain events of bankruptcy or insolvency with respect to the Company or any Subsidiary Guarantor, all outstanding Securities shall become due and payable immediately without further action or notice. Securityholders may not enforce the Indenture or the Securities except as provided in the Indenture. The Trustee may require indemnity satisfactory to it before it enforces the Indenture or the Securities. Subject to certain limitations, Holders of a majority in principal amount of the then outstanding Securities may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Securityholders notice of any continuing default (except a default in payment of principal or interest) if it determines that withholding notice is in their interests. The Company must furnish an annual compliance certificate to the Trustee. 14. Trustee Dealings with the Company. The Trustee under the Indenture, in its individual or any other capacity may make loans to, accept deposits from, and perform services for the Company, the Subsidiary Guarantors or any Affiliate of the Company or the Subsidiary Guarantors, and may otherwise deal with the Company, the Subsidiary Guarantors and their respective Affiliates as if it were not Trustee. 15. Restrictive Covenants. The Indenture imposes certain limitations on the ability of the Company and its Restricted Subsidiaries to, among other things, incur additional Indebtedness, make payments in respect of its Capital Stock or certain Indebtedness, enter into transactions with Affiliates, create dividend or other payment restrictions affecting Subsidiaries, merge or consolidate with any other Person, sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of its assets or adopt a plan of liquidation. Such limitations are subject to a number of important qualifications and exceptions provided for in the Indenture. The Company must annually report to the Trustee on compliance with such limitations. 108 EXHIBIT A Page 11 16. Authentication. This Security shall not be valid until authenticated by the manual signature of the Trustee or an authenticating agent. 17. Subsidiary Guarantee. Each Subsidiary Guarantor has jointly and severally irrevocably and unconditionally guaranteed the payment of principal, premium, if any, and interest (including interest on overdue principal and overdue interest, if lawful) on the Securities; provided, however, each Subsidiary Guarantor that makes a payment or distribution under a Subsidiary Guarantee shall be entitled to a contribution from each other Guarantor in a pro rata amount based on the Adjusted Net Assets of each Subsidiary Guarantor. 18. Defeasance. Subject to certain conditions provided for in the Indenture, the Company at any time may terminate some or all of its obligations under the Securities and the Indenture if the Company deposits with the Trustee money or U.S. Government Obligations for the payment of principal, premium (if any) and interest on the Securities to redemption or maturity, as the case may be. 19. Governing Law. The Laws of the State of New York shall govern this Security and the Indenture, without regard to principles of conflict of laws. 20. Abbreviations. Customary abbreviations may be used in the name of a Securityholder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the entireties), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors Act). 21. CUSIP Numbers. Pursuant to a recommendation promulgated by the Committee on Uniform Security Identification Procedures, the Company has caused CUSIP numbers to be printed on the Securities and has directed the Trustee to use CUSIP numbers in notices of redemption as a convenience to Securityholders. No representation is made as to the accuracy of such numbers either as printed on the Securities or as contained in any notice of redemption and reliance may be placed only on the other identification numbers placed thereon. The Company will furnish to any Securityholder upon written request and without charge a copy of the Indenture. Request may be made to: Source Media, Inc. 8140 Walnut Hill Lane Suite 100 Dallas, TX 75231 Attn: Chief Financial Officer 109 EXHIBIT A Page 12 ASSIGNMENT FORM To assign this Security, fill in the form below: (I) or (we) assign and transfer this Security to - -------------------------------------------------------------------------------- (Insert assignee's soc. sec. or tax I.D. no.) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (Print or type assignee's name, address and zip code) and irrevocably appoint -------------------------------------------------------- 110 EXHIBIT A Page 13 agent to transfer this Security on the books of the Company. The agent may substitute another to act for him. Date: -------------- Your Signature: ------------------------------- (Sign exactly as your name appears on the face of this Security) Signature Guarantee: - ------------------------------ (Signatures must be guaranteed by an "eligible guarantor institution" meeting the requirements of the Registrar, which requirements will include membership or participation in the Securities Transfer Agents Medallion Program ("STAMP") or such other "signature guarantee program" as may be determined by the Registrar in addition to, or in substitution for, STAMP, all in accordance with the Securities Exchange Act of 1934, as amended.) 111 EXHIBIT A Page 14 In connection with any transfer of this Security occurring prior to the date which is the earlier of (i) the date of the declaration by the Commission of the effectiveness of a registration statement under the Securities Act of 1933, as amended (the "Securities Act") covering resales of this Security (which effectiveness shall not have been suspended or terminated at the date of the transfer) and (ii) June 25, 1999, the undersigned confirms that it has not utilized any general solicitation or general advertising in connection with the transfer and that this Security is being transferred: Check One (1) ___ to the Company or a subsidiary thereof; or (2) ___ pursuant to and in compliance with Rule 144A under the Securities Act; or (3) ___ to an institutional "accredited investor" (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act) that has furnished to the Trustee a signed letter containing certain representations and agreements (the form of which letter can be obtained from the Trustee); or (4) ___ outside the United States to a "foreign person" in compliance with Rule 904 of Regulation S under the Securities Act; or (5) ___ pursuant to the exemption from registration provided by Rule 144 under the Securities Act; or (6) ___ pursuant to an effective registration statement under the Securities Act; or (7) ___ pursuant to another available exemption from the registration requirements of the Securities Act. Unless one of the boxes is checked, the Trustee will refuse to register any of the Securities evidenced by this certificate in the name of any Person other than the registered Securityholder thereof; provided that if box (3), (4), (5) or (7) is checked, the Company or the Trustee may require, prior to registering any such transfer of the Securities, in its sole discretion, such legal opinions, certifications (including an investment letter in the case of box (3) or (4)) and other information as the Trustee or the Company has reasonably requested to confirm that such transfer is being made pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act. If none 112 EXHIBIT A Page 15 of the foregoing boxes is checked, the Trustee or Registrar shall not be obligated to register this Security in the name of any person other than the Securityholder hereof unless and until the conditions to any such transfer of registration set forth herein and in Section 2.17 of the Indenture shall have been satisfied. Dated: Signed: -------------------------- -------------------------------------- (Sign exactly as name appears on the other side of this Security) Signature Guarantee: ------------------------------------------------ - ------------------------------ (Signatures must be guaranteed by an "eligible guarantor institution" meeting the requirements of the Registrar, which requirements will include membership or participation in the Securities Transfer Agents Medallion Program ("STAMP") or such other "signature guarantee program" as may be determined by the Registrar in addition to, or in substitution for, STAMP, all in accordance with the Securities Exchange Act of 1934, as amended.) TO BE COMPLETED BY PURCHASER IF (2) ABOVE IS CHECKED The undersigned represents and warrants that it is purchasing this Security for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is a "qualified institutional buyer" within the meaning of Rule 144A under the Securities Act and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Company as the undersigned has requested pursuant to Rule 144A or has determined not to request such information and that it is aware that the transferor is relying 113 EXHIBIT A Page 16 upon the undersigned's foregoing representations in order to claim the exemption from registration provided by Rule 144A. Dated: ----------------------- ------------------------------------- NOTICE: To be executed by an executive officer 114 EXHIBIT A Page 17 OPTION OF SECURITYHOLDER TO ELECT PURCHASE If you want to elect to have all or any part of this Security purchased by the Company pursuant to Section 4.10 or Section 4.14 of the Indenture check the appropriate box: [ ] Section 4.10 [ ] Section 4.14 If you want to have only part of the Security purchased by the Company pursuant to Section 4.10 or Section 4.14 of the Indenture, state the amount you elect to have purchased: $ ---------------------- Date: ----------------- Your Signature: ------------------------ (Sign exactly as your name appears on the face of this Security) Signature Guarantee: - ---------------------------------------- (Signatures must be guaranteed by an "eligible guarantor institution" meeting the requirements of the Registrar, which requirements will include membership or participation in the Securities Transfer Agents Medallion Program ("STAMP") or such other "signature guarantee program" as may be determined by the Registrar in addition to, or in substitution for, STAMP, all in accordance with the Securities Exchange Act of 1934, as amended.) 115 EXHIBIT B UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR SECURITIES IN DEFINITIVE FORM, THIS SECURITY MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITARY TO A NOMINEE OF THE DEPOSITARY, OR BY ANY SUCH NOMINEE OF THE DEPOSITARY, OR BY THE DEPOSITARY OR NOMINEE OF SUCH SUCCESSOR DEPOSITARY OR ANY SUCH NOMINEE TO A SUCCESSOR DEPOSITARY OR A NOMINEE OF SUCH SUCCESSOR DEPOSITARY. UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT HEREON IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF CEDE & CO. OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN THE INDENTURE. 116 EXHIBIT B Page 2 CUSIP No: (Front of Security) No. 1 $ ----------- SOURCE MEDIA, INC. 12% Senior Note dues 2004, Series B SOURCE MEDIA, INC., a Delaware corporation, promises to pay to Cede & Co., as nominee of the Depository Trust Company, or its registered assigns, the principal sum of $100,000,000 on November 1, 2004. Interest Payment Dates: May 1 and November 1, commencing May 1, 1998. Record Dates: April 15 and October 15 (whether or not a Business Day). Additional provisions of this Security are set forth on the other side of this Security. Dated: SOURCE MEDIA, INC. By: ------------------------ Name: Title: By: ------------------------ Name: Title: TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the Securities referred to in the within-mentioned Indenture U.S. Trust Company of Texas, N.A., as Trustee By: ------------------------------- Authorized Signatory Date: ----------------------- 117 EXHIBIT B Page 3 (Reverse of Security) 12% SENIOR NOTES DUE 2004, SERIES B Capitalized terms used herein have the meanings assigned to them in the Indenture (as defined below) unless otherwise indicated. 1. Interest. Source Media, Inc., a Delaware corporation (the "Company"), promises to pay interest on the principal amount of this Security at the rate and in the manner specified below. The Company shall pay, in cash, interest on the principal amount of this Security at the rate per annum of 12%. The Company will pay interest semiannually in arrears on May 1 and November 1 of each year (each an "Interest Payment Date"), commencing May 1, 1998, or if any such day is not a Business Day on the next succeeding Business Day. Interest will be computed on the basis of a 360-day year consisting of twelve 30-day months. Interest shall accrue from the most recent Interest Payment Date to which interest has been paid or, if no interest has been paid, from the date of the original issuance of the Securities. To the extent lawful, the Company shall pay interest on overdue principal at the rate of 2% per annum in excess of the then applicable interest rate on the Securities; it shall pay interest on overdue installments of interest (without regard to any applicable grace periods) at the same rate to the extent lawful. 2. Method of Payment. The Company shall pay interest on the Securities (except defaulted interest) to the Persons who are registered Securityholders at the close of business on the Record Date immediately preceding the Interest Payment Date, even if such Securities are cancelled after such Record Date and on or before such Interest Payment Date. Securityholders must surrender Securities to a Paying Agent to collect principal payments. The Company shall pay principal premium, if any, and interest in money of the United States that at the time of payment is legal tender for payment of public and private debts ("U.S. Legal Tender"). However, the Company may pay principal and interest by its check payable in such U.S. Legal Tender. The Company may deliver any such interest payment to the Paying Agent or to a Securityholder at the Securityholder's registered address. 3. Paying Agent and Registrar. Initially, the Trustee will act as Paying Agent and Registrar. The Company may change any Paying Agent, Registrar or co-registrar without prior notice to any Securityholder. The Company, or any Subsidiary Guarantor of the Company may act in any such capacity, except that none of the Company, its Subsidiaries or their Affiliates shall act (i) as Paying Agent in connection with any redemption, offer to purchase, discharge or defeasance, as otherwise specified in the 118 EXHIBIT B Page 4 Indenture, and (ii) as Paying Agent or Registrar if a Default or Event of Default has occurred and is continuing. 4. Indenture. The Company issued the Securities under an Indenture, dated as of October 30, 1997 (the "Indenture"), between the Company and the Trustee. The terms of the Securities include those stated in the Indenture and those made part of the Indenture by reference to the TIA as in effect on the date the Indenture is qualified. The Securities are subject to all such terms, and Securityholders are referred to the Indenture and the TIA for a statement of such terms. The terms of the Indenture shall govern any inconsistencies between the Indenture and the Securities. The Securities are senior Obligations of the Company limited to $100,000,000 in aggregate principal amount. 5. (a) Optional Redemption. Except as indicated in the next succeeding paragraph, the Securities are not redeemable at the Company's option prior to November 1, 2001. Thereafter, the Securities will be redeemable, at the option of the Company, in whole or in part, at the redemption prices (expressed as percentages of the principal amount of the Securities) set forth below, plus accrued interest to the redemption date:
PERIOD REDEMPTION PRICE - ------ ---------------- 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . 106% 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . 103% 2003 and thereafter 100.000%
(b) Optional Redemption Upon Equity Offerings. At any time, or from time to time, on or prior to November 1, 2000, the Company may, at its option, use the Net Cash Proceeds of one or more Equity Offerings by the Company so long as there is a Public Market at the time of such redemption, at a redemption price equal to 35% of the principal amount thereof, plus accrued and unpaid interest thereon, if any, to the date of redemption; provided, however, that after any such redemption, the aggregate principal amount of the Securities outstanding must equal at least $65 million. In order to effect the foregoing redemption with the proceeds of any Equity Offering, the Company shall make such redemption not more than 60 days after the consummation of any such Equity Offering. 6. Mandatory Redemption. The Securities are not subject to mandatory redemption or sinking fund payments. 119 EXHIBIT B Page 5 7. Repurchase at Option of Securityholder. (a) If there is a Change of Control, each Holder of Securities will have the right to require the Company to repurchase all or any part of such Holder's Securities at a repurchase price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of repurchase (subject to the right of Holders of record on the relevant Record Date to receive interest due on the relevant Interest Payment Date). Within 45 days following any Change of Control, the Company will mail a notice to each Securityholder stating (i) that a Change of Control has occurred and that such Securityholder has the right to require the Company to repurchase all or any part of such Securityholder's Securities at a repurchase price in cash equal to 101% of the principal amount thereof plus accrued and unpaid interest, if any, to the date of repurchase (subject to the right of Holders of record on the relevant Record Date to receive interest due on the relevant Interest Payment Date); (ii) the circumstances and relevant facts regarding such Change of Control (including information with respect to pro forma historical income, cash flow and capitalization after giving effect to such Change of Control; (iii) the repurchase date (which will be no earlier then 30 days nor later than 30 days from the date such notice is mailed); and (iv) the procedures, determined by the Company consistent with the Indenture, that a Securityholder must follow in order to have its Securities repurchased. Securityholders that are subject to an offer to repurchase may elect to have such Securities repurchased by completing the form entitled "Option of Securityholder to Elect Purchase" appearing below. (b) If the Company or a Subsidiary consummates any Asset Disposition, and when the aggregate amount of Net Available Cash from such an Asset Disposition exceeds $3 million, the Company shall be required to offer to purchase the maximum principal amount of Securities, that is in an integral multiple of $1,000, that may be purchased out of the Net Available Cash, at an offer price in cash in an amount equal to 100% of the outstanding principal amount thereof, plus accrued and unpaid interest, if any, to the date fixed for the closing of such offer in accordance with the procedures set forth in the Indenture. If the aggregate principal amount of Securities surrendered by Holders thereof exceeds the amount of Net Available Cash, the Securities to be redeemed shall be selected on a pro rata basis. Securityholders that are the subject of an offer to purchase will receive an Asset Disposition Offer from the Company prior to any related purchase date and may elect to have such Securities purchased by completing the form entitled "Option of Securityholder to Elect Purchase" appearing below. 8. Notice of Redemption. Notice of redemption shall be mailed at least 30 days (unless a shorter period is acceptable to the Trustee) but not more than 60 days before the redemption date to each Holder whose Securities are to be redeemed at its registered address. Securities may be redeemed in part but only in whole multiples of $1,000, unless all of the Securities held by a Securityholder are to be redeemed. On and after the 120 EXHIBIT B Page 6 redemption date, interest ceases to accrue on Securities or portions of them called for redemption. 9. Denominations, Transfer, Exchange. The Securities are in registered form without coupons in denominations of $1,000 and integral multiples of $1,000. The transfer of Securities may be registered and Securities may be exchanged as provided in the Indenture. The Registrar and the Trustee may require a Securityholder among other things, to furnish appropriate endorsements and transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. The Registrar need not exchange or register the transfer of any Security or portion of a Security selected for redemption. Also, it need not exchange or register the transfer of any Securities during a period beginning on the opening of business on a Business Day 15 days before the day of any selection of Securities to be redeemed and ending on the close of business on the day of selection or during the period between a Record Date and the corresponding Interest Payment Date. 10. Persons Deemed Owners. Prior to due presentment to the Trustee for registration of the transfer of this Security, the Trustee, any Agent and the Company may deem and treat the Person in whose name this Security is registered as its absolute owner for the purpose of receiving payment of principal of, premium, if any, and interest on this Security and for all other purposes whatsoever, whether or not this Security is overdue, and neither the Trustee, any Agent nor the Company shall be affected by notice to the contrary. The registered Securityholder shall be treated as its owner for all purposes. 11. Amendments and Waivers. Subject to certain exceptions provided in the Indenture, the Indenture or the Securities may be amended with the consent of the Holders of a majority in principal amount of the then outstanding Securities, and any existing default or Event of Default (except a payment default) may be waived with the consent of the Holders of a majority in principal amount of the then outstanding Securities. Without the consent of any Securityholder the Indenture or the Securities may be amended to, among other things, cure any ambiguity, defect or inconsistency, to comply with the requirements of the Commission in order to effect or maintain qualification of the Indenture under the TIA Securityholders or to make any change that does not adversely affect the rights of any Securityholder. 12. Defaults and Remedies. If an Event of Default occurs and is continuing, the Trustee or the Holders of at least 25% in principal amount of the then outstanding Securities may declare the unpaid principal of, and any accrued and unpaid interest on, all the Securities to be due and payable immediately; provided, that in the case of an Event of Default arising from certain events of bankruptcy or insolvency with respect to the Company or any Subsidiary Guarantor, all outstanding Securities shall become due and payable immediately without further action or notice. Securityholders may not enforce 121 EXHIBIT B Page 7 the Indenture or the Securities except as provided in the Indenture. The Trustee may require indemnity satisfactory to it before it enforces the Indenture or the Securities. Subject to certain limitations, Holders of a majority in principal amount of the then outstanding Securities may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Securityholders notice of any continuing default (except a default in payment of principal or interest) if it determines that withholding notice is in their interests. The Company must furnish an annual compliance certificate to the Trustee. 13. Trustee Dealings with the Company. The Trustee under the Indenture, in its individual or any other capacity may make loans to, accept deposits from, and perform services for the Company, the Subsidiary Guarantor or any Affiliate of the Company or the Subsidiary Guarantor, and may otherwise deal with the Company, the Subsidiary Guarantor and their respective Affiliates as if it were not Trustee. 14. Restrictive Covenants. The Indenture imposes certain limitations on the ability of the Company and its Restricted Subsidiaries to, among other things, incur additional Indebtedness, make payments in respect of its Capital Stock or certain Indebtedness, enter into transactions with Affiliates, create dividend or other payment restrictions affecting Subsidiaries, merge or consolidate with any other Person, sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of its assets or adopt a plan of liquidation. Such limitations are subject to a number of important qualifications and exceptions provided for in the Indenture. The Company must annually report to the Trustee on compliance with such limitations. 15. Authentication. This Security shall not be valid until authenticated by the manual signature of the Trustee or an authenticating agent. 16. Subsidiary Guarantee. Each Subsidiary Guarantor has jointly and severally irrevocably and unconditionally guaranteed the payment of principal, premium, if any, and interest (including interest on overdue principal and overdue interest, if lawful) on the Securities; provided, however, each Subsidiary Guarantor that makes a payment or distribution under a Subsidiary Guarantee shall be entitled to a contribution from each other Subsidiary Guarantor in a pro rata amount based on the Adjusted Net Assets of each Subsidiary Guarantor. 17. Defeasance. Subject to certain conditions provided for in the Indenture, the Company at any time may terminate some or all of its obligations under the Securities and the Indenture if the Company deposits with the Trustee money or U.S. Government Obligations for the payment of principal, premium (if any) and interest on the Securities to redemption or maturity, as the case may be. 122 EXHIBIT B Page 8 18. Governing Law. The Laws of the State of New York shall govern this Security and the Indenture, without regard to principles of conflict of laws. 19. Abbreviations. Customary abbreviations may be used in the name of a Securityholder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the entireties), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors Act). 20. CUSIP Numbers. Pursuant to a recommendation promulgated by the Committee on Uniform Security Identification Procedures, the Company has caused CUSIP numbers to be printed on the Securities and has directed the Trustee to use CUSIP numbers in notices of redemption as a convenience to Securityholders. No representation is made as to the accuracy of such numbers either as printed on the Securities or as contained in any notice of redemption and reliance may be placed only on the other identification numbers placed thereon. The Company will furnish to any Securityholder upon written request and without charge a copy of the Indenture. Request may be made to: Source Media, Inc. 8140 Walnut Hill Lane Suite 100 Dallas, TX 75231 Attn: Chief Financial Officer 123 EXHIBIT B Page 9 ASSIGNMENT FORM To assign this Security, fill in the form below: (I) or (we) assign and transfer this Security to - -------------------------------------------------------------------------------- (Insert assignee's soc. sec. or tax I.D. no.) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (Print or type assignee's name, address and zip code) and irrevocably appoint --------------------------------------------------------- 124 EXHIBIT B Page 10 agent to transfer this Security on the books of the Company. The agent may substitute another to act for him. Date: -------------- Your Signature: -------------------------------- (Sign exactly as your name appears on the face of this Security) Signature Guarantee: - ------------------------------- (Signatures must be guaranteed by an "eligible guarantor institution" meeting the requirements of the Registrar, which requirements will include membership or participation in the Securities Transfer Agents Medallion Program ("STAMP") or such other "signature guarantee program" as may be determined by the Registrar in addition to, or in substitution for, STAMP, all in accordance with the Securities Exchange Act of 1934, as amended.) 125 EXHIBIT B Page 11 OPTION OF SECURITYHOLDER TO ELECT PURCHASE If you want to elect to have all or any part of this Security purchased by the Company pursuant to Section 4.10 or Section 4.14 of the Indenture check the appropriate box: [ ] Section 4.10 [ ] Section 4.14 If you want to have only part of the Security purchased by the Company pursuant to Section 4.10 or Section 4.14 of the Indenture, state the amount you elect to have purchased: $ ---------------------- Date: ----------------- Your Signature: ------------------------------- (Sign exactly as your name appears on the face of this Security) Signature Guarantee: - ------------------------------- (Signatures must be guaranteed by an "eligible guarantor institution" meeting the requirements of the Registrar, which requirements will include membership or participation in the Securities Transfer Agents Medallion Program ("STAMP") or such other "signature guarantee program" as may be determined by the Registrar in addition to, or in substitution for, STAMP, all in accordance with the Securities Exchange Act of 1934, as amended.) 126 EXHIBIT C Form of Certificate To Be Delivered in Connection with Transfers to Non-QIB Accredited Investors U.S. Trust Company of Texas, N.A. - ------------------------------------------ - ------------------------------------------ Attention: Corporate Trust Administration Re: Source Media, Inc. 12% Senior Notes due 2004 Ladies and Gentlemen: In connection with our proposed purchase of 12% Senior Secured Notes due 2004 (the "Securities") of Source Media, Inc. (the "Company"), we confirm that: 1. We have received a copy of the Offering Memorandum (the "Offering Memorandum"), dated October 30, 1997 relating to the Securities and such other information as we deem necessary in order to make our investment decision. We acknowledge that we have read and agreed to the matters stated on pages (ii) and (iii) of the Offering Memorandum and in the section entitled "Transfer Restrictions" of the Offering Memorandum including the restrictions on duplication and circulation of the Offering Memorandum. 2. We understand that any subsequent transfer of the Securities is subject to certain restrictions and conditions set forth in the Indenture relating to the Securities (as described in the Offering Memorandum) and the undersigned agrees to be bound by, and not to resell, pledge or otherwise transfer the Securities except in compliance with, such restrictions and conditions and the Securities Act of 1933, as amended (the "Securities Act"). 3. We understand that the offer and sale of the Securities have not been registered under the Securities Act, and that the Securities may not be offered or sold except as permitted in the following sentence. We agree, on our own behalf and on behalf of any accounts for which we are acting as hereinafter stated, that if we should sell or 127 EXHIBIT C Page 2 otherwise transfer any Securities prior to the date which is two years after the original issuance of the Securities, we will do so only (i) to the Company or any of its subsidiaries, (ii) inside the United States in accordance with Rule 144A under the Securities Act to a "qualified institutional buyer" (as defined in Rule 144A under the Securities Act), (iii) inside the United States to an institutional "accredited investor" (as defined below) that, prior to such transfer, furnishes (or has furnished on its behalf by a U.S. broker-dealer) to the Trustee (as defined in the Indenture relating to the Securities), a signed letter containing certain representations and agreements relating to the restrictions on transfer of the Securities, (iv) outside the United States in accordance with Rule 904 of Regulation S under the Securities Act, (v) pursuant to the exemption from registration provided by Rule 144 under the Securities Act (if available), or (vi) pursuant to an effective registration statement under the Securities Act, and we further agree to provide to any person purchasing any of the Securities from us a notice advising such purchaser that resales of the Securities are restricted as stated herein. 4. We are not acquiring the Securities for or on behalf of, and will not transfer the Securities to, any pension or welfare plan (as defined in Section 3 of the Employee Retirement Income Security Act of 1974), except as permitted in the section entitled "Transfer Restrictions" of the Offering Memorandum. 5. We understand that, on any proposed resale of any Securities, we will be required to furnish to the Trustee and the Company such certification, legal opinions and other information as the Trustee and the Company may reasonably require to confirm that the proposed sale complies with the foregoing restrictions. We further understand that the Securities purchased by us will bear a legend to the foregoing effect. 6. We are an institutional "accredited investor" (as defined in Rule 501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act) and have such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of our investment in the Securities, and we and any accounts for which we are acting are each able to bear the economic risk of our or their investment, as the case may be. 7. We are acquiring the Securities purchased by us for our account or for one or more accounts (each of which is an institutional "accredited investor") as to each of which we exercise sole investment discretion. You and the Company are entitled to rely upon this letter and are irrevocably authorized to produce this letter or a copy hereof to any interested party in any 128 EXHIBIT C Page 3 administrative or legal proceeding or official inquiry with respect to the matters covered hereby. Very truly yours, By: --------------------------------------- Name: 129 EXHIBIT D Form of Certificate To Be Delivered in Connection with Transfers Pursuant to Regulation S , --------------- ---- U.S. Trust Company of Texas, N.A. - ------------------------------------------ - ------------------------------------------ Attention: Corporate Trust Administration Re: Source Media, Inc. (the "Company") __% Senior Unsecured Notes due 2004 (the "Securities") Ladies and Gentlemen: In connection with our proposed sale of $_____________ aggregate principal amount of the Securities, we confirm that such sale has been effected pursuant to and in accordance with Regulation S under the U.S. Securities Act of 1933, as amended (the "Securities Act"), and, accordingly, we represent that: (1) the offer of the Securities was not made to a Person in the United States; (2) either (a) at the time the buy offer was originated, the transferee was outside the United States or we and any person acting on our behalf reasonably believed that the transferee was outside the United States, or (b) the transaction was executed in, on or through the facilities of a designated off-shore securities market and neither we nor any person acting on our behalf knows that the transaction has been pre- arranged with a buyer in the United States; (3) no directed selling efforts have been made in the United States in contravention of the requirements of Rule 903(b) or Rule 904(b) of Regulation S, as applicable; 130 EXHIBIT D Page 2 (4) the transaction is not part of a plan or scheme to evade the registration requirements of the Securities Act; and (5) we have advised the transferee of the transfer restrictions applicable to the Securities. You and the Company are entitled to rely upon this letter and are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceedings or official inquiry with respect to the matters covered hereby. Terms used in this certificate have the meanings set forth in Regulation S. Very truly yours, [Name of Transferor] By: ----------------------------------------- Authorized Signature EX-4.2 5 CERT OF DESIGNATION-13.5% SENIOR PIK PREFRD STOCK 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. 2 (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 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. -2- 3 (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 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 -3- 4 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. (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): -4- 5
Year Percentage ---- ---------- 2002 106.75% 2003 104.50% 2004 102.25% 2005 and thereafter 100.000%
(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: (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- 6 (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 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 -6- 7 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 Amendment. It is understood that no -7- 8 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 -8- 9 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 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 -9- 10 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 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 -10- 11 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 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). -11- 12 (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; (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; -12- 13 (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 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. -13- 14 (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 cost of construction or improvement, in each case Incurred no later than -14- 15 365 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, -15- 16 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 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); -16- 17 (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 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 -17- 18 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 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) -18- 19 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 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 -19- 20 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 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 -20- 21 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 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 -21- 22 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. -22- 23 (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: "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 -23- 24 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. "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 -24- 25 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 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. -25- 26 "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 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 -26- 27 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 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 -27- 28 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 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 -28- 29 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. -29- 30 "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 (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. -30- 31 "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. "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 -31- 32 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, (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. -32- 33 "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 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. -33- 34 "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 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. -34- 35 "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 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. -35- 36 "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 of another Restricted Subsidiary) including Indebtedness that refinances Refinancing -36- 37 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. -37- 38 "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 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. -38- 39 "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 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. -39- 40 "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. -40- 41 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 -41- EX-4.3 6 WARRANT AGREEMENT DATED 10/30/97 1 EXHIBIT 4.3 WARRANT AGREEMENT Between SOURCE MEDIA, INC. and CHASEMELLON SHAREHOLDER SERVICES, L.L.C. as Warrant Agent _________________________ Dated as of October 30, 1997 __________________________ 2 TABLE OF CONTENTS
Page ---- SECTION 1. Appointment of Warrant Agent . . . . . . . . . . . . . . . . . 1 SECTION 2. Warrant Certificates . . . . . . . . . . . . . . . . . . . . . 1 SECTION 3. Execution of Warrant Certificates . . . . . . . . . . . . . . . 2 SECTION 4. Registration and Countersignature . . . . . . . . . . . . . . . 2 SECTION 5. Transfer and Exchange of Warrants . . . . . . . . . . . . . . . 3 SECTION 6. Registration of Transfers and Exchanges . . . . . . . . . . . . 4 (a) Transfer and Exchange of Physical Warrants . . . . . . . . 4 (b) Legends . . . . . . . . . . . . . . . . . . . . . . . . . 5 (c) Obligations with Respect to Transfers and Exchanges of Physical Warrants . . . . . . . . . . . . . . . . . . . 7 SECTION 7. Separation of Warrants: Terms of Warrants, Exercise of Warrants . . . . . . . . . . . . . . . . . . . . . . . 7 SECTION 8. Payment of Taxes . . . . . . . . . . . . . . . . . . . . . . . 9 SECTION 9. Mutilated or Missing Warrant Certificates . . . . . . . . . . . 9 SECTION 10. Reservation of Warrant Shares . . . . . . . . . . . . . . . . 10 SECTION 11. Obtaining Stock Exchange Listings . . . . . . . . . . . . . . 11 SECTION 12. Adjustment of Number of Warrant Shares Issuable . . . . . . . 11 (a) Adjustment for Change in Capital Stock . . . . . . . . . . 11 (b) Adjustment for Certain Issuances of Common Stock . . . . . 12 (c) Adjustment for Other Distribution . . . . . . . . . . . . 13
(i) 3
Page ---- (d) Adjustments for Mergers, Consolidations, Sale of Assets, Distributions, etc. . . . . . . . . . . . . 14 (e) Current Market Value . . . . . . . . . . . . . . . . . . . 15 (f) When De Minimis Adjustment May Be Deferred . . . . . . . . 17 (g) When No Adjustment Required . . . . . . . . . . . . . . . 17 (h) Notice of Adjustment . . . . . . . . . . . . . . . . . . . 17 (i) Voluntary Reduction . . . . . . . . . . . . . . . . . . . 18 (j) When Issuance or Payment May Be Deferred . . . . . . . . . 18 (k) Reorganizations . . . . . . . . . . . . . . . . . . . . . 18 (l) Form of Warrants . . . . . . . . . . . . . . . . . . . . . 19 (m) Miscellaneous . . . . . . . . . . . . . . . . . . . . . . 19 SECTION 13. Fractional Interests . . . . . . . . . . . . . . . . . . . . . 20 SECTION 14. Notices to Warrant Holders . . . . . . . . . . . . . . . . . . 20 SECTION 15. Notices to the Company and Warrant Agent . . . . . . . . . . . 22 SECTION 16. Supplements and Amendments . . . . . . . . . . . . . . . . . . 23 SECTION 17. Concerning the Warrant Agent . . . . . . . . . . . . . . . . . 23 SECTION 18. Change of Warrant Agent . . . . . . . . . . . . . . . . . . . 26 SECTION 19. Identity of Transfer Agent . . . . . . . . . . . . . . . . . . 26 SECTION 20. Successors . . . . . . . . . . . . . . . . . . . . . . . . . . 27 SECTION 21. Termination . . . . . . . . . . . . . . . . . . . . . . . . . 27 SECTION 22. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . 27 SECTION 23. Benefits of This Agreement . . . . . . . . . . . . . . . . . . 27 SECTION 24. Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . 27
(ii) 4 WARRANT AGREEMENT (the "Agreement"), dated as of October 30, 1997, between Source Media, Inc., a Delaware corporation (together with any successors and assigns, the "Company"), and ChaseMellon Shareholder Services, L.L.C., a limited liability company organized under the laws of the State of New Jersey, as Warrant Agent (the "Warrant Agent"). WHEREAS, the Company proposes, among other things, to issue and sell pursuant to a Purchase Agreement, dated as of October 23, 1997, among the Company and NatWest Capital Markets Limited and Prudential Securities Incorporated, as Initial Purchasers (the "Purchase Agreement"), 800,000 shares of its 13 1/2% Senior PIK Preferred Stock (the "Senior PIK Preferred Stock"), along with Warrants (the "Warrants"), for the purchase of 447,000 shares of its Common Stock, par value $.001 per share (the "Common Stock," and the shares of Common Stock issuable upon exercise of the Warrants being referred to herein as the "Warrant Shares"). The Senior PIK Preferred Stock and Warrants will be sold in units (the "Units), each Unit representing 1,000 shares of Preferred Stock and 558.75 Warrants, each Warrant to purchase one share of Common Stock; WHEREAS, the Company wishes the Warrant Agent to act on behalf of the Company and the Warrant Agent is willing to act in connection with the issuance, division, transfer, exchange and exercise of Warrants as provided herein; NOW, THEREFORE, in consideration of the premises and mutual agreements herein, the Company and the Warrant Agent hereby agree as follows: SECTION 1. Appointment of Warrant Agent. The Company hereby appoints the Warrant Agent to act as agent for the Company in accordance with the instructions hereinafter set forth in this Agreement, and the Warrant Agent hereby accepts such appointment. SECTION 2. Warrant Certificates. The Warrants will initially be issued in registered form as physical Warrant certificates (the "Physical Warrants"). Any certificates (the "Warrant Certificates") evidencing the Physical Warrants to be delivered pursuant to this Agreement shall be substantially in the form set forth in Exhibit A attached hereto. Such Warrant Certificates shall represent such of the outstanding Warrants as shall be specified therein and each shall provide that it shall represent the aggregate amount of outstanding Warrants from time to time endorsed thereon and that the aggregate amount of outstanding Warrants represented thereby may from time to time be reduced or increased, as appropriate. Any endorsement of a Warrant 5 Certificate to reflect the amount of any increase or decrease in the amount of outstanding Warrants represented thereby shall be made by the Warrant Agent in accordance with instructions given by the Holder thereof. SECTION 3. Execution of Warrant Certificates. Warrant Certificates shall be signed on behalf of the Company by its Chairman of the Board, Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, President or a Vice President and by its Secretary or an Assistant Secretary. Each such signature upon the Warrant Certificates may be in the form of a facsimile signature of the present or any future Chairman of the Board, President, Chief Executive Officer, Chief Operating Officer, Vice President, Treasurer, Chief Financial Officer, Secretary or Assistant Secretary and may be imprinted or otherwise reproduced on the Warrant Certificates and for that purpose the Company may adopt and use the facsimile signature of any person who shall have been Chairman of the Board, President, Chief Executive Officer, Chief Operating Officer, Vice President, Treasurer, Chief Financial Officer, Secretary or Assistant Secretary, notwithstanding the fact that at the time the Warrant Certificates shall be countersigned and delivered or disposed of he shall have ceased to hold such office. The seal of the Company may be in the form of a facsimile thereof and may be impressed, affixed, imprinted or otherwise reproduced on the Warrant Certificates. In case any officer of the Company who shall have signed any of the Warrant Certificates shall cease to be such officer before the Warrant Certificates so signed shall have been countersigned by the Warrant Agent, or disposed of by the Company, such Warrant Certificates nevertheless may be countersigned and delivered or disposed of as though such person had not ceased to be such officer of the Company; and any Warrant Certificate may be signed on behalf of the Company by any person who, at the actual date of the execution of such Warrant Certificate, shall be a proper officer of the Company to sign such Warrant Certificate, although at the date of the execution of this Warrant Agreement any such person was not such officer. Warrant Certificates shall be dated the date of countersignature by the Warrant Agent. SECTION 4. Registration and Countersignature. The Warrants shall be numbered and shall be registered on the books of the Company maintained at the principal office of the Warrant Agent in Ridgefield Park, New Jersey (the "Warrant Register") as they are issued. Warrant Certificates shall be manually countersigned by the Warrant Agent and shall not be valid for any purpose unless so countersigned. The Warrant -2- 6 Agent shall, upon written instructions of the Chairman of the Board, the President, Chief Executive Officer, Chief Operating Officer, a Vice President, the Treasurer, Chief Financial Officer or an Assistant Secretary of the Company, initially countersign and deliver Warrants entitling the Holders thereof to purchase not more than the number of Warrant Shares referred to above in the first recital hereof and shall thereafter countersign and deliver Warrants upon the written instruction of the foregoing officers. The Company and the Warrant Agent may deem and treat the registered Holders (the "Holders") of the Warrant Certificates as the absolute owners thereof (notwithstanding any notation of ownership or other writing thereon made by anyone) for all purposes, and neither the Company nor the Warrant Agent shall be affected by any notice to the contrary. SECTION 5. Transfer and Exchange of Warrants. The Warrant Agent shall from time to time, subject to the limitations of Section 6, register the transfer of any outstanding Warrants upon the records to be maintained by it for that purpose, upon surrender thereof duly endorsed or accompanied (if so required by it) by a written instrument or instruments of transfer, duly executed by the registered Holder or Holders thereof or by the duly appointed legal representative thereof or by a duly authorized attorney. Subject to the terms of this Agreement, each Warrant Certificate may be exchanged for another certificate or certificates entitling the Holder thereof to purchase a like aggregate number of Warrant Shares as the certificate or certificates surrendered then entitle each Holder to purchase. Any Holder desiring to exchange a Warrant Certificate or Certificates shall make such request in writing delivered to the Warrant Agent, and shall surrender, duly endorsed or accompanied (if so required by the Warrant Agent) by a written instrument or instruments of transfer, the Warrant Certificate or Certificates to be so exchanged. Upon registration of transfer, the Warrant Agent shall countersign and deliver by mail a new Warrant Certificate or Certificates to the persons entitled thereto. The Warrant Certificates may be exchanged at the option of the Holder thereof, when surrendered at the office or agency of the Company maintained for such purpose, which initially will be the corporate trust office of the Warrant Agent in Ridgefield Park, New Jersey or at the drop office in New York, New York for another Warrant Certificate, or other Warrant Certificates of different denominations, of like tenor and representing in the aggregate the right to purchase a like number of Warrant Shares. No service charge shall be made for any exchange or registration of transfer of Warrant Certificates, but the Company may require payment of a sum sufficient to cover any stamp or other tax or other governmental charge that is imposed in connection with any such exchange or registration of transfer. -3- 7 SECTION 6. Registration of Transfers and Exchanges. (a) Transfer and Exchange of Physical Warrants. When Physical Warrants are presented to the Warrant Agent with a request, and after the Warrant Agent has had adequate time to confer and receive written instructions from the Company: (i) to register the transfer of the Physical Warrants; or (ii) to exchange such Physical Warrants for an equal number of Physical Warrants of other authorized denominations; the Warrant Agent shall register the transfer or make the exchange as requested if the requirements under this Agreement as set forth in this Section 6 for such transactions are met; provided, however, that the Physical Warrants presented or surrendered for registration of transfer or exchange: (I) shall be duly endorsed or accompanied by a written instrument of transfer, duly executed by the Holder thereof or his attorney duly authorized in writing; and (II) in the case of Physical Warrants the offer and sale of which have not been registered under the Securities Act of 1933, as amended (the "Security Act"), such Physical Warrants shall be accompanied, in the sole discretion of the Company, by the following additional information and documents, as applicable: (A) if such Physical Warrants are being delivered to the Warrant Agent by a Holder for registration in the name of such Holder, without transfer, a certification from such Holder to that effect (in substantially the form of Exhibit B hereto); or (B) if such Physical Warrants are being transferred to an institutional "accredited investor" (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act (an "Institutional Accredited Investor")) delivery of a certification to that effect (in substantially the form of Exhibit B hereto) and a Transferee Certificate for Institutional Accredited Investors in substantially the form of Exhibit C hereto; or -4- 8 (C) if such Physical Warrants are being transferred in reliance on Regulation S under the Securities Act ("Regulation S"), delivery of a certification to that effect (in substantially the form of Exhibit B hereto) and a Transferee Certificate for Regulation S Transfers in substantially the form of Exhibit D hereto and an Opinion of Counsel reasonably satisfactory to the Company to the effect that such transfer is in compliance with the Securities Act; or (D) if such Physical Warrants are being transferred in reliance on another exemption from the registration requirements of the Securities Act, a certification to that effect (in substantially the form of Exhibit B hereto) and an opinion of counsel reasonably satisfactory to the Company to the effect that such transfer is in compliance with the Securities Act. (b) Legends. (i) For so long as transfer of a Warrant is not permitted without registration under the Securities Act, each Warrant Certificate evidencing such Warrant (and all Warrants issued in exchange therefor or substitution thereof) shall bear a legend substantially to the following effect: THIS SECURITY (OR ITS PREDECESSOR) HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") AND, ACCORDINGLY, MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS, EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE BY ITS ACQUISITION HEREOF OR A BENEFICIAL INTEREST HEREIN, THE HOLDER (1) REPRESENTS THAT (A) IT IS AN INSTITUTIONAL "ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(a), (1), (2), (3) OR (7) OF REGULATION D UNDER THE SECURITIES ACT (AN "INSTITUTIONAL ACCREDITED INVESTOR") OR (B) IT IS NOT A U.S. PERSON, IS NOT ACQUIRING THIS SECURITY FOR THE ACCOUNT OR BENEFIT OF A U.S. PERSON AND IS ACQUIRING THIS SECURITY IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH REGULATORS UNDER THE SECURITIES ACT, (2) AGREES THAT IT WILL NOT, WITHIN THE TIME PERIOD REFERRED TO UNDER RULE 144(k) (TAKING INTO ACCOUNT THE PROVISIONS OF RULE 144(d) UNDER THE SECURITIES ACT, IF APPLICABLE) UNDER THE -5- 9 SECURITIES ACT AS IN EFFECT ON THE DATE OF THE TRANSFER OF THIS SECURITY, RESELL OR OTHERWISE TRANSFER THIS SECURITY EXCEPT (A) TO SOURCE MEDIA, INC. ("SOURCE") OR ANY SUBSIDIARY THEREOF, (B) INSIDE THE UNITED STATES TO AN INSTITUTIONAL ACCREDITED INVESTOR THAT, PRIOR TO SUCH TRANSFER FURNISHES TO THE WARRANT AGENT, A SIGNED LETTER CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS RELATING TO THE RESTRICTIONS ON TRANSFER OF THIS SECURITY, AND IF SUCH TRANSFER IS IN RESPECT OF AN AGGREGATE AMOUNT OF WARRANTS AT THE TIME OF TRANSFER OF LESS THAN $250,000, AN OPINION OF COUNSEL ACCEPTABLE TO SOURCE THAT SUCH TRANSFER IS IN COMPLIANCE WITH THE SECURITIES ACT, (C) OUTSIDE THE UNITED STATES IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH RULE 904 UNDER THE SECURITIES ACT, (D) PURSUANT TO THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT (IF AVAILABLE, BASED UPON AN OPINION OF COUNSEL ACCEPTABLE TO SOURCE), (E) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR (F) IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (BASED UPON AN OPINION OF COUNSEL ACCEPTABLE TO SOURCE) AND IN EACH CASE, IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS, AND (3) AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THIS SECURITY OR AN INTEREST HEREIN IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION," "UNITED STATES" AND "U.S. PERSON" HAVE THE MEANING GIVEN TO THEM BY RULE 902 OF REGULATION S UNDER THE SECURITIES ACT. THE WARRANT AGREEMENT, DATED AS OF OCTOBER 30, 1997, BETWEEN SOURCE AND CHASEMELLON SHAREHOLDER SERVICES, L.L.C., CONTAINS A PROVISION REQUIRING THE WARRANT AGENT TO REFUSE TO REGISTER TRANSFER OF THIS SECURITY IN VIOLATION OF THE FOREGOING RESTRICTIONS. -6- 10 (c) Obligations with Respect to Transfers and Exchanges of Physical Warrants. (i) To permit registrations of transfers and exchanges, the Company shall execute the Physical Warrants and instruct the Warrant Agent to countersign the Physical Warrants. (ii) All Physical Warrants issued upon any registration, transfer or exchange of Physical Warrants shall be the valid obligations of the Company, entitled to the same benefits under this Agreement as the Physical Warrants surrendered upon the registration of transfer or exchange. (iii) Prior to due presentment for registration of transfer of any Warrant, the Warrant Agent and the Company may deem and treat the person in whose name any Warrant is registered as the absolute owner of such Warrant, and neither the Warrant Agent nor the Company shall be affected by notice to the contrary. SECTION 7. Separation of Warrants: Terms of Warrants, Exercise of Warrants. The Senior PIK Preferred Stock and Warrants will not be separately transferable until the "Separability Date," which shall be immediately upon sale of the Units by the Initial Purchasers. Subject to the terms of this Agreement, each Warrant Holder shall have the right, which may be exercised commencing on or after the date of issuance and until 5:00 p.m., New York City time, on November 1, 2007 (the "Expiration Date"), to receive from the Company upon the exercise of each warrant the number of fully paid and nonassessable Warrant Shares which the Holder may at the time be entitled to receive on exercise of such Warrants and payment of the Exercise Price (as defined below) then in effect for such Warrant Shares. Each Warrant not exercised prior to the Expiration Date shall become void and all rights thereunder and an rights in respect thereof under this Agreement shall cease as of such time. No adjustments as to dividends will be made upon exercise of the Warrants. The initial price per share at which Warrant Shares shall be purchasable upon exercise of Warrants (the "Exercise Price") shall be $.01, subject to adjustment, provided, that in no event shall the Exercise Price be less than $.01 per share. A Warrant may be exercised upon surrender at the office or agency of the Company maintained for such purpose, which initially will be the corporate trust office of the Warrant Agent in Ridgefield Park, New Jersey, of the certificate or certificates evidencing the Warrants to be exercised with the form of election to purchase on the -7- 11 reverse thereof duly filled in and signed, which signature shall be guaranteed by a participant in a recognized Signature Guarantee Medallion Program, and upon payment to the Warrant Agent for the account of the Company of the Exercise Price, as adjusted as herein provided, for the number of Warrant Shares in respect of which such Warrants are then exercised. Payment of the aggregate Exercise Price shall be made in cash or by certified or official bank check to the order of the Warrant Agent on behalf of the Company in Immediately Available Funds. Subject to the provisions of Section 6 hereof, upon such surrender of Warrants and payment of the Exercise Price, the Company shall issue and cause to be delivered with all reasonable dispatch to or upon the written order of the Holder and in such name or names as the Warrant Holder may designate a certificate or certificates for the number of Warrant Shares issuable upon the exercise of such Warrants together with cash as provided in Section 12; provided, however, that if any consolidation, merger or lease or sale of assets is proposed to be effected by the Company as described in subsection (j) of Section 12 hereof, or a tender offer or an exchange offer for shares of Common Stock of the Company shall be made, upon such surrender of Warrants and payment of the Exercise Price as aforesaid, the Company shall, as soon as possible, but in any event not later than 10 days, other than a Saturday or Sunday or a day on which banking institutions in the State of New York are not open for business ("Business Day") thereafter, issue and cause to be mailed the number of Warrant Shares issuable upon the exercise of such Warrants in the manner described in this sentence together with cash as provided in Section 12. Such certificate or certificates shall be deemed to have been issued and any person so designated to be named therein shall be deemed to have become a Holder of record of such Warrant Shares as of the date of the surrender of such Warrants and payment of the Exercise Price. The Warrants shall be exercisable, at the election of the Holders thereof, either in full or from time to time in part and, in the event that a certificate evidencing Warrants is exercised in respect of fewer than all of the Warrant Shares issuable on such exercise at any time prior to the date of expiration of the Warrants, a new certificate evidencing the remaining Warrant or Warrants will be issued, and the Warrant Agent shall, at the Company's direction, countersign and deliver the required new Warrant Certificate or Certificates pursuant to the provisions of this Section and of Section 3 hereof, and the Company will promptly supply the Warrant Agent with Warrant Certificates duly executed on behalf of the Company for such purpose. All Warrant Certificates surrendered upon exercise of Warrants shall be cancelled by the Warrant Agent. Such cancelled Warrant Certificates shall then be disposed of by the Warrant Agent in a manner consistent with the Warrant Agent's -8- 12 customary procedure for such disposal. The Warrant Agent shall promptly pay to the Company all monies received by the Warrant Agent for the purchase of the Warrant Shares through the exercise of such Warrants. SECTION 8. Payment of Taxes. The Company will pay all documentary stamp taxes attributable to the initial issuance of Warrant Shares upon the exercise of Warrants; provided, however, that the Company shall not be required to pay any tax or taxes which may be payable in respect of any transfer involved in the issue of any Warrant Certificates or any certificates for Warrant Shares in a name other than that of the registered Holder of a Warrant Certificate surrendered upon the exercise of a Warrant, and the Company shall not be required to issue or deliver such Warrant Certificates unless or until the person or persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. SECTION 9. Mutilated or Missing Warrant Certificates. In case any of the Warrant Certificates shall be mutilated, lost, stolen or destroyed, the Company may at its discretion issue and the Warrant Agent shall countersign, in exchange and substitution for and upon cancellation of the mutilated Warrant Certificate, or in lieu of and substitution for the Warrant Certificate lost, stolen or destroyed, a new Warrant Certificate of like tenor and representing an equivalent number of Warrants, but only upon receipt of evidence satisfactory to the Company of such loss, theft or destruction of such Warrant Certificate and indemnity in the sole discretion of the Warrant Agent. Applicants for such substitute Warrant Certificates shall also comply with such other reasonable regulations and pay such other reasonable charges as the Company or the Warrant Agent may prescribe. SECTION 10. Reservation of Warrant Shares. The Company will at all times reserve and keep available, free from preemptive rights, out of the aggregate of its authorized but unissued Common Stock or its authorized and issued Common Stock held in its treasury, for the purpose of enabling it to satisfy an obligation to issue Warrant Shares upon exercise of Warrants, the maximum number of shares of Common Stock which may then be deliverable upon the exercise of all outstanding Warrants. The Company or, if appointed, the transfer agent for the Common Stock (the "Transfer Agent") and every subsequent transfer agent for any shares of the Company's capital stock issuable upon the exercise of any of the rights of purchase aforesaid will be irrevocably authorized and directed at all times to reserve such number of authorized shares as shall be required for such purpose. The Company will keep a copy of this Agreement on file with the Transfer Agent and with every subsequent transfer agent for any shares of the Company's capital stock issuable upon the exercise -9- 13 of the rights of purchase represented by the Warrants. The Warrant Agent is hereby irrevocably authorized to requisition from time to time from such Transfer Agent the stock certificates required to honor outstanding Warrants upon exercise thereof in accordance with the terms of this Agreement. The Company will supply such Transfer Agent with duly executed certificates for such purposes and will provide or otherwise make available any cash which may be payable as provided in Section 12. The Company will furnish such Transfer Agent a copy of all notices of adjustments and certificates related thereto transmitted to each Holder pursuant to Section 14 hereof. The Company covenants that all Warrant Shares which may be issued upon exercise of Warrants made in accordance with the terms of this Agreement will, upon payment of the Exercise Price therefor and issue thereof, be validly authorized and issued, fully paid, nonassessable, free of preemptive rights and free from all taxes, liens, charges and security interests with respect to the issuance thereof. The Company will take no action to increase the par value of the Common Stock to an amount in excess of the Exercise Price, and the Company will not enter into any agreements inconsistent with the rights of Holders hereunder. The Company will use its best efforts to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof as may be necessary to enable the Company to perform its obligations under this Agreement. The Company shall not take any action reasonably within its control, including the hiring of a broker to solicit exercises, which would render unavailable an exemption from registration under the Securities Act which might otherwise be available with respect to the issuance of Warrant Shares upon exercise of any Warrants, unless there is an effective registration statement with respect to such issuance. SECTION 11. Obtaining Stock Exchange Listings. The Company will from time to time take all action which may be necessary so that the Warrant Shares, immediately upon their issuance upon the exercise of Warrants, will be listed on the principal securities exchanges and markets within the United States of America (including the NASDAQ National Market System), if any, on which other shares of Common Stock are then listed. In the event that, at any time during the period in which the Warrants are exercisable, the Common Stock is not listed on any principal securities or exchanges or markets within the United States of America, the Company will use its best efforts to permit the Warrant Shares to be designated PORTAL securities in accordance with the rules and regulations adopted by the National Association of Securities Dealers, Inc. relating to trading in the Private Offering, Resales and Trading through Automated Linkages market. SECTION 12. Adjustment of Number of Warrant Shares Issuable. The number of shares of Common Stock issuable upon the exercise of each Warrant (the -10- 14 "Exercise Rate") is subject to adjustment from time to time upon the occurrence of the events enumerated in this Section 12. The Warrant Agent is not responsible for any calculations or determinations made or to be made under this Section 12. The Exercise Rate shall initially be one. (a) Adjustment for Change in Capital Stock. If the Company: (1) pays a dividend or makes a distribution on its Common Stock in shares of its Common Stock or other capital stock of the Company; (2) subdivides, combines or reclassifies its outstanding shares of Common Stock; (3) makes a distribution to all Holders of its Common Stock of rights, warrants or options to purchase Common Stock of the Company at a price per share less than the Current Market Value (as defined in Section 12(d)) at the Time of Determination (as defined below); and (4) makes distributions to stockholders of Common Stock of the Company or rights, warrants or options to purchase Common Stock of the Company; then the Exercise Rate in effect immediately prior to such action shall be proportionately adjusted so that the Holder of any Warrant thereafter exercised may receive the aggregate number and kind of shares of capital stock of the Company which he would have owned immediately following such action if such Warrant had been exercised immediately prior to such action; provided, however, that notwithstanding the foregoing, upon the occurrence of an event described in any of paragraphs (1), (3) or (4) above, which otherwise would have given rise to an adjustment, no adjustment shall be made if the Company includes the Holders of Warrants in such distribution pro rata to the number of shares of Common Stock issued and outstanding (after giving effect to the Warrant Shares as if they were issued and outstanding). The adjustment which shall be calculated by the Company shall become effective immediately after the record date in the case of a dividend or distribution (the "Time of Determination") and immediately after the effective date in the case of a subdivision, combination or reclassification. If after an adjustment a Holder of a Warrant upon exercise of it may receive shares of two or more classes of capital stock of the Company, the Board of Directors of the Company shall determine the allocation of the adjusted Exercise Price -11- 15 between the classes of capital stock. After such allocation, the exercise privilege and the Exercise Price of each class of capital stock shall thereafter be subject to adjustment on terms comparable to those applicable to Common Stock in this Section. Such adjustment shall be made successively whenever any event listed above shall occur. (b) Adjustment for Certain Issuances of Common Stock. Subject to Section 12(a), if the Company issues or sells shares of its Common Stock or distributes any rights, options or warrants to all Holders of its Common Stock entitling them to purchase shares of Common Stock, or securities convertible into or exchangeable for Common Stock (other than pursuant to (1) the exercise of the Warrants, (2) any options, warrants or rights outstanding as of the date of this Agreement, (3) without limiting any options, warrants or rights outstanding pursuant to the immediately preceding clause (2), any director's plans and employee stock option or purchase plans to the extent that the aggregate number of shares of Common Stock of the Company (or securities convertible into or exchangeable or exercisable for the Common Stock of the Company) distributed under all such director's plans and employee stock option and purchase plans does not exceed 2,300,000 shares of the Company's Common Stock at any time (of which options to purchase 1,118,599 shares are currently outstanding)), at a price per share less than the Current Market Value at the Time of Determination, the Exercise Rate shall be adjusted in accordance with the formula: E1 = E x (O + N) ----- (O + (N x P) ----- M where: E(1) = the adjusted Exercise Rate. E = the Exercise Rate immediately prior to the Time of Determination for any such distribution. O = the number of Fully Diluted Shares (as defined in Section 12(i)) outstanding on the Time of Determination for any such issuance, sale or distribution. N = the number of additional shares of Common Stock issued, sold or issuable upon exercise of such rights, options or warrants. -12- 16 P = the price received in the case of any issuance or sale of Common Stock or exercise price per share of such rights, options or warrants. M = the Current Market Value per share of Common Stock on the Time of Determination for any such issuance, sale or distribution. The adjustment shall be made successively whenever any such rights, options or warrants are issued and shall become effective immediately after the record date for the determination of stockholders entitled to receive the rights, options or warrants. If at the end of the period during which any such rights, options or warrants are exercisable, not all rights, options or warrants shall have been exercised, the Warrant shall be immediately readjusted to what it would have been if "N" in the above formula had been the number of shares actually issued. (c) Adjustment for Other Distribution. Subject to Section 12(a), if the Company distributes to all Holders of its Common Stock (i) any evidences of indebtedness of the Company or any of its subsidiaries, (ii) any assets of the Company or any of its subsidiaries (other than cash dividends or other cash distributions or distributions from current or retained earnings other than any Extraordinary Cash Dividend), or (iii) any rights, options or warrants to acquire any of the foregoing or to acquire any other securities of the Company, the Exercise Rate shall be adjusted in accordance with the formula: E(1) = E x M ----- M - F where: E(1) = the adjusted Exercise Rate. E = the current Exercise Rate on the record date mentioned below. M = the Current Market Value per share of Common Stock on the record date mentioned below. F = the fair market value on the record date mentioned below of the indebtedness, assets, rights, options or warrants distributable to -13- 17 one share of Common Stock, based on the number of Fully Diluted Shares. The adjustment shall be made successively whenever any such distribution is made and shall become effective immediately after the record date for the determination of stockholders entitled to receive the distribution. If an adjustment is made pursuant to clause (iii) above of this subsection (c) as a result of the issuance of rights, options or warrants and at the end of the period during which any such rights, options or warrants are exercisable, not all such rights, options or warrants shall have been exercised, the Warrant shall be immediately readjusted as if "F" in the above formula was the fair market value on the record date of the indebtedness or assets actually distributed upon exercise of such rights, options or warrants divided by the number of shares of Common Stock outstanding on the record date. Notwithstanding the foregoing provisions of this Section 12(c), (x) an event which would otherwise give rise to an adjustment pursuant to this Section 12(c) shall not give rise to such an adjustment if the Company includes the Holders of the Warrants in such distribution pro rata to the number of shares of Common Stock issued and outstanding after giving effect to the Warrant Shares as if they were issued and outstanding and (y) no adjustment shall be made pursuant to this Section 12(c) with respect to cash dividends other than Extraordinary Cash Dividends. This subsection does not apply to rights, options or warrants referred to in subsection (b) of this Section 12. (d) Adjustments for Mergers, Consolidations, Sale of Assets, Distribution, etc. If (x) the Company merges or consolidates with, or sells all or substantially all of its property and assets to, another person (other than an Affiliate of the Company) and consideration is payable to Holders of Common Stock in exchange for their Common Stock in connection with such merger, consolidation or sale which consists solely of cash, or (y) in the event of the dissolution, liquidation or winding up of the Company, then the Holders of Warrants shall be entitled to receive distributions on the date of such event on an equal basis with Holders of Common Stock (or other securities issuable upon exercise of the Warrants) as if the Warrants had been exercised immediately prior to such event, less the Exercise Price. Upon receipt of such payment, if any, the rights, of a Holder shall terminate and cease and his or her Warrants shall expire. In case of any such merger, consolidation or sale of assets, the surviving or acquiring Person and, in the event of any dissolution, liquidation or winding up of the Company, the Company shall deposit promptly with the Warrant Agent the funds, if any, necessary to pay the Holders of the Warrants. After receipt -14- 18 of such deposit from such Person or the Company and after receipt of surrendered Warrant Certificates, the Warrant Agent shall make payment by delivering a check in such amount as is appropriate (or, in the case of consideration other than cash, such other consideration as is appropriate) to such Person or Persons as it may be directed in writing by the Holder surrendering such Warrants. (e) Current Market Value. "Current Market Value" per share of Common Stock or of any other security (herein collectively referred to as a "Security") at any date shall be: (1) if the Security is not registered under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), (i) the value of the Security determined in good faith by the Board of Directors of the Company and certified in a board resolution, based on the most recently completed arm's length transaction between the Company and a person other than an Affiliate of the Company in which such determination is necessary and the closing of which occurs on such date or shall have occurred within the six months preceding such date, (ii) if no such transaction shall have occurred on such date or within such six-month period, the value of the Security most recently determined as of a date within the six months preceding such date by an Independent Financial Expert or (iii) if neither clause (i) nor (ii) is applicable, the value of the Security determined as of such date by an Independent Financial Expert, or (2) if the Security is registered under the Exchange Act, the average of the daily market prices for each business day during the period commencing 15 business days before such date and ending on the date one day prior to such date or, if the Security has been registered under the Exchange Act for less than 15 consecutive business days before such date, then the average of the daily market prices for all of the business days before such date for which daily market prices are available. If the market price is not determinable for at least 10 business days in such period, the Current Market Value of the Security shall be determined as if the Security was not registered under the Exchange Act. The "market price" for any Security on each business day means: (A) if such Security is listed or admitted to trading on any securities exchange, the closing price, regular way, on such day on the principal exchange on which such Security is traded, or if no sale takes place on such day, the average of the closing bid and asked prices on such day, (B) if such Security is not then listed or admitted to trading on any securities exchange, the last reported sale price on such day, or if there is no such last reported sale price on such day, the average of the closing bid and the asked prices on -15- 19 such day, as reported by a reputable quotation source designated by the Company, or (C) if neither clause (A) nor (B) is applicable, the average of the reported high bid and low asked prices on such day, as reported by a reputable quotation service, or a newspaper of general circulation in the Borough of Manhattan, City of New York, customarily published on each business day, designated by the Company. If there are no such prices on a business day, then the market price shall not be determinable for such business day. "Independent Financial Expert" shall mean (a) NatWest (or any successor) or (b) another nationally recognized investment banking firm, a nationally recognized regional investment banking firm or an internationally reputable accounting firm selected by the Company reasonably acceptable to the Warrant Agent (i) that does not (and whose directors, officers, employees and Affiliates do not) have a direct or indirect material financial interest in the Company, (ii) that has not been, and, at the time it is called upon to serve as an Independent Financial Expert under this Agreement is not (and none of whose directors, officers, employees or Affiliates is) a promoter, director or officer of the Company, (iii) that has not been retained by the Company for any purpose, other than to perform an equity valuation, within the preceding twelve months, and (iv) that, in the reasonable judgement of the Board of Directors of the Company (certified by a board resolution), is otherwise qualified to serve as an independent financial advisor. Any such person may receive customary compensation and indemnification by the Company for opinions or services it provides as an Independent Financial Expert. "Affiliate" shall mean, with respect to any person, any other person directly or indirectly controlling or controlled by or under direct or indirect common control with such 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. "Extraordinary Cash Dividend" means cash dividends, subject to the sentence below, with respect to the Common Stock the aggregate amount of which in any fiscal year exceeds $500,000. -16- 20 (f) When De Minimis Adjustment May Be Deferred. No adjustment in the Exercise Rate need be made unless the adjustment would require an increase or decrease of at least 5% in the Exercise Rate. Notwithstanding the foregoing, any adjustments that are not made shall be carried forward and taken into account in any subsequent adjustment, provided that no such adjustment shall be deferred beyond the date on which a Warrant is exercised. All calculations under this Section 12 shall be made to the nearest cent or to the nearest 1/100th of a share, as the case may be. (g) When No Adjustment Required. If an adjustment is made upon the establishment of a record date for a distribution subject to subsections (a), (b) or (c) hereof and such distribution is subsequently cancelled, the Exercise Rate then in effect shall be readjusted, effective as of the date when the Board of Directors determines to cancel such distribution, to that which would have been in effect if such record date had not been fixed. To the extent the Warrants become convertible into cash, no adjustment need be made thereafter as to the amount of cash into which such Warrants are exercisable. Interest will not accrue on the cash. (h) Notice of Adjustment. Whenever the Exercise Rate or Exercise Price is adjusted, the Company shall provide the notices required by Section 14 hereof. (i) Voluntary Reduction. The Company from time to time may increase the Exercise Rate by any amount for any period of time (including, without limitation, permanently) if the period is at least 20 business days. An increase of the Exercise Rate under this Subsection (i) (other than a permanent increase) does not change or adjust the Exercise Rate otherwise in effect for purposes of subsections (a), (b) or (c) of this Section 12. (j) When Issuance or Payment May Be Deferred. -17- 21 In any case in which this Section 12 shall require that an adjustment in the Exercise Rate be made effective as of a record date for a specified event, the Company may elect to defer until the occurrence of such event (i) issuing to the Holder of any Warrant exercised after such record date the Warrant Shares and other capital stock of the Company, if any, issuable upon such exercise over and above the Warrant Shares and other capital stock of the Company, if any, issuable upon such exercise on the basis of the Exercise Rate prior to such adjustment, and (ii) paying to such Holder any amount in cash in lieu of a fractional share pursuant to Section 13; provided, however, that the Company shall deliver to the Warrant Agent and shall cause the Warrant Agent, on behalf of and at the expense of the Company, to deliver to such Holder a due bill or other appropriate instrument evidencing such Holder's right to receive such additional Warrant Shares, other capital stock and cash upon the occurrence of the event requiring such adjustment. (k) Reorganizations. In case of any capital reorganization, other than in the cases referred to in Sections 12(a), (b), (c) or (d) hereof, or the consolidation or merger of the Company with or into another corporation (other than a merger or consolidation in which the Company is the continuing corporation and which does not result in any reclassification of the outstanding shares of Common Stock into shares of other stock or other securities or property), or the sale of the property of the Company as an entirety or substantially as an entirety (collectively such actions being hereinafter referred to as "Reorganizations"), there shall thereafter be deliverable upon exercise of any Warrant (in lieu of the number of shares of Common Stock theretofore deliverable) the number of shares of stock or other securities or property to which a Holder of the number of shares of Common Stock that would otherwise have been deliverable upon the exercise of such Warrant would have been entitled upon such Reorganization if such Warrant had been exercised in full immediately prior to such Reorganization. In case of any Reorganization, appropriate adjustment, as determined in good faith by the Board of Directors of the Company, whose determination shall be described in a duly adopted resolution certified by the Company's Secretary or Assistant Secretary, shall be made in the application of the provisions herein set forth with respect to the rights and interests of Holders so that the provisions set forth herein shall thereafter be applicable, as nearly as possible, in relation to any shares or other property thereafter deliverable upon exercise of Warrants. The Company shall not effect any such Reorganization unless prior to or simultaneously with the consummation thereof the successor corporation (if other than the Company) resulting from such Reorganization or the corporation purchasing or leasing such assets or other appropriate corporation or entity shall (i) expressly assume, -18- 22 by a supplemental Warrant Agreement or other acknowledgment executed and delivered to the Warrant Agent the obligation to deliver to the Warrant Agent and to cause the Warrant Agent to deliver to each such Holder such shares of stock, securities or assets as, in accordance with the foregoing provisions, such Holder maybe entitled to purchase, and all other obligations and liabilities under this Agreement and (ii) enter into an agreement providing to the Holders rights and benefits substantially similar to those enjoyed by the Holders under the Registration Rights Agreement of even date herewith. The foregoing provisions of this Section 12(k) shall apply to successive Reorganization transactions. (l) Form of Warrants. Irrespective of any adjustments in the number or kind of shares purchasable upon the exercise of the Warrants, Warrants theretofore or thereafter issued may continue to express the same price and number and kind of shares as are stated in the Warrants initially issuable pursuant to this Agreement. (m) Miscellaneous. For purposes of this Section 12 the term "Fully Diluted Shares" shall mean (i) the shares of Common Stock outstanding as of a specified date, and (ii) shares of Common Stock into or for which rights, options, warrants or other securities outstanding as of such date are exercisable or convertible (other than the Warrants). In the event that at any time, as a result of an adjustment made pursuant to this Section 12, the Holders of Warrants shall become entitled to purchase any securities of the Company other than, or in addition to, shares of Common Stock, thereafter the number or amount of such other securities so purchasable upon exercise of each Warrant 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 Warrant Shares contained in subsections (a) through (1) of this Section 12, inclusive, and the provisions of Sections 7, 8, 10 and 13 with respect to the Warrant Shares or the Common Stock shall apply on like terms to any such other securities. SECTION 13. Fractional Interests. The Company shall not be required to issue fractional Warrant Shares on the exercise of Warrants. If more than one Warrant shall be presented for exercise in full at the same time by the same Holder, the number of full Warrant Shares which shall be issuable upon the exercise thereof shall be computed on the basis of the aggregate number of Warrant Shares purchasable on exercise of the Warrants so presented. If any fraction of a Warrant Share would, -19- 23 except for the provisions of this Section 13, be issuable on the exercise of any Warrants (or specified portion thereof), the Company shall pay an amount in cash equal to the Current Market Value on the day immediately preceding the date the Warrant is presented for exercise, multiplied by such fraction. SECTION 14. Notices to Warrant Holders. Upon any adjustment pursuant to Section 12 hereof, the Company shall give prompt written notice of such adjustment to the Warrant Agent and shall cause the Warrant Agent, on behalf of and at the expense of the Company, within 10 days after the receipt of such notice from the Company, to mail by first class mail, postage prepaid, to each Holder a notice of such adjustment(s) and shall deliver to the Warrant Agent a certificate of the Chief Financial Officer of the Company, setting forth in reasonable detail (i) the number of Warrant Shares purchasable upon the exercise of each Warrant and the Exercise Price of such Warrant after such adjustment(s), (ii) a brief statement of the facts requiring such adjustment(s) and (iii) the computation by which such adjustment(s) was made. Where appropriate, such notice may be given in advance and included as a part of the notice required under the other provisions of this Section 14. In case: (a) the Company shall authorize the issuance to all Holders of shares of Common Stock of rights, options or warrants to subscribe for or purchase shares of Common Stock or of any other subscription rights or warrants; or (b) the Company shall authorize the distribution to all Holders of shares of Common Stock of evidences of its indebtedness or assets; or (c) of any consolidation or merger to which the Company is a part and for which approval of any shareholders of the Company is required, or of the conveyance or transfer of the properties and assets of the Company substantially as an entirety, or of any reclassification or change of Common Stock issuable upon exercise of the Warrants (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination), or a tender offer or exchange offer for shares of Common Stock; or (d) of the voluntary or involuntary dissolution, liquidation or winding up of the Company; or -20- 24 (e) the Company proposes to take any action that would require an adjustment to the Exercise Rate or the Exercise Price pursuant to Section 12 hereof; then the Company shall give prompt written notice to the Warrant Agent and shall cause the Warrant Agent, on behalf of and at the expense of the Company to give to each of the registered Holders of the Warrant Certificates at his or its address appearing on the Warrant register, at least 30 days (or 20 days in any case specified in clauses (a) or (b) above) prior to the applicable record date hereinafter specified, or the date of the event in the case of events for which there is no record date, by first-class mail, postage prepaid, a written notice containing information provided by the Company to the Warrant Agent and stating (i) the date as of which the Holders of record of shares of Common Stock to be entitled to receive any such rights, options, warrants or distribution are to be determined, or (ii) the initial expiration date set forth in any tender offer or exchange offer for shares of Common Stock, or (iii) the date on which any such consolidation, merger, conveyance, transfer, dissolution, liquidation or winding up is expected to become effective or consummated, and the date as of which it is expected that Holders of record of shares of Common Stock shall be entitled to exchange such shares for securities or other property, if any, deliverable upon such reclassification, consolidation, merger, conveyance, transfer, dissolution, liquidation or winding up. The failure by the Company or the Warrant Agent to give such notice or any defect therein shall not affect the legality or validity of any distribution, right, option, warrant, consolidation, merger, conveyance, transfer, dissolution, liquidation or winding up, or the vote upon any action. The Company shall give prompt written notice to the Warrant Agent (in no event less than 45 days prior to the designated record date) and shall cause the Warrant Agent, on behalf of and at the expense of the Company to give to each Holder written notice of any determination to make a distribution to the Holders of its Common Stock of any cash dividends, assets, debt securities, preferred stock, or any rights or warrants to purchase debt securities, preferred stock, assets or other securities (other than Common Stock, or rights, options, or warrants to purchase Common Stock) of the Company, which notice shall state the nature and amount of such planned dividend or distribution and the record date therefor, and shall be received by the Holders at least 30 days prior to such record date therefor. Nothing contained in this Agreement or in any Warrant Certificate shall be construed as conferring upon the Holders the right to vote or to consent or to receive notice as shareholders in respect of the meetings of shareholders or the election of Directors of the Company or any other matter, or any rights whatsoever as shareholders of the Company. -21- 25 SECTION 15. Notices to the Company and Warrant Agent. Any notice or demand authorized by this Agreement to be given or made by the Warrant Agent or by any Holder to or on the Company shall be sufficiently given or made when received at the office of the Company expressly designated by the Company as its office for purposes of this Agreement (until the Warrant Agent is otherwise notified in accordance with this Section 15 by the Company), as follows: Source Media, Inc. 5400 LBJ Freeway Suite 680 Dallas, TX 75231 Facsimile: (972) 701-5454 with a copy to: Thompson & Knight, P.C., 1700 Pacific Avenue Suite 300 Dallas, TX 75231 Attention: Michael L. Bengston Facsimile: (214) 969-1751 Any notice pursuant to this Agreement to be given by the Company or by any Holder(s) to the Warrant Agent shall be sufficiently given when received by the Warrant Agent at the address appearing below (until the Company is otherwise notified in accordance with this Section by the Warrant Agent). ChaseMellon Shareholder Services, L.L.C. 2323 Bryan Street Suite 2300 Dallas, TX 75201-2656 Facsimile: (214) 965-2233 SECTION 16. Supplements and Amendments. The Company and the Warrant Agent may from time to time supplement or amend this Agreement without the approval of any Holders of Warrants in order to cure any ambiguity or to correct or supplement any provision contained herein which may be defective or inconsistent with any other provision herein, or to make any other provisions in regard to matters or questions arising hereunder which the Company and the Warrant Agent may deem necessary or desirable and which shall not in any way adversely affect the interests of any Holder of Warrants. -22- 26 SECTION 17. Concerning the Warrant Agent. The Warrant Agent undertakes the duties and obligations imposed by this Agreement (and no implied duties and obligations shall be read into this Agreement against the Warrant Agent) upon the following terms and conditions, by all of which the Company and the Holders, by their acceptance of Warrants, shall be bound: (a) The statements contained herein and in the Warrant Certificate shall be taken as statements of the Company, and the Warrant Agent assumes no responsibility for the correctness of any of the same except such as describe the Warrant Agent or any action taken by it. The Warrant Agent assumes no responsibility with respect to the distribution of the Warrants except as herein otherwise provided. (b) The Warrant Agent shall not be responsible for and shall incur no liability to the Company or any Holder for any failure of the Company to comply with the covenants contained in this Agreement or in the Warrants to be complied with by the Company. (c) The Warrant Agent may execute and exercise any of the rights or powers hereby vested in it or perform any duty hereunder either itself (through its employees) or by or through its attorneys or agents (which shall not include its employees) and shall not be responsible for the misconduct of any agent appointed with due care. (d) The Warrant Agent may consult at any time with legal counsel satisfactory to it (who may be counsel for the Company), and the Warrant Agent shall incur no liability or responsibility to the Company or to any Holder in respect of any action taken, suffered or omitted by it hereunder in good faith and in accordance with the opinion or the advice of such counsel. (e) Whenever in the performance of its duties under this Agreement the Warrant Agent shall deem it necessary or desirable that any fact or matter be proved or established by the Company prior to taking or suffering any action hereunder, such fact or matter may be deemed conclusively to be proved and established by a certificate signed by the Chairman of the Board, the Chief Executive Officer, the President, the Chief Operating Officer, one of the Vice Presidents, the Treasurer or the Secretary of the Company and delivered to the Warrant Agent; and such certificate shall be full authorization to the Warrant Agent for any action taken or suffered in good faith by it under the provisions of this Agreement in reliance upon such certificate. Without limiting the foregoing, the Company shall notify the Warrant Agent of the occurrence of the -23- 27 Separability Date on the Date it occurs, and until receipt of such notice the Warrant Agent may (but need not) be entitled to assume that any such date has not occurred. (f) The Company agrees to pay the Warrant Agent reasonable compensation for all services rendered by the Warrant Agent in the performance of its duties under this Agreement, to reimburse the Warrant Agent for all expenses, taxes and governmental charges and other charges of any kind and nature (including attorneys' fees) incurred by the Warrant Agent in the performance of its duties under this Agreement (including, without limitation, reasonable fees and expenses of counsel), and to indemnify the Warrant Agent and its agents, employees, directors, officers and affiliates and save it and them harmless against any and all liabilities, losses and expenses, including, without limitation, judgments, costs and counsel fees, for anything done or omitted by the Warrant Agent in the performance of its duties under this Agreement, except as a result of the Warrant Agent's negligence or bad faith. The obligations of the Company to the Warrant Agent under this subparagraph (f) shall survive the termination of the agency under this Agreement. (g) The Warrant Agent shall be under no obligation to institute any action, suit or legal proceeding or to take any other action likely to involve expense unless the Company or one or more Holders shall furnish the Warrant Agent with reasonable security and indemnity for any costs and expenses which may be incurred, but this provision shall not affect the power of the Warrant Agent to take such action as the Warrant Agent may consider proper, whether with or without any such security or indemnity. All rights of action under this Agreement or under any of the Warrants may be enforced by the Warrant Agent without the possession of any of the Warrants or the production thereof at any trial or other proceeding relative thereto, and any such action, suit or proceeding instituted by the Warrant Agent shall be brought in its name as Warrant Agent, and any recovery of judgment shall be for the ratable benefit of the Holders, as their respective rights or interests may appear. (h) The Warrant Agent and any stockholder, director, officer or employee ("Related Parties") of the Warrant Agent may buy, sell or deal in any of the Warrants or other securities of the Company or become pecuniarily interested in any transactions 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 Warrant Agent under this Agreement or such director, officer or employee. Nothing herein shall preclude the Warrant Agent or any Related Party from acting in any other capacity for the Company or for any other legal -24- 28 entity including, without limitation, acting as Transfer Agent or as a lender to the Company or an affiliate thereof. (i) The Warrant Agent shall act hereunder solely as agent, and its duties shall be determined solely by the provisions thereof. The Warrant Agent shall not be liable for anything which it may do or refrain from doing in connection with this Agreement except for its own negligence or bad faith. (j) The Warrant Agent will not incur any liability or responsibility to the Company or to any Holder for any action taken in reliance on any notice, resolution, waiver, consent, order, certificate, or other paper, document or instrument reasonably believed by it to be genuine and to have been signed, sent or presented by the proper party or parties. (k) The Warrant Agent shall not 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 Warrant Agent) or in respect of the validity or execution of any Warrant (except its countersignature thereof); nor shall the Warrant Agent by any act hereunder be deemed to make any representation or warranty as to the authorization or reservation of any Warrant Shares (or other stock) to be issued pursuant to this Agreement or any Warrant, or as to whether any Warrant Shares (or other stock) will, when issued, be validly issued, fully paid and nonassessable, or as to the Exercise Price or the number or amount of Warrant Shares or other securities or other property issuable upon exercise of any Warrant. (l) The Warrant Agent is hereby authorized and directed to accept instructions with respect to the performance of its duties hereunder from the Chairman of the Board, the Chief Executive Officer, the President, the Chief Operating Officer, the Chief Financial Officer, any Vice President or the Secretary of the Company, and to apply to such officers for advice or instructions in connection with its duties, and shall not be liable for and shall be fully protected with respect to any action taken or suffered to be taken by it in good faith and without negligence in accordance with instructions of any such officer or officers. (m) Before the Warrant Agent acts or refrains from acting with respect to any matter contemplated by this Warrant Agreement, it may require: (1) an officers' certificate signed by two officers stating that, in the opinion of the signers, all conditions precedent, if any, provided for in this -25- 29 Warrant Agreement relating to the proposed action have been complied with; and (2) an opinion of counsel for the Company stating that, in the opinion of such counsel, all such conditions precedent have been complied with. Each officers' certificate or opinion of counsel with respect to compliance with a condition or covenant provided for in this Warrant Agreement shall include: (1) a statement that the person making such certificate or opinion has read such covenant or condition; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that in the opinion of such person, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether or not, in the opinion of such person, such condition or covenant has been complied with. The Warrant Agent shall not be liable for and shall be fully protected with respect to any action it takes or omits to take in good faith in reliance on any such certificate or opinion. (n) No provision of this Agreement shall require the Warrant 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 any of its rights or powers if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. SECTION 18. Change of Warrant Agent. The Warrant Agent may resign and be discharged from its duties under this Agreement by giving to the Company 30 days' notice in writing. The Warrant Agent may be removed by like notice to the Warrant Agent from the Company. If the Warrant Agent shall resign or be removed or shall otherwise become incapable of acting, the Company shall appoint a successor to the Warrant Agent. If the Company shall fail to make such appointment within a period of 30 days after such removal or after it has been notified in writing of -26- 30 such resignation or incapacity by the resigning or incapacitated Warrant Agent or by any Holder (who shall with such notice submit his Warrant for inspection by the Company), then the Warrant Agent or any Holder may apply to any court of competent jurisdiction for the appointment of a successor to the Warrant Agent. Pending appointment of a successor to the Warrant Agent, either by the Company or by such court, the duties of the Warrant Agent shall be carried out by the Company. Any successor warrant agent, whether appointed by the Company or such a court, shall be a suitable alternate, experienced in these duties and in good standing, incorporated under the laws of the United States of America or any State thereof or the District of Columbia and having at the time of its appointment as warrant agent a combined capital and surplus of at least $25,000,000. After appointment, the successor warrant agent shall be vested with the same powers, rights, duties and responsibilities as if it had been originally named as Warrant Agent without further act or deed; but the former Warrant Agent shall deliver and transfer to the successor warrant agent any property at the time held by it hereunder, and execute and deliver any further assurance, conveyance, act or deed necessary for such purpose. Failure to file any notice provided for in this Section 18, however, or any defect therein, shall not affect the legality or validity of the resignation or removal of the Warrant Agent or the appointment of the successor warrant agent, as the case may be. In the event of such resignation or removal, the Company or the successor warrant agent shall mail by first class mail, postage prepaid, to each Holder, written notice of such removal or resignation and the name and address of such successor warrant agent. SECTION 19. Identity of Transfer Agent. Forthwith upon the appointment of any Transfer Agent for the Common Stock, or any other shares of the Company's capital stock issuable upon the exercise of the Warrants, the Company shall file with the Warrant Agent a statement setting forth the name and address of such Transfer Agent. SECTION 20. Successors. All the covenants and provisions of this Agreement by or for the benefit of the Company, the Warrant Agent or any Holder of Warrants shall bind and inure to the benefit of their respective successors and assigns hereunder. SECTION 21. Termination. This Agreement shall terminate on the Expiration Date. Notwithstanding the foregoing, this Agreement will terminate on any earlier date if all Warrants have been exercised or redeemed pursuant to this Agreement. SECTION 22. Governing Law. This Agreement and each Warrant Certificate issued hereunder shall be deemed to be a contract made under the laws of -27- 31 the State of New York and shall be governed by and construed in accordance with the laws of said State, without regard to the conflict of law rules thereof. SECTION 23. Benefits of This Agreement. Nothing in this Agreement shall be construed to give to any person or corporation other than the Company, the Warrant Agent and the registered Holders of the Warrant Certificates 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 Warrant Agent and the registered Holders of the Warrant Certificates. SECTION 24. 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. -28- 32 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, as of the day and year first above written. SOURCE MEDIA, INC. By: /s/ MICHAEL G. PATE ----------------------------- Name: Michael G. Pate Title: Chief Financial Officer CHASEMELLON SHAREHOLDER SERVICES, L.L.C. as Warrant Agent By: /s/ R. JOHN DAVIS, VP ----------------------------- Name: R. John Davis Title: Vice President -29- 33 EXHIBIT A [Form of Warrant Certificate] [Face] THIS SECURITY (OR ITS PREDECESSOR) HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") AND, ACCORDINGLY, MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS, EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE BY ITS ACQUISITION HEREOF OR A BENEFICIAL INTEREST HEREIN, THE HOLDER (1) REPRESENTS THAT (A) IT IS AN INSTITUTIONAL "ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(a), (1), (2), (3) OR (7) OF REGULATION D UNDER THE SECURITIES ACT (AN "INSTITUTIONAL ACCREDITED INVESTOR") OR (B) IT IS NOT A U.S. PERSON, IS NOT ACQUIRING THIS SECURITY FOR THE ACCOUNT OR BENEFIT OF A U.S. PERSON AND IS ACQUIRING THIS SECURITY IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH REGULATORS UNDER THE SECURITIES ACT, (2) AGREES THAT IT WILL NOT, WITHIN THE TIME PERIOD REFERRED TO UNDER RULE 144(k) (TAKING INTO ACCOUNT THE PROVISIONS OF RULE 144(d) UNDER THE SECURITIES ACT, IF APPLICABLE) UNDER THE SECURITIES ACT AS IN EFFECT ON THE DATE OF THE TRANSFER OF THIS SECURITY, RESELL OR OTHERWISE TRANSFER THIS SECURITY EXCEPT (A) TO SOURCE MEDIA, INC. ("SOURCE") OR ANY SUBSIDIARY THEREOF, (B) INSIDE THE UNITED STATES TO AN INSTITUTIONAL ACCREDITED INVESTOR THAT, PRIOR TO SUCH TRANSFER FURNISHES TO THE WARRANT AGENT, A SIGNED LETTER CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS RELATING TO THE RESTRICTIONS ON TRANSFER OF THIS SECURITY, AND IF SUCH TRANSFER IS IN RESPECT OF AN AGGREGATE AMOUNT OF WARRANTS AT THE TIME OF TRANSFER OF LESS THAN $250,000, AN OPINION OF COUNSEL ACCEPTABLE TO SOURCE THAT SUCH TRANSFER IS IN COMPLIANCE WITH THE SECURITIES ACT, (C) OUTSIDE THE UNITED STATES IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH RULE 904 UNDER THE SECURITIES ACT, (D) PURSUANT TO THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT (IF AVAILABLE, BASED UPON AN OPINION OF COUNSEL ACCEPTABLE TO SOURCE), (E) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR (F) IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (BASED UPON AN 34 EXHIBIT A Page 2 OPINION OF COUNSEL ACCEPTABLE TO SOURCE) AND IN EACH CASE, IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS, AND (3) AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THIS SECURITY OR AN INTEREST HEREIN IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION," "UNITED STATES" AND "U.S. PERSON" HAVE THE MEANING GIVEN TO THEM BY RULE 902 OF REGULATION S UNDER THE SECURITIES ACT. THE WARRANT AGREEMENT CONTAINS A PROVISION REQUIRING THE WARRANT AGENT TO REFUSE TO REGISTER TRANSFER OF THIS SECURITY IN VIOLATION OF THE FOREGOING RESTRICTIONS. 35 EXHIBIT A Page 3 EXERCISABLE ON OR AFTER THE DATE OF ISSUANCE AND ON OR BEFORE NOVEMBER 1, 2007 No. ______ Warrants CUSIP No.: Warrant Certificate Source Media, Inc. This Warrant Certificate certifies that _____________________ or registered assigns, is the registered Holder of Warrants expiring November 1, 2007 (the "Warrants") to purchase shares of common stock (the "Common Stock") of Source Media, Inc., a Delaware corporation (the "Company"). Each Warrant entitles the Holder upon exercise to receive from the Company on or after the date hereof and on or before 5: 00 p.m. New York City Time on November 1, 2007, _______ fully paid and nonassessable shares of Common Stock (each a "Warrant Share") at the initial exercise price (the "Exercise Price") of $.001 payable in lawful money of the United States of America upon surrender of this Warrant Certificate and payment of the Exercise Price at the office or agency of the Warrant Agent, but only subject to the conditions set forth herein and in the Warrant Agreement referred to on the reverse hereof. The Exercise Price and number of Warrant Shares issuable upon exercise of the Warrants are subject to adjustment upon the occurrence of certain events set forth in the Warrant Agreement. No Warrant may be exercised after 5:00 p.m., New York City Time, on November 1, 2007, and to the extent not exercised by such time such Warrants shall become void. This Warrant Certificate shall not be valid unless countersigned by the Warrant Agent, as such term is used in the Warrant Agreement. This Warrant Certificate shall be governed and construed in accordance with the internal laws of the State of New York. 36 EXHIBIT A Page 4 IN WITNESS WHEREOF, Source Media, Inc. has caused this Warrant Certificate to be signed by its Chairman and by its Secretary. Dated: SOURCE MEDIA, INC. By: ----------------------------- Name: Title: By: ----------------------------- Name: Title: Countersigned: ChaseMellon Shareholder Services, L.L.C. as Warrant Agent By: ---------------------------------- Authorized Signature 37 EXHIBIT A Page 5 [Form of Warrant Certificate] [Reverse] The Warrants evidenced by this Warrant Certificate are part of a duly authorized issue of Warrants expiring November 1, 2007, entitling the Holder on exercise to receive shares of voting Common Stock, of the Company (the "Common Stock"), $.001 par value, and are issued or to be issued pursuant to a Warrant Agreement dated as of October 30, 1997 (the "Warrant Agreement"), duly executed and delivered by the Company to ChaseMellon Shareholder Services, L.L.C., a New Jersey limited liability company as warrant agent (the "Warrant Agent"), which Warrant Agreement is hereby incorporated by reference in and made a part of this instrument and is hereby referred to for a description of the rights, limitation of rights, obligations, duties and immunities thereunder of the Warrant Agent, the Company and the Holders (the words "Holders" or "Holder" meaning the registered Holders or registered Holder) of the Warrants. A copy of the Warrant Agreement may be obtained by the Holder hereof upon written request to the Company. Warrants may be exercised at any time on or after the date hereof and on or before November 1, 2007, subject to extension as provided in the Warrant Agreement. The Holder of Warrants evidenced by this Warrant Certificate may exercise them by surrendering this Warrant Certificate, with the form of election to purchase set forth hereon properly completed and executed, together with payment of the Exercise Price in cash at the office of the Warrant Agent. In the event that upon any exercise of Warrants evidenced hereby the number of Warrants exercised shall be less than the total number of Warrants evidenced hereby, there shall be issued to the Holder hereof or his assignee a new Warrant Certificate evidencing the number of Warrants not exercised. No adjustment shall be made for any dividends on any Common Stock issuable upon exercise of this Warrant. The Warrant Agreement provides that upon the occurrence of certain events the number of Warrants set forth on the face hereof may, subject to certain conditions, be adjusted. No fractions of a share of Common Stock will be issued upon the exercise of any Warrant, but the Company win pay the cash value thereof determined as provided in the Warrant Agreement. 38 EXHIBIT A Page 6 Warrant Certificates, when surrendered at the office of the Warrant Agent by the registered Holder thereof in person or by legal representative or attorney duly authorized in writing, may be exchanged, in the manner and subject to the limitations provided in the Warrant Agreement, but without payment of any service charge, for another Warrant Certificate or Warrant Certificates of like tenor evidencing in the aggregate a like number of Warrants. Upon due presentation for registration of transfer of this Warrant Certificate at the office of the Warrant Agent a new Warrant Certificate or Warrant Certificates of like tenor and evidencing in the aggregate a like number of Warrants shall be issued to the transferees in exchange for this Warrant Certificate, subject to the limitations provided in the Warrant Agreement, without charge except for any tax or other governmental charge imposed in connection therewith. The Company and the Warrant Agent may deem and treat the registered Holder(s) thereof as the absolute owner(s) of this Warrant Certificate (notwithstanding any notation of ownership or other writing hereon made by anyone), for the purpose of any exercise hereof, of any distribution to the Holder(s) hereof, and for all other purposes, and neither the Company nor the Warrant Agent shall be affected by any notice to the contrary. Neither the Warrants nor this Warrant Certificate entitles any Holder hereof to any rights of a stockholder of the Company. ELECTION TO EXERCISE (TO BE EXECUTED UPON EXERCISE OF THE WARRANT) The undersigned hereby irrevocably elects to exercise the right, represented by this Warrant Certificate, to purchase _____ shares of Common Stock of Source Media, Inc. and herewith tenders in payment for such Shares $___________ in lawful money of the United States of America. In accordance with the terms hereof. The undersigned requests that a certificate representing such Shares be registered and delivered as follows: ----------------------------------- Name ----------------------------------- 39 EXHIBIT A Page 7 Address ----------------------------------- Delivery Address (if different) If such number of Shares is less than the aggregate number of Shares purchasable hereunder, the undersigned requests that a new Warrant Certificate representing the balance of such Shares be registered and delivered as follows: ----------------------------------- Name ----------------------------------- Address ----------------------------------- Delivery Address (if different) - -------------------------------------------------------------------------------- Social Security or Other Taxpayer Identification Number of Holder - -------------------------------------------------------------------------------- Signature Note: The above signature must correspond with the name as written upon the face of this Warrant Certificate in every particular, without alteration or enlargement or any change whatsoever. If the certificate representing the Shares or any Warrant Certificate representing Warrants not exercised is to be registered in a name other than that in which this Warrant Certificate is registered, the signature of the holder hereof must be guaranteed. Signature Guaranteed: - ------------------------------ ASSIGNMENT (TO BE EXECUTED BY THE REGISTERED HOLDER IF SUCH HOLDER DESIRES TO TRANSFER THE WARRANT CERTIFICATE) For Value Received, the undersigned registered holder hereby sells, assigns and transfers unto 40 EXHIBIT A Page 8 ----------------------------------- Name of Assignee ----------------------------------- Address of Assignee this Warrant Certificate, together with all right, title and interest therein, and does irrevocably constitute and appoint - -------------------------------------------------------------------------------- attorney, to transfer the within Warrant Certificate on the books of the Warrant Agent, with full power of substitution. - -------------------------------------------------------------------------------- Date - -------------------------------------------------------------------------------- Signature Note: The above signature must correspond with the name as written upon the face of this Warrant Certificate in every particular, without alteration or enlargement or any change whatsoever. - -------------------------------------------------------------------------------- Social Security or Other Taxpayer Identification Number of Assignee Signature Guaranteed: - ------------------------- 41 EXHIBIT B CERTIFICATE TO BE DELIVERED UPON EXCHANGE OR REGISTRATION OF TRANSFER OF WARRANTS Re: Warrants to purchase Common Stock (the "Securities"), of Source Media, Inc. This Certificate relates to _________ Securities held in the form of* ___________ a beneficial interest in ___________ Physical Warrants by ___________ (the "Transferor"). The Transferor:* / / has requested that the Warrant Agent by written order to exchange or register the transfer of a Physical Warrant or Physical Warrants. In connection with such request and in respect of each such Security, the Transferor does hereby certify that the Transferor is familiar with the Warrant Agreement relating to the above captioned Securities and the restrictions on transfers thereof as provided in Section 6 of such Warrant Agreement, and that the transfer of these Securities does not require registration under the Securities Act of 1933, as amended (the "Act") because*: / / Such Security is being acquired for the Transferor's own account, without transfer. / / Such Security is being transferred to an institutional "accredited investor" (within the meaning of subparagraphs (a)(1), (2), (3) or (7) of Rule 501 under the Act. / / Such Security is being transferred in reliance on Regulation S under the Act. / / Such Security is being transferred in reliance on Rule 144 under the Act. 42 EXHIBIT B Page 2 / / Such Security is being transferred in reliance on and in compliance with an exemption from the registration requirements of the Act other than Rule 144A or Rule 144 or Regulation S under the Act to a person other than an institutional "accredited investor. ------------------------------- (INSERT NAME OF TRANSFEROR) By: ---------------------------- (Authorized Signatory) Date: - ---------------------- *Check applicable box. 43 EXHIBIT C Form of Certificate to Be Delivered in Connection with Transfers to Institutional Accredited Investors [Date] [Name of Warrant Agent] [Address] Attention: Corporate Trust Administration Re: Source Media, Inc. (the "Company") Warrants to purchase Common Stock (the "Securities") Ladies and Gentlemen: In connection with our proposed purchase of Securities, of the Company, we confirm that: 1. We have received such information as we deem necessary in order to make our investment decision. 2. We understand that any subsequent transfer of the Securities is subject to certain restrictions and conditions set forth in the Warrant Agreement and the undersigned agrees to be bound by, and not to resell, pledge or otherwise transfer the Securities except in compliance with, such restrictions and conditions and the Securities Act of 1933, as amended (the "Securities Act"). 3. We understand that the Warrants of the Company represented by this Certificate are subject to a Warrant Registration Rights Agreement dated as of October 30, 1997, which contains provisions regarding restrictions on the transfer and the mandatory transfer of such shares and other matters. 44 EXHIBIT C Page 2 4. We understand that the offer and sale of the Securities have not been registered under the Securities Act, and that the Securities may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons except as permitted in the following sentence. We agree, on our own behalf-and on behalf of any accounts for which we are acting as hereinafter stated, that if we should sell any Securities, we will do so only (A) to the Company or any subsidiary thereof, (B) inside the United States to an institutional "accredited investor" (as defined below) that, prior to such transfer, furnishes (or has furnished on its behalf by a U.S. broker-dealer) to the Warrant Agent a signed letter substantially in the form hereof, (C) outside the United States in accordance with Regulation S under the Securities Act, (D) pursuant to the exemption from registration provided by Rule 144 under the Securities Act (if available), or (E) pursuant to an effective registration statement under the Securities Act, and we further agree to provide to any person purchasing Securities from us a notice advising such purchaser that resales of the Securities are restricted as stated herein. 5. We understand that, on any proposed resale of Securities, we will be required to furnish to the Warrant Agent and the Company, such certification, legal opinions and other information as the Warrant Agent and the Company may reasonably require to confirm that the proposed sale complies with the foregoing restrictions. We further understand that the Securities purchased by us will bear a legend to the foregoing effect. 6. We are an institutional "accredited investor" (as defined in Rule 501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act) and have such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of our investment in the Securities, and we and any accounts for which we are acting are each able to bear the economic risk of our or their investment, as the case may be. 7. We are acquiring the Securities purchased by us for our account or for one or more accounts (each of which is an institutional "accredited investor") as to each of which we exercise sole investment discretion. 45 EXHIBIT C Page 3 You and the Company are entitled to rely upon this letter and are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceeding or official inquiry with respect to the matters covered hereby. Very truly yours, (Name of Transferor) By: ------------------------------ (Authorized Signatory) 46 EXHIBIT D Form of Certificate to Be Delivered in Connection with Regulation S Transfers [Date] [Name of Warrant Agent] [Address] Attention: Source Media, Inc. Re: Source Media, Inc. (the "Company") Warrants to purchase Common Stock (the "Securities") Dear Sirs: In connection with our proposed sale of __________ of the Securities, we confirm that such sale has been effected pursuant to and in accordance with Regulation S under the Securities Act of 1933, as amended (the "Securities Act"), and, accordingly, we represent that: (1) the offer of the Securities was not made to a person in the United States; (2) either (a) at the time the buy offer was originated, the transferee was outside the United States or we and any person acting on our behalf reasonably believed that the transferee was outside the United States, or (b) the transaction was executed in, on or through the facilities of a designated off-shore securities market and neither we nor any person acting on our behalf knows that the transaction has been prearranged with a buyer in the United States; 47 EXHIBIT D Page 2 (3) no directed selling efforts have been made in the United States in contravention of the requirements of Rule 903(b) or Rule 904(b) of Regulation S, as applicable; (4) the transaction is not part of a plan or scheme to evade the registration requirements of the Securities Act; and (5) we have advised the transferee of the transfer restrictions applicable to the Securities. You and the Company are entitled to rely upon this letter and are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceedings or official inquiry with respect to the matters covered hereby. Defined terms used herein without definition have the respective meanings provided in Regulation S. Very truly yours, (Name of Transferor) By: ----------------------------- (Authorized Signatory) EX-4.4 7 UNIT AGREEMENT DATED 10/30/97 1 EXHIBIT 4.4 EXECUTION COPY UNIT AGREEMENT UNIT AGREEMENT dated as of October 30, 1997 between Source Media, Inc., a Delaware corporation (the "Company"), and ChaseMellon Shareholder Services, L.L.C., a New Jersey limited liability company ("ChaseMellon" or the "Unit Agent"), organized under the laws of the State of New Jersey. WHEREAS, the Company proposes to issue 800,000 shares of its 13 1/2% Senior PIK Preferred Stock (the "Senior PIK Preferred Stock") and warrants (the "Warrants") to purchase 447,000 shares of its Common Stock, par value $0.001 per share (the "Common Stock"), in the form of 800 units (the "Units"), with each Unit consisting of 1,000 shares of Senior PIK Preferred Stock and 558.75 Warrants to purchase one share of Common Stock; WHEREAS, the Company and ChaseMellon in its capacity as warrant agent for the Warrants (the "Warrant Agent") and transfer agent for the Senior PIK Preferred Stock (the "Transfer Agent") desire to appoint ChaseMellon to act as their agent for the purpose of issuing certificates ("Unit Certificates") representing the Units and registration of transfers and exchanges thereof. ChaseMellon in such capacity is referred to herein as the "Unit Agent"; WHEREAS, the Units will be exchangeable for the Senior PIK Preferred Stock and Warrants represented thereby immediately upon sale by the Initial Purchasers (the "Separability Date"); NOW THEREFORE, in consideration of the premises and the mutual agreements herein set forth, the parties hereto agree as follows: SECTION 1. Appointment of Unit Agent. (a) The Company hereby appoints the Unit Agent to act as agent for the Company in accordance with the instructions set forth hereinafter in this Agreement, and the Unit Agent hereby accepts such appointment. (b) The Transfer Agent and the Company hereby appoint the Unit Agent as a co-transfer agent for the Senior PIK Preferred Stock for so long as the Senior PIK Preferred Stock is represented by the Units. In its capacity as a co-transfer agent, the Unit Agent shall have the rights and obligations provided for a transfer agent in the Certificate of Designation governing the Senior PIK Preferred Stock. -1- 2 (c) The Warrant Agent and the Company hereby appoint the Unit Agent as an agent of the Warrant Agent for the purposes of maintaining a register of the registered owners of and the registration of transfers and exchanges of the Warrants represented by the Units. SECTION 2. Unit Certificates. (a) The Units will be issued in registered form as definitive Unit certificates substantially in the form of Exhibit A attached hereto. (b) Legends. Each Unit Certificate evidencing the Units (and all Units issued in exchange therefor or substitution thereof) shall bear a legend substantially to the following effect: THIS SECURITY (OR ITS PREDECESSOR) HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") AND, ACCORDINGLY, MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS, EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE BY ITS ACQUISITION HEREOF OR A BENEFICIAL INTEREST HEREIN, THE HOLDER (1) REPRESENTS THAT (A) IT IS AN INSTITUTIONAL "ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(A), (1), (2), (3) OR (7) OF REGULATION D UNDER THE SECURITIES ACT (AN "INSTITUTIONAL ACCREDITED INVESTOR") OR (B) IT IS NOT A U.S. PERSON, IS NOT ACQUIRING THIS SECURITY FOR THE ACCOUNT OR BENEFIT OF A U.S. PERSON AND IS ACQUIRING THIS SECURITY IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH REGULATION S UNDER THE SECURITIES ACT, (2) AGREES THAT IT WILL NOT, WITHIN THE TIME PERIOD REFERRED TO UNDER RULE 144(K) (TAKING INTO ACCOUNT THE PROVISIONS OF RULE 144(D) UNDER THE SECURITIES ACT, IF APPLICABLE) UNDER THE SECURITIES ACT AS IN EFFECT ON THE DATE OF THE TRANSFER OF THIS SECURITY, RESELL OR OTHERWISE TRANSFER THIS SECURITY EXCEPT (A) TO SOURCE MEDIA, INC. ("SOURCE") OR ANY SUBSIDIARY THEREOF, (B) INSIDE THE UNITED STATES TO AN INSTITUTIONAL ACCREDITED INVESTOR THAT, PRIOR TO SUCH TRANSFER FURNISHES TO THE WARRANT AGENT, A SIGNED LETTER CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS RELATING TO THE RESTRICTIONS ON TRANSFER OF THIS SECURITY, AND IF SUCH TRANSFER IS IN RESPECT OF AN AGGREGATE AMOUNT OF WARRANTS OR WARRANT SHARES -2- 3 AT THE TIME OF TRANSFER OF LESS THAN $250,000, AN OPINION OF COUNSEL ACCEPTABLE TO SOURCE THAT SUCH TRANSFER IS IN COMPLIANCE WITH THE SECURITIES ACT, (C) OUTSIDE THE UNITED STATES IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH RULE 904 UNDER THE SECURITIES ACT, (D) PURSUANT TO THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT (IF AVAILABLE, BASED UPON AN OPINION OF COUNSEL ACCEPTABLE TO SOURCE), (E) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR (F) IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (BASED UPON AN OPINION OF COUNSEL ACCEPTABLE TO SOURCE) AND IN EACH CASE, IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS, AND (3) AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THIS SECURITY OR AN INTEREST HEREIN IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION," "UNITED STATES" AND "U.S. PERSON" HAVE THE MEANINGS GIVEN TO THEM BY RULE 902 OF REGULATIONS S UNDER THE SECURITIES ACT. THE UNIT AGREEMENT, DATED AS OF OCTOBER 30, 1997, BETWEEN SOURCE AND CHASEMELLON SHAREHOLDER SERVICES, L.L.C., CONTAINS A PROVISION REQUIRING THE WARRANT AGENT TO REFUSE TO REGISTER TRANSFER OF THIS SECURITY IN VIOLATION OF THE FOREGOING RESTRICTIONS. SECTION 3. Execution of Unit Certificates. Each Unit Certificate shall be signed on behalf of the Company by its Chairman of the Board or its President, Chief Executive Officer, Chief Operating Officer, Treasurer, Chief Financial Officer or a Vice President and by its Secretary or an Assistant Secretary. Each such signature upon the Unit Certificates may be in the form of a facsimile signature of the present or any future Chairman of the Board, President, Vice President, Chief Financial Officer, Treasurer, Secretary or Assistant Secretary and may be imprinted or otherwise reproduced on the Unit Certificates and for that purpose the Company may adopt and use the facsimile signature of any person who shall have been Chairman of the Board, President, Chief Executive Officer, Chief Operating Officer, Vice President, Treasurer, Chief Financial Officer, Secretary or Assistant Secretary, notwithstanding the fact that at the time the Unit Certificates shall be countersigned and delivered or disposed of such officer shall have ceased to hold such office. -3- 4 In case any officer of the Company who shall have signed any of the Unit Certificates shall cease to be such officer before the Unit Certificates so signed shall have been countersigned by the Unit Agent, or disposed of by the Company, such Unit Certificates nevertheless may be countersigned and delivered or disposed of as though such person had not ceased to be such officer of the Company; and any Unit Certificate may be signed on behalf of the Company by any person who, at the actual date of the execution of such Unit Certificate, shall be a proper officer of the Company to sign such Unit Certificate, although at the date of the execution of this Unit Agreement any such person was not such officer. Unit Certificates shall be dated the date of counter-signature by the Unit Agent. SECTION 4. Registration and Countersignature. The Unit Agent, on behalf of the Company and upon written direction of the Company, shall number and register the Unit Certificates in a register as they are issued by the Company. Unit Certificates shall be manually countersigned by the Unit Agent and shall not be valid for any purpose unless so countersigned. The Unit Agent shall, upon written instructions of the Chairman of the Board, the President, Chief Executive Officer, Chief Operating Officer, a Vice President, Chief Financial Officer, Treasurer, the Secretary or an Assistant Secretary of the Company, initially countersign and deliver not more than 800 Units and shall thereafter countersign and deliver Units in accordance with the written instructions of the foregoing officers. The Company and the Unit Agent may deem and treat the registered holder(s) of the Unit Certificates as the absolute owner(s) thereof (notwithstanding any notation of ownership or other writing thereon made by anyone) for all purposes, and neither the Company nor the Unit Agent shall be affected by any notice to the contrary. SECTION 5. Separation of the Senior PIK Preferred Stock and Warrants. After the Separability Date, the Senior PIK Preferred Stock and the Warrants represented by the Units shall be separately transferable. Upon presentation after the Separability Date of any Unit Certificate for exchange for Senior PIK Preferred Stock and Warrants or for registration of transfer or otherwise, (i) the Unit Agent shall notify the Transfer Agent and the Warrant Agent of the number of Units so presented, the registered owner thereof, such owner's registered address, the nature of any legends or restrictive endorsements set forth on such Unit Certificate and any other information provided by the holder thereof in connection therewith, (ii) the -4- 5 Transfer Agent, if the requirements of the Certificate of Designation with respect to the Senior PIK Preferred Stock for such transaction and any applicable legend are met based solely on the certification by the transferor on the Preferred Stock, shall promptly register, authenticate and deliver a new Senior PIK Preferred Stock Certificate equal in number of shares of Senior PIK Preferred Stock represented by such Unit Certificate in accordance with the direction of such holder and (iii) the Warrant Agent, if the requirements for such transactions are met as confirmed by the Company to the Warrant Agent, shall promptly countersign, register and deliver a new Warrant Certificate for the number of Warrants previously represented by such Unit Certificate in accordance with the directions of such holder. The Warrant Agent and the Transfer Agent will notify the Unit Agent of any additional requirements in connection with a particular transfer or exchange. Following the Separability Date, no Unit Certificates shall be issued upon transfer or exchange of Unit Certificates, or otherwise. SECTION 6. Rights of Unit Holders. The registered owner of a Unit Certificate shall have all the rights and privileges of a registered owner of the number of shares of Senior PIK Preferred Stock represented thereby and the number of Warrants represented thereby and shall be treated as the registered owner thereof for all purposes. The Company agrees that it shall be bound by all provisions of the Certificate of Designation governing the Senior PIK Preferred Stock and that the Senior PIK Preferred Stock and Warrants represented by each Unit Certificate shall be deemed valid and obligatory obligations of the Company. SECTION 7. Unit Agent. The Unit Agent undertakes the duties and obligations imposed by this Agreement (and no implied duties and obligations shall be read into this Agreement against the Unit Agent) upon the following terms and conditions, by all of which the Company and the holders of Units, by their acceptance thereof, shall be bound: (a) The statements contained herein and in the Unit Certificates shall be taken as statements of the Company, and the Unit Agent assumes no responsibility for the correctness of any of the same except such as describe the Unit Agent or action taken or to be taken by it. The Unit Agent assumes no responsibility with respect to the distribution of the Unit Certificates except as herein otherwise provided. (b) The Unit Agent shall not be responsible for and shall incur no liability to the Company or any holder of the Units for any failure of the Company to -5- 6 comply with any of the covenants in this Agreement or in the Unit Certificates to be complied with by the Company. (c) The Unit Agent may consult at any time with counsel satisfactory to it (who may be counsel for the Company) and the Unit Agent shall incur no liability or responsibility to the Company or to any holder of any Unit Certificate in respect of any action taken, suffered or omitted by it hereunder in good faith and in accordance with the opinion or the advice of such counsel provided, that the foregoing clause shall not apply if the Unit Agent is found to have acted with willful misconduct or gross negligence. (d) The Unit Agent shall incur no liability or responsibility to the Company or to any holder of any Unit Certificate for any action taken in reliance on any Unit Certificate, certificate of shares, notice, resolution, waiver, consent, order, certificate or other paper, document or instrument believed by it to be genuine and to have been signed, sent or presented by the proper party or parties. (e) The Company agrees to pay to the Unit Agent reasonable compensation for all services rendered by the Unit Agent in connection with this Agreement, to reimburse the Unit Agent for all expenses, taxes and governmental charges and other charges of any kind and nature (including attorneys' fees) incurred by the Unit Agent in the connection with this Agreement and to indemnify the Unit Agent and its agents, employees, directors, officers and affiliates and save it and them harmless against any and all liabilities, losses and expenses including without limitation judgments, costs and counsel fees and actual expenses, for anything done or omitted by the Unit Agent in connection with this Agreement except as a result of the Unit Agent's gross negligence or willful misconduct. The obligation of the Company to the Unit Agent under this subparagraph (e) shall survive the termination of the agency under this Agreement. (f) The Unit Agent shall be under no obligation to institute any action, suit or legal proceeding or to take any other action unless the Company or one or more registered holders of Unit Certificates shall furnish the Unit Agent with security and indemnity for any costs and expenses which may be incurred acceptable to the Unit Agent. This provision shall not affect the power of the Unit Agent to take such action as it may consider proper, whether with or without any such security or indemnity. All rights of action under this Agreement or under any of the Units my be enforced by the Unit Agent without the possession of any of the Unit Certificates or the production thereof at any trial or other proceeding relative thereto, and any such action, suit or proceeding instituted by the Unit Agent shall be brought in its name as Unit Agent for the benefit of holders of Unit Certificates and any recovery of judgment shall -6- 7 be for the ratable benefit of the registered holders of the Units, as their respective rights or interests may appear. (g) The Unit Agent, and any stockholder, director, officer or employee of it (the "Related Parties"), may buy, sell or deal in any of the 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 Unit Agent under this Agreement. Nothing herein shall preclude the Unit Agent or such Related Parties from acting in any other capacity for the Company or for any other legal entity. (h) The Unit Agent shall act hereunder solely as agent for the Company, the Transfer Agent and the Warrant Agent, and its duties shall be determined solely by the provisions hereof. The Unit Agent shall not be liable for anything which it may do or refrain from doing in connection with this Agreement except for its own gross negligence or bad faith or willful misconduct. (i) Before the Unit Agent acts or refrains from acting with respect to any matter contemplated by this Unit Agreement, it may require: (1) an officers' certificate signed by two officers stating that, in the opinion of the signers, all conditions precedent, if any, provided for in this Unit Agreement relating to the proposed action have been complied with; and (2) an opinion of counsel for the Company stating that, in the opinion of such counsel, all such conditions precedent have been complied with. Each officers' certificate or opinion of counsel with respect to compliance with a condition or covenant provided for in this Unit Agreement shall include: (1) a statement that the person making such certificate or opinion has read such covenant or condition; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that in the opinion of such person, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and -7- 8 (4) a statement as to whether or not, in the opinion of such person, such condition or covenant has been complied with. The Unit Agent shall not be liable for and shall be fully protected with respect to any action it takes or omits to take in good faith in reliance on any such certificate or opinion. (j) In the absence of bad faith on its part, the Unit Agent may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Unit Agent and conforming to the requirements of this Unit Agreement. However, the Unit Agent shall examine the certificates and opinions to determine whether or not they conform to the requirements of this Unit Agreement. (k) The Unit Agent may rely and shall be fully protected in relying upon any document believed by it to be genuine and to have been signed or presented by the proper person. The Unit Agent need not investigate any fact or matter stated in the document. (l) The Unit Agent may act through agents and shall not be responsible for the misconduct or negligence of any agent appointed with due care. SECTION 8. Notices to Company and Unit Agent, Transfer Agent and Warrant Agent. Any notice or demand authorized by this Agreement to be given or made to or on the Company shall be sufficiently given or made when and if deposited in the mail, first class or registered, postage paid, addressed If to the Company: Source Media, Inc. 8140 Walnut Hill Lane Suite 1000 Dallas, Texas 75231 Attention: Chief Financial Officer Facsimile: (214) 890-9014 -8- 9 with a copy to: Thompson & Knight 1700 Pacific Avenue Suite 3300 Attention: Michael L. Bengtson, Esq. Facsimile: (214) 969-1751 If to the Unit Agent, Warrant Agent or the Transfer Agent: ChaseMellon Shareholder Services, L.L.C. 2323 Bryan Street Suite 2300 Dallas, TX 75201-2656 Facsimile: (214) 965-2233 The parties hereto by notice to the other parties may designate additional or different addresses for subsequent communications or notice. Any notice to be mailed to a holder of Units shall be mailed to him or her at the address that appears on the register of Units maintained by the Unit Agent. Copies of any such communication shall also be mailed to the Unit Agent, Transfer Agent and Warrant Agent. The Unit Agent shall furnish the Company, the Transfer Agent or the Warrant Agent promptly when requested with a list of registered holders of Units for the purpose of mailing any notice or communication to the holders of the Senior PIK Preferred Stock or Warrants and at such other times as may be reasonably requested. SECTION 9. Change of Unit Agent. The Unit Agent may resign and be discharged from its duties under this Agreement by giving to the Company 30 days' notice in writing. The Unit Agent may be removed by like notice to the Unit Agent from the Company. If the Unit Agent shall resign or be removed or shall otherwise become incapable of acting, the Company shall appoint a successor to the Unit Agent. If the Company shall fail to make such appointment within a period of 30 days after such removal or after it has been notified in writing of such resignation or incapacity by the resigning or incapacitated Unit Agent or by any holder of the Units (who shall with such notice submit his Unit for inspection by the Company), then the Unit Agent or any such holder may apply to any court of competent jurisdiction for the appointment of a successor to the Unit Agent. Pending appointment of a successor to the Unit Agent, either by the Company or by such court, the duties of the Unit Agent shall be -9- 10 carried out by the Company. Any successor Unit Agent, whether appointed by the Company or such a court, shall be a suitable alternate, experienced in these duties and in good standing, incorporated under the laws of the United States of America or any State thereof or the District of Columbia and having at the time of its appointment as Unit Agent a combined capital and surplus of at least $25,000,000. After appointment, the successor Unit Agent shall be vested with the same powers, rights, duties and responsibilities as if it had been originally named as Unit Agent without further act or deed; but the former Unit Agent shall deliver and transfer to the successor Unit Agent any property at the time held by it hereunder, and execute and deliver any further assurance, conveyance, act or deed necessary for such purpose. Failure to file any notice provided for in this Section 9, however, or any defect therein, shall not affect the legality or validity of the resignation or removal of the Unit Agent or the appointment of the successor Unit Agent, as the case may be. In the event of such resignation or removal, the Company or the successor Unit Agent shall mail by first class mail, postage prepaid, to each holder of the Units, written notice of such removal or resignation and the name and address of such successor Unit Agent. SECTION 10. Supplements and Amendments. The Company, the Transfer Agent, the Warrant Agent and the Unit Agent may from time to time supplement or amend this Agreement without the approval of any holders of Unit Certificates in order to cure any ambiguity or to correct or supplement any provision contained herein which may be defective or inconsistent with any other provision herein, or to make any other provisions in regard to matters or questions arising hereunder which the Company, the Transfer Agent, the Warrant Agent and the Unit Agent may deem necessary or desirable and which shall not in any way adversely affect the interests of the holders of Unit Certificates. Any amendment or supplement to this Agreement that has a material adverse effect on the interests of the Unit holders shall require the written consent of registered holders of a majority of the then outstanding Units. SECTION 11. Successors. All covenants and provisions of this Agreement by or for the benefit of the Company, the Transfer Agent, the Warrant Agent or the Unit Agent shall bind and inure to the benefit of their respective successors and assigns hereunder. SECTION 12. Governing Law. THIS AGREEMENT AND EACH UNIT CERTIFICATE ISSUED HEREUNDER SHALL BE DEEMED TO BE A CONTRACT MADE UNDER THE LAWS OF THE STATE OF NEW YORK AND -10- 11 SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF SAID STATE, WITHOUT REGARD TO THE CONFLICT OF LAW RULES THEREOF. SECTION 13. Benefits of This Agreement. Nothing in this Agreement shall be construed to give to any person or corporation other than the Company, the Transfer Agent, the Warrant Agent, the Unit Agent and the registered holders of the Unit Certificates 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 Transfer Agent, the Warrant Agent, the Unit Agent and the registered holders of the Unit Certificates. SECTION 14. 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. -11- 12 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, as of the day and year first above written. SOURCE MEDIA, INC. By: /s/ MICHAEL G. PATE ---------------------------------- Name: Michael G. Pate Title: Chief Financial Officer CHASEMELLON SHAREHOLDER SERVICES, L.L.C. as Transfer Agent, Warrant Agent and Unit Agent By: /s/ R. JOHN DAVIS, VP ---------------------------------- Name: R. John Davis Title: Vice President 13 EXHIBIT A [FORM OF SECURITY] THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS EXCEPT AS SET FORTH BELOW. BY ITS ACQUISITION HEREOF, THE SECURITYHOLDER (1) REPRESENTS THAT IT IS AN INSTITUTIONAL "ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(a)(1), (2), (3) or (7) UNDER THE SECURITIES ACT) (AN "ACCREDITED INVESTOR") OR (B) IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS SECURITY IN AN OFFSHORE TRANSACTION, (2) AGREES THAT IT WILL NOT WITHIN TWO YEARS AFTER THE ORIGINAL ISSUANCE OF THIS SECURITY RESELL OR OTHERWISE TRANSFER THIS SECURITY EXCEPT (A) TO THE ISSUER OR ANY SUBSIDIARY THEREOF, (B) INSIDE THE UNITED STATES TO AN ACCREDITED INVESTOR THAT, PRIOR TO SUCH TRANSFER FURNISHES (OR HAS FURNISHED ON ITS BEHALF BY A U.S. BROKER-DEALER) TO THE UNIT AGENT A SIGNED LETTER CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS RELATING TO THE RESTRICTIONS ON TRANSFER OF THIS SECURITY, (C) OUTSIDE THE UNITED STATES IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH RULE 904 OF REGULATION S UNDER THE SECURITIES ACT, (D) PURSUANT TO THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT (IF AVAILABLE) OR (E) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND (3) AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THIS SECURITY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. IF THE PROPOSED TRANSFEREE IS AN INSTITUTIONAL ACCREDITED INVESTOR PURCHASING PURSUANT TO CLAUSE (2)(B) ABOVE, THE HOLDER MUST, PRIOR TO SUCH TRANSFER, FURNISH TO THE UNIT AGENT AND THE ISSUER SUCH CERTIFICATIONS, LEGAL OPINIONS OR OTHER INFORMATION AS EITHER OF THEM MAY REASONABLY REQUIRE TO CONFIRM THAT SUCH TRANSFER IS BEING MADE PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION," "UNITED STATES" AND "UNITED STATES PERSON" HAVE THE MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES ACT. 14 EXHIBIT A Page 2 SOURCE MEDIA, INC. Units Consisting of 1,000 Shares of Senior PIK Preferred Stock and 558.75 Warrants, each to Purchase One Share of Common Stock No. CUSIP No. [ ] SOURCE MEDIA, INC., a Delaware corporation (the "Company"), which term includes any successor corporation, hereby certifies that [ ] is the owner of [ ] Units as described above, transferable only on the books of the Company by the holder thereof in person or by his or her duly authorized attorney on surrender of this Certificate properly endorsed. Each Unit consists of 1,000 shares of 13.5% Senior PIK Preferred Stock ("Senior PIK Preferred Stock") and 558.75 Warrants to purchase one share of Common Stock, par value $0.01 per share, of the Company (the "Warrants"). This Unit is issued pursuant to the Unit Agreement (the "Unit Agreement") dated as of October 30, 1997 among the Company and ChaseMellon Shareholder Services, L.L.C, as Unit Agent (the "Unit Agent"), Transfer Agent and Warrant Agent, and is subject to the terms and provisions contained therein, to all of which terms and provisions the holder of this Unit Certificate consents by acceptance hereof. The terms of the Senior PIK Preferred Stock are governed by a Certificate of Designation filed with the Secretary of State of Delaware on October 29, 1997 (the "Certificate of Designation"), are subject to the terms and provisions contained therein, to all of which terms and provisions the holder of this Unit Certificate consents by acceptance hereof. Reference is made to the further provisions of this Unit Certificate contained herein, which will for all purposes have the same effect as if set forth at this place. Reference is also made to the Warrant Agreement (the "Warrant Agreement") dated as of October 30, 1997 between the Company and ChaseMellon Shareholder Services, L.L.C., as Warrant Agent, which governs the terms of the Warrants, to all of which terms and provisions the holder of this Unit Certificate consents by acceptance hereof. Copies of the Unit Agreement, Certificate of Designation and Warrant Agreement are on file at the office of the Company, 8140 Walnut Hill Lane, Suite 1000, Dallas, Texas 75231, Facsimile: (214) 890-9014, Attention: Corporate Secretary, and are available to any holder on written request and without cost. 15 EXHIBIT A Page 3 The Senior PIK Preferred Stock and Warrants of the Company represented by this Unit Certificate shall be immediately detachable and separately transferable until the next day after the sale by the Initial Purchasers. Dated: SOURCE MEDIA, INC. By: ---------------------------------- Name: Title: Countersigned: CHASEMELLON SHAREHOLDER SERVICES By: ---------------------------------- Authorized Signatory 16 EXHIBIT A Page 4 ASSIGNMENT FORM To assign this Security, fill in the form below: (I) or (we) assign and transfer this Security to - -------------------------------------------------------------------------------- (Insert assignee's soc. sec. or tax I.D. no.) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (Print or type assignee's name, address and zip code) and irrevocably appoint agent to transfer this Security on the books of the Company. The agent may substitute another to act for him. Date: ------------------------------ Your Signature: ---------------------- (Sign exactly as your name appears on the face of this Security) Signature Guarantee: - ----------------------------------- 17 EXHIBIT A Page 5 (Signatures must be guaranteed by an "eligible guarantor institution" meeting the requirements of the Unit Agent, which requirements will include membership or participation in the Securities Transfer Agents Medallion Program ("STAMP") or such other "signature guarantee program" as may be determined by the Unit Agent in addition to, or in substitution for, STAMP, all in accordance with the Securities Exchange Act of 1934, as amended.) EX-10.1 8 EXCHANGE & REGISTRATION RIGHTS AGMT DATED 10/30/97 1 EXHIBIT 10.1 EXECUTION COPY =================================== COMMON STOCK REGISTRATION RIGHTS AGREEMENT Dated as of October 30, 1997 by and among SOURCE MEDIA, INC. and NATWEST CAPITAL MARKETS LIMITED and PRUDENTIAL SECURITIES INCORPORATED as the Initial Purchasers =================================== 2 TABLE OF CONTENTS
Page ---- 1. Definitions...................................................................................... 1 2. Shelf Registration............................................................................... 4 3. Registration Procedures.......................................................................... 5 4. Registration Expenses............................................................................ 13 5. Indemnification.................................................................................. 14 6. Rule 144......................................................................................... 18 7. Underwritten Registrations....................................................................... 18 8. Miscellaneous. .................................................................................. 18 (a) No Inconsistent Agreements......................................................... 18 (b) Adjustments Affecting Transfer Restricted Warrant Certificates..................... 19 (c) Amendments and Waivers............................................................. 19 (d) Notices............................................................................ 19 (e) Successors and Assigns............................................................. 20 (f) Counterparts....................................................................... 20 (g) Headings........................................................................... 21 (h) Governing Law...................................................................... 21 (i) Severability....................................................................... 21 (j) Preferred Stock Held by the Company or Their Affiliates............................ 21 (k) Third Party Beneficiaries.......................................................... 21
(i) 3 COMMON STOCK REGISTRATION RIGHTS AGREEMENT This Common Stock Registration Rights Agreement (the "Agreement") is dated as of October 30, 1997, by and among Source Media, Inc., a Delaware corporation (the "Company"), NatWest Capital Markets Limited and Prudential Securities Incorporated (each an "Initial Purchaser" and collectively the "Initial Purchasers"). This Agreement is entered into in connection with the Purchase Agreement, dated October 23, 1997, among the Company and the Initial Purchasers (the "Purchase Agreement"), which provides for the sale by the Company to the Initial Purchasers of 800 units (the "Units") consisting of 1,000 shares of 13 1/2% Senior PIK Preferred Stock (the "Preferred Stock") and 558.75 Warrants (the "Warrants"), each Warrant to purchase one share of common stock. Full exercise of the Warrants would result in the purchase of 447,000 shares of common stock (the "Warrant Shares"), or approximately 3% of the Company's shares on a fully diluted basis. In order to induce the Initial Purchasers to enter into the Purchase Agreement, the Company has agreed to provide the registration rights set forth in this Agreement for the benefit of the Initial Purchasers and their direct and indirect transferees. The execution and delivery of this Agreement is a condition to the obligation of the Initial Purchasers to purchase the Units under the Purchase Agreement. The parties hereby agree as follows: 1. Definitions As used in this Agreement, the following terms shall have the following meanings: Advice: Has the meaning provided in the last paragraph of Section 3 hereof. Agreement: Has the meaning provided in the first introductory paragraph hereto. Closing Date: Has the meaning provided in the Purchase Agreement. Company: Has the meaning provided in the first introductory paragraph hereto. Effectiveness Date: The 75th day after the Filing Date. Effectiveness Period: Has the meaning provided in Section 2(a) hereof. Event Date: Has the meaning provided in Section 4(b) hereof. 4 Exchange Act: The Securities Exchange Act of 1934, as amended, and the rules and regulations of the SEC promulgated thereunder. Filing Date: The day six months after the Issue Date. Holder: Any holder of Warrant Shares. Indemnified Person: Has the meaning provided in Section 5(c) hereof. Indemnifying Person: Has the meaning provided in Section 5(c) hereof. Initial Purchasers: Has the meaning provided in the first introductory paragraph hereto. Inspectors: Has the meaning provided in Section 3(o) hereof. Issue Date: The date on which the Warrants were sold to the Initial Purchasers pursuant to the Purchase Agreement. NASD: Has the meaning provided in Section 3(s) hereof. Participant: Has the meaning provided in Section 5(a) hereof. Paying Agent: ChaseMellon as Paying Agent for the Warrant Certificates. Persons: An individual, trustee, corporation, partnership, limited liability company, joint stock company, trust, unincorporated association, union, business association, firm or other legal entity. Preferred Stock: Has the meaning provided in the second introductory paragraph hereto. Prospectus: The prospectus included in any Registration Statement (including, without limitation, any prospectus subject to completion and a prospectus that includes any infor mation previously omitted from a prospectus filed as part of an effective registration statement in reliance upon Rule 430A promulgated under the Securities Act), as amended or supplemented by any prospectus supplement, and all other amendments and supplements to the Prospectus, with respect to the terms of the offering of any portion of the Warrant Shares covered by such Registration Statement including post-effective amendments, and all material incorporated by reference or deemed to be incorporated by reference in such Prospectus. -2- 5 Purchase Agreement: Has the meaning provided in the second introductory paragraph hereto. Records: Has the meaning provided in Section 3(o) hereof. Registration Statement: Any registration statement of the Company, including that covers any of the Warrant Shares pursuant to the provisions of this Agreement, including the Prospectus, amendments and supplements to such registration statement, including post-effective amendments, all exhibits, and all material incorporated by reference or deemed to be incorporated by reference in such registration statement. Rule 144(k): Rule 144(k) promulgated under the Securities Act, as such Rule may be amended from time to time, or any similar rule (other than Rule 144A) or regulation hereafter adopted by the SEC as a replacement thereto having substantially the same effect as such Rule. Rule 415: Rule 415 promulgated under the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the SEC. SEC: The Securities and Exchange Commission. Securities Act: The Securities Act of 1933, as amended, and the rules and regulations of the SEC promulgated thereunder. Shelf Registration: Has the meaning provided in Section 2(a) hereof. Shelf Registration Statement: shall mean a "shelf" registration statement of the Company which covers all of the Warrant Shares on an appropriate form under Rule 415 under the 1933 Act, or any similar rule that may be adopted by the SEC, and all amendments and supplements to such registration statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. Underwritten registration or underwritten offering: A registration in which securities of the Company are sold to an underwriter for reoffering to the public. Units: Has the meaning provided in the second paragraph hereto. Warrant Certificates: Means the Warrant Certificates as provided in the Warrant Agreement. Warrant Shares: Has the meaning provided in the second introductory paragraph hereto. -3- 6 Warrants: Has the meaning provided in the second introductory paragraph hereto. 2. Shelf Registration (a) Shelf Registration. The Company shall file with the SEC no later than the Filing Date a Registration Statement for an offering to be made on a continuous basis pursuant to Rule 415 covering all of the Warrant Shares (the "Shelf Registration"). The Shelf Registration shall be on Form S-3 or another appropriate form permitting registration of such Warrant Shares for resale by Holders in the manner or manners designated by them (including, without limitation, one or more underwritten offerings). The Company shall not permit any securities other than the Warrant Shares to be included in the Shelf Registration, except to the extent that the Company is unable to obtain waivers of registration rights from the persons listed on Schedule A which the Company shall use its best efforts to obtain. The Company shall use its best efforts to cause the Shelf Registration to be declared effective under the Securities Act by the Effectiveness Date and to keep the Shelf Registration continuously effective under the Securities Act until the date which is two years from the Issue Date (the "Effectiveness Period"), subject to extension pursuant to the last paragraph of Section 3 hereof, or such shorter period ending when all the Warrant Shares covered by the Shelf Registration have been sold in the manner set forth and as contemplated in the Shelf Registration or such Warrant Shares become eligible for resale without volume restrictions pursuant to Rule 144(k) under the Securities Act. (b) Withdrawal of Stop Orders. If the Shelf Registration ceases to be effective for any reason at any time during the Effectiveness Period (other than because of the sale of all of the securities registered thereunder), the Company shall use its best efforts to obtain the prompt withdrawal of any order suspending the effectiveness thereof. (c) Supplements and Amendments. The Company shall promptly supplement and amend the Shelf Registration if required by the rules, regulations or instructions applicable to the registration form used for such Shelf Registration, if required by the Securities Act, or if reasonably requested for such purpose by the Holders of a majority of the Warrant Shares covered by such Registration Statement. 3. Registration Procedures In connection with the filing of any Registration Statement pursuant to Section 2 hereof, the Company shall effect such registration(s) to permit the sale of the securities covered thereby in accordance with the intended method or methods of disposition thereof, and pursuant thereto and in connection with any Registration Statement filed by the Company hereunder, the Company shall: -4- 7 (a) Prepare and file with the SEC prior to the Filing Date a Registration Statement as prescribed by Section 2 hereof, and use its best efforts to cause such Registration Statement to become effective and remain effective as provided herein; provided, however, that, the Company shall, if requested in writing, furnish to and afford the Holders of the Warrant Shares covered by such Registration Statement and their counsel, a reasonable opportunity to review copies of all such documents (including copies of any documents to be incorporated by reference therein and all exhibits thereto) proposed to be filed (in each case at least three business days prior to such filing). The Company shall not file any Registration Statement or Prospectus or any amendments or supplements thereto in respect of which the Holders must be afforded an opportunity to review prior to the filing of such document under the immediately preceding sentence, if the Holders of a majority of the Warrant Shares covered by such Registration Statement or their counsel, shall object directly to the Company in writing, which writing shall set forth a reasonable basis for such objection. (b) Prepare and file with the SEC such amendments and post-effective amend ments to the Shelf Registration as may be necessary to keep such Registration Statement continuously effective for the Effectiveness Period, cause the related Prospectus to be supplemented by any Prospectus supplement required by applicable law, and as so sup plemented to be filed pursuant to Rule 424 (or any similar provisions then in force) promulgated under the Securities Act; and comply with the provisions of the Securities Act and the Exchange Act applicable to it with respect to the disposition of all securities covered by such Registration Statement as so amended or in such Prospectus as so supplemented; the Company shall be deemed not to have used its best efforts to keep a Registration Statement effective during the Effectiveness Period if it voluntarily takes any action that would result in selling Holders of the Warrant Shares covered thereby not being able to sell such Warrant Shares during that period unless such action is required by applicable law or unless the Company complies with this Agreement, including, without limitation, the provisions of paragraph 3(j) hereof and the last paragraph of this Section 3. (c) Notify the selling Holders of Warrant Shares and their counsel promptly (but in any event within two business days), and confirm such notice in writing, (i) when a Prospectus or any Prospectus supplement or post-effective amendment has been filed, and, with respect to a Registration Statement or any post-effective amendment, when the same has become effective under the Securities Act (including in such notice a written statement that any Holder may, upon request, obtain, at the sole expense of the Company, one conformed copy of such Registration Statement or post-effective amendment including financial statements and schedules, documents incorporated or deemed to be incorporated by reference and exhibits), (ii) of the issuance by the SEC of any stop order suspending the effectiveness of a Registration Statement or of any order preventing or suspending the use of any preliminary prospectus or the initiation of any proceedings for that purpose, -5- 8 (iii) of the receipt by the Company of any notification with respect to the suspension of the qualification or exemption from qualification of a Registration Statement, (iv) of the hap pening of any event, the existence of any condition or any information becoming known that makes any statement made in such Registration Statement or related Prospectus or any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or that requires the making of any changes in or amendments or supplements to such Registration Statement, Prospectus or documents so that, in the case of the Registration Statement, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and that in the case of the Prospectus, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and (v) of the determination by the Company that a post-effective amendment to a Registration Statement would be appro priate. (d) Use its best efforts to prevent the issuance of any order suspending the effectiveness of a Registration Statement or of any order preventing or suspending the use of a Prospectus or suspending the qualification (or exemption from qualification) of any of the Warrant Shares for sale in any jurisdiction, and, if any such order is issued, to use its best efforts to obtain the withdrawal of any such order at the earliest possible moment. (e) Furnish to each selling Holder of Warrant Shares who so requests and to such Holder's counsel, at the sole expense of the Company, one conformed copy of the Registration Statement or Registration Statements and each post-effective amendment thereto, including financial statements and schedules, and, if requested, all documents incorporated or deemed to be incorporated therein by reference and all exhibits. (f) Deliver to each selling Holder of Warrant Shares and such Holder's counsel, at the sole expense of the Company, as many copies of the Prospectus or Prospectuses (including each form of preliminary prospectus) and each amendment or supplement thereto and any documents incorporated by reference therein as such Persons may reasonably request; and, subject to the last paragraph of this Section 3, the Company hereby consents to the use of such Prospectus and each amendment or supplement thereto by each of the selling Holders of Warrant Shares, in connection with the offering and sale of the Warrant Shares covered by such Prospectus and any amendment or supplement thereto. (g) Prior to any public offering of Warrant Shares to use its best efforts to register or qualify such Warrant Shares (and to cooperate with selling Holders of Warrant Shares and their counsel in connection with the registration or qualification (or exemption from such registration or qualification) of such Warrant Shares) for offer and sale under -6- 9 the securities or Blue Sky laws of such jurisdictions within the United States as any selling Holder, reasonably request in writing; provided, however, that where Warrant Shares are offered other than through an underwritten offering, the Company agrees to cause their counsel to perform Blue Sky investigations and file registrations and qualifications required to be filed pursuant to this Section 3(g); keep each such registration or qualification (or exemption therefrom) effective during the period such Registration Statement is required to be kept effective and do any and all other acts or things reasonably necessary or advisable to enable the disposition in such jurisdictions of the Warrant Shares covered by the applicable Registration Statement; provided, however, that the Company shall not be required to (A) qualify generally to do business in any jurisdiction where it is not then so qualified, (B) take any action that would subject it to general service of process in any such jurisdiction where it is not then so subject or (C) subject itself to taxation in excess of a nominal dollar amount in any such jurisdiction where it is not then so subject. (h) Cooperate with the selling Holders of Warrant Shares, to facilitate the timely preparation and delivery of certificates representing Warrant Shares to be sold, which certificates shall not bear any restrictive legends and shall be in a form eligible for deposit with The Depository Trust Company; and enable such Warrant Shares to be in such denominations and registered in such names as the Holders may reasonably request. (i) Use its best efforts to cause the Warrant Shares covered by the Registration Statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to enable the Holders thereof, to dispose of such Warrant Shares, except as may be required solely as a consequence of the nature of a selling Holder's business, in which case the Company will cooperate in all reasonable respects with the filing of such Registration Statement and the granting of such approvals. (j) Upon the occurrence of any event contemplated by paragraph 3(c)(v) or 3(c)(vi) hereof, as promptly as practicable prepare and (subject to Section 3(a) hereof) file with the SEC, at the sole expense of the Company, a supplement or post-effective amend ment to the Registration Statement or a supplement to the related Prospectus or any docu ment incorporated or deemed to be incorporated therein by reference, or file any other required document so that, as thereafter delivered to the purchasers of the Warrant Shares being sold thereunder any such Prospectus will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, that this Section 3(j) shall not be deemed to require the Company to disclose any information that, in the good faith opinion of the management of the Company, is not yet required to be disclosed and would not be in the best interests of the Company to disclose, so long as the Company complies with all applicable laws and government regulations and the last paragraph of this Section 3. -7- 10 (k) Prior to the effective date of the first Registration Statement relating to the Warrant Shares, provide a CUSIP number for the Warrant Shares. (l) In connection with any underwritten offering initiated by the Company of Warrant Shares pursuant to a Shelf Registration, enter into an underwriting agreement as is customary in underwritten offerings of securities similar to the Warrant Certificates and take all such other actions as are reasonably requested by the managing underwriter or underwriters in order to facilitate the registration or the disposition of such Warrant Shares and, in such connection, (i) make such representations and warranties to, and covenants with, the underwriters with respect to the business of the Company and its respective subsidiaries and the Registration Statement, Prospectus and documents, if any, incorporated or deemed to be incorporated by reference therein, in each case, as are customarily made by Company to underwriters in underwritten offerings of securities similar to the Warrant Certificates, and confirm the same in writing if and when requested; (ii) obtain the written opinion of counsel to the Company and written updates thereof in form, scope and substance reasonably satisfactory to the managing underwriter or underwriters, addressed to the underwriters covering the matters customarily covered in opinions requested in underwritten offerings of securities similar to the Warrant Certificates and such other matters as may be reasonably requested by the managing underwriter or underwriters; (iii) obtain "cold comfort" letters and updates thereof in form, scope and substance reasonably satisfactory to the managing underwriter or underwriters from the independent certified public accountants of the Company (and, if necessary, any other independent certified public accountants of any subsidiary of any of the Company or of any business acquired by any of the Company for which financial state ments and financial data are, or are required to be, included or incorporated by reference in the Registration Statement), addressed to each of the underwriters, such letters to be in customary form and covering matters of the type customarily covered in "cold comfort" letters in connection with underwritten offerings of securities similar to the Warrant Certificates and such other matters as reasonably requested by the managing underwriter or underwriters; and (iv) if an underwriting agreement is entered into, the same shall contain indemnification provisions and procedures no less favorable than those set forth in Section 5 hereof (or such other provisions and procedures acceptable to Holders of a majority of Warrant Shares covered by such Registration Statement and the managing underwriter or underwriters or agents) with respect to all parties to be indemnified pursuant to said Section. The above shall be done at each closing under such underwriting agreement, or as and to the extent required thereunder. (m) Make available for inspection by any selling Holder of such Warrant Shares being sold and any attorney, accountant or other agent retained by any such selling Holder (collectively, the "Inspectors"), at the offices where normally kept, during reasonable busi ness hours, all financial and other records, pertinent corporate documents and instruments of the Company and its subsidiaries (collectively, the "Records") as shall be reasonably -8- 11 necessary to enable them to exercise any applicable due diligence responsibilities, and cause the officers, directors and employees of the Company and its respective subsidiaries to make available for inspection all information reasonably requested by any such Inspector in connection with such Registration Statement. Records which the Company determines, in good faith, to be confidential and any Records which it notifies the Inspectors are confidential shall not be disclosed by the Inspectors unless (i) the disclosure of such Records is necessary to avoid or correct a misstatement or omission in such Registration Statement, (ii) the release of such Records is ordered pursuant to a subpoena or other order from a court of competent jurisdiction, (iii) disclosure of such information is, in the opinion of counsel (a copy of which shall be delivered to the Company) for any Inspector, necessary or advisable in connection with any action, claim, suit or proceeding, directly or indirectly, involving or potentially involving such Inspector and arising out of, based upon, relating to, or involving this Agreement, or any transactions contemplated hereby or arising hereunder, or (iv) the information in such Records has been made gener ally available to the public. Each selling Holder of Warrant Shares will be required to agree that information obtained by it as a result of such inspections shall be deemed confidential and shall not be used by it as the basis for any market transactions in the secu rities of the Company unless and until such information is generally available to the public. Each selling Holder of such Warrant Shares will be required to further agree that it will, upon learning that disclosure of such Records is sought in a court of competent jurisdiction, give notice to the Company and allow the Company to undertake appropriate action to prevent disclosure of the Records deemed confidential at the Company's sole expense. (n) Comply with all applicable rules and regulations of the SEC and make generally available to its securityholders earnings statements satisfying the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder (or any similar rule promulgated under the Securities Act) no later than 45 days after the end of any 12-month period (or 90 days after the end of any 12-month period if such period is a fiscal year) (i) commencing at the end of any fiscal quarter in which Warrant Shares are sold to underwriters in a firm commitment or best efforts underwritten offering and (ii) if not sold to underwriters in such an offering, commencing on the first day of the first fiscal quarter of the Company after the effective date of a Registration Statement, which statements shall cover said 12-month periods. (o) Cooperate with each seller of Warrant Shares covered by any Registration Statement and each underwriter, if any, participating in the disposition of such Warrant Shares and their respective counsel in connection with any filings required to be made with the National Association of Securities Dealers, Inc. (the "NASD"). -9- 12 (p) Use its best efforts to take all other steps necessary or advisable to effect the registration of the Warrant Shares covered by a Registration Statement contemplated hereby. The Company may require each seller of Warrant Shares as to which any Registration Statement is being effected to furnish to the Company such information regarding such seller and the distribution of such Warrant Shares as the Company may, from time to time, reasonably request. The Company may exclude from such Registration Statement the Warrant Shares of any seller who unreasonably fails to furnish such information within a reasonable time after receiving such request. Each seller as to which any Shelf Registration is being effected agrees to furnish promptly to the Company all information required to be disclosed in order to make the information previously furnished to the Company by such seller not materially misleading. Each Holder of Warrant Shares agrees by acquisition of such Warrant Shares that, upon actual receipt of any notice from the Company of the happening of any event of the kind described in Section 3(c)(ii), 3(c)(iv), 3(c)(v), or 3(c)(vi) hereof, such Holder will forthwith discontinue disposition of such Warrant Shares covered by such Registration Statement or Prospectus to be sold by such Holder, until such Holder's receipt of the copies of the supple mented or amended Prospectus contemplated by Section 3(j) hereof, or until it is advised in writ ing (the "Advice") by the Company that the use of the applicable Prospectus may be resumed, and has received copies of any amendments or supplements thereto. In the event the Company shall give any such notice, each of the Effectiveness Period shall be extended by the number of days during such periods from and including the date of the giving of such notice to and including the date when each seller of Warrant Shares covered by such Registration Statement shall have received (x) the copies of the supplemented or amended Prospectus contemplated by Section 3(j) hereof or (y) the Advice. In the event the Company does not give any such notice within five business days, each Holder shall return such Registration Statement or Prospectus to the Company or destroy all copies of such Registration Statement or Prospectus; and if so requested by the Company, shall certify that all copies of the Registration Statement or Prospectus were destroyed. 4. Registration Expenses. All fees and expenses incident to the performance of or compliance with this Agreement by the Company shall be borne by the Company whether or not the Shelf Registration is filed or becomes effective, including, without limitation, (i) all registration and filing fees (including, without limitation, (A) fees with respect to filings with the SEC, (B) fees with respect to filings required to be made with the NASD in connection with an underwritten offering and (C) fees and expenses of compliance with state securities or Blue Sky laws (including, without limitation, reasonable fees and disbursements of the Company's counsel in connection with Blue Sky qualifications of the Warrant Shares and determination of the eligibility of the Warrant Shares for investment under the laws of such jurisdictions where the holders of Warrant Shares are located, (ii) printing expenses, including, without limitation, expenses of printing certificates for Warrant Shares in a form eligible for deposit with The Depository Trust -10- 13 Company and of printing Prospectuses if the printing of Prospectuses is requested by Holders of a majority of the Warrant Shares or the managing underwriter or underwriters, if any, (iii) messenger, telephone and delivery expenses, (iv) fees and disbursements of counsel for the Company, (v) fees and disbursements of all independent certified public accountants referred to in Section 3(m)(iii) hereof (including, without limitation, the expenses of any special audit and "cold comfort" letters required by or incident to such performance by or incident to such performance), (vi) rating agency fees, if any, (vii) Securities Act liability insurance, if the Company desires such insurance, (viii) fees and expenses of all other Persons retained by the Company, (ix) internal expenses of the Company (including, without limitation, all salaries and expenses of officers and employees of the Company performing legal or accounting duties), (x) the expense of any annual audit, (ix) the fees and expenses incurred in connection with the listing of the securities to be registered on any securities exchange or any inter-dealer quotation system, if applicable, and (xii) the expenses relating to printing, word processing and distributing all Registration Statements, underwriting agreements, securities sales agreements, indentures and any other documents necessary in order to comply with this Agreement. 5. Indemnification. (a) The Company agrees to indemnify and hold harmless each Holder of Warrant Shares offered pursuant to a Shelf Registration Statement, the affiliates, directors, officers, agents, representatives and employees of each such Person or its affiliates, and each other Person, if any, who controls any such Person or its affiliates within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act (each, a "Participant") from and against any and all losses, claims, damages and liabilities (including, without limitation, the reasonable legal fees and other expenses actually incurred in connection with any suit, action or proceeding or any claim asserted) caused by, arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement pursuant to which the offering of such Warrant Shares is registered (or any amendment thereto) or related Prospectus (or any amendments or supplements thereto) or any related preliminary prospectus, or caused by, arising out of or based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that the Company will not be required to indemnify a Participant if (i) such losses, claims, damages or liabilities are caused by any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with information furnished to the Company in writing by or on behalf of such Participant expressly for use therein or (ii) if such Participant sold to the person asserting the claim the Warrant Shares which are the subject of such claim and such untrue statement or omission or alleged untrue statement or omission was contained or made in any pre liminary prospectus and corrected in the Prospectus or any amendment or supplement thereto and the Prospectus does not contain any other untrue statement or omission or alleged untrue statement or omission of a material fact that was the subject matter of the related proceeding and such Participant failed to deliver or provide a copy of the Prospectus (as amended or supplemented) to such Person with or prior to the confirmation of the sale of such Warrant Shares sold to such Person if required by applicable laws, unless such failure to deliver or provide a copy of the -11- 14 Prospectus (as amended or supplemented) was a result of noncompliance by the Company with Section 3 of this Agreement. (b) Each Participant agrees, severally and not jointly, to indemnify and hold harmless the Company, its respective directors, officers, agents, representatives, employees and each Person who controls the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act to the same extent as the foregoing indemnity from the Company to each Participant, but only (i) with reference to information furnished to the Company in writing by or on behalf of such Participant expressly for use in any Registration Statement or Prospectus, any amendment or supplement thereto, or any preliminary prospectus or (ii) with respect to any untrue statement or representation made by such Participant in writing to the Company. (c) If any suit, action, proceeding (including any governmental or regulatory investigation), claim or demand shall be brought or asserted against any Person in respect of which indemnity may be sought pursuant to either of the two preceding paragraphs, such Person (the "Indemnified Person") shall promptly notify the Person against whom such indemnity may be sought (the "Indemnifying Person") in writing, and the Indemnifying Person shall have the right to retain counsel reasonably satisfactory to the Indemnified Person to represent the Indemnified Person and any others the Indemnifying Person may reasonably designate in such proceeding and shall pay the reasonable fees and expenses actually incurred by such counsel related to such proceeding; provided, however, that the failure to so notify the Indemnifying Person shall not relieve it of any obligation or liability which it may have hereunder or otherwise (unless and only to the extent that such failure results in the loss or compromise of any material rights or defenses by the Indemnifying Person). In any such proceeding, any Indemnified Person shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such Indemnified Person unless (i) the Indemnifying Person and the Indemnified Person shall have mutually agreed in writing to the contrary, (ii) the Indemnifying Person shall have failed within a reasonable period of time to retain counsel reasonably satisfactory to the Indemnified Person or (iii) the named parties in any such proceeding (including any impleaded parties) include both the Indemnifying Person and the Indemnified Person and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. It is understood that, unless there exists a conflict among Indemnified Persons, the Indemnifying Person shall not, in connection with any one such proceeding or separate but substantially similar related proceeding in the same jurisdiction arising out of the same general allegations, be liable for the reasonable fees and expenses of more than one separate firm (in addition to any local counsel) for all Indemnified Persons, and that all such fees and expenses shall be reimbursed promptly as they are incurred. Any such separate firm for the Participants and such control Persons of Participants shall be designated in writing by Participants who sold a majority in interest of Warrant Shares sold by all such Participants and any such separate firm for the Company, its directors, their officers and such control Persons of the Company shall be designated in writing by the Company. The Indemnifying Person shall not be liable for any settlement of any proceeding effected without its prior written consent, but if settled -12- 15 with such consent or if there be a final non-appealable judgment for the plaintiff for which the Indemnified Person is entitled to indemnification pursuant to this Agreement, the Indemnifying Person agrees to indemnify and hold harmless each Indemnified Person from and against any loss or liability by reason of such settlement or judgment. No Indemnifying Person shall, without the prior written consent of the Indemnified Person, effect any settlement or compromise of any pending or threatened proceeding in respect of which any Indemnified Person is or could have been a party, and indemnity could have been sought hereunder by such Indemnified Person, unless such settlement (A) includes an unconditional written release of such Indemnified Person, in form and substance reasonably satisfactory to such Indemnified Person, from all liability on claims that are the subject matter of such proceeding and (B) does not include any statement as to an admis sion of fault, culpability or failure to act by or on behalf of any Indemnified Person. (d) If the indemnification provided for in Sections 5(a) and 5(b) hereof is for any reason unavailable to, or insufficient to hold harmless, an Indemnified Person in respect of any losses, claims, damages or liabilities referred to therein, then each Indemnifying Person under such paragraphs, in lieu of indemnifying such Indemnified Person thereunder and in order to provide for just and equitable contribution, shall contribute to the amount paid or payable by such Indemnified Person as a result of such losses, claims, damages or liabilities in such proportion as is appropriate to reflect (i) the relative benefits received by the Indemnifying Person or Persons on the one hand and the Indemnified Person or Persons on the other from the offering of the Preferred Stock or (ii) if the allocation provided by the foregoing clause (i) is not permitted by applicable law, not only such relative benefits but also the relative fault of the Indemnifying Person or Persons on the one hand and the Indemnified Person or Persons on the other in connection with the statements or omissions or alleged statements or omissions that resulted in such losses, claims, damages or liabilities (or actions in respect thereof). The relative fault of the parties 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 on the one hand or such Participant or such other Indemnified Person, as the case may be, on the other, the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission, and any other equitable considerations appropriate in the circumstances. (e) The parties agree that it would not be just and equitable if contribution pursuant to this Section 5 were determined by pro rata allocation (even if the Participants were treated as one entity for such purposes) or by any other method of allocation that does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an Indemnified Person as a result of the losses, claims, damages and liabilities referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any reasonable legal or other expenses actually incurred by such Indemnified Person in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 5, in no event shall a Participant be required to contribute any amount in excess of the amount by which proceeds received by such Participant -13- 16 from sales of Warrant Shares exceeds the amount of any damages that such Participant has otherwise been required to pay or has paid by reason of such untrue or alleged untrue statement or omission or alleged omission. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. (f) The indemnity and contribution agreements contained in this Section 5 will be in addition to any liability which the Indemnifying Persons may otherwise have to the Indemnified Persons referred to above. 6. Rule 144. The Company covenants that it will file the reports required to be filed by it under the Securities Act and the Exchange Act and the rules and regulations adopted by the SEC thereunder in a timely manner in accordance with the requirements of the Securities Act and the Exchange Act and, if at any time the Company is not required to file such reports, it will, upon the request of any Holder of Warrant Shares, make publicly available annual reports and such information, documents and other reports of the type specified in Sections 13 and 15(d) of the Exchange Act. The Company further covenants for so long as any Warrant Shares remain outstanding, to make available to any Holder or beneficial owner of Warrant Shares in connection with any sale thereof and any prospective purchaser of such Warrant Shares from such Holder or beneficial owner the information required by the Securities Act in order to permit resales of such Warrant Shares pursuant to Rule 144. 7. Underwritten Registrations. If any of the Warrant Shares covered by any Shelf Registration are to be sold in an underwritten offering, the investment banker or investment bankers and manager or managers that will manage the offering will be selected by the Holders of a majority of such Warrant Shares included in such offering and reasonably acceptable to the Company. No Holder of Warrant Shares may participate in any underwritten registration hereunder unless such Holder (a) agrees to sell such Holder's Warrant Shares on the basis provided in any underwriting arrangements approved by the Persons entitled hereunder to approve such arrangements and (b) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents required under the terms of such underwriting arrangements. 8. Miscellaneous. (a) No Inconsistent Agreements. The Company has not entered, as of the date hereof, and the Company shall not, after the date of this Agreement, enter into any agreement with respect to any of its securities that is inconsistent with the rights granted to the Holders of Warrant Shares in this Agreement or otherwise conflicts with the provisions hereof. Other than as provided in Schedule A attached hereto, the Company has not entered and none of the Company will enter into any agreement with respect to any of its securities which will grant to any Person piggy-back registration rights with respect to a Registration Statement. -14- 17 (b) Adjustments Affecting Warrant Shares. The Company shall not, directly or indirectly, take any action with respect to the Warrant Shares as a class that would adversely affect the ability of the Holders of Warrant Shares to include such Warrant Shares in a registration undertaken pursuant to this Agreement. (c) Amendments and Waivers. The provisions of this Agreement may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, otherwise than with the prior written consent of the Holders of not less than a majority of the then outstanding Warrant Shares. Notwithstanding the foregoing, a waiver or consent to depart from the provisions hereof with respect to a matter that relates exclusively to the rights of Holders of Warrant Shares whose securities are being sold pursuant to a Registration Statement and that does not directly or indirectly affect, impair, limit or compromise the rights of other Holders of Warrant Shares may be given by Holders of at least a majority of the Warrant Shares being sold by such Holders pursuant to such Registration Statement; provided, however, that the provisions of this sentence may not be amended, modified or supplemented except in accordance with the provisions of the immediately preceding sentence. (d) Notices. All notices and other communications provided for or permitted hereunder shall be made in writing by hand-delivery, registered first-class mail, next-day air courier or facsimile: 1. if to a Holder of the Warrant Shares, at the most current address of such Holder, set forth on the records of the registrar under the Indenture, with a copy in like manner to the Initial Purchasers as follows: NatWest Capital Markets Limited 135 Bishopsgate London, EC2M 3XT United Kingdom Attention: Roger Hoit with a copy to: White & Case 1155 Avenue of the Americas New York, NY 10036 Facsimile No: (212) 354-8113 Attention: Timothy B. Goodell, Esq. 2. if to the Initial Purchasers, at the addresses specified in Section 10(d)(1); -15- 18 3. if to the Company, as follows: Source Media, Inc. 5400 LBJ Freeway Suite 680 Dallas, TX 75240 Attention: Maryann Walsh, Esq. with a copy to: Thompson & Knight, P.C. 1700 Pacific Avenue Suite 3300 Dallas, TX 75201 Attention: Michael L. Bengtson, Esq. All such notices and communications shall be deemed to have been duly given: when delivered by hand, if personally delivered; five business days after being deposited in the mail, postage prepaid, if mailed; one business day after being timely delivered to a next-day air courier; and when receipt is acknowledged by the addressee, if sent by facsimile. (e) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties hereto; provided, however, that this Agreement shall not inure to the benefit of or be binding upon a successor or assign of a Holder unless and to the extent such successor or assign holds Registerable Preferred Stock. (f) Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. (g) Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning thereof. (h) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, AS APPLIED TO CONTRACTS MADE AND PERFORMED WHOLLY WITHIN THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. EACH OF THE PARTIES HERETO AGREES TO SUBMIT TO THE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT. -16- 19 (i) Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their best efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such that may be hereafter declared invalid, illegal, void or unenforceable. -17- 20 IN WITNESS WHEREOF, the parties have executed the Agreement as of the date first written above. Company: SOURCE MEDIA, INC. By: /s/ MICHAEL G. PATE --------------------------- Name: Michael G. Pate Title: Chief Financial Officer The foregoing Agreement is hereby confirmed and accepted as of the date first above written: NATWEST CAPITAL MARKETS LIMITED By: /s/ NS GOULBECK --------------------------- Name: NS Goulbeck Title: Director PRUDENTIAL SECURITIES INCORPORATED By: /s/ CHRISTOPHER J. BARBER --------------------------- Name: Christopher J. Barber Title: Managing Director -1- EX-10.2 9 PREFERRED STOCK REGISTRATION RIGHTS AGMT -10/30/97 1 EXHIBIT 10.2 EXECUTION COPY =========================================================== PREFERRED STOCK REGISTRATION RIGHTS AGREEMENT Dated as of October 30, 1997 by and among SOURCE MEDIA, INC. and NATWEST CAPITAL MARKETS LIMITED and PRUDENTIAL SECURITIES INCORPORATED as the Initial Purchasers =========================================================== 13.5% SENIOR PIK PREFERRED STOCK 2 TABLE OF CONTENTS
Page ---- 1. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2. Exchange Offer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 3. Shelf Registration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 4. Additional Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 5. Registration Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 6. Registration Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 7. Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 8. Rules 144 and 144A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 9. Underwritten Registrations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 10. Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 (a) No Inconsistent Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 (b) Adjustments Affecting Transfer Restricted Preferred Stock . . . . . . . . . . . . . . . . . . . . . 26 (c) Amendments and Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 (d) Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 (e) Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 (f) Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 (g) Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 (h) Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 (i) Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 (j) Preferred Stock Held by the Company or Their Affiliates . . . . . . . . . . . . . . . . . . . . . . 29 (k) Third Party Beneficiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
(i) 3 PREFERRED STOCK REGISTRATION RIGHTS AGREEMENT This Preferred Stock Registration Rights Agreement (the "Agreement") is dated as of October 30, 1997, by and among Source Media, Inc., a Delaware corporation (the "Company"), NatWest Capital Markets Limited and Prudential Securities Incorporated (each an "Initial Purchaser" and collectively the "Initial Purchasers"). This Agreement is entered into in connection with the Purchase Agreement, dated October 23, 1997, among the Company and the Initial Purchasers (the "Purchase Agreement"), which provides for the sale by the Company to the Initial Purchasers of 800 units (the "Units") consisting of 1,000 shares of 13.5% Senior PIK Preferred Stock (the "Preferred Stock") with warrants to purchase an aggregate of 447,000 shares of common stock of the Company. In order to induce the Initial Purchasers to enter into the Purchase Agreement, the Company has agreed to provide the registration rights set forth in this Agreement for the benefit of the Initial Purchasers and their direct and indirect transferees. The execution and delivery of this Agreement is a condition to the obligation of the Initial Purchasers to purchase the Preferred Stock under the Purchase Agreement. The parties hereby agree as follows: 1. Definitions As used in this Agreement, the following terms shall have the following meanings: Additional Dividends: Has the meaning provided in Section 4(a) hereof. Advice: Has the meaning provided in the last paragraph of Section 5 hereof. Agreement: Has the meaning provided in the first introductory paragraph hereto. Applicable Period: Has the meaning provided in Section 2(b) hereof. Certificate of Designation: means the certificate of designation governing the Preferred Stock and the Exchange Preferred Stock. 4 Closing Date: Has the meaning provided in the Purchase Agreement. Company: Has the meaning provided in the first introductory paragraph hereto. Effectiveness Date: The 120th day after the Issue Date. Effectiveness Period: Has the meaning provided in Section 3(a) hereof. Event Date: Has the meaning provided in Section 4(b) hereof. Exchange Act: The Securities Exchange Act of 1934, as amended, and the rules and regulations of the SEC promulgated thereunder. Exchange Offer: Has the meaning provided in Section 2(a) hereof. Exchange Preferred Stock: The shares of 13.5% Senior PIK Preferred Stock of the Company that are identical to the Preferred Stock in all material respects, except that the provisions regarding restrictions on transfer shall be modified, as provided in the Certificate of Designation, and the issuance thereof pursuant to the Exchange Offer shall have been registered pursuant to an effective Registration Statement in compliance with the Securities Act. Exchange Registration Statement: Has the meaning provided in Section 2(a) hereof. Filing Date: The 45th day after the Issue Date. Holder: Any holder of Transfer Restricted Preferred Stock. Indemnified Person: Has the meaning provided in Section 7(c) hereof. Indemnifying Person: Has the meaning provided in Section 7(c) hereof. Initial Purchasers: Has the meaning provided in the first introductory paragraph hereto. Inspectors: Has the meaning provided in Section 5(o) hereof. Issue Date: The date on which the original Preferred Stock was sold to the Initial Purchasers pursuant to the Purchase Agreement. -2- 5 NASD: Has the meaning provided in Section 5(s) hereof. Participant: Has the meaning provided in Section 7(a) hereof. Participating Broker-Dealer: Has the meaning provided in Section 2(b) hereof. Paying Agent: ChaseMellon as Paying Agent for the Preferred Stock. Persons: An individual, trustee, corporation, partnership, limited liability company, joint stock company, trust, unincorporated association, union, business association, firm or other legal entity. Preferred Stock: Has the meaning provided in the second introductory paragraph hereto. Private Exchange: Has the meaning provided in Section 2(b) hereof. Private Exchange Preferred Stock: Has the meaning provided in Section 2(b) hereof. Prospectus: The prospectus included in any Registration Statement (including, without limitation, any prospectus subject to completion and a prospectus that includes any information previously omitted from a prospectus filed as part of an effective registration statement in reliance upon Rule 430A promulgated under the Securities Act), as amended or supplemented by any prospectus supplement, and all other amendments and supplements to the Prospectus, with respect to the terms of the offering of any portion of the Transfer Restricted Preferred Stock covered by such Registration Statement including post-effective amendments, and all material incorporated by reference or deemed to be incorporated by reference in such Prospectus. Purchase Agreement: Has the meaning provided in the second introductory paragraph hereto. Records: Has the meaning provided in Section 5(o) hereof. Registration Statement: Any registration statement of the Company, including, but not limited to, the Exchange Registration Statement, that covers any of the Transfer Restricted Preferred Stock pursuant to the provisions of this Agreement, including the Prospectus, amendments and supplements to such registration statement, -3- 6 including post-effective amendments, all exhibits, and all material incorporated by reference or deemed to be incorporated by reference in such registration statement. Rule 144(k): Rule 144(k) promulgated under the Securities Act, as such Rule may be amended from time to time, or any similar rule (other than Rule 144A) or regulation hereafter adopted by the SEC as a replacement thereto having substantially the same effect as such Rule. Rule 144A: Rule 144A promulgated under the Securities Act, as such Rule may be amended from time to time, or any similar rule (other than Rule 144) or regulation hereafter adopted by the SEC. Rule 415: Rule 415 promulgated under the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the SEC. SEC: The Securities and Exchange Commission. Securities Act: The Securities Act of 1933, as amended, and the rules and regulations of the SEC promulgated thereunder. Shelf Notice: Has the meaning provided in Section 2(c) hereof. Shelf Registration: Has the meaning provided in Section 3(a) hereof. Shelf Registration Statement: shall mean a "shelf" registration statement of the Company and the Guarantors which covers all of the Transfer Restricted Preferred Stock on an appropriate form under Rule 415 under the 1933 Act, or any similar rule that may be adopted by the SEC, and all amendments and supplements to such registration statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. TIA: The Trust Indenture Act of 1939, as amended. Transfer Restricted Preferred Stock: Each share of Preferred Stock upon original issuance of the Preferred Stock and at all times subsequent thereto, each share of Exchange Preferred Stock as to which Section 2(c)(v) hereof is applicable upon original issuance and at all times subsequent thereto and each Private Exchange Preferred Stock upon original issuance thereof and at all times subsequent thereto, until in the case of any such Preferred Stock, Exchange Preferred Stock or Private Exchange -4- 7 Preferred Stock, as the case may be, the earliest to occur of (i) a Registration Statement (other than, with respect to any Exchange Preferred Stock as to which Section 2(c)(v) hereof is applicable, the Exchange Registration Statement) covering such Preferred Stock, Exchange Preferred Stock or Private Exchange Preferred Stock, as the case may be, has been declared effective by the SEC and such Preferred Stock, Exchange Preferred Stock or Private Exchange Preferred Stock, as the case may be, has been disposed of in accordance with such effective Registration Statement, (ii) such Preferred Stock, Exchange Preferred Stock or Private Exchange Preferred Stock, as the case may be, is, or may be, sold in compliance with Rule 144(k), or (iii) such Preferred Stock, Exchange Preferred Stock or Private Exchange Preferred Stock, as the case may be, ceases to be outstanding for purposes of the Certificate of Designation. Underwritten registration or underwritten offering: A registration in which securities of the Company are sold to an underwriter for reoffering to the public. 2. Exchange Offer (a) The Company agrees to file with the SEC no later than the Filing Date an offer to exchange (the "Exchange Offer") any and all shares of Preferred Stock (other than the Private Exchange Preferred Stock, if any) for a like number of shares of Exchange Preferred Stock. The Exchange Offer shall be registered under the Securities Act on the appropriate form (the "Exchange Registration Statement") and shall comply with all applicable tender offer rules and regulations under the Exchange Act and state securities or Blue Sky Laws. The Company agrees to use its best efforts to (x) cause the Exchange Registration Statement to be declared effective under the Securities Act no later than the 120th day after the Issue Date; (y) keep the Exchange Offer open for at least 30 business days (or longer if required by applicable law) after the date that notice of the Exchange Offer is mailed to the Holders; and (z) consummate the Exchange Offer on or prior to the 180th day following the Issue Date. If after such Exchange Registration Statement is declared effective by the SEC, the Exchange Offer or the issuance of the Exchange Preferred Stock thereunder is interfered with by any stop order, injunction or other order or requirement of the SEC or any other governmental agency or court, such Exchange Registration Statement shall be deemed not to have become effective for purposes of this Agreement until each stop order, injunction or other order or requirement is no longer in effect. Each Holder who participates in the Exchange Offer will be required to represent that any Exchange Preferred Stock received by it will be acquired in the ordinary course of its business, that at the time of the consummation of the Exchange Offer such Holder will have no arrangement or understanding with any Person to participate in the distribution of the Exchange Preferred Stock in violation of the provisions of the Securities Act, and that such Holder in not an "affiliate" of the Company within the meaning of the Securities Act. -5- 8 Upon consummation of the Exchange Offer in accordance with this Section 2, the Company shall have no further obligation to register Transfer Restricted Preferred Stock (other than Private Exchange Preferred Stock and other than in respect of any Exchange Preferred Stock as to which clause 2(c)(v) hereof applies) pursuant to Section 3 hereof. No securities other than the Exchange Preferred Stock shall be included in the Exchange Registration Statement. (b) The Company shall include within the Prospectus contained in the Exchange Registration Statement a section entitled "Plan of Distribution," reasonably acceptable to the Initial Purchasers, which shall contain a summary statement of the positions taken or policies made by the Staff of the SEC with respect to the potential "underwriter" status of any broker-dealer that is the beneficial owner (as defined in Rule 13d-3 under the Exchange Act) of Exchange Preferred Stock received by such broker-dealer in the Exchange Offer (a "Participating Broker-Dealer"), whether such positions or policies have been publicly disseminated by the Staff of the SEC or such positions or policies, in the judgment of the Initial Purchasers, represent the prevailing views of the Staff of the SEC. Such "Plan of Distribution" section shall also expressly permit the use of the Prospectus by all Persons subject to the prospectus delivery requirements of the Securities Act, including all Participating Broker-Dealers, and include a statement describing the means by which Participating Broker-Dealers may resell the Exchange Preferred Stock. The Company shall use its best efforts to keep the Exchange Registration Statement effective and to amend and supplement the Prospectus contained therein, in order to permit such Prospectus to be lawfully delivered by any Participating Broker-Dealer subject to the prospectus delivery requirements of the Securities Act for such period of time as is necessary to comply with applicable law in connection with any resale of the Exchange Preferred Stock; provided, however, that such period shall not exceed 180 days after the consummation of the Exchange Offer (or such longer period if extended pursuant to the last paragraph of Section 5 hereof) (the "Applicable Period"). If, prior to consummation of the Exchange Offer, either of the Initial Purchasers holds any Preferred Stock acquired by it and having the status of an unsold allotment in the initial distribution, the Company shall, upon the request of the Initial Purchasers, simultaneously with the delivery of the Exchange Preferred Stock in the Exchange Offer issue and deliver to the Initial Purchasers in exchange (the "Private Exchange") for such Preferred Stock held by the Initial Purchasers a like number of shares of Preferred Stock of the Company, that is identical in all material respects to the Exchange Preferred Stock (the "Private Exchange Preferred Stock") (and which is issued pursuant to the same Certificate of Designation as the Exchange Preferred Stock) -6- 9 except for the placement of a restrictive legend on such Private Exchange Preferred Stock. The Private Exchange Preferred Stock shall if permissible bear the same CUSIP number as the Exchange Preferred Stock. Dividends on the Exchange Preferred Stock and the Private Exchange Preferred Stock will accumulate from the last dividend payment date on which dividends were paid on the Preferred Stock surrendered in exchange therefor or, if no dividends have been paid on the Preferred Stock, from the Issue Date. In connection with the Exchange Offer, the Company shall: (1) mail to each Holder a copy of the Prospectus forming part of the Exchange Registration Statement, together with an appropriate letter of transmittal and related documents; (2) utilize the services of a depositary for the Exchange Offer with an address in the Borough of Manhattan, The City of New York; (3) permit Holders to withdraw tendered Preferred Stock at any time prior to the close of business, New York time, on the last business day on which the Exchange Offer shall remain open; and (4) otherwise comply in all material respects with all applicable laws, rules and regulations. As soon as practicable after the close of the Exchange Offer or the Private Exchange, as the case may be, the Company shall: (1) accept for exchange all Preferred Stock tendered and not validly withdrawn pursuant to the Exchange Offer or the Private Exchange; (2) deliver to the Trustee for cancellation all Preferred Stock so accepted for exchange; and (3) cause the Trustee to authenticate and deliver promptly to each Holder of Preferred Stock, Exchange Preferred Stock or Private Exchange Preferred Stock, as the case may be, the number of shares of the Preferred Stock of such Holder so accepted for exchange. The Exchange Preferred Stock and the Private Exchange Preferred Stock are to be issued under (i) the Certificate of Designation or (ii) a Certificate of -7- 10 Designation identical in all material respects to the Certificate of Designation, which in either event shall provide that (1) the Exchange Preferred Stock shall not be subject to the transfer restrictions set forth in the Certificate of Designation and (2) the Private Exchange Preferred Stock shall be subject to the transfer restrictions set forth in the Certificate of Designation. The Certificate of Designation shall provide that the Exchange Preferred Stock, the Private Exchange Preferred Stock and the Preferred Stock shall vote and consent together on all matters as to which they have the right to vote or consent as one class and that none of the Exchange Preferred Stock, the Private Exchange Preferred Stock or the Preferred Stock will have the right to vote or consent as a separate class on any matter. (c) If, (i) because of any change in law or in currently prevailing interpretations of the Staff of the SEC, the Company is not permitted to effect an Exchange Offer, (ii) the Exchange Offer is not consummated within 180 days after the Issue Date, (iii) any holder of Private Exchange Preferred Stock so requests at any time after the consummation of the Private Exchange, or (iv) any Holder (other than the Initial Purchaser) is not eligible to participate in the Exchange Offer, then the Company shall promptly deliver written notice thereof (the "Shelf Notice") to the Trustee and, in the case of clauses (i) and (ii) above, all Holders, in the case of clause (iii) above, the Holders of the Private Exchange Preferred Stock and, in the case of clause (iv) above, the affected Holder, and shall file a Shelf Registration pursuant to Section 3 hereof, provided, however, that in the case of clause (iii) above such Holders shall pay all reasonable registration expenses of the Company as described in Section 6 hereof in connection with such Shelf Registration. 3. Shelf Registration If a Shelf Notice is delivered as contemplated by Section 2(c) hereof, then: (a) Shelf Registration. The Company shall as promptly as reasonably practicable file with the SEC a Registration Statement for an offering to be made on a continuous basis pursuant to Rule 415 covering all of the Transfer Restricted Preferred Stock (the "Shelf Registration"). If the Company shall not have yet filed an Exchange Registration Statement, the Company shall use its best efforts to file with the SEC the Shelf Registration on or prior to the Filing Date. The Shelf Registration shall be on Form S-3 or another appropriate form permitting registration of such Transfer Restricted Preferred Stock for resale by Holders in the manner or manners designated by them (including, without limitation, one or more underwritten offerings). The Company shall not permit any securities other than the Transfer Restricted Preferred Stock to be included in the Shelf Registration, except to the extent that the Company -8- 11 is unable to obtain waivers of registration rights from the persons listed on Schedule A, which the Company shall use its best efforts to obtain. The Company shall use its best efforts to cause the Shelf Registration to be declared effective under the Securities Act by the 120th day after the Preferred Stock Shelf Request and to keep the Shelf Registration continuously effective under the Securities Act until the date which is two years from the Issue Date, subject to extension pursuant to the last paragraph of Section 5 hereof, or such shorter period ending when all shares of Transfer Restricted Preferred Stock covered by the Shelf Registration have been sold in the manner set forth and as contemplated in the Shelf Registration or such Transfer Restricted Preferred Stock becomes eligible for resale without volume restrictions pursuant to Rule 144 and or the Securities Act. (b) Withdrawal of Stop Orders. If the Shelf Registration ceases to be effective for any reason at any time during the Effectiveness Period (other than because of the sale of all of the securities registered thereunder), the Company shall use its best efforts to obtain the prompt withdrawal of any order suspending the effectiveness thereof. (c) Supplements and Amendments. The Company shall promptly supplement and amend the Shelf Registration if required by the rules, regulations or instructions applicable to the registration form used for such Shelf Registration, if required by the Securities Act, or if reasonably requested for such purpose by the Holders of a majority of the shares of the Transfer Restricted Preferred Stock covered by such Registration Statement or by any underwriter of such Transfer Restricted Preferred Stock. 4. Additional Dividends (a) The Company and the Initial Purchaser agree that the Holders of Transfer Restricted Preferred Stock will suffer damages if the Company fails to fulfill its obligations under Section 2 or Section 3 hereof and that it would not be feasible to ascertain the extent of such damages with precision. Accordingly, the Company agrees to pay, as liquidated damages and as the sole and exclusive remedy therefor, additional dividends on the Preferred Stock ("Additional Dividends") under the circumstances and to the extent set forth below: (i) if the Preferred Stock Exchange Offer Registration Statement or Preferred Stock Shelf Registration Statement is not filed within, in the case of the Preferred Stock Exchange Offer Registration Statement, 45 days following the Preferred Stock Issue Date or, in the case of the Preferred Stock Shelf -9- 12 Registration Statement, within 45 days following a Preferred Stock Shelf Request, Preferred Stock Additional Dividends shall accrue on the Preferred Stock over and above the stated rate of 0.50% per annum for the first 30 days commencing on the 46th day after the Preferred Stock Issue Date or such Preferred Stock Shelf Request, respectively, such Additional Dividends increasing by an additional 0.50% per annum at the beginning of each subsequent 30-day period; (ii) if the Preferred Stock Exchange Offer Registration Statement or Preferred Stock Shelf Registration Statement is not declared effective within, in the case of the Preferred Stock Exchange Offer Registration Statement, 120 days following the Preferred Stock Issue Date or, in the case of Preferred Stock Shelf Registration Statement, 120 days following a Preferred Stock Shelf Request, Additional Dividends shall accrue on the Preferred Stock over and above the stated Additional Dividends at a rate of 0.50% per annum for the first 30 days commencing on the 121st day after the Preferred Stock Issue Date or such Preferred Stock Shelf Request, respectively, such Additional Dividends increasing by an additional 0.50% per annum at the beginning of each subsequent 30-day period; or (iii) if (A) the Company has not exchanged all Preferred Stock validly tendered in accordance with the terms of the Preferred Stock Exchange Offer on or prior to 180 days after the Preferred Stock Issue Date or (B) the Preferred Stock Exchange Offer Registration Statement ceases to be effective at any time prior to the time that the Preferred Stock Exchange Offer is consummated or (C) if applicable, the Preferred Stock Shelf Registration Statement has been declared effective and such Preferred Stock Shelf Registration Statement ceases to be effective at any time prior to the second anniversary of the Preferred Stock Issue Date (unless all the Preferred Stock has been sold thereunder), then Additional Dividends shall accrue on the Preferred Stock over and above the stated Additional Dividends at a rate of 0.50% per annum for the first 30 days commencing on (x) the 181st day after the Preferred Stock Issue Date with respect to the Preferred Stock validly tendered and not exchanged by the Company, in the case of (A) above, or (y) the day the Preferred Stock Exchange Offer Registration Statement ceases to be effective or usable for its intended purpose in the case of (B) above, or (z) the day such Preferred Stock Shelf Registration Statement ceases to be effective in the case of (C) above, such Additional Dividends increasing by an additional 0.50% per annum at the beginning of each subsequent 30- day period. -10- 13 provided, however, that the Additional Dividends on the Preferred Stock may not exceed in the aggregate 2.0% per annum; and provided, further, that (1) upon the filing of the Preferred Stock Exchange Offer Registration Statement or Preferred Stock Shelf Registration Statement (in the case of clause (i) above), (2) upon the effectiveness of the Preferred Stock Exchange Offer Registration Statement or Preferred Stock Shelf Registration Statement (in the case of (ii) above), or (3) upon the exchange of Exchange Preferred Stock for all Preferred Stock tendered (in the case of clause (iii)(A) above), or upon the effectiveness of the Preferred Stock Exchange Offer Registration Statement which had ceased to remain effective (in the case of clause (iii)(B) above), or upon the effectiveness of the Preferred Stock Shelf Registration Statement which had ceased to remain effective (in the case of clause (iii)(C) above), Additional Dividends on the Preferred Stock as a result of such clause (or the relevant subclause thereof), as the case may be, shall cease to accrue. (b) The Company shall notify the Paying Agent within one business day after each and every date on which an event occurs in respect of which Additional Dividends are required to be paid (an "Event Date"). The Company shall pay the Additional Dividends due on the Transfer Restricted Preferred Stock by depositing with the Paying Agent (which shall not be the Company for these purposes) for the Transfer Restricted Preferred Stock, in trust, for the benefit of the holders thereof, prior to 11:00 A.M. on the next dividend payment date specified by the Certificate of Designation (or such other certificate of designation), sums or shares of the Preferred Stock, as the case may be, sufficient to pay the Additional Dividends then due. Any amounts of Additional Dividends due pursuant to clauses (a)(i), (a)(ii) or (a)(iii) of this Section 4 will be payable to the Holders of affected Preferred Stock in cash or shares of the Preferred Stock, as the case may be, quarterly on each dividend payment date specified by the Certificate of Designation (or such other certificate of designation) to the record holders entitled to receive the dividend payment to be made on such date, commencing with the first such date occurring after any such Additional Dividends commence to accrue. The amount of Additional Dividends will be determined by multiplying the applicable Additional Dividends rate by the liquidation preference of the affected Transfer Restricted Preferred Stock of such Holders, multiplied by a fraction, the numerator of which is the number of days such Additional Dividends rate was applicable during such period (determined on the basis of a 360-day year comprised of twelve 30-day months and, in the case of a partial month, the actual number of days elapsed), and the denominator of which is 360. 5. Registration Procedures In connection with the filing of any Registration Statement pursuant to Sections 2 or 3 hereof, the Company shall effect such registration(s) to permit the sale -11- 14 of the securities covered thereby in accordance with the intended method or methods of disposition thereof, and pursuant thereto and in connection with any Registration Statement filed by the Company hereunder, the Company shall: (a) Prepare and file with the SEC prior to the Filing Date a Registration Statement or Registration Statements as prescribed by Sections 2 or 3 hereof, and use its best efforts to cause each such Registration Statement to become effective and remain effective as provided herein; provided, however, that, if (1) such filing is pursuant to Section 3 hereof, or (2) a Prospectus contained in an Exchange Registration Statement filed pursuant to Section 2 hereof is required to be delivered under the Securities Act by any Participating Broker-Dealer who seeks to sell Exchange Preferred Stock during the Applicable Period, before filing any Registration Statement or Prospectus or any amendments or supplements thereto, the Company shall, if requested in writing, furnish to and afford the Holders of the Transfer Restricted Preferred Stock covered by such Registration Statement or each such Participating Broker-Dealer, as the case may be, their counsel and the managing underwriters, if any, a reasonable opportunity to review copies of all such documents (including copies of any documents to be incorporated by reference therein and all exhibits thereto) proposed to be filed (in each case at least three business days prior to such filing). The Company shall not file any Registration Statement or Prospectus or any amendments or supplements thereto in respect of which the Holders must be afforded an opportunity to review prior to the filing of such document under the immediately preceding sentence, if the Holders of a majority in aggregate principal amount of the Transfer Restricted Preferred Stock covered by such Registration Statement, or any such Participating Broker-Dealer, as the case may be, their counsel, or the managing underwriters, if any, shall object directly to the Company in writing, which writing shall set forth a reasonable basis for such objection. (b) Prepare and file with the SEC such amendments and post-effective amendments to each Shelf Registration or Exchange Registration Statement, as the case may be, as may be necessary to keep such Registration Statement continuously effective for the Effectiveness Period or the Applicable Period or until consummation of the Exchange Offer, as the case may be; cause the related Prospectus to be supplemented by any Prospectus supplement required by applicable law, and as so supplemented to be filed pursuant to Rule 424 (or any similar provisions then in force) promulgated under the Securities Act; and comply with the provisions of the Securities Act and the Exchange Act applicable to it with respect to the disposition of all securities covered by such Registration Statement as so amended or in such Prospectus as so supplemented and with -12- 15 respect to the subsequent resale of any securities being sold by a Participating Broker-Dealer covered by any such Prospectus; the Company shall be deemed not to have used its best efforts to keep a Registration Statement effective during the Applicable Period if it voluntarily takes any action that would result in selling Holders of the Transfer Restricted Preferred Stock covered thereby or Participating Broker-Dealers seeking to sell Exchange Preferred Stock not being able to sell such Transfer Restricted Preferred Stock or such Exchange Preferred Stock during that period unless such action is required by applicable law or unless the Company complies with this Agreement, including, without limitation, the provisions of paragraph 5(k) hereof and the last paragraph of this Section 5. (c) If (1) a Shelf Registration is filed pursuant to Section 3 hereof, or (2) a Prospectus contained in an Exchange Registration Statement filed pursuant to Section 2 hereof is required to be delivered under the Securities Act by any Participating Broker-Dealer who seeks to sell Exchange Preferred Stock during the Applicable Period, notify the selling Holders of Transfer Restricted Preferred Stock, or each such Participating Broker-Dealer, as the case may be, their counsel and the managing underwriters, if any, promptly (but in any event within two business days), and confirm such notice in writing, (i) when a Prospectus or any Prospectus supplement or post-effective amendment has been filed, and, with respect to a Registration Statement or any post-effective amendment, when the same has become effective under the Securities Act (including in such notice a written statement that any Holder may, upon request, obtain, at the sole expense of the Company, one conformed copy of such Registration Statement or post-effective amendment including financial statements and schedules, documents incorporated or deemed to be incorporated by reference and exhibits), (ii) of the issuance by the SEC of any stop order suspending the effectiveness of a Registration Statement or of any order preventing or suspending the use of any preliminary prospectus or the initiation of any proceedings for that purpose, (iii) if at any time when a Prospectus is required by the Securities Act to be delivered in connection with sales of the Transfer Restricted Preferred Stock or resales of Exchange Preferred Stock by Participating Broker-Dealers the representations and warranties of the Company contained in any agreement (including any underwriting agreement), contemplated by Section 5(n) hereof cease to be true and correct, (iv) of the receipt by the Company of any notification with respect to the suspension of the qualification or exemption from qualification of a Registration Statement or any of the Transfer Restricted Preferred Stock or the Exchange Preferred Stock to be sold by any Participating Broker-Dealer for offer or sale in any jurisdiction, or the initiation or threatening of any proceeding for such purpose, (v) of the -13- 16 happening of any event, the existence of any condition or any information becoming known that makes any statement made in such Registration Statement or related Prospectus or any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or that requires the making of any changes in or amendments or supplements to such Registration Statement, Prospectus or documents so that, in the case of the Registration Statement, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and that in the case of the Prospectus, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and (vi) of the determination by the Company that a post-effective amendment to a Registration Statement would be appropriate. (d) Use its best efforts to prevent the issuance of any order suspending the effectiveness of a Registration Statement or of any order preventing or suspending the use of a Prospectus or suspending the qualification (or exemption from qualification) of any of the Transfer Restricted Preferred Stock or the Exchange Preferred Stock for sale in any jurisdiction, and, if any such order is issued, to use its best efforts to obtain the withdrawal of any such order at the earliest possible moment. (e) If a Shelf Registration is filed pursuant to Section 3 hereof and if requested by the managing underwriter or underwriters (if any), or the Holders of a majority in aggregate principal amount of the Transfer Restricted Preferred Stock being sold in connection with an underwritten offering, (i) promptly incorporate in a prospectus supplement or post-effective amendment such information as the managing underwriter or underwriters (if any), such Holders, or counsel for any of them reasonably request to be included therein, (ii) make all required filings of such prospectus supplement or such post-effective amendment as soon as practicable after the Company has received notification of the matters to be incorporated in such prospectus supplement or post-effective amendment, and (iii) supplement or make amendments to such Registration Statement. (f) If (1) a Shelf Registration is filed pursuant to Section 3 hereof, or (2) a Prospectus contained in an Exchange Registration Statement filed pursuant to Section 2 hereof is required to be delivered under the Securities Act by any Participating Broker-Dealer who seeks to sell Exchange Preferred Stock during the Applicable Period, furnish to each selling Holder of Transfer -14- 17 Restricted Preferred Stock and to each such Participating Broker-Dealer who so requests and to counsel and each managing underwriter, if any, at the sole expense of the Company, one conformed copy of the Registration Statement or Registration Statements and each post-effective amendment thereto, including financial statements and schedules, and, if requested, all documents incorporated or deemed to be incorporated therein by reference and all exhibits. (g) If (1) a Shelf Registration is filed pursuant to Section 3 hereof, or (2) a Prospectus contained in an Exchange Registration Statement filed pursuant to Section 2 hereof is required to be delivered under the Securities Act by any Participating Broker-Dealer who seeks to sell Exchange Preferred Stock during the Applicable Period, deliver to each selling Holder of Transfer Restricted Preferred Stock, or each such Participating Broker-Dealer, as the case may be, their respective counsel, and the underwriters, if any, at the sole expense of the Company, as many copies of the Prospectus or Prospectuses (including each form of preliminary prospectus) and each amendment or supplement thereto and any documents incorporated by reference therein as such Persons may reasonably request; and, subject to the last paragraph of this Section 5, Company hereby consents to the use of such Prospectus and each amendment or supplement thereto by each of the selling Holders of Transfer Restricted Preferred Stock or each such Participating Broker-Dealer, as the case-may be, and the underwriters or agents, if any, and dealers (if any), in connection with the offering and sale of the Transfer Restricted Preferred Stock covered by, or the sale by Participating Broker-Dealers of the Exchange Preferred Stock pursuant to, such Prospectus and any amendment or supplement thereto. (h) Prior to any public offering of Transfer Restricted Preferred Stock or any delivery of a Prospectus contained in the Exchange Registration Statement by any Participating Broker-Dealer who seeks to sell Exchange Preferred Stock during the Applicable Period, to use its best efforts to register or qualify such Transfer Restricted Preferred Stock (and to cooperate with selling Holders of Transfer Restricted Preferred Stock or each such Participating Broker-Dealer, as the case may be, the managing underwriter or underwriters, if any, and their respective counsel in connection with the registration or qualification (or exemption from such registration or qualification) of such Transfer Restricted Preferred Stock) for offer and sale under the securities or Blue Sky laws of such jurisdictions within the United States as any selling Holder, Participating Broker-Dealer, or the managing underwriter or underwriters reasonably request in writing; provided, however, that where Exchange Preferred Stock held by Participating Broker-Dealers or Transfer Restricted Preferred -15- 18 Stock are offered other than through an underwritten offering, the Company agrees to cause their counsel to perform Blue Sky investigations and file registrations and qualifications required to be filed pursuant to this Section 5(h); keep each such registration or qualification (or exemption therefrom) effective during the period such Registration Statement is required to be kept effective and do any and all other acts or things reasonably necessary or advisable to enable the disposition in such jurisdictions of the Exchange Preferred Stock held by Participating Broker-Dealers or the Transfer Restricted Preferred Stock covered by the applicable Registration Statement; provided, however, that the Company shall not be required to (A) qualify generally to do business in any jurisdiction where it is not then so qualified, (B) take any action that would subject it to general service of process in any such jurisdiction where it is not then so subject or (C) subject itself to taxation in excess of a nominal dollar amount in any such jurisdiction where it is not then so subject. (i) If a Shelf Registration is filed pursuant to Section 3 hereof, cooperate with the selling Holders of Transfer Restricted Preferred Stock and the managing underwriter or underwriters, if any, to facilitate the timely preparation and delivery of certificates representing Transfer Restricted Preferred Stock to be sold, which certificates shall not bear any restrictive legends and shall be in a form eligible for deposit with The Depository Trust Company; and enable such Transfer Restricted Preferred Stock to be in such denominations and registered in such names as the managing underwriter or underwriters, if any, or Holders may reasonably request. (j) Use its best efforts to cause the Transfer Restricted Preferred Stock covered by the Registration Statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to enable the Holders thereof or the underwriter or underwriters, if any, to dispose of such Transfer Restricted Preferred Stock, except as may be required solely as a consequence of the nature of a selling Holder's business, in which case the Company will cooperate in all reasonable respects with the filing of such Registration Statement and the granting of such approvals. (k) If (1) a Shelf Registration is filed pursuant to Section 3 hereof, or (2) a Prospectus contained in an Exchange Registration Statement filed pursuant to Section 2 hereof is required to be delivered under the Securities Act by any Participating Broker-Dealer who seeks to sell Exchange Preferred Stock during the Applicable Period, upon the occurrence of any event contemplated by paragraph 5(c)(v) or 5(c)(vi) hereof, as promptly as practicable prepare and (subject to Section 5(a) hereof) file with the SEC, at the sole expense of the -16- 19 Company, a supplement or post-effective amendment to the Registration Statement or a supplement to the related Prospectus or any document incorporated or deemed to be incorporated therein by reference, or file any other required document so that, as thereafter delivered to the purchasers of the Transfer Restricted Preferred Stock being sold thereunder or to the purchasers of the Exchange Preferred Stock to whom such Prospectus will be delivered by a Participating Broker-Dealer, any such Prospectus will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, that this Section 5(k) shall not be deemed to require the Company to disclose any information that, in the good faith opinion of the management of the Company, is not yet required to be disclosed and would not be in the best interests of the Company to disclose, so long as the Company complies with all applicable laws and government regulations and the last paragraph of this Section 5. (l) Prior to the effective date of the first Registration Statement relating to the Transfer Restricted Preferred Stock, provide a CUSIP number for the Transfer Restricted Preferred Stock or Exchange Preferred Stock, as the case may be. (m) In connection with any underwritten offering initiated by the Company of Transfer Restricted Preferred Stock pursuant to a Shelf Registration, enter into an underwriting agreement as is customary in underwritten offerings of securities similar to the Preferred Stock and take all such other actions as are reasonably requested by the managing underwriter or underwriters in order to facilitate the registration or the disposition of such Transfer Restricted Preferred Stock and, in such connection, (i) make such representations and warranties to, and covenants with, the underwriters with respect to the business of the Company and its respective subsidiaries and the Registration Statement, Prospectus and documents, if any, incorporated or deemed to be incorporated by reference therein, in each case, as are customarily made by Company to underwriters in underwritten offerings of securities similar to the Preferred Stock, and confirm the same in writing if and when requested; (ii) obtain the written opinion of counsel to the Company and written updates thereof in form, scope and substance reasonably satisfactory to the managing underwriter or underwriters, addressed to the underwriters covering the matters customarily covered in opinions requested in underwritten offerings of securities similar to the Preferred Stock and such other matters as may be reasonably requested by the managing underwriter or underwriters; (iii) obtain "cold comfort" letters and updates thereof in form, scope and substance reasonably -17- 20 satisfactory to the managing underwriter or underwriters from the independent certified public accountants of the Company (and, if necessary, any other independent certified public accountants of any subsidiary of any of the Company or of any business acquired by any of the Company for which financial statements and financial data are, or are required to be, included or incorporated by reference in the Registration Statement), addressed to each of the underwriters, such letters to be in customary form and covering matters of the type customarily covered in "cold comfort" letters in connection with underwritten offerings of securities similar to the Preferred Stock and such other matters as reasonably requested by the managing underwriter or underwriters; and (iv) if an underwriting agreement is entered into, the same shall contain indemnification provisions and procedures no less favorable than those set forth in Section 7 hereof (or such other provisions and procedures acceptable to Holders of a majority in aggregate principal amount of Transfer Restricted Preferred Stock covered by such Registration Statement and the managing underwriter or underwriters or agents) with respect to all parties to be indemnified pursuant to said Section. The above shall be done at each closing under such underwriting agreement, or as and to the extent required thereunder. (n) If (1) a Shelf Registration is filed pursuant to Section 3 hereof, or (2) a Prospectus contained in an Exchange Registration Statement filed pursuant to Section 2 hereof is required to be delivered under the Securities Act by any Participating Broker-Dealer who seeks to sell Exchange Preferred Stock during the Applicable Period, make available for inspection by any selling Holder of such Transfer Restricted Preferred Stock being sold, or each such Participating Broker-Dealer, as the case may be, any underwriter participating in any such disposition of Transfer Restricted Preferred Stock, if any, and any attorney, accountant or other agent retained by any such selling Holder or each such Participating Broker-Dealer, as the case may be, or underwriter (collectively, the "Inspectors"), at the offices where normally kept, during reasonable business hours, all financial and other records, pertinent corporate documents and instruments of the Company and its subsidiaries (collectively, the "Records") as shall be reasonably necessary to enable them to exercise any applicable due diligence responsibilities, and cause the officers, directors and employees of the Company and its respective subsidiaries to make available for inspection all information reasonably requested by any such Inspector in connection with such Registration Statement. Records which the Company determine, in good faith, to be confidential and any Records which it notifies the Inspectors are confidential shall not be disclosed by the Inspectors unless (i) the disclosure of such Records is necessary to avoid or correct a misstatement or omission in such Registration Statement, (ii) the release of such Records is ordered pursuant -18- 21 to a subpoena or other order from a court of competent jurisdiction, (iii) disclosure of such information is, in the opinion of counsel (a copy of which shall be delivered to the Company) for any Inspector, necessary or advisable in connection with any action, claim, suit or proceeding, directly or indirectly, involving or potentially involving such Inspector and arising out of, based upon, relating to, or involving this Agreement, or any transactions contemplated hereby or arising hereunder, or (iv) the information in such Records has been made generally available to the public. Each selling Holder of such Registrable Securities and each such Participating Broker-Dealer will be required to agree that information obtained by it as a result of such inspections shall be deemed confidential and shall not be used by it as the basis for any market transactions in the securities of the Company unless and until such information is generally available to the public. Each selling Holder of such Transfer Restricted Preferred Stock and each such Participating Broker-Dealer will be required to further agree that it will, upon learning that disclosure of such Records is sought in a court of competent jurisdiction, give notice to the Company and allow the Company to undertake appropriate action to prevent disclosure of the Records deemed confidential at the Company's sole expense. (o) Comply with all applicable rules and regulations of the SEC and make generally available to its securityholders earnings statements satisfying the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder (or any similar rule promulgated under the Securities Act) no later than 45 days after the end of any 12-month period (or 90 days after the end of any 12-month period if such period is a fiscal year) (i) commencing at the end of any fiscal quarter in which Transfer Restricted Preferred Stock are sold to underwriters in a firm commitment or best efforts underwritten offering and (ii) if not sold to underwriters in such an offering, commencing on the first day of the first fiscal quarter of the Company after the effective date of a Registration Statement, which statements shall cover said 12-month periods. (p) If an Exchange Offer or a Private Exchange is to be consummated, upon delivery of the Transfer Restricted Preferred Stock by Holders to the Company (or to such other Person as directed by the Company) in exchange for the Exchange Preferred Stock or the Private Exchange Preferred Stock, as the case may be, the Company shall mark, or cause to be marked, on such Transfer Restricted Preferred Stock that such Transfer Restricted Preferred Stock is being cancelled in exchange for the Exchange Preferred Stock or the Private Exchange Preferred Stock, as the case may be; in no event shall such Transfer Restricted Preferred Stock be marked as paid or otherwise satisfied. -19- 22 (q) Cooperate with each seller of Transfer Restricted Preferred Stock covered by any Registration Statement and each underwriter, if any, participating in the disposition of such Transfer Restricted Preferred Stock and their respective counsel in connection with any filings required to be made with the National Association of Securities Dealers, Inc. (the "NASD"). (r) Use its best efforts to take all other steps necessary or advisable to effect the registration of the Transfer Restricted Preferred Stock covered by a Registration Statement contemplated hereby. The Company may require each seller of Transfer Restricted Preferred Stock as to which any Registration Statement is being effected to furnish to the Company such information regarding such seller and the distribution of such Transfer Restricted Preferred Stock as the Company may, from time to time, reasonably request. The Company may exclude from such Registration Statement the Transfer Restricted Preferred Stock of any seller who unreasonably fails to furnish such information within a reasonable time after receiving such request. Each seller as to which any Shelf Registration is being effected agrees to furnish promptly to the Company all information required to be disclosed in order to make the information previously furnished to the Company by such seller not materially misleading. Each Holder of Transfer Restricted Preferred Stock and each Participating Broker-Dealer agrees by acquisition of such Transfer Restricted Preferred Stock or Exchange Preferred Stock to be sold by such Participating Broker-Dealer, as the case may be, that, upon actual receipt of any notice from the Company of the happening of any event of the kind described in Section 5(c)(ii), 5(c)(iv), 5(c)(v), or 5(c)(vi) hereof, such Holder will forthwith discontinue disposition of such Transfer Restricted Preferred Stock or Exchange Preferred Stock, as the case may be, covered by such Registration Statement or Prospectus to be sold by such Holder or Participating Broker-Dealer, as the case may be, until such Holder's or Participating Broker-Dealer's receipt of the copies of the supplemented or amended Prospectus contemplated by Section 5(k) hereof, or until it is advised in writing (the "Advice") by the Company that the use of the applicable Prospectus may be resumed, and has received copies of any amendments or supplements thereto. In the event the Company shall give any such notice, each of the Effectiveness Period and the Applicable Period shall be extended by the number of days during such periods from and including the date of the giving of such notice to and including the date when each seller of Transfer Restricted Preferred Stock covered by such Registration Statement or Exchange Preferred Stock to be sold by such Participating Broker-Dealer, as the case may be, shall have received (x) the copies of the supplemented or amended Prospectus contemplated by Section 5(k) hereof or (y) the Advice. In the event the Company does not give any such notice within five business days, each -20- 23 Holder shall return such Registration Statement or Prospectus to the Company or destroy all copies of such Registration Statement or Prospectus; and if so requested by the Company, shall certify that all copies of the Registration Statement or Prospectus were destroyed. 6. Registration Expenses (a) All fees and expenses incident to the performance of or compliance with this Agreement by the Company shall be borne by the Company whether or not the Exchange Offer or a Shelf Registration is filed or becomes effective, including, without limitation, (i) all registration and filing fees (including, without limitation, (A) fees with respect to filings with the SEC, (B) fees with respect to filings required to be made with the NASD in connection with an underwritten offering and (C) fees and expenses of compliance with state securities or Blue Sky laws (including, without limitation, reasonable fees and disbursements of the Company's counsel in connection with Blue Sky qualifications of the Transfer Restricted Preferred Stock or Exchange Preferred Stock and determination of the eligibility of the Transfer Restricted Preferred Stock or Exchange Preferred Stock for investment under the laws of such jurisdictions (x) where the holders of Transfer Restricted Preferred Stock are located, in the case of the Exchange Preferred Stock, or (y) as provided in Section 5(h) hereof, in the case of Transfer Restricted Preferred Stock or Exchange Preferred Stock to be sold by a Participating Broker-Dealer during the Applicable Period)), (ii) printing expenses, including, without limitation, expenses of printing certificates for Transfer Restricted Preferred Stock or Exchange Preferred Stock in a form eligible for deposit with The Depository Trust Company and of printing Prospectuses if the printing of Prospectuses is requested by the managing underwriter or underwriters, if any, by the Holders of a majority in aggregate principal amount of the Transfer Restricted Preferred Stock included in any Registration Statement or sold by any Participating Broker-Dealer, as the case may be, (iii) messenger, telephone and delivery expenses, (iv) fees and disbursements of counsel for the Company, (v) fees and disbursements of all independent certified public accountants referred to in Section 5(n)(iii) hereof (including, without limitation, the expenses of any special audit and "cold comfort" letters required by or incident to such performance by or incident to such performance), (vi) rating agency fees, if any, and any fees associated with making the Transfer Restricted Preferred Stock or Exchange Preferred Stock eligible for trading through The Depository Trust Company, (vii) Securities Act liability insurance, if the Company desires such insurance, (viii) fees and expenses of all other Persons retained by the Company, (ix) internal expenses of the Company (including, without limitation, all salaries and expenses of officers and employees of the Company performing legal or accounting duties), (x) the expense of any annual audit, (ix) the fees and expenses incurred in connection with the listing of the securities to be registered on any securities -21- 24 exchange or any inter-dealer quotation system, if applicable, and (xii) the expenses relating to printing, word processing and distributing all Registration Statements, underwriting agreements, securities sales agreements, indentures and any other documents necessary in order to comply with this Agreement. (b) The Company shall reimburse the Holders of the Transfer Restricted Preferred Stock being registered in a Shelf Registration for the reasonable fees and disbursements of not more than one counsel chosen in writing by the Holders of a majority in aggregate principal amount of the Transfer Restricted Preferred Stock to be included in such Registration Statement. In addition, the Company, shall reimburse the Initial Purchasers for 50% (but not more than $10,000 or such other amount as may be mutually agreed to by the Initial Purchasers and the Company) of the reasonable fees and expenses of one counsel in connection with the Exchange Offer which shall be White & Case, and shall not be required to pay any other legal expenses of the Initial Purchaser in connection therewith. 7. Indemnification. (a) The Company agrees to indemnify and hold harmless each Holder of Transfer Restricted Preferred Stock offered pursuant to a Shelf Registration Statement and each Participating Broker-Dealer selling Exchange Preferred Stock during the Applicable Period, the affiliates, directors, officers, agents, representatives and employees of each such Person or its affiliates, and each other Person, if any, who controls any such Person or its affiliates within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act (each, a "Participant") from and against any and all losses, claims, damages and liabilities (including, without limitation, the reasonable legal fees and other expenses actually incurred in connection with any suit, action or proceeding or any claim asserted) caused by, arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement pursuant to which the offering of such Transfer Restricted Preferred Stock or Exchange Preferred Stock, as the case may be, is registered (or any amendment thereto) or related Prospectus (or any amendments or supplements thereto) or any related preliminary prospectus, or caused by, arising out of or based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that the Company will not be required to indemnify a Participant if (i) such losses, claims, damages or liabilities are caused by any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with information furnished to the Company in writing by or on behalf of such Participant expressly for use therein or (ii) if such Participant sold to the person asserting the claim the Transfer Restricted Preferred Stock or Exchange Preferred Stock which is the subject of such claim and such untrue statement or omission or alleged untrue statement or omission was contained or made in any -22- 25 preliminary prospectus and corrected in the Prospectus or any amendment or supplement thereto and the Prospectus does not contain any other untrue statement or omission or alleged untrue statement or omission of a material fact that was the subject matter of the related proceeding and such Participant failed to deliver or provide a copy of the Prospectus (as amended or supplemented) to such Person with or prior to the confirmation of the sale of such Transfer Restricted Preferred Stock or Exchange Preferred Stock sold to such Person if required by applicable laws, unless such failure to deliver or provide a copy of the Prospectus (as amended or supplemented) was a result of noncompliance by the Company with Section 5 of this Agreement. (b) Each Participant agrees, severally and not jointly, to indemnify and hold harmless the Company, its respective directors, officers, agents, representatives, employees and each Person who controls the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act to the same extent as the foregoing indemnity from the Company to each Participant, but only (i) with reference to information furnished to the Company in writing by or on behalf of such Participant expressly for use in any Registration Statement or Prospectus, any amendment or supplement thereto, or any preliminary prospectus or (ii) with respect to any untrue statement or representation made by such Participant in writing to the Company. (c) If any suit, action, proceeding (including any governmental or regulatory investigation), claim or demand shall be brought or asserted against any Person in respect of which indemnity may be sought pursuant to either of the two preceding paragraphs, such Person (the "Indemnified Person") shall promptly notify the Person against whom such indemnity may be sought (the "Indemnifying Person") in writing, and the Indemnifying Person shall have the right to retain counsel reasonably satisfactory to the Indemnified Person to represent the Indemnified Person and any others the Indemnifying Person may reasonably designate in such proceeding and shall pay the reasonable fees and expenses actually incurred by such counsel related to such proceeding; provided, however, that the failure to so notify the Indemnifying Person shall not relieve it of any obligation or liability which it may have hereunder or otherwise (unless and only to the extent that such failure results in the loss or compromise of any material rights or defenses by the Indemnifying Person). In any such proceeding, any Indemnified Person shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such Indemnified Person unless (i) the Indemnifying Person and the Indemnified Person shall have mutually agreed in writing to the contrary, (ii) the Indemnifying Person shall have failed within a reasonable period of time to retain counsel reasonably satisfactory to the Indemnified Person or (iii) the named parties in any such proceeding (including any impleaded parties) include both the Indemnifying Person and the Indemnified Person and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests -23- 26 between them. It is understood that, unless there exists a conflict among Indemnified Persons, the Indemnifying Person shall not, in connection with any one such proceeding or separate but substantially similar related proceeding in the same jurisdiction arising out of the same general allegations, be liable for the reasonable fees and expenses of more than one separate firm (in addition to any local counsel) for all Indemnified Persons, and that all such fees and expenses shall be reimbursed promptly as they are incurred. Any such separate firm for the Participants and such control Persons of Participants shall be designated in writing by Participants who sold a majority in interest of Transfer Restricted Preferred Stock and Exchange Preferred Stock sold by all such Participants and any such separate firm for the Company, its directors, their officers and such control Persons of the Company shall be designated in writing by the Company. The Indemnifying Person shall not be liable for any settlement of any proceeding effected without its prior written consent, but if settled with such consent or if there be a final non-appealable judgment for the plaintiff for which the Indemnified Person is entitled to indemnification pursuant to this Agreement, the Indemnifying Person agrees to indemnify and hold harmless each Indemnified Person from and against any loss or liability by reason of such settlement or judgment. No Indemnifying Person shall, without the prior written consent of the Indemnified Person, effect any settlement or compromise of any pending or threatened proceeding in respect of which any Indemnified Person is or could have been a party, and indemnity could have been sought hereunder by such Indemnified Person, unless such settlement (A) includes an unconditional written release of such Indemnified Person, in form and substance reasonably satisfactory to such Indemnified Person, from all liability on claims that are the subject matter of such proceeding and (B) does not include any statement as to an admission of fault, culpability or failure to act by or on behalf of any Indemnified Person. (d) If the indemnification provided for in Sections 7(a) and 7(b) hereof is for any reason unavailable to, or insufficient to hold harmless, an Indemnified Person in respect of any losses, claims, damages or liabilities referred to therein, then each Indemnifying Person under such paragraphs, in lieu of indemnifying such Indemnified Person thereunder and in order to provide for just and equitable contribution, shall contribute to the amount paid or payable by such Indemnified Person as a result of such losses, claims, damages or liabilities in such proportion as is appropriate to reflect (i) the relative benefits received by the Indemnifying Person or Persons on the one hand and the Indemnified Person or Persons on the other from the offering of the Preferred Stock or (ii) if the allocation provided by the foregoing clause (i) is not permitted by applicable law, not only such relative benefits but also the relative fault of the Indemnifying Person or Persons on the one hand and the Indemnified Person or Persons on the other in connection with the statements or omissions or alleged statements or omissions that resulted in such losses, claims, damages or liabilities (or actions in -24- 27 respect thereof). The relative fault of the parties 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 on the one hand or such Participant or such other Indemnified Person, as the case may be, on the other, the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission, and any other equitable considerations appropriate in the circumstances. (e) The parties agree that it would not be just and equitable if contribution pursuant to this Section 7 were determined by pro rata allocation (even if the Participants were treated as one entity for such purposes) or by any other method of allocation that does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an Indemnified Person as a result of the losses, claims, damages and liabilities referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any reasonable legal or other expenses actually incurred by such Indemnified Person in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 7, in no event shall a Participant be required to contribute any amount in excess of the amount by which proceeds received by such Participant from sales of Transfer Restricted Preferred Stock or Exchange Preferred Stock, as the case may be, exceeds the amount of any damages that such Participant has otherwise been required to pay or has paid by reason of such untrue or alleged untrue statement or omission or alleged omission. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. (f) The indemnity and contribution agreements contained in this Section 7 will be in addition to any liability which the Indemnifying Persons may otherwise have to the Indemnified Persons referred to above. 8. Rules 144 and 144A. The Company covenants that it will file the reports required to be filed by it under the Securities Act and the Exchange Act and the rules and regulations adopted by the SEC thereunder in a timely manner in accordance with the requirements of the Securities Act and the Exchange Act and, if at any time the Company is not required to file such reports, it will, upon the request of any Holder of Transfer Restricted Preferred Stock, make publicly available annual reports and such information, documents and other reports of the type specified in Sections 13 and 15(d) of the Exchange Act. The Company further covenants for so long as any Transfer Restricted Preferred Stock remain outstanding, to make available to any Holder or beneficial owner of Transfer Restricted Preferred Stock in connection with any sale -25- 28 thereof and any prospective purchaser of such Transfer Restricted Preferred Stock from such Holder or beneficial owner the information required by Rule 144(d)(4) under the Securities Act in order to permit resales of such Transfer Restricted Preferred Stock pursuant to Rule 144A. 9. Underwritten Registrations. If any of the Transfer Restricted Preferred Stock covered by any Shelf Registration are to be sold in an underwritten offering, the investment banker or investment bankers and manager or managers that will manage the offering will be selected by the Holders of a majority in aggregate principal amount of such Transfer Restricted Preferred Stock included in such offering and reasonably acceptable to the Company. No Holder of Transfer Restricted Preferred Stock may participate in any underwritten registration hereunder unless such Holder (a) agrees to sell such Holder's Transfer Restricted Preferred Stock on the basis provided in any underwriting arrangements approved by the Persons entitled hereunder to approve such arrangements and (b) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents required under the terms of such underwriting arrangements. 10. Miscellaneous. (a) No Inconsistent Agreements. The Company has not entered, as of the date hereof, and the Company shall not, after the date of this Agreement, enter into any agreement with respect to any of its securities that is inconsistent with the rights granted to the Holders of Transfer Restricted Preferred Stock in this Agreement or otherwise conflicts with the provisions hereof. Other than as provided in Schedule A attached hereto, the Company has not entered and none of the Company will enter into any agreement with respect to any of its securities which will grant to any Person piggy-back registration rights with respect to a Registration Statement. (b) Adjustments Affecting Transfer Restricted Preferred Stock. The Company shall not, directly or indirectly, take any action with respect to the Transfer Restricted Preferred Stock as a class that would adversely affect the ability of the Holders of Transfer Restricted Preferred Stock to include such Transfer Restricted Preferred Stock in a registration undertaken pursuant to this Agreement. (c) Amendments and Waivers. The provisions of this Agreement may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, otherwise than with the prior written consent of the Holders of not less than a majority in aggregate principal amount of the then outstanding Transfer Restricted Preferred Stock. Notwithstanding the foregoing, a -26- 29 waiver or consent to depart from the provisions hereof with respect to a matter that relates exclusively to the rights of Holders of Transfer Restricted Preferred Stock whose securities are being sold pursuant to a Registration Statement and that does not directly or indirectly affect, impair, limit or compromise the rights of other Holders of Transfer Restricted Preferred Stock may be given by Holders of at least a majority in aggregate principal amount of the Transfer Restricted Preferred Stock being sold by such Holders pursuant to such Registration Statement; provided, however, that the provisions of this sentence may not be amended, modified or supplemented except in accordance with the provisions of the immediately preceding sentence. (d) Notices. All notices and other communications provided for or permitted hereunder shall be made in writing by hand-delivery, registered first-class mail, next-day air courier or facsimile: 1. if to a Holder of the Transfer Restricted Preferred Stock or any Participating Broker- Dealer, at the most current address of such Holder or Participating Broker-Dealer, as the case may be, set forth on the records of the registrar under the Indenture, with a copy in like manner to the Initial Purchaser as follows: NatWest Capital Markets Limited 135 Bishopsgate London, EC2M 3XT United Kingdom Attention: Roger Hoit with a copy to: White & Case 1155 Avenue of the Americas New York, NY 10036 Facsimile No: (212) 354-8113 Attention: Timothy B. Goodell, Esq. 2. if to the Initial Purchaser, at the addresses\ specified in Section 10(d)(1); 3. if to the Company, as follows: Source Media, Inc. 8140 Walnut Mill Lane -27- 30 Suite 1000 Dallas, TX 75231 Attention: Maryann Walsh, Esq. with a copy to: Thompson & Knight, P.C. 1700 Pacific Avenue Suite 3300 Dallas, TX 75201 Attention: Michael L. Bengtson, Esq. All such notices and communications shall be deemed to have been duly given: when delivered by hand, if personally delivered; five business days after being deposited in the mail, postage prepaid, if mailed; one business day after being timely delivered to a next-day air courier; and when receipt is acknowledged by the addressee, if sent by facsimile. (e) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties hereto; provided, however, that this Agreement shall not inure to the benefit of or be binding upon a successor or assign of a Holder unless and to the extent such successor or assign holds Registerable Preferred Stock. (f) Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. (g) Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning thereof. (h) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, AS APPLIED TO CONTRACTS MADE AND PERFORMED WHOLLY WITHIN THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. EACH OF THE PARTIES HERETO AGREES TO SUBMIT TO THE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT. -28- 31 (i) Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their best efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such that may be hereafter declared invalid, illegal, void or unenforceable. (j) Preferred Stock Held by the Company or Their Affiliates. Whenever the consent or approval of Holders of a specified percentage of Registerable Preferred Stock is required hereunder, Registerable Preferred Stock held by the Company or its affiliates (as such term is defined in Rule 405 under the Securities Act) shall not be counted in determining whether such consent or approval was given by the Holders of such required percentage. (k) Third Party Beneficiaries. Holders of Registerable Preferred Stock and Participating Broker-Dealers are intended third party beneficiaries of this Agreement and this Agreement may be enforced by such Persons. -29- 32 IN WITNESS WHEREOF, the parties have executed the Agreement as of the date first written above. Company: SOURCE MEDIA, INC. By: /s/ MICHAEL G. PATE ------------------------------ Name: Michael G. Pate Title: Chief Financial Officer The foregoing Agreement is hereby confirmed and accepted as of the date first above written: NATWEST CAPITAL MARKETS LIMITED By: /s/ N. COULBECK ---------------------------- Name: NB Coulbeck Title: Director PRUDENTIAL SECURITIES INCORPORATED By: /s/ CHRISTOPHER J. BARBER ---------------------------- Name: Christopher J. Barber Title: Managing Director -30- 33 SCHEDULE A Piggy-Back Registration Rights 34 SCHEDULE B Adjustments Reflecting Transfer Restricted Preferred Stock EX-10.3 10 COMMON STOCK REGISTRATION RIGHTS AGREEMENT 1 EXHIBIT 10.3 EXECUTION COPY SECURITY AGREEMENT SECURITY AGREEMENT, dated as of October 30, 1997, made by the grantors listed on the signature pages hereof (each individually a "Grantor" and collectively the "Grantors"), in favor of U.S. Trust Company of Texas, N.A., in its capacity as collateral agent (in such capacity, the "Collateral Agent") for the ratable benefit of the Holders (the "Noteholders") of the 12% Senior Secured Notes due 2004 (the "Notes") issued by Source Media, Inc., a Delaware corporation (the "Company") under the Indenture dated as of October 30, 1997, between the Company and U.S. Trust Company of Texas, N.A., in its capacity as trustee (the "Indenture"). W I T N E S S E T H : WHEREAS, the Company, NatWest Capital Markets Limited and Prudential Securities Incorporated (together, the "Initial Purchasers") have entered into a Purchase Agreement dated October 23, 1997 (the "Purchase Agreement"), pursuant to which, among other things, the Initial Purchasers have agreed to purchase the Notes from the Company; and WHEREAS, it is a condition precedent to the obligations of the Initial Purchasers to purchase the Notes under the Purchase Agreement, that the Grantors shall have executed and delivered this Security Agreement to the Collateral Agent; NOW, THEREFORE, in consideration of the premises and to induce the Initial Purchasers to enter into the Purchase Agreement and to purchase the Notes, the Grantors hereby agree with the Collateral Agent, as follows: 1. Defined Terms. Unless otherwise defined herein, terms which are defined in the Indenture and used herein are so used as so defined, and the meanings assigned to terms defined herein or in the Indenture shall be equally applicable to both the singular and plural forms of such terms; the following terms which are defined in the Uniform Commercial Code in effect in the State of New York on the date hereof are used herein as so defined: Accounts, Chattel Paper, Documents, Equipment, Farm Products, General Intangibles, Instruments, Inventory and Proceeds; and the following terms shall have the following meanings: "Closing Date" means October 30, 1997. "Code" means the Uniform Commercial Code as from time to time in effect in the State of New York. 2 "Collateral" shall have the meaning assigned to it in Section 2 of this Security Agreement. "Computer Hardware and Software Collateral" means (a) all computer and other electronic data processing hardware, integrated computer systems, central processing units, memory units, display terminals, printers, features, computer elements, card readers, tape drives, hard and soft disk drives, cables, electrical supply hardware, generators, power equalizers, accessories and all peripheral devices and other related computer hardware; (b) all software programs (including both source code, object code and related applications and data files), whether now owned, licensed or leased or hereafter acquired by each Grantor, designed for use on the computers and electronic data processing hardware described in clause (a) above; (c) all firmware associated therewith; (d) all documentation (including flow charts, logic diagrams, manuals, guides and specifications) with respect to such hardware, software and firmware described in the preceding clauses (a) through (c); and (e) all rights with respect to all of the foregoing, including, without limitation, any and all copyrights, licenses, options, warranties, service contracts, program services, test rights, maintenance rights, support rights, improvement rights, renewal rights and indemnifications and any substitutions, replacements, additions or model conversions of any of the foregoing. "Contracts" means the contracts entered into by each Grantor, including, without limitation, (a) all rights of each Grantor to receive moneys due and to become due to it thereunder or in connection therewith, (b) all rights of each Grantor to damages arising out of, or for, breach or default in respect thereof and (c) all rights of each Grantor to perform and exercise all remedies thereunder. "Copyright License" means any written agreement naming any Grantor as licensor or licensee or granting any right under any Copyright, including the agreements described in Schedule I hereto. "Copyrights" means (a) all copyrights of any Grantor, whether published or unpublished and whether now or hereafter in force throughout the world, all registrations and recordings thereof, and all applications in connection therewith, including, without limitation, registrations, recordings and applications in the United States Copyright office referred to in Schedule I hereto and (b) all renewals thereof. "ICT Group" means any and all Subsidiaries of ICT including, but not limited to, Cable Share (U.S.) Limited, Cable Share International, Inc., and 1229501 Ontario, Inc. "Obligations" shall mean the unpaid principal amount of, or any premium applicable to, and interest on the Notes (including, without limitation, interest accruing after the maturity of the Notes and interest accruing after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to any Grantor, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding) and all other obligations and -2- 3 liabilities of any Grantor to the Holders or the Collateral Agent, whether direct or indirect, absolute or contingent, due or to become due, or now existing or hereafter incurred, which may arise under, out of, or in connection with, the Notes, the Indenture or this Security Agreement (in each such case as the same may be amended, supplemented or modified from time to time) and any other document made, delivered or given in connection therewith or herewith, whether on account of principal, premium, interest, reimbursement obligations, fees, indemnities, costs, expenses (including, without limitation, all fees and disbursements of counsel) or otherwise. "Patent License" means any agreement providing for the grant by or to any Grantor of any right under any patent or patent application, or any Patent, and all license rights, immunities from suit and all other rights and interests conferred by or to any Grantor with respect to patents, patent applications, utility models and utility model applications under all licenses and agreements, including but not limited to all licenses and agreements between any Grantor, on the one hand, and any member of the ICT Group, on the other, and including, without limitation any thereof referred to in Schedule II hereto. "Patents" means any and all now or in the future issued or registered, anywhere in the world, patents and utility models, and any and all now or in the future filed, anywhere in the world, patent applications and utility model applications, whose subject matter is now or hereafter conceived, or reduced to practice, or which is now or hereafter owned, acquired or controlled, by any Grantor under which such Grantor has the right to grant licenses; and all divisions, continuations, and continuations-in-part of, substitutions for and additions to any of the foregoing patent and utility model applications directly or through one or more intervening applications, and all reissues, reexaminations, renewals, and extensions of any such patents and utility models, including, without limitation, any thereof referred to in Schedule II hereto. "Security" means any "security," as such term is defined in Article 8 of the Code and, in any event, shall include, but not be limited to, any obligation of an "issuer" (as such term is defined in Article 8 of the Code), or a share, participation, or other interest in an issuer or in property or an enterprise of an issuer: (a) which is represented by a Security certificate in bearer or registered form, or the transfer of which may be registered upon books maintained for that purpose by or on behalf of the issuer; (b) which is one of a class or series or by its terms is divisible into a class or series of shares, participations, interests, or obligations; and (c) which (i) is, or is of a type, dealt in or traded on securities exchanges or securities markets; or (ii) is a medium for investment and by its terms expressly provides that it is a security governed by Article 8 of the Code. "Security Agreement" means this Security Agreement, as amended, supplemented or otherwise modified from time to time. "Termination Date" means the date upon which the Grantors under this Security Agreement, the Pledgors under the Pledge Agreement and the Company under the Indenture have fulfilled all obligations under the Notes and the aforementioned agreements. -3- 4 "Trademark License" means any agreement providing for the grant by or to any Grantor of any right to use any Trademark, including, without limitation, any thereof referred to in Schedule III hereto. "Trademarks" means (a) all trademarks, trade names, corporate names, company names, business names, fictitious business names, trade styles, service marks, logos and other source or business identifiers of any Grantor, now existing anywhere in the world or hereafter adopted or acquired, whether currently in use or not, and the goodwill associated therewith, all registrations and recordings thereof, and all applications in connection therewith, including, without limitation, any thereof referred to in Schedule III hereto, and (b) all renewals thereof. 2. Grant of Security Interest. As collateral security for the prompt and complete payment and performance when due (whether at the stated maturity, by acceleration or otherwise) of the Obligations, each Grantor hereby grants to the Collateral Agent a security interest for the benefit of the Holders in all of the following property now owned or at any time hereafter acquired by such Grantor or in which such Grantor now has or at any time in the future may acquire any right, title or interest (collectively, the "Collateral"): (i) all Accounts; (ii) all Chattel Paper; (iii) all Computer Hardware and Software Collateral; (iv) all Contracts; (v) all Copyrights; (vi) all Copyright Licenses; (vii) all Documents; (viii) all Equipment; (ix) all General Intangibles; (x) all Patents; (xi) all Patent Licenses; (xii) all Instruments; -4- 5 (xiii) all Inventory; (xiv) all Trademarks; (xv) all Trademark Licenses; and (xvi) to the extent not otherwise included, all Proceeds and products of any and all of the foregoing. 3. Rights of the Collateral Agent; Limitations on the Collateral Agent's Obligations. (a) Grantors Remain Liable under Accounts and Contracts. Anything herein to the contrary notwithstanding, each Grantor shall remain liable under each of its Accounts and Contracts to observe and perform all the conditions and obligations to be observed and performed by it thereunder, all in accordance with the terms of any agreement giving rise to each such Account and in accordance with and pursuant to the terms and provisions of each such Contract. The Collateral Agent shall not have any obligation or liability under any Account (or any agreement giving rise thereto) or under any Contract by reason of or arising out of this Security Agreement or the receipt by the Collateral Agent of any payment relating to such Account or Contract pursuant hereto, nor shall the Collateral Agent be obligated in any manner to perform any of the obligations of any Grantor under or pursuant to any Account (or any agreement giving rise thereto) or under or pursuant to any contract, to make any payment, to make any inquiry as to the nature or the sufficiency of any payment received by it or as to the sufficiency of any performance by any party under any Account (or any agreement giving rise thereto) or under any Contract, to present or file any claim, to take any action to enforce any performance or to collect the payment of any amounts which may have been assigned to it or to which it may be entitled at any time or times. (b) Notice to Account Debtors and Contracting Parties. Upon the request of the Collateral Agent at any time after the occurrence and during the continuance of an Event of Default, each Grantor shall notify account debtors on its Accounts and parties to the Contracts that the Accounts and each Contract have been assigned to the Collateral Agent for the benefit of the Holders and that payments in respect thereof shall be made directly to the Collateral Agent. The Collateral Agent may in its own name or in the name of others communicate with account debtors on the Accounts and parties to the Contracts to verify with them to its satisfaction the existence, amount and terms of any Accounts or Contracts. (c) Analysis of Accounts. The Collateral Agent shall have the right to make test verifications of the Accounts in any manner and through any medium that it reasonably considers advisable, and each Grantor shall furnish all such assistance and information as the Collateral Agent may require in connection therewith. At any time and from time to time, upon the Collateral Agent's request and at the expense of each -5- 6 Grantor, each Grantor shall cause independent public accountants or others satisfactory to the Collateral Agent to furnish to the Collateral Agent reports showing reconciliations, aging and test verifications of, and trial balances for, the Accounts. (d) Collections on Accounts. If required by the Collateral Agent after the occurrence and during the continuance of an Event of Default, any payments of Accounts, when collected by any Grantor, shall be forthwith (and, in any event, within two Business Days) deposited by such Grantor in the exact form received, duly indorsed by such Grantor to the Collateral Agent if required, in a special collateral account maintained by the Collateral Agent, and, until so turned over, shall be held by such Grantor in trust for the Collateral Agent, segregated from other funds of such Grantor. Each deposit of any such Proceeds shall be accompanied by a report identifying in reasonable detail the nature and source of the payments included in the deposit. All Proceeds constituting collections of Accounts while held by the Collateral Agent (or by the Grantor in trust for the Collateral Agent) shall continue to be collateral security for all of the Obligations and shall not constitute payment thereof until applied as hereinafter provided. At any time after the occurrence and during the continuance of an Event of Default, at the Collateral Agent's election, the Collateral Agent shall apply all or any part of the funds on deposit in said special collateral account on account of the Obligations in such order as the Collateral Agent may elect, and any part of such funds which the Collateral Agent elects not so to apply and deems not required as collateral security for the Obligations shall be paid over from time to time by the Collateral Agent to the applicable Grantor or to whomsoever may be lawfully entitled to receive the same. After the occurrence and during the continuance of an Event of Default, at the Collateral Agent's request, the Grantors shall deliver to the Collateral Agent all original and other documents evidencing, and relating to, the agreements and transactions which gave rise to the Accounts, including, without limitation, all original orders, invoices and shipping receipts. 4. Representations and Warranties. Each Grantor hereby represents and warrants that: (a) Title; No Other Liens. Except for the Lien granted to the Collateral Agent pursuant to this Security Agreement, such Grantor owns each item of the Collateral free and clear of any and all Liens or claims of others except as permitted by the Indenture. No security agreement, financing statement or other public notice with respect to all or any part of the Collateral is on file or of record in any public office, except as permitted by the Indenture and such as may have been filed in favor of the Collateral Agent, pursuant to this Security Agreement. (b) Perfected First Priority Liens. The Liens granted pursuant to this Security Agreement will constitute upon the completion of all necessary filings or notices in proper public offices or the taking of any necessary possessions or similar acts, perfected Liens on all Collateral, which are, except as permitted by the Indenture, prior to all other Liens on such Collateral created by such Grantor and in existence on the date hereof and which are enforceable as such against all creditors of such Grantor. -6- 7 (c) Accounts. The amount represented by such Grantor to the Collateral Agent from time to time as owing by each account debtor or by all account debtors in respect of the Accounts will at such time be the correct amount actually owing by such account debtor or debtors thereunder. No amount payable to such Grantor under or in connection with any Account is evidenced by any Instrument or Chattel Paper which has not been delivered to the Collateral Agent. The place where each Grantor keeps its records concerning the Accounts is set forth on Schedule IV hereto. (d) Consents. No consent of any party to any Contract is required, or purports to be required, in connection with the execution, delivery and performance of this Security Agreement. (e) Bank Accounts. The bank accounts with the banks listed on Schedule V hereto are the only bank or deposit accounts that such Grantor maintains. (f) Inventory and Equipment. The Inventory and the Equipment are kept at the locations listed on Schedule VI hereto and have not been kept at any other location within the five-month period ending on the Closing Date. (g) Chief Executive Office. Each Grantor's chief executive office and chief place of business is located at the offices listed in Schedule VII. (h) Farm Products. None of the Collateral constitutes, or is the Proceeds of, Farm Products. (i) Governmental Obligors. None of the obligors on any Account is a Governmental Authority. 5. Covenants. Each Grantor covenants and agrees with the Collateral Agent, from and after the date of this Security Agreement until the Obligations are paid in full: (a) Further Documentation; Pledge of Instruments and Chattel Paper. At any time and from time to time, upon the written request of the Collateral Agent, and at the sole expense of each Grantor, each Grantor will promptly and duly execute and deliver such further instruments and documents and take such further action as the Collateral Agent may reasonably request for the purpose of obtaining or preserving the full benefits of this Security Agreement and of the rights and powers herein granted, including, without limitation, the filing of any financing or continuation statements under the Uniform Commercial Code in effect in any such jurisdiction with respect to the Liens created hereby. Each Grantor also hereby authorizes the Collateral Agent to file any such financing or continuation statement without the signature of such Grantor to the extent permitted by applicable law. A carbon, photographic or other reproduction of this Security Agreement shall be sufficient as a financing statement for filing in any jurisdiction. If any amount payable under or in -7- 8 connection with any of the Collateral shall be or become evidenced by any Instrument or Chattel Paper, such Instrument or Chattel Paper shall be immediately delivered to the Collateral Agent, duly endorsed in a manner satisfactory to the Collateral Agent, to be held as Collateral pursuant to this Security Agreement. (b) Indemnification. Each Grantor agrees to pay, and to save the Collateral Agent harmless from, any and all liabilities, costs and expenses (including, without limitation, legal fees and expenses) (i) with respect to, or resulting from, any delay in paying, any and all excise, sales or other taxes which may be payable or determined to be payable with respect to any of the Collateral, (ii) with respect to, or resulting from, any delay in complying with any requirement of law applicable to any of the Collateral or (iii) in connection with any of the transactions contemplated by this Security Agreement. In any suit, proceeding or action brought by the Collateral Agent under any Account or Contract for any sum owing thereunder, or to enforce any provisions of any Account or Contract, each Grantor will save, indemnify and keep the Collateral Agent harmless from and against all expense, loss or damage suffered by reason of any defense, setoff, counterclaim, recoupment or reduction or liability whatsoever of the account debtor or obligor thereunder, arising out of a breach by such Grantor of any obligation thereunder or arising out of any other agreement, indebtedness or liability at any time owing to or in favor of such account debtor or obligor or its successors from such Grantor. (c) Maintenance of Records. Each Grantor will keep and maintain at its own cost and expense satisfactory and complete records of the Collateral, including, without limitation, a record of all payments received and all credits granted with respect to the Accounts. For the Collateral Agent's further security, the Collateral Agent shall have a security interest in all of each Grantor's books and records pertaining to the Collateral, and each Grantor shall turn over any such books and records for inspection at the office of such Grantor to the Collateral Agent or to its representatives during normal business hours at the request of the Collateral Agent. (d) Limitation on Liens on Collateral. Each Grantor (x) will not create, incur or permit to exist, will defend the Collateral against, and will take such other action as is necessary to remove, any Lien or claim on or to the Collateral, other than the Liens created hereby and other than as permitted pursuant to the Indenture, and (y) will defend the right, title and interest of the Collateral Agent in and to any of the Collateral against the claims and demands of all Persons whomsoever. (e) Limitations on Dispositions of Collateral. Each Grantor will not sell, transfer, lease or otherwise dispose of any of the Collateral, or attempt, offer or contract to do so except for (x) sales of Inventory in the ordinary course of its business, (y) so long as no Default or Event of Default has occurred and is continuing, the disposition in the ordinary course of business of items of Equipment and which have become worn out or obsolete and (z) as otherwise permitted by the Indenture. -8- 9 (f) Limitations on Modifications, Waivers, Extensions of Contracts and Agreements Giving Rise to Accounts. Each Grantor will not (i) amend, modify, terminate or waive any provision of any Contract or any agreement giving rise to an Account in any manner which could reasonably be expected to materially adversely affect the value of such Contract or Account as Collateral, (ii) fail to exercise promptly and diligently each and every material right which it may have under each Contract and each agreement giving rise to an Account (other than any right of termination) or (iii) fail to deliver to the Collateral Agent a copy of each material demand, notice or document received by it relating in any way to any Contract or any agreement giving rise to an Account. (g) Limitations on Discounts, Compromises, Extensions of Accounts. Other than in the ordinary course of business as generally conducted by each Grantor over a period of time, each Grantor will not grant any extension of the time of payment of any of the Accounts, compromise, compound or settle the same for less than the full amount thereof, release, wholly or partially, any Person liable for the payment thereof, or allow any credit or discount whatsoever thereon, to the extent that the same, individually or in the aggregate, could have a material adverse effect on the business, properties, assets, liabilities, results of operations, condition (financial or other) or prospects of such Grantor. (h) Further Identification of Collateral. Each Grantor will furnish to the Collateral Agent from time to time, statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as the Collateral Agent may reasonably request, all in reasonable detail. (i) Notices. Each Grantor will advise the Collateral Agent promptly, in reasonable detail of, (i) any Lien (other than Liens created hereby or permitted under the Indenture) on, or claim asserted against, any of the Collateral, (ii) the opening by such Grantor of any bank or deposit account after the Closing Date, (iii) any Account arising after the Closing Date with respect to which the obligor thereon is a Governmental Authority and (iv) the occurrence of any other event which could reasonably be expected to have a material adverse effect on the aggregate value of the Collateral or on the Liens created hereunder. (j) Changes in Locations, Name, etc. Each Grantor will not (i) change the location of its chief executive office/chief place of business from that specified in Section 4(g) or remove its books and records from the location specified in Section 4(c), (ii) permit any of the Inventory or Equipment to be kept at a location other than that specified in Section 4(f) or (iii) change its name, identity or corporate structure to such an extent that any financing statement filed by the Collateral Agent in connection with this Agreement would become misleading, unless it shall have given the Collateral Agent at least 30 days' prior written notice thereof. (k) Copyrights. (i) Each Grantor (either itself or through licensees) will (a) employ each Copyright with appropriate copyright notice consistent with its past practice and (b) -9- 10 not knowingly (and not permit any licensee or sublicensee thereof knowingly to) do any act or knowingly omit to do any act whereby any Copyright or any portion of the Copyright may become invalidated. (ii) Each Grantor will not (either itself or through licensees) knowingly do any act, or omit to do any act, whereby any Copyright or any portion of the Copyrights may become injected into the public domain. (iii) Each Grantor shall notify the Collateral Agent immediately if it knows, or has reason to know, that any Copyright or any portion of the Copyrights may become injected into the public domain or of any adverse determination (including, without limitation, the institution of, or any such determination or development in, any court or tribunal in the United States or any other country) regarding such Grantor's ownership of any Copyright or any portion of the Copyrights. (iv) Each Grantor will, with respect to any Copyright that such Grantor registers after the Closing Date or any Copyright License that such Grantor knowingly acquires after the Closing Date, promptly (i) take all actions necessary so that the Collateral Agent shall obtain a perfected security interest in such Copyright or Copyright License and (ii) provide to the Collateral Agent a revised Schedule I hereto listing all registered Copyright and all Copyright Licenses owned by such Grantor. (v) On each December 31 of each year following the Closing Date (or, if the Collateral Agent so requests in writing, more often), each Grantor either itself or through any agent, employee, licensee or designee, shall provide to the Collateral Agent a document confirming the Collateral Agent's security interest in all Copyrights and Copyright Licenses acquired by such Grantor during the preceding calendar year. Upon request of the Collateral Agent, each Grantor shall execute and deliver any and all additional agreements, instruments, documents, and papers as the Collateral Agent may reasonably request to confirm the Collateral Agent's security interest in such Copyrights and Copyright Licenses, and each Grantor hereby constitutes the Collateral Agent its attorney-in-fact to file all such writings for the foregoing purposes, all lawful acts of such attorney being hereby ratified and confirmed; such power being coupled with an interest is irrevocable until the Obligations are paid in full. (vi) Each Grantor will take all reasonable and necessary steps as it shall deem appropriate under the circumstances, to maintain and pursue each application (and to obtain the relevant registration) and to maintain each registration of each Copyright owned by such Grantor including, without limitation, filing of applications for renewal, where necessary. (vii) Each Grantor will promptly notify the Collateral Agent of any infringement of any Copyright or any portion of the Copyrights of which it becomes aware and will take all appropriate steps to stop the infringement as are reasonably mutually agreed upon by such Grantor and the Collateral Agent. -10- 11 (viii) Each Grantor will deliver to the Collateral Agent on the Closing Date an assignment of security interest in United States Copyrights substantially in the form of Annex C hereto. (l) Trademarks. (i) Each Grantor (either itself or through licensees) will, with respect to each Trademark, (i) continue to use such Trademark to the extent necessary to maintain such Trademark in full force free from any claim of abandonment for non-use, if consistent with its overall business plan or if to do otherwise would be an unsound commercial and business judgment, (ii) maintain as in the past the quality of products and services offered under such Trademark, (iii) employ such Trademark with the appropriate notice of registration, (iv) not (and not permit any licensee or sublicensee thereof to) do any act or knowingly omit to do any act whereby any Trademark may become invalidated other than solely (x) through the discontinuance of the sale of goods or the provision of services or (y) the abandonment of a Trademark where, in each such case covered by (x) and (y) above, the Collateral Agent shall have received not less than fifteen (15) days' prior written notice of any such discontinuance or abandonment and such Grantor shall have acted in a manner consistent with its overall business plan and the exercise of sound commercial and business judgment. Nothing in this Security Agreement shall restrict such Grantor from adding new goods and services to its business or, upon not less than fifteen (15) days' prior written notice to the Collateral Agent and in a manner consistent with such Grantor's overall business plan and the exercise of sound commercial and business judgment, discontinuing the provision of goods or services and thereby abandoning any Trademark relating thereto. (ii) Each Grantor will notify the Collateral Agent immediately if it knows, or has reason to know, that any application or registration relating to any Trademark may become abandoned, or of any adverse determination or development (including, without limitation, the institution of, or any such determination or development in, any proceeding in the United States Patent and Trademark Office or any court or tribunal in any country) regarding such Grantor's ownership of any Trademark or its right to register the same or to keep and maintain the same. (iii) Each Grantor will, with respect to any Trademark that such Grantor registers after the Closing Date or any Trademark License that such Grantor acquires after the Closing Date, promptly (i) take all actions necessary so that the Collateral Agent shall obtain a perfected security interest in such Trademark or Trademark License and (ii) provide to the Collateral Agent a revised Schedule III hereto listing all registered Trademarks and all Trademark Licenses owned by such Grantor. (iv) On each December 31 of each year following the Closing Date (or, if the Collateral Agent so requests in writing, more often), each Grantor either itself or through any agent, employee, licensee or designee, shall provide to the Collateral Agent, a document confirming the Collateral Agent's security interest in any Trademark with respect to which such Grantor has filed an application for registration during the preceding calendar year. Upon request of the Collateral -11- 12 Agent, each Grantor shall execute and deliver any and all agreements, instruments, documents, and papers as the Collateral Agent may request to evidence the Collateral Agent's security interest in any Trademark and the goodwill and general intangibles of such Grantor relating thereto or represented thereby, and each Grantor hereby constitutes the Collateral Agent its attorney-in-fact to execute and file all such writings for the foregoing purposes, all acts of such attorney being hereby ratified and confirmed; such power being coupled with an interest is irrevocable until the Obligations are paid in full. (v) Each Grantor will take all reasonable and necessary steps, including, without limitation, in any proceeding before the United States Patent and Trademark office, or any similar office or agency in any other country or any political subdivision thereof, to maintain and pursue each application (and to obtain the relevant registration) and to maintain each registration of the Trademarks, including, without limitation, filing of applications for renewal, affidavits of use and affidavits of incontestability. Notwithstanding the foregoing, each Grantor may decline to maintain and pursue each of its applications and decline to maintain each of its registrations as aforesaid upon not less than fifteen (15) days' prior written notice to the Collateral Agent and if to so decline is consistent with such Grantor's overall business plan and is an exercise of sound commercial and business judgment. (vi) In the event that any Trademark included in the Collateral is infringed, misappropriated or diluted by a third party, each Grantor shall promptly notify the Collateral Agent after it learns thereof and shall promptly take all appropriate steps to stop the infringement as are reasonably mutually agreed upon by such Grantor and the Collateral Agent. (vii) Each Grantor will deliver to the Collateral Agent on the Closing Date an assignment of security interest in United States Trademarks substantially in the form of Annex A hereto. (m) Patents. (i) Each Grantor will notify the Collateral Agent immediately if it knows, or has reason to know, that any application relating to any Patent may become abandoned or of any adverse determination or development (including, without limitation, the institution of, or any such determination or development in, any proceeding in the United States Patent and Trademark Office or any court or tribunal in any country) regarding such Grantor's ownership of any Patent. (ii) Each Grantor will, with respect to any Patent that such Grantor obtains after the Closing Date or any Patent License that such Grantor acquires after the Closing Date, promptly (i) take all actions necessary so that the Collateral Agent shall obtain a perfected security interest in such Patent or Patent License and (ii) provide to the Collateral Agent a revised Schedule II hereto listing all Patents and all Patent Licenses owned by such Grantor. -12- 13 (iii) On each December 31 of each year following the Closing Date (or, if the Collateral Agent so requests in writing, more often), each Grantor either itself or through any agent, employee, licensee or designee, shall provide to the Collateral Agent, a document confirming the Collateral Agent's security interest in any Patent or Patent License which such Grantor has obtained during the preceding calendar year. Upon request of the Collateral Agent, each Grantor shall execute and deliver any and all agreements, instruments, documents, and papers as the Collateral Agent may request to evidence the Collateral Agent's security interest in such Patents or Patent Licenses, and each Grantor hereby constitutes the Collateral Agent its attorney-in-fact to execute and file all such writings for the foregoing purposes, all acts of such attorney being hereby ratified and confirmed; such power being coupled with an interest is irrevocable until the Obligations are paid in full. (iv) Each Grantor will take all reasonable and necessary steps, including, without limitation, in any proceeding before the United States Patent and Trademark Office, or any similar office or agency in any other country or any political subdivision thereof, to maintain and pursue each patent or application for patent and to maintain each Patent, including, without limitation, payment of maintenance fees. Notwithstanding the foregoing, each Grantor may decline to maintain and pursue each of its patents and applications for patents and decline to maintain each Patent as aforesaid upon not less than fifteen (15) days' prior written notice to the Collateral Agent and if to so decline is consistent with such Grantor's overall business plan and is an exercise of sound commercial and business judgment. (v) In the event that any Patent included in the Collateral is infringed by a third party, each Grantor shall promptly notify the Collateral Agent after it learns thereof and shall promptly take all appropriate steps to stop the infringement as are reasonably mutually agreed upon by such Grantor and the Collateral Agent. (vi) Each Grantor will deliver to the Collateral Agent on the Closing Date an assignment of security interest in United States Patents substantially in the form of Annex B hereto. (n) Patent Licenses. Each Grantor shall comply with its obligations under each of its license agreements relating to each Patent. 6. Collateral Agent's Appointment as Attorney-in-Fact. (a) Powers. Each Grantor hereby irrevocably constitutes and appoints the Collateral Agent and any officer or agent thereof, with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of such Grantor and in the name of such Grantor or in its own name, from time to time (in the Collateral Agent's discretion) for the purpose of carrying out the terms of this Security Agreement, to take any and all appropriate action and to execute any and all documents and instruments which may be necessary or desirable to accomplish the purposes of this Security Agreement, and, without limiting the generality of the foregoing, each Grantor hereby gives the Collateral Agent the power and right, on -13- 14 behalf of such Grantor, without notice to or assent by such Grantor, except any notice required by law referred to in Section 9 hereof, to do the following: (i) at any time when any Event of Default shall have occurred and is continuing, in the name of such Grantor or its own name, or otherwise, to take possession of and indorse and collect any checks, drafts, notes, acceptances or other instruments for the payment of moneys due under any Account, Instrument, General Intangible or Contract or with respect to any other Collateral and to file any claim or to take any other action or proceeding in any court of law or equity or otherwise deemed appropriate by the Collateral Agent for the purpose of collecting any and all such moneys due under any Account, Instrument, General Intangible or Contract or with respect to any other Collateral whenever payable; (ii) to pay or discharge taxes and Liens levied or placed on or threatened against the Collateral, to effect any repairs or any insurance called for by the terms of this Security Agreement and to pay all or any part of the premiums therefor and the costs thereof; and (iii) upon the occurrence and during the continuance of any Event of Default, (A) to direct any party liable for any payment under any of the Collateral to make payment of any and all moneys due or to become due thereunder directly to the Collateral Agent or as the Collateral Agent shall direct; (B) to ask for or demand, collect, receive payment of and receipt for, any and all moneys, claims and other amounts due or to become due at any time in respect of or arising out of any Collateral; (C) to sign and indorse any invoices, freight or express bills, bills of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications, notices and other documents in connection with any of the Collateral; (D) to commence and prosecute any suits, actions or proceedings at law or in equity in any court of competent jurisdiction to collect the Collateral or any thereof and to enforce any other right in respect of any Collateral; (E) to defend any suit, action or proceeding brought against such Grantor with respect to any Collateral; (F) to settle, compromise or adjust any suit, action or proceeding described in clause (E) above and, in connection therewith, to give such discharges or releases as the Collateral Agent may deem appropriate; (G) to assign any Copyright or Trademark (along with the goodwill of the business to which any such Copyright or Trademark pertains), throughout the world for such term or terms, on such conditions, and in such manner, as the Collateral Agent shall in its sole discretion determine; and (H) generally, to sell, transfer, pledge and make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though the Collateral Agent were the absolute owner thereof for all purposes, and to do, at the Collateral Agent's option and such Grantor's expense, at any time, or from time to time, all acts and things which the Collateral Agent deems necessary to protect, preserve or realize upon the Collateral and the Collateral Agent's Liens thereon and to effect the intent of this Security Agreement, all as fully and effectively as the Grantor might do. -14- 15 Each Grantor hereby ratifies all that said attorneys shall lawfully do or cause to be done by virtue hereof. This power of attorney is a power coupled with an interest and shall be irrevocable until the Obligations are paid in full. (b) Other Powers. Each Grantor also authorizes the Collateral Agent, at any time and from time to time, to execute, in connection with the sale provided for in Section 9 hereof, any endorsements, assignments or other instruments of conveyance or transfer with respect to the Collateral. (c) No Duty on Collateral Agent's Part. The powers conferred on the Collateral Agent hereunder are solely to protect the Collateral Agent's interests in the Collateral and shall not impose any duty upon the Collateral Agent to exercise any such powers. The Collateral Agent shall be accountable only for amounts that it actually receives as a result of the exercise of such powers, and neither it nor any of its officers, directors, employees or agents shall be responsible to such Grantor for any act or failure to act hereunder, except for their own gross negligence or willful misconduct. 7. Performance by Collateral Agent of Each Grantor's Obligations. If any Grantor fails to perform or comply with any of its agreements contained herein and the Collateral Agent, as provided for by the terms of this Security Agreement, shall itself perform or comply, or otherwise cause performance or compliance, with such agreement, the expenses of the Collateral Agent incurred in connection with such performance or compliance, together with interest thereon at a rate per annum specified in the Indenture, shall be payable by such Grantor to the Collateral Agent on demand and shall constitute Obligations secured hereby. 8. Proceeds. In addition to the rights of the Collateral Agent specified in Section 3(d) with respect to payments of Accounts, it is agreed that if an Event of Default shall occur and be continuing (a) all Proceeds received by each Grantor consisting of cash, checks and other instruments shall be held by such Grantor in trust for the Collateral Agent, segregated from other funds of such Grantor, and shall, forthwith upon receipt by such Grantor, be turned over to the Collateral Agent in the exact form received by such Grantor (duly indorsed by such Grantor to the Collateral Agent, if required), and (b) any and all such Proceeds received by the Collateral Agent (whether from such Grantor or otherwise) may, in the sole discretion of the Collateral Agent, be held by the Collateral Agent as collateral security for, and/or then or at any time thereafter may be applied by the Collateral Agent against, the Obligations (whether matured or unmatured), such application to be in such order as the Collateral Agent shall elect. Any balance of such Proceeds remaining after the Obligations shall have been paid in full shall be paid over to such Grantor or to whomsoever may be lawfully entitled to receive the same. 9. Remedies. If an Event of Default shall occur and be continuing, the Collateral Agent may exercise, in addition to all other rights and remedies granted to it in this Security Agreement and in any other instrument or agreement securing, evidencing or relating to the -15- 16 Obligations, all rights and remedies of a secured party under the Code. Without limiting the generality of the foregoing, the Collateral Agent, without demand of performance or other demand, presentment, protest, advertisement or notice of any kind (except any notice required by law referred to below) to or upon any Grantor or any other Person (all and each of which demands, defenses, advertisements and notices are, to the extent permitted by applicable law, hereby waived), may in such circumstances forthwith collect, receive, appropriate and realize upon the Collateral, or any part thereof, and/or may forthwith sell, lease, assign, give option or options to purchase, or otherwise dispose of and deliver the Collateral or any part thereof (or contract to do any of the foregoing), in one or more parcels at public or private sale or sales, at any exchange, broker's board or office of the Collateral Agent or elsewhere upon such terms and conditions as it may deem advisable and at such prices as it may deem best, for cash or on credit or for future delivery without assumption of any credit risk. The Collateral Agent shall have the right upon any such public sale or sales, and, to the extent permitted by law, upon any such private sale or sales, to purchase the whole or any part of the Collateral so sold, free of any right or equity of redemption in such Grantor, which right or equity is hereby waived, to the extent permitted by applicable law, or released. Each Grantor further agrees, at the Collateral Agent's request, to assemble the Collateral and make it available to the Collateral Agent at places which the Collateral Agent shall reasonably select, whether at such Grantor's premises or elsewhere. The Collateral Agent shall apply the net proceeds of any such collection, recovery, receipt, appropriation, realization or sale, after deducting all costs and expenses of every kind incurred therein or incidental to the care or safekeeping of any of the Collateral or in any way relating to the Collateral or the rights of the Collateral Agent hereunder, including, without limitation, reasonable attorneys' fees and disbursements, to the payment in whole or in part of the Obligations, in such order as the Collateral Agent may elect, and only after such application and after the payment by the Collateral Agent of any other amount required by any provision of law, including, without limitation, Section 9-504(1)(c) of the Code, need the Collateral Agent account for the surplus, if any, to such Grantor. To the extent permitted by applicable law, such Grantor waives all claims, damages and demands it may acquire against the Collateral Agent arising out of the exercise by them of any rights hereunder. If any notice of a proposed sale or other disposition of Collateral shall be required by law, such notice shall be deemed reasonable and proper if given at least 10 days before such sale or other disposition. Each Grantor shall remain liable for any deficiency if the proceeds of any sale or other disposition of the Collateral are insufficient to pay the Obligations and the fees and disbursements of any attorneys employed by the Collateral Agent to collect such deficiency. In furtherance, but not in limitation of, the foregoing, if an Event of Default shall occur and be continuing, each Grantor shall assign, license, or sublicense, as requested by Collateral Agent, any or all of the Patent Licenses to the Collateral Agent. 10. Limitation on Duties Regarding Preservation of Collateral. The Collateral Agent's sole duty with respect to the custody, safekeeping and physical preservation of the Collateral in its possession, under Section 9-207 of the Code or otherwise, shall be to deal with it in the same manner as the Collateral Agent deals with similar property for its own account. Neither the -16- 17 Collateral Agent, nor any of its directors, officers, employees or agents shall be liable for failure to demand, collect or realize upon all or any part of the Collateral or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any Collateral upon the request of any Grantor or otherwise. 11. Powers Coupled with an Interest. All authorizations and agencies herein contained with respect to the Collateral are irrevocable and powers coupled with an interest until the Obligations are indefeasibly paid in full. 12. Severability. Any provision of this Security Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 13. Paragraph Headings. The paragraph headings used in this Security Agreement are for convenience of reference only and are not to affect the construction hereof or be taken into consideration in the interpretation hereof. 14. No Waiver; Cumulative Remedies. The Collateral Agent shall not by any act (except by a written instrument pursuant to Section 15 hereof), delay, indulgence, omission or otherwise be deemed to have waived any right or remedy hereunder or to have acquiesced in any Default or Event of Default or in any breach of any of the terms and conditions hereof. No failure to exercise, nor any delay in exercising, on the part of the Collateral Agent, any right, power or privilege hereunder shall operate as a waiver thereof. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. A waiver by the Collateral Agent of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which the Collateral Agent would otherwise have on any future occasion. The rights and remedies herein provided are cumulative, may be exercised singly or concurrently and are not exclusive of any rights or remedies provided by law. 15. Waivers and Amendments; Successors and Assigns. None of the terms or provisions of this Security Agreement may be waived, amended, supplemented or otherwise modified except by a written instrument executed by each Grantor and the Collateral Agent, provided that any provision of this Security Agreement may be waived by the Collateral Agent in a written letter or agreement executed by the Collateral Agent or by facsimile transmission from the Collateral Agent. This Security Agreement shall be binding upon the successors and assigns of each Grantor and shall inure to the benefit of the Collateral Agent, the Holders and their respective successors and assigns. -17- 18 16. Termination of Security Interest; Release of Collateral. (a) Upon the repayment in full of all Obligations, the security interest granted in the Collateral pursuant to this Security Agreement shall terminate and all rights to the Collateral shall revert to the Grantors. (b) Upon any such termination of the security interest granted in the Collateral pursuant to this Security Agreement or release of Collateral pursuant to this Section, the Collateral Agent will, at the expense of each Grantor, execute and deliver to each Grantor such documents as such Grantor shall reasonably request to evidence the termination of such security interest and deliver to such Grantor all Collateral so released then in its possession. 17. Notices. All notices or other communications provided for hereunder shall be in writing and sent by first class mail or nationwide overnight delivery service, (i) if to a Grantor, addressed to it at its chief executive office listed in Schedule VII, or at such other address as such Grantor shall have specified to the Collateral Agent, and (ii) if to the Collateral Agent, addressed to it at 2001 Ross Avenue, Suite 2700, Dallas, TX 75201. 18. Grant of Access to Trademark, Trademark License, Copyright, Copyright License, Patent or Patent License or Collateral. For the purposes of enabling the Collateral Agent to exercise rights and remedies under Sections 6 and 9 hereof at such time as the Collateral Agent shall be lawfully entitled to exercise such rights and remedies, each Grantor hereby grants to the Collateral Agent during the continuance of an Event of Default access to all media in which any Trademark, Copyright, Patent, Trademark License, Copyright License or Patent License may be recorded or stored and to all computer and automatic machinery software and programs used for the compilation or printout thereof to the extent that such Grantor may lawfully do so. 19. Integration. This Security Agreement represents the agreement of each Grantor and the Collateral Agent with respect to the subject matter hereof, and there are no promises, undertakings, representations or warranties by the Collateral Agent relative to subject matter hereof not expressly set forth or referred to herein or in the other Notes and Units Purchase Documents. 20. GOVERNING LAW. THIS SECURITY AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF EACH GRANTOR UNDER THIS SECURITY AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK, EXCEPT TO THE EXTENT THAT THE PERFECTION AND THE EFFECT OF PERFECTION OR NON-PERFECTION OF THE SECURITY INTEREST CREATED HEREBY, IN RESPECT OF ANY PARTICULAR COLLATERAL, ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF NEW YORK. -18- 19 IN WITNESS WHEREOF, each Grantor has caused this Security Agreement to be duly executed and delivered as of the date first above written. GRANTORS: SOURCE MEDIA, INC. By /s/ MICHAEL G. PATE ------------------------------- Name: Michael G. Pate Title: Chief Financial Officer SMI HOLDINGS, INC. By /s/ MICHAEL G. PATE ------------------------------- Name: Michael G. Pate Title: Chief Financial Officer IT NETWORK, INC. By /s/ MARYANN WALSH ------------------------------- Name: Maryann Walsh Title: Vice President INTERACTIVE CHANNEL, INC. By /s/ MARYANN WALSH ------------------------------- Name: Maryann Walsh Title: Vice President -19- 20 CABLESHARE (U.S.) LIMITED By /s/ MICHAEL G. PATE ------------------------------- Name: Michael G. Pate Title: Director Accepted and Agreed: U.S. TRUST COMPANY OF TEXAS, N.A. as Collateral Agent By /s/ BILL BARBER --------------------------------- Name: Bill Barber Title: Vice President -20- 21 SCHEDULE I Copyrights and Copyright Licenses Source Media, Inc. Development and Licensing Agreement entered into as of April 1, 1995, between IT Network, Inc., Source Media, Inc., Interactive Channel Technologies, Inc., Cable Share International Inc., Cableshare (U.S.) Limited and Cableshare B.V., First Amendment to Development and Licensing Agreement, dated October 31, 1996. Second Amendment to Development and Licensing Agreement, dated March 17, 1997. SMI Holdings, Inc. None IT Network, Inc. Development and Licensing Agreement entered into as of April 1, 1995, between IT Network, Inc., Source Media, Inc., Interactive Channel Technologies, Inc., Cable Share International Inc., Cableshare (U.S.) Limited and Cableshare B.V., First Amendment to Development and Licensing Agreement, dated October 31, 1996. Second Amendment to Development and Licensing Agreement, dated March 17, 1997. Interactive Channel, Inc. Cableshare (U.S.) Limited Development and Licensing Agreement entered into as of April 1, 1995, between IT Network, Inc., Source Media, Inc., Interactive Channel Technologies, Inc., Cable Share International Inc., Cableshare (U.S.) Limited and Cableshare B.V., First Amendment to Development and Licensing Agreement, dated October 31, 1996. Second Amendment to Development and Licensing Agreement, dated March 17, 1997. 22 SCHEDULE II Patents and Patent Licenses
U.S. Patent No. Description Expiration --------------- ----------- ---------- Source Media, Inc. Development and Licensing Agreement entered into as of April 1, 1995, between IT Network, Inc., Source Media, Inc., Interactive Channel Technologies, Inc., Cable Share International Inc., Cableshare (U.S.) Limited and Cableshare B.V. First Amendment to Development and Licensing Agreement, dated October 31, 1996. Second Amendment to Development and Licensing Agreement, dated March 17, 1997. SMI Holdings, Inc. None IT Network, Inc. Development and Licensing Agreement entered into as of April 1, 1995, between IT Network, Inc., Source Media, Inc., Interactive Channel Technologies, Inc., Cable Share International Inc., Cableshare (U.S.) Limited and Cableshare B.V. First Amendment to Development and Licensing Agreement, dated October 31, 1996.
23 SCHEDULE II Page 2
U.S. Patent No. Description Expiration --------------- ----------- ---------- Second Amendment to Development and Licensing Agreement, dated March 17, 1997. Interactive Channel, Inc. US 4,792,849 Digital interactive communication system August 2007 US 4,829,372 Presentation player to serve users within a August 2007 digital interactive communication system US 4,860,123 Video/audio presentation of still-frame October 2007 images for electronic store US 4,905,094 System to assemble video/audio June 2008 presentations US 5,113,496 Interconnection structure with redundancy May 2009 for communication of media presentations US 5,119,188 Digital audio-video presentation display June 2009 system US 5,191,410 Communications system for particular March 2010 multimedia presentations to multiple viewers US 5,195,092 Distribution system for presentation of a March 2010 continuous flow of information, using fixed frames US 5,208,665 Presentation player in digital format to May 2010 distribute information to viewers via television
24 SCHEDULE II Page 3
U.S. Patent No. Description Expiration --------------- ----------- ---------- Cableshare (U.S.) Limited Development and Licensing Agreement entered into as of April 1, 1995, between IT Network, Inc., Source Media, Inc., Interactive Channel Technologies, Inc., Cable Share International Inc., Cableshare (U.S.) Limited and Cableshare B.V. First Amendment to Development and Licensing Agreement, dated October 31, 1996. Second Amendment to Development and Licensing Agreement, dated March 17, 1997.
25 SCHEDULE III Trademarks and Trademark Licenses
Trademark Name Serial/ Application or -------------- Registration Registration Number Date - ---------------------------------------------------------------- ------------- Source Media, Inc. None SMI Holdings, Inc. None IT Network, Inc. None Interactive Channel, Inc. There are presently five (5) registered U.S. trademarks, TEACHERS ASSISTANTS PROGRAM (TAP)(R), THE IT NETWORK(R) and TELEHOME & DESIGN(R), INTERACTIVE CHANNEL & DESIGN(R), and TOUCHING TOMORROW TODAY(R) and four (4) pending U.S. applications "IT NETWORK GUIDE", CHANNELINK", "ADLINK" and "LOCAL SOURCE." There is one (1) Canadian registered trademark for "THE IT NETWORK." Cableshare (U.S.) Limited None
26 SCHEDULE IV Location of Records Regarding Accounts -------------------------------------- Source Media, Inc. 8140 Walnut Hill Lane, Suite 1000 Dallas, Texas 75231 SMI Holdings, Inc. 8140 Walnut Hill Lane, Suite 1000 Dallas, Texas 75231 IT Network, Inc. 8140 Walnut Hill Lane, Suite 1000 Dallas, Texas 75231 Interactive Channel, Inc. 8140 Walnut Hill Lane, Suite 1000 Dallas, Texas 75231 Cableshare (U.S.) Limited 8140 Walnut Hill Lane, Suite 1000 Dallas, Texas 75231 27 SCHEDULE V Bank Accounts ------------- Source Media, Inc. None SMI Holdings, Inc. Texas Bank & Trust, N.A. 1999 Bryan Street Dallas, Texas 75201 Account #80-1363-3 Money Market Account #1219-5 Operating Account #1220-3 Payroll Account #1375-5 Escrow Texas Commerce Bank 2200 Ross Avenue Dallas, Texas 75201 Account #08805147244 Operating Account #60320878 Money Market Account #319473 Investment IT Network, Inc. None Interactive Channel, Inc. None 28 SCHEDULE V Page 2 Cableshare (U.S.) Limited None 29 SCHEDULE VI Location of Inventory and Equipment ----------------------------------- Source Media, Inc. 8140 Walnut Hill Lane, Suite 1000 Dallas, Texas 75231 5601 Executive Drive Suite 200 Irving, Texas 75038-2508 5400 LBJ Freeway Suite 680 Dallas, Texas 75240 SMI Holdings, Inc. None IT Network, Inc. 5055 California Avenue Suite 310 Bakersfield, CA 420 South Beverly Drive Suite 211 Beverly Hills, CA 269 West Alameda Avenue Unit E Burbank, CA 100 Park Offices 30 SCHEDULE VI Page 2 Suite 114-G Chapel Hill, NC 8140 Walnut Hill Lane Suite 1000 Dallas, TX 39159 Paseo Padre Parkway Suite 238 Fremont, CA 5586 North Palm Avenue Suite B-2 Fresno, CA 11752 Garden Grove Blvd. Suite 213 Garden Grove, CA 16303 South Western Avenue Suite 11 Gardena, CA 525 North Belt East Suite 380G Houston, TX 5575 Lake Park Way Suite 100 La Mesa, CA 426 Fourteenth St. Suite 112 Modesto, CA 1440 Broadway 31 SCHEDULE VI Page 3 Suite 817 Oakland, CA 101 E. Green Street Suite 6 Pasadena, CA 18645 Sherman Way Suite 115 Resada, CA 777 Campus Commons Road Suite 200 Sacramento, CA 302 N. Camino Real Suite 17 San Clemente, CA 9655 Granite Ridge Drive Suite 36 San Diego, CA 220 Montgomery Street Suite 1087 San Francisco, CA 12 South First Street Suite 202 San Jose, CA 28819 Crow Canyon Road Suite 201A San Ramon, CA 831 State Street, Suite 300 32 SCHEDULE VI Page 4 Santa Barbara, CA 343 East Main Street Suite 819 Stockton, CA 301 Georgia Street Plaza Suite 380 Vallejo, CA 122 Escondido Avenue Suite B Vista, CA 7700 Ball Road Suite E/F Windsor, CA 615 North Euclid Avenue Ontario, Canada 5601 Executive Drive Suite 200 Irving, TX 50 Vashell Way 1st Floor Orinda, CA One Lincoln Centre 5400 LBJ Suite 680 Dallas, TX 150 Dufferin Avenue Suite 906 33 SCHEDULE VI Page 5 London, Ontario, Canada 505 Central Avenue Pacific Grove, CA 93950 9047 Soquel Drive Building Santa Cruz, CA 95060 7830 State Line Road Suite 101 Prairie Village, KS 66208 [Alliance Media] 1344 Harrodsburg Road Lexington, KY 40504 [Charlotte Observer] 600 S. Tryon Street Charlotte, NC 28232 [Blue Valley] 30 Victoria Street Hamilton, Bermuda HMDX [Coastal - Savannah] 6555 Abercorn Suite 206 Savannah, GA 31406 [Dalton Area Talkin] P.O. Box 2485 Dalton, GA 30720 [Kiwi Publishing] P.O. Box 1757 34 SCHEDULE VI Page 6 St. George, UT 84771 [Mast Advertising] 118 Lee Parkway Suite 307 Chattanooga, TN 34721 [Pennco Publishing] 1900 North 99 West Suite H McMinnville, OR 97128 Interactive Channel, Inc. 8140 Walnut Hill Lane, Suite 1000 Dallas, Texas 75231 5601 Executive Drive Suite 200 Irving, Texas 75038-2508 5400 LBJ Freeway Suite 680 Dallas, Texas 75240 102 North Cascade Suite 250 Colorado Springs, CO Sullivan & Worcester LLP 767 Third Avenue, 39th Floor New York, NY 10017 Cablevision Systems Corporation One Media Cross Ways Woodbury, NY 11797 Cablevision Systems Corporation 179 Armory Street Brookline, MA 02146 Cableshare (U.S.) Limited None 35 SCHEDULE VII Chief Executive Offices ----------------------- Source Media, Inc. 8140 Walnut Hill Lane Suite 1000 Dallas, Texas 75231 SMI Holdings, Inc. 8140 Walnut Hill Lane Suite 1000 Dallas, Texas 75231 IT Network, Inc. 8140 Walnut Hill Lane Suite 1000 Dallas, Texas 75231 Interactive Channel, Inc. 8140 Walnut Hill Lane Suite 1000 Dallas, Texas 75231 Cableshare (U.S.) Limited 8140 Walnut Hill Lane Suite 1000 Dallas, Texas 75231 36 SCHEDULE VII Page 2 Annex A ASSIGNMENT OF SECURITY INTEREST IN UNITED STATES TRADEMARKS FOR GOOD AND VALUABLE CONSIDERATION, receipt and sufficiency of which are hereby acknowledged, the undersigned with principal offices at the address set forth next to their name appearing in the signature pages hereof, (each individually an "Assignor" and collectively the "Assignors") hereby assigns and grants to U.S. Trust Company of Texas, N.A., as Collateral Agent, with principal offices at 2001 Ross Avenue, Suite 2700, Dallas, TX 75201 (the "Assignee"), a security interest in (i) all of the Assignors' right, title and interest in and to the United States trademarks, trademark registrations and trademark applications (the "Marks") set forth on Schedule A attached hereto, together with (ii) all Proceeds (as such term is defined in the Security Agreement referred to below) and products of the Marks, (iii) the goodwill of the businesses symbolized by the Marks and (iv) all causes of action arising prior to or after the date hereof for infringement of any of the Marks or unfair competition regarding the same. THIS ASSIGNMENT is made to secure the full and prompt performance and payment of all the Obligations of the Assignors, as such term is defined in the Security Agreement among the Assignors, the other assignors party thereto and the Assignee, dated as of October 30, 1997 (as amended from time to time, the "Security Agreement"). Upon the occurrence of the Termination Date (as defined in the Security Agreement), the 37 ANNEX A Page 2 Assignee shall, upon such satisfaction, execute, acknowledge, and deliver to the Assignors an instrument in writing releasing the security interest in the Marks acquired under this Assignment. This Assignment has been granted in conjunction with the security interest granted to the Assignee under the Security Agreement. The rights and remedies of the Assignee with respect to the security interest granted herein are without prejudice to, and are in addition to those set forth in the Security Agreement, all terms and provisions of which are incorporated herein by reference. In the event that any provisions of this Assignment are deemed to conflict with the Security Agreement, the provisions of the Security Agreement shall govern. 38 ANNEX A Page 3 IN WITNESS WHEREOF, the undersigned have executed this Assignment of Security Interest as of the ____ day of _______, ____. SOURCE MEDIA, INC., as Assignor By ------------------------------------ Name: Title: SMI HOLDINGS, INC. as Assignor By ------------------------------------ Name: Title: IT NETWORK, INC., as Assignor By ------------------------------------ Name: Title: 39 ANNEX A Page 4 INTERACTIVE CHANNEL, INC. as Assignor By ------------------------------------ Name: Title: CABLESHARE (U.S.) LIMITED, as Assignor By ------------------------------------ Name: Title: U.S. TRUST COMPANY OF TEXAS, N.A. as Collateral Agent and Assignee By ------------------------------------ Name: Title: 40 [To be notarized for each signatory] STATE OF NEW YORK ) ) ss.: COUNTY OF NEW YORK ) On this __ day of _______, ____ before me personally came ____________ who, being by me duly sworn, did state as follows: that [s]he is ______________ of __________________________, that [s]he is authorized to execute the foregoing Assignment of Security Interest on behalf of said corporation and that [s]he did so by authority of the Board of Directors of said corporation. ____________________________ Notary Public 41 Annex B ASSIGNMENT OF SECURITY INTEREST IN UNITED STATES PATENTS FOR GOOD AND VALUABLE CONSIDERATION, receipt and sufficiency of which are hereby acknowledged, the undersigned with principal offices at the address set forth next to their name appearing in the signature pages hereof (each individually an "Assignor" and collectively the "Assignors") hereby assigns and grants to U.S. Trust Company of Texas, N.A., as Collateral Agent, with principal offices at 2001 Ross Avenue, Suite 2700, Dallas, TX 75201 (the "Assignee"), a security interest in (i) all of the Assignors' right, title and interest in and to the United States patents (the "Patents") set forth on Schedule A attached hereto, together with (ii) all Proceeds (as such term is defined in the Security Agreement referred to below) and products of the Patents and (iii) all causes of action arising prior to or after the date hereof for infringement of any of the Patents or unfair competition regarding the same. THIS ASSIGNMENT is made to secure the full and prompt performance and payment of all the Obligations of the Assignors, as such term is defined in the Security Agreement among the Assignors, the other assignors party thereto and the Assignee, dated as of October 30, 1997 (as amended from time to time, the "Security Agreement"). Upon the occurrence of the Termination Date (as defined in the Security Agreement), the Assignee shall, upon such satisfaction, execute, acknowledge, and deliver to the Assignors 42 ANNEX B Page 2 an instrument in writing releasing the security interest in the Patents acquired under this Assignment. This Assignment has been granted in conjunction with the security interest granted to the Assignee under the Security Agreement. The rights and remedies of the Assignee with respect to the security interest granted herein are without prejudice to, and are in addition to those set forth in the Security Agreement, all terms and provisions of which are incorporated herein by reference. In the event that any provisions of this Assignment are deemed to conflict with the Security Agreement, the provisions of the Security Agreement shall govern. 43 ANNEX B Page 3 IN WITNESS WHEREOF, the undersigned have executed this Assignment of Security Interest as of the ____ day of _______, ____. Address: SOURCE MEDIA, INC., as Assignor By ------------------------------------- Name: Title: SMI HOLDINGS, INC. as Assignor By ------------------------------------- Name: Title: IT NETWORK, INC., as Assignor By ------------------------------------- Name: Title: 44 ANNEX B Page 4 INTERACTIVE CHANNEL, INC. as Assignor By ------------------------------------- Name: Title: CABLESHARE (U.S.) LIMITED, as Assignor By ------------------------------------- Name: Title: U.S. TRUST COMPANY OF TEXAS, N.A., as Collateral Agent and Assignee By ------------------------------------- Name: Title: 45 [Notarized for each signatory] STATE OF NEW YORK ) ) ss.: COUNTY OF NEW YORK ) On this __ day of _______, ____ before me personally came _______________, who being duly sworn, did depose and say that [s]he is _________________ of ____________________, that [s]he is authorized to execute the foregoing Assignment of Security Interest on behalf of said corporation and that [s]he did so by authority of the Board of Directors of said Corporation. _________________________ Notary Public 46 ANNEX C ASSIGNMENT OF SECURITY INTEREST IN UNITED STATES COPYRIGHTS FOR GOOD AND VALUABLE CONSIDERATION, receipt and sufficiency of which are hereby acknowledged, the undersigned with principal offices at the address set forth next to their name appearing in the signature pages hereof (each individually an "Assignor" and collectively the "Assignors") is the owner of all right, title and interest in and to the United States copyrights and associated United States copyright registrations and applications for registration set forth in Schedule A attached hereto; WHEREAS, U.S. Trust Company of Texas, N.A., as Collateral Agent, having its principal offices at 2001 Ross Avenue, Suite 2700, Dallas, TX 75201 (the "Assignee"), desires to acquire a security interest in, and lien on, all of Assignors' right, title and interest in and to Assignors' copyrights and copyright registrations and applications therefor; and WHEREAS, the Assignors are willing to assign to the Assignee, and to grant to the Assignee a security interest in and lien upon the copyrights and copyright registrations and applications therefor described above; NOW, THEREFORE, for good and valuable consideration, the receipt of which is hereby acknowledged, and subject to the terms and conditions of the Security Agreement, dated as of October 30, 1997, among the Assignors, the other assignors from 47 ANNEX C Page 2 time to time party thereto and the Assignee (as amended from time to time, the "Security Agreement"), each of the Assignors hereby assigns to the Assignee, and grants to the Assignee a security interest in and a lien upon, all of Assignors' right, title and interest in and to Assignors' copyrights and copyright registrations and applications more particularly set forth on Schedule A attached hereto, (the "Copyrights") together with (i) all Proceeds (as such term is defined in the Security Agreement referred to below) of the Copyrights, and (ii) all causes of action arising prior to or after the date hereof for infringement of any Copyright. This ASSIGNMENT OF SECURITY INTEREST is made to secure the satisfactory performance and payment of all the Obligations (as such term is defined in the Security Agreement) of the Assignors and shall be effective as of the date of the Security Agreement. Upon the occurrence of the Termination Date (as defined in the Security Agreement), the Assignee shall, upon such satisfaction, execute, acknowledge, and deliver to the Assignors an instrument in writing releasing the security interest in the Copyrights acquired under this Assignment of Security Interest. This Assignment of Security Interest has been granted in conjunction with the security interest granted to Assignee under the Security Agreement. The rights and remedies of the Assignee with respect to the security interest granted herein are without 48 ANNEX C Page 3 prejudice to, and are in addition to those set forth in the Security Agreement, all terms and provisions of which are incorporated herein by reference. In the event that any provisions of this Assignment of Security Interest are deemed to conflict with the Security Agreement, the provisions of the Security Agreement shall govern. IN WITNESS WHEREOF, the undersigned have executed this Assignment as of the _____ day of _____________, ____. SOURCE MEDIA, INC., as Assignor By --------------------------- Name: Title: SMI HOLDINGS, INC. as Assignor By --------------------------- Name: Title: IT NETWORK, INC., as Assignor 49 ANNEX C Page 4 By --------------------------- Name: Title: 50 ANNEX C Page 5 INTERACTIVE CHANNEL, INC. as Assignor By --------------------------- Name: Title: CABLESHARE (U.S.) LIMITED, as Assignor By --------------------------- Name: Title: U.S. TRUST COMPANY OF TEXAS, N.A., as Collateral Agent and Assignee By --------------------------- Name: Title: 51 [Notary for each signatory] STATE OF NEW YORK ) ) ss.: COUNTY OF NEW YORK ) On this __ day of ____________, ____, before me personally came ______________ who, being by me duly sworn, did state as follows: that [s]he is _______________ of __________________, that [s]he is authorized to execute the foregoing Assignment of Security Interest on behalf of said corporation and that [s]he did so by authority of the Board of Directors of said corporation. _________________________ Notary Public EX-23.1 11 CONSENT OF ARTHUR ANDERSEN LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in this Form 8-K into Source Media, Inc.'s previously filed Form S-8 Registration Statements File No. 333-31439, 333-30197, 333-00142 and 333-00144 and Source Media, Inc.'s previously filed Form S-3 Registration Statement No. 333-37279. Arthur Andersen LLP Kansas City, Missouri, November 7, 1997 EX-23.2 12 CONSENT OF PRICE WATERHOUSE LLP 1 EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Prospectus constituting part of the Registration Statement on Form S-3 (File No. 333-37279) and in the Registration Statements on Form S-8 (File Nos. 333-30197, 333-31439, 333-00142 and 333-00144) of Source Media, Inc. of our report dated October 1, 1997 relating to the financial statements of Voice News Network, Inc., which appears on page F-35 of this Form 8-K. PRICE WATERHOUSE LLP Chicago, Illinois November 10, 1997 -----END PRIVACY-ENHANCED MESSAGE-----