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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED
SEPTEMBER 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ....... TO .......
COMMISSION FILE NUMBER 0-21894
SOURCE MEDIA, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3700438
(STATE OF INCORPORATION) (I.R.S. EMPLOYER
IDENTIFICATION NUMBER)
8140 WALNUT HILL LANE, SUITE 1000
DALLAS, TEXAS 75231
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(214) 890-9050
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
----- -----
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AT NOVEMBER 8, 1996: 9,945,690
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SOURCE MEDIA, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Page Number
-----------
<S> <C>
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets (Unaudited)
September 30, 1996 and December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations (Unaudited)
Three and nine months ended
September 30, 1996 and 1995. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows (Unaudited)
Nine months ended September 30, 1996 and 1995. . . . . . . . . . . . . . . . . . . . 6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N/A
Item 3. Defaults Upon Senior Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N/A
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . N/A
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N/A
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
SOURCE MEDIA, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $17,479,223 $12,159,425
Trade accounts receivable, less allowance
for doubtful accounts 1,076,239 1,048,609
Prepaid expenses and other current assets 892,234 745,501
Deferred expenses 889,393 768,167
----------- -----------
Total current assets 20,337,089 14,721,702
Property and equipment:
Production equipment 2,421,816 2,212,074
Computer equipment 927,672 1,806,267
Other equipment 960,446 1,922,863
Furniture and fixtures 120,544 128,506
----------- -----------
4,430,478 6,069,710
Accumulated depreciation 2,670,017 3,315,340
----------- -----------
Net property and equipment 1,760,461 2,754,370
Intangible assets:
Patents 3,597,989 3,597,989
Goodwill 3,010,137 3,010,137
----------- -----------
6,608,126 6,608,126
Accumulated amortization 4,510,434 5,283,936
----------- -----------
other non-current assets - 354,453
----------- -----------
Total assets $24,195,242 $19,154,715
=========== ===========
</TABLE>
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SOURCE MEDIA, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
----------- ------------
<S> <C> <C>
Liabilities and Stockholders' Equity
Current liabilities:
Trade accounts payable $ 1,296,516 $ 909,371
Accrued payroll 258,734 213,049
Other accrued liabilities 1,650,091 1,252,499
Unearned income 4,724,957 4,507,523
Current portion of capital lease obligations 184,175 119,361
----------- -----------
Total current liabilities 8,114,473 7,001,803
Long-term debt, net of discount - 4,580,365
Capital lease obligations, less current portion 35,039 38,407
Minority interests in consolidated subsidiaries 3,618,629 3,549,806
Note receivable and accrued interest from minority
stockholder, net of discount of $178,866 and
$147,580 in 1995 and 1996, respectively (610,175) (652,721)
----------- -----------
3,008,454 2,897,085
Stockholders' equity:
Common stock, $.001 par value:
Authorized shares - 50,000,000
Issued shares - 10,303,605 and 10,316,605 in 1995
and 1996, respectively 10,304 10,317
Less treasury stock, at cost - 356,200 and 381,351 in
1995 and 1996, respectively (3,515,563) (3,757,641)
Capital in excess of par value 59,955,392 60,750,878
Accumulated deficit (43,076,663) (52,245,061)
Foreign currency translation (34,619) (8,507)
Notes receivable and accrued interest
from stockholders (301,575) (112,931)
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Total stockholders' equity 13,037,276 4,637,055
----------- -----------
Total liabilities and stockholders' equity $24,195,242 $19,154,715
=========== ===========
</TABLE>
See accompanying notes.
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SOURCE MEDIA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPT. 30, NINE MONTHS ENDED SEPT. 30,
1995 1996 1995 1996
============================= =============================
<S> <C> <C> <C> <C>
Monetary revenues $2,397,496 $1,819,422 $7,102,346 $6,405,778
Nonmonetary revenues 3,769,085 2,366,560 12,670,079 8,041,541
--------------------------- --------------------------
Total revenues 6,166,581 4,185,982 19,772,425 14,447,319
Monetary cost of sales 1,229,612 854,946 3,845,940 2,707,457
Nonmonetary cost of sales 3,769,085 2,366,560 12,670,079 8,041,541
--------------------------- --------------------------
Total cost of sales 4,998,697 3,221,506 16,516,019 10,748,998
--------------------------- --------------------------
Gross profit 1,167,884 964,476 3,256,406 3,698,321
Selling, general and administrative expenses 1,874,761 3,111,836 5,860,516 8,081,441
Amortization of intangible assets 257,834 257,835 773,503 773,503
Research and development expenses 1,067,428 1,763,316 2,614,344 4,414,119
--------------------------- --------------------------
3,200,023 5,132,987 9,248,363 13,269,063
--------------------------- --------------------------
Operating loss (2,032,139) (4,168,511) (5,991,957) (9,570,742)
Interest expense 21,249 167,907 346,604 360,617
Interest income (114,390) (223,147) (156,383) (661,931)
Other (income) expense (7,807) (6,592) (12,515) (32,207)
Minority interest in earnings (losses) of consolidated
subsidiaries 244,984 40,501 (130,411) (68,823)
Charges related to financing incentives 0 - 1,581,250 -
--------------------------- --------------------------
Net loss (2,176,175) (4,147,180) (7,620,502) (9,168,398)
Preferred stock dividends - - 832,651 -
Net loss attributable to common stockholders ($2,176,175) ($4,147,180) ($8,453,152) ($9,168,398)
=========================== ==========================
Net loss per common share ($0.56) ($0.42) ($2.95) ($0.92)
=========================== ==========================
Weighted average common shares outstanding 3,917,669 9,934,238 2,863,868 9,932,528
=========================== ==========================
</TABLE>
See accompanying notes
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SOURCE MEDIA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1995 1996
-------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss ($7,620,502) ($9,168,398)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 636,353 645,323
Amortization of intangible assets 773,503 773,502
Provision for losses on accounts receivable 89,475 86,983
Minority interests in net losses (130,411) (68,823)
Charges related to financing incentives 1,581,250 -
Other, net (7,809) (157,152)
Changes in operating assets and liabilities:
Trade accounts receivable (136,192) (59,353)
Prepaid expenses and other current assets 110,927 146,733
Deferred expenses (25,445) 121,226
Trade accounts payable 294,395 (387,145)
Accrued payroll 82,851 (45,685)
Other accrued liabilities (2,072) (70,786)
Other accrued liabilities to related parties (166,263) -
Unearned income (375,557) (217,434)
---------- -----------
Net cash used in operating activities (4,895,497) (8,401,009)
INVESTING ACTIVITIES
Capital expenditures (196,598) (1,449,213)
---------- -----------
Net cash used in investing activities (196,598) (1,449,213)
FINANCING ACTIVITIES
Proceeds from issuance of debt and warrant 2,825,000 5,000,000
Cash acquired in HBAC Merger 8,891,389 -
Payment of fees and expenses associated with Merger (1,135,159) -
Redemption of HBAC shares (527,220) -
Payments on debt (4,380,000) -
Payment of fees and expenses associated with Merger
issuance of debt and warrant - (393,891)
Payments on capital lease obligations (129,293) (151,466)
Proceeds from issuance of common stock 574,230 79,712
Other - (30,043)
---------- -----------
Net cash provided by financing activities 6,118,947 4,504,312
Effect of exchange rate changes on cash and cash equivalents (33,105) 26,112
---------- -----------
Net increase (decrease) in cash and cash equivalents 993,747 (5,319,798)
Cash and cash equivalents at beginning of period 127,010 17,479,223
---------- -----------
Cash and cash equivalents at end of period $1,120,757 $12,159,425
========== ===========
</TABLE>
See accompanying notes.
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SOURCE MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions for Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management these financial statements
include all adjustments, consisting of normal recurring accruals, necessary to
present fairly the financial position, results of operations and cash flows of
Source Media, Inc. and its consolidated subsidiaries (the "Company") for the
periods indicated. The balance sheet at December 31, 1995 has been derived from
the audited financial statements at that date. For further information, refer
to the consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1995.
2. Net Loss and Supplemental Net Loss per Common Share
The computation of net loss per common share in each period is based
on the weighted average number of common shares outstanding for each period,
after the retroactive adjustment to reflect shares issued to the former common
stockholders of IT Network, Inc. ("IT") in the merger of IT into a wholly-owned
subsidiary of HB Communications Acquisition Corp. ("HBAC") (the "Merger") and
the 1-for-2 reverse stock split that was effected on October 10, 1995. See
Management's Discussion and Analysis of Financial Condition and Results of
Operations herein and Note 1 to the audited consolidated financial statements
for the year ended December 31, 1995 included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1995 for additional discussion of the
Merger. Convertible securities and stock options are not included in the net
loss per common share calculation for each period because they are
anti-dilutive. The common stock held by HBAC stockholders prior to the Merger
and the common stock issued upon the conversion of the preferred stock of IT
into shares of common stock of the Company are included in the computation from
the date of the Merger.
Supplemental net loss per common share for the quarter ended September
30, 1995 was ($0.56). Supplemental net loss per common share for the nine
months ended September 30, 1995 was ($2.08). Supplemental net loss per common
share and supplemental weighted average common shares outstanding (3,917,669
for the quarter ended September 30, 1995 and 3,601,474 for the nine months
ended September 30, 1995) are provided under the assumption the Merger took
place at the beginning of the respective periods. Under this assumption,
supplemental weighted average common shares outstanding include (1) common
shares that would have been outstanding upon the conversion of IT's preferred
shares, and (2) additional
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shares equal to that portion of the common shares held by HBAC stockholders
assumed to have been issued in order to repay the portion of the $4.1 million
of IT debt and related accrued interest outstanding during the respective
periods. Supplemental net loss is computed as historical net loss less the
impact of interest expense related to the portion of the $4.1 million of IT
debt and related accrued interest outstanding during the respective periods and
repaid with the proceeds from the Merger.
3. Long-Term Debt and Notes Payable
On April 3, 1996, the Company issued a senior note (the "First Tranche
Note") in the principal amount of $5.0 million and a warrant entitling the
holder thereof to purchase 500,000 shares of the Company's common stock at a
purchase price of $10.21 per share. Additional notes (the "Second Tranche
Note") in the aggregate principal amount of up to $5.0 million may be issued on
or before April 3, 1997 provided certain conditions are met. On September 30,
1996, the Company issued an additional senior note in the amount of $326,806
for the payment of interest on the First Tranche Note. This note has terms
identical to the First Tranche Note. In connection with this transaction, if
certain conditions are met and the Company elects to issue the Second Tranche
Note, the Company will be obligated to issue a second warrant entitling the
holder to purchase up to an additional 500,000 shares of the Company's common
stock at a purchase price of $10.21 per share. All notes issued in connection
with this transaction are due on March 31, 2001 and bear interest at the rate
of 13% per annum through March 31, 1998 and 12% thereafter. On March 31, 2000,
the Company must make a prepayment of the notes equal to 33.33% of the then
outstanding principal (together with interest accrued to date on such principal
amount). Through March 31, 1998, at the option of the Company, interest
payments may be made through the issuance of additional notes. The notes are
secured by a lien on all of the Company's assets, including its shares of stock
of its majority-owned subsidiary, Cableshare Inc. ("Cableshare"), an Ontario,
Canada corporation, and a licensing agreement with Cableshare. Except for the
required prepayment described above, the note agreement provides for a
prepayment penalty and customary covenants and events of default. The warrants
contain standard anti-dilution provisions. The Company also granted the holders
of the warrants demand and "piggyback" registration rights covering the shares
of the Company's common stock issuable upon exercise of the warrants.
The warrant is exercisable, in whole or in part, at any time until its
expiration on March 31, 2001. The estimated fair market value of the warrant
was credited to capital in excess of par value and the senior notes were
recorded at a corresponding discount. The discount on the senior notes is being
amortized to interest expense using the effective interest rate method over the
stated term of the senior notes, resulting in an effective interest rate on the
senior notes of 16.2%.
4. Stock Options, Employee Stock Purchase Plan and Shares Reserved For
Conversion
During July 1996, the Board of Directors of the Company adopted the
Employee Stock Purchase Plan (the "Plan"), subject to approval by the Company's
stockholders at the 1997
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annual meeting. Under the Plan, eligible employees may purchase shares of the
Company's common stock at a discount through voluntary monthly payroll
deductions, beginning in September 1996. In connection with the Plan, the
Company has set aside 100,000 shares of Common Stock held in treasury.
During June and July 1996, the Board of Directors granted 665,000
stock options to certain officers and managers of the Company under the terms
of the 1995 Performance Equity Plan at exercise prices ranging from $8.28 per
share to $10.50 per share.
5. Contingencies
In January 1994, a former officer and director and significant
stockholder of Cableshare, and certain of his relatives, who are also
stockholders of Cableshare, filed a lawsuit in Ontario, Canada in the Ontario
Court (General Division) against the Company and several of its officers
individually, two of whom have served on the Board of Directors of Cableshare.
The plaintiffs are seeking, among other things, Cdn $8,000,000 in damages for
reduced value of their holdings of Cableshare stock allegedly caused by the
actions of the defendants and Cdn $6,000,000 in damages for losses of stock
options allegedly caused by the actions of the defendants. No trial date has
been set.
In addition, in January 1994, the former officer and director of
Cableshare also filed a claim of wrongful termination seeking Cdn $350,000 in
damages. A seven day trial, before a judge, was completed on May 1, 1996. A
decision by the judge is pending. Although the ultimate outcome of these
actions cannot be determined at this time, management believes they will not
have a material impact on the consolidated financial condition or results of
operations of the Company.
William T. Little, a stockholder and former director of the Company,
has represented in letters to the Company that a potential lawsuit existed by
various convertible noteholders, alleging that they converted their notes based
upon misrepresentations by the Company. Mr. Little claims that the Company
offered to issue to Mr. Little, during the time he was serving as a director of
the Company, 171,000 shares of Common Stock in consideration of his release of
any claims related to such alleged misrepresentations. In addition, Mr. Little
has claimed that the Company agreed to pay him approximately $81,000 relating
to the conversion of certain convertible notes held by Mr. Little. The Company
disputes all such claims by Mr. Little.
The Company is party to ordinary routine litigation and other claims incidental
to its business, none of which is expected to have a material adverse effect on
the Company's results of operations or financial position.
6. Proposed Acquisition
The Company and Cableshare executed a letter of intent on August 30,
1996, which was amended on October 31, 1996, pursuant to which Cableshare
stockholders would exchange the shares of Cableshare they currently hold for
exchangeable shares of Cableshare
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representing the right to receive common stock of the Company and entitling the
holder to certain voting and dividend rights with respect to the common stock
of the Company. It is currently anticipated that the acquisition would be
accomplished through a Plan of Arrangement. Although the Company has reached an
agreement in principle with the Special Committee of Cableshare's board of
directors, the transaction is still subject to approval by applicable Canadian
governmental authorities and Cableshare's stockholders other than the Company.
7. Subsequent Event
In October 1996, the Company acquired certain audiotext servicing
assets from The Reuben H. Donnelly Corporation ("Donnelly") for an aggregate
purchase price of $750,000. In connection therewith, the Company executed a
services agreement with a three year minimum term. Under the terms of the
agreement, Donnelly is obligated to pay the Company a minimum of $3.2 million
over the term of the agreement and the Company is assuming Donnelly's operating
responsibilities for its audiotext business.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report on Form 10-Q contains statements that are not historical
facts but are forward-looking statements involving risks and uncertainties that
could significantly impact the Company. Such forward-looking statements
include, but are not limited to, those statements about confidence and
strategies and plans and expectations about new and existing products,
services, technologies and opportunities, industry growth, demand and
acceptance of new and existing products, and returns on investments in products
and markets. The risks and uncertainties include, but are not limited to, the
projected losses of the Company, developmental nature of its business,
uncertainty of subscriber acceptance for the Interactive Channel, possible
obsolescence of the Company's technology, sources and degree of competition,
possible unavailability of equipment and other factors discussed from time to
time in the Company's Securities and Exchange Commission filings.
THE COMPANY
The Company is a provider of information and services to consumers
through the television and telephone. In September 1996 in Colorado Springs,
Colorado, the Company commercially introduced the Interactive Channel, its
on-line television programming service which provides a range of on-demand
information and services to subscribers utilizing cable television and
telephone lines. For the past eight years, the Company has been delivering
audiotext information to consumers through the touch-tone telephone. Through
its On-Line Telephone Business, the Company provides consumers with information
on demand, such as news, weather and sports, together with topical information
for health, legal and other matters of consumer interest. The financial results
discussed below reflect the operations of the Company's On-Line Telephone
Business and general, development, advertising and promotion expenses related
to the Interactive Channel and the Company's recently discontinued on-line
personal computer services and do not purport to give an accurate indication of
the Company's future results of operations in light of the anticipated market
expansion of the Interactive Channel.
The Company has earned monetary revenues through advertising
sponsorships in the Network Guide, a product of its On-Line Telephone Business,
which are recorded as unearned income when billed and recognized on a
straight-line basis as earned over the terms of the respective contracts (which
are typically from 3 to 12 months). The Company also has earned monetary
revenues from sales of audiotext services, principally its Consumer Tips
service, to certain of the Regional Bell Operating Companies ("RBOCs") or other
publishers of Yellow Pages directories. In the future, the Company believes a
significant portion of its monetary revenues will be generated from Interactive
Channel fees generated on a per subscriber basis.
Historical revenues generated from the On-Line Telephone Business have
been predominantly nonmonetary. In each of its markets, the Company has entered
into nonmonetary barter agreements with local television and radio stations.
These media sponsors
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provide the Company with advertising time on their stations and update local
news, weather and sports programming on the On-Line Telephone Business in
exchange for promotional messages on the On-Line Telephone Business and print
advertisements in the Company's Network Guide. Revenues and cost of sales
associated with these nonmonetary barter transactions are included in the
Company's consolidated statements of operations at the estimated fair value of
the on-air advertisements and information content provided to the Company by
media sponsors. The amount of nonmonetary revenues has declined in 1996 because
of the cancellation of agreements with Southwestern Bell Yellow Pages, Inc.
("Southwestern Bell") and Ameritech Publishing, Inc. ("Ameritech") and the
decision by the Company to reduce the amount of space devoted to information
provided by media sponsors in the Network Guide.
The Company owns a majority interest in Cableshare Inc.
("Cableshare"), an Ontario, Canada corporation which licenses to the Company
patented technology utilized by the Company in connection with the Interactive
Channel and provides research and development services to the Company. The
Company's consolidated results of operation and financial condition include
Cableshare.
The Company and Cableshare executed a letter of intent on August 30,
1996 pursuant to which Cableshare stockholders would exchange the shares of
Cableshare they currently hold for exchangeable shares of Cableshare
representing the right to receive common stock of the Company and entitling the
holder to certain voting and dividend rights with respect to the common stock
of the Company. It is currently anticipated that the acquisition would be
accomplished through a Plan of Arrangement. Although the Company has reached an
agreement in principle with the Special Committee of Cableshare's board of
directors, the transaction is still subject to approval by applicable Canadian
governmental authorities and Cableshare's stockholders other than the Company.
On June 23, 1995, IT Network, Inc. ("IT") merged with a wholly-owned
subsidiary of HB Communications Acquisition Corp. ("HBAC") (the "Merger").
Pursuant to the Merger, the outstanding common stock and preferred stock of IT
was converted into common stock of HBAC. The results of operations and
financial position of the Company for periods and dates prior to the Merger are
the historical results of operations and financial position of IT for such
periods and dates. For accounting and financial reporting purposes, the Company
has reflected in its consolidated financial statements the assets, liabilities
and equity of IT at their historical book values. Additionally, where
applicable, all historical information has been restated to reflect a 1-for-2
reverse stock split that was effected on October 10, 1995.
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RESULTS OF OPERATIONS
Three Months Ended September 30, 1996 and 1995
Monetary revenues declined 24 percent to $1.8 million for the quarter
ended September 30, 1996 from $2.4 million for the quarter ended September 30,
1995. The net decline of $578,000 included declines of $476,000 attributable to
the Network Guide product and $274,000 attributable to the Company's Consumer
Tips service. These declines were partially offset by increases of $143,000 in
revenues attributable to product development trials of the Interactive Channel
and Cableshare technology and $29,000 related to the Company's other audiotext
services and the Company's recently discontinued on-line personal computer
services.
The decline in Network Guide monetary revenues primarily reflects the
termination of distribution of the Network Guide in 12 designated market areas
("DMAs"), eight of which are located within the Southwestern Bell region.
Total Network Guide revenues within the twelve terminated DMAs were $119,000
for the quarter ended September 30, 1996 and $523,000 for the quarter ended
September 30, 1995. Additionally, there was a net decline in Network Guide
monetary revenues among the Company's 48 other DMAs, primarily reflecting lower
sales of advertising contracts associated with distribution uncertainties in
the Ameritech region.
Until February 1, 1996, the Company published the Network Guide in
Yellow Pages directories in certain DMAs within the Ameritech region and
produced the related audiotext messages in exchange for a share of the Network
Guide revenues generated in those DMAs. As described previously, the Company's
agreement with Ameritech was terminated by Ameritech, and the Network Guide has
not been included in any Ameritech Yellow Pages directories published after
September 1996. Accordingly, the Company expects Network Guide revenues to
decline in those Ameritech DMAs in 1996 and to end completely in the third
quarter of 1997 due to the conclusion of revenue from Network Guide contracts
in effect prior to the termination of the Ameritech agreement. Total monetary
revenues for both the Network Guide and Consumer Tips products in the Ameritech
region were $348,000 for the quarter ended September 30, 1996 and $754,000 for
the quarter ended September 30, 1995. The Company expects to partially offset
such revenue declines in future periods with revenues generated through (i) its
recently-signed sales agency agreement with The Reuben H. Donnelly Corporation
("Donnelly") to sell the Network Guide in Yellow Pages published by Donnelly in
four top-100 DMAs in the mid-Atlantic region and (ii) its recently-completed
purchase of certain assets from Donnelly and a related audiotext service
contract with Donnelly under which the Company will provide audiotext services
and sell the Network Guide in Yellow Pages published by Donnelly in seven
top-100 DMAs located throughout the United States.
The decline in Consumer Tips revenues is the result of the termination
of the Company's agreement with Ameritech by Ameritech. Consumer Tips revenues
in the Ameritech region ended completely in the second quarter of 1996.
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Nonmonetary revenues and nonmonetary cost of sales declined 37 percent
to $2.4 million for the quarter ended September 30, 1996 from $3.8 million for
the quarter ended September 30, 1995. Substantially all of this $1.4 million
decline in nonmonetary revenues and nonmonetary cost of sales occurred because
of the termination of distribution agreements in certain DMAs and because, in
other DMAs, the Company reduced the amount of space devoted to information
provided by media sponsors in its Network Guide and, accordingly, renewed its
barter contracts with such media sponsors for lesser amounts of promotional
advertising. In light of the cancellation by Southwestern Bell and Ameritech of
their agreements with the Company, the Company expects its nonmonetary revenues
and nonmonetary cost of sales to decline substantially in future periods. The
Company expects to partially offset such nonmonetary revenue declines in future
periods with nonmonetary revenues generated in association with a
recently-signed sales agency agreement with Donnelly.
Monetary cost of sales declined 30 percent to $855,000, or 47 percent
of monetary revenues, for the quarter ended September 30, 1996 from $1.2
million, or 51 percent of monetary revenues, for the quarter ended September
30, 1995. In certain RBOC regions, the Company has operated under comprehensive
Network Guide agreements whereby the Company has agreed to share a portion of
its advertising revenues with the RBOC in return for pages in the RBOC's Yellow
Pages directories and use of the RBOC's audiotext equipment and telephone
lines. Consequently, as DMAs become governed by such an agreement, the
Company's monetary cost of sales reflects increasing revenue sharing expense
and declining Yellow Pages purchase expense and telephone line charges in such
RBOC region. Monetary cost of sales for the third quarters of 1996 and 1995,
respectively, was primarily comprised of (i) revenue sharing expenses
associated with Network Guide agreements with Ameritech, DonTech and BellSouth
of $474,000 and $515,000, respectively, an eight percent decline, reflecting
lower monetary revenues in those RBOC regions, (ii) operations personnel
salaries of $119,000 and $145,000, respectively, an 18 percent decline, (iii)
Yellow Pages purchase expenses of $111,000 and $307,000, respectively, a 64
percent decline, reflecting the discontinuation of distribution in all eight
DMAs within the Southwestern Bell region as well as lower Yellow Pages prices
and the Company's decision to purchase fewer pages in the Pacific Bell region,
and (iv) telephone line charges of $64,000 and $98,000, respectively, a 35
percent decline, primarily reflecting fewer DMAs in the Southwestern Bell
region.
Selling, general and administrative expenses, including amortization
of intangible assets increased 58 percent to $3.4 million for the quarter ended
September 30, 1996 from $2.1 million for the quarter ended September 30, 1995.
This increase resulted primarily from increased subscriber acquisition costs
associated with the commercial introduction of the Company's Interactive
Channel. These costs included items such as advertising agency creative fees,
television production costs of commercials and an infomercial, and direct mail
and newspaper advertising expenses.
14
<PAGE> 15
Research and development expenses increased 65 percent to $1.8 million
for the quarter ended September 30, 1996 from $1.1 million for the quarter
ended September 30, 1995. This increase occurred due to (i) the addition of
personnel by the Company and by Cableshare to support business development
activities as well as to continue the development of cable converter boxes
which will be deployed in Interactive Channel subscriber households, (ii) the
continued modification of the Cableshare on-line television technology to
operate on a UNIX-based platform which increases the speed and capacity of the
Interactive Channel headend equipment, (iii) the continued development of a
Windows-based media presentation workstation that could be used by the Company
and others to create and edit programming for the Interactive Channel, and (iv)
other related development activities associated with the commercial
introduction of the Interactive Channel.
Other. Net interest income was $55,000 for the quarter ended September
30, 1996 compared with $93,000 for the quarter ended September 30, 1995,
reflecting higher interest expense incurred as a result of the Company's
issuance of senior secured notes in April 1996.
Nine Months Ended September 30, 1996 and 1995
Monetary revenues declined 10 percent to $6.4 million for the nine
months ended September 30, 1996 from $7.1 million for the nine months ended
September 30, 1995. The net decline of $697,000 included declines of $1.1
million attributable to the Network Guide product and $676,000 attributable to
the Company's Consumer Tips service. These declines were partially offset by
increases of $794,000 in revenues related to product development trials of the
Interactive Channel and license fees, and $250,000 in revenues related to the
Company's other audiotext services and recently discontinued on-line personal
computer services. The decline in Network Guide monetary revenues primarily
reflects the termination of distribution in twelve DMAs, eight of which are
located within the Southwestern Bell region. Total Network Guide revenues
within the twelve terminated DMAs were $601,000 for the nine months ended
September 30, 1996 and $1.5 million for the nine months ended September 30,
1995.
Additionally, there was a net decline in Network Guide monetary
revenues among the Company's 48 other DMAs, primarily reflecting lower sales of
advertising contracts associated with distribution uncertainties relating to
the termination of the Ameritech agreement. As previously discussed, because of
the termination of the Company's agreement with Ameritech, the Company expects
revenues to decline in those Ameritech DMAs in 1996 and to end completely in
the third quarter of 1997 due to the conclusion of revenue from Network Guide
contracts in effect prior to the termination of the Ameritech agreement. The
decline in Consumer Tips revenues is also the result of the termination of the
Company's agreement with Ameritech by Ameritech, and Consumer Tips revenues in
the Ameritech region ended completely in the second quarter of 1996. Total
monetary revenues for both the Network Guide and Consumer Tips products in the
Ameritech region were $1.4 million for the nine months ended September 30, 1996
and $2.3 million for the nine months ended September 30, 1995. The Company
expects to partially offset such revenue declines in future periods with
15
<PAGE> 16
revenues generated through (i) its recently-signed sales agency agreement with
Donnelly to sell the Network Guide in Yellow Pages published by Donnelly in
four top-100 DMAs in the mid-Atlantic region and (ii) its recently-completed
purchase of certain assets from Donnelly and a related audiotext service
contract with Donnelly under which the Company will provide audiotext services
and sell the Network Guide in Yellow Pages published by Donnelly in seven
top-100 DMAs located throughout the United States.
The increase in interactive television revenues in the first nine
months of 1996 compared with the same period in 1995 reflects a portion of the
license paid to Cableshare by GTE Corporation and GTE MainStreet (collectively
"GTE") for the use of Cableshare's United States patents as part of an
agreement entered into in April 1996 to end litigation between Cableshare and
GTE as well as certain hardware and software sales to a third party related to
a trial of Interactive Channel technology.
Nonmonetary revenues and nonmonetary cost of sales declined 37 percent
to $8.0 million for the nine months ended September 30, 1996 from $12.7 million
for the nine months ended September 30, 1995. Substantially all of this $4.7
million decline in nonmonetary revenues and nonmonetary cost of sales occurred
because of the termination of distribution agreements in the seven DMAs
previously discussed and because, in other DMAs, the Company reduced the amount
of space devoted to information provided by media sponsors in its Network Guide
and, accordingly, renewed its barter contracts with such media sponsors for
lesser amounts of promotional advertising. In light of the cancellation by
Southwestern Bell and Ameritech of their agreements with the Company, the
Company expects its nonmonetary revenues and nonmonetary cost of sales to
decline substantially in future periods. The Company expects to partially
offset such nonmonetary revenue declines in future periods with nonmonetary
revenues generated in association with its recently-signed sales agency
agreement with Donnelly.
Monetary cost of sales declined 30 percent to $2.7 million, or 42
percent of monetary revenues, for the nine months ended September 30, 1996 from
$3.8 million, or 54 percent of monetary revenues, for the nine months ended
September 30, 1995. In certain RBOC regions, the Company has operated under
comprehensive Network Guide agreements whereby the Company has agreed to share
a portion of its advertising revenues with the RBOC in return for pages in the
RBOC's Yellow Pages directories and use of the RBOC's audiotext equipment and
telephone lines. As DMAs become governed by such an agreement, the Company's
monetary cost of sales reflects increasing revenue sharing expense and
declining Yellow Pages purchase expense and telephone line charges in such RBOC
regions. Monetary cost of sales for the first nine months of 1996 and 1995,
respectively, was primarily comprised of (i) revenue sharing expenses
associated with Network Guide agreements with Ameritech, DonTech and BellSouth
of $1.4 million and $1.6 million, respectively, a nine percent decline,
reflecting lower monetary revenues in those RBOC regions, (ii) Yellow Pages
purchase expenses of $394,000 and $1,005,000, respectively, a 61 percent
decline, reflecting the discontinuation of distribution in all eight DMAs
within the Southwestern Bell region as well as lower Yellow Pages prices and
the Company's decision to purchase fewer pages in the Pacific Bell region,
16
<PAGE> 17
(iii) operations personnel salaries of $374,000 and $446,000, respectively, a
16 percent decline, (iv) telephone line charges of $195,000 and $286,000,
respectively, a 32 percent decline, primarily reflecting fewer DMAs in the
Southwestern Bell region, and (v) satellite transmission charges of $122,000
and $271,000, respectively, a 55 percent decline.
Selling, general and administrative expenses, including amortization
of intangible assets increased 33 percent to $8.9 million for the nine months
ended September 30, 1996 from $6.6 million for the nine months ended September
30, 1995. This increase resulted primarily from increased subscriber
acquisition costs such as advertising agency creative fees, television
production costs of commercials and an infomercial, and direct mail and
newspaper advertising expenses associated with the commercial introduction of
the Interactive Channel as well as $655,000 of increased expenses associated
with the Company's recently discontinued on-line personal computer services.
Research and development expenses increased 69 percent to $4.4 million
for the nine months ended September 30, 1996 from $2.6 million for the nine
months ended September 30, 1995. This increase occurred due to (i) the addition
of personnel by the Company and by Cableshare to support business development
activities as well as to continue the development of cable converter boxes
which will be deployed in Interactive Channel subscriber households, (ii) the
continued modification of the Cableshare on-line television technology to
operate on a UNIX-based platform which increases the speed and capacity of the
Interactive Channel headend equipment, (iii) the continued development of a
Windows-based media presentation workstation that could be used by the Company
and others to create and edit programming for the Interactive Channel, and (iv)
other related development activities associated with the commercial
introduction of the Interactive Channel.
Other. Net interest income was $301,000 for the nine months ended
September 30, 1996 compared with net interest expense of $190,000 for the nine
months ended September 30, 1995, reflecting interest earned on the proceeds
from a public offering of the Company's common stock in December 1995. Charges
related to financing incentives for the nine months ended September 30, 1995
included $1.6 million related to the issuance of warrants in January and May
1995 in connection with a bridge financing which provided the Company with
operating funds to the point of the Merger.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has experienced substantial operating
losses and net losses as a result of its efforts to develop, deploy and support
its On-Line Telephone Business and to develop and conduct trials of the
Interactive Channel. As of September 30, 1996, the Company had an accumulated
deficit of approximately $52.2 million and had used cumulative net cash in
operations of $33.1 million. The difference at September 30, 1996 between the
accumulated deficit since inception and cumulative net cash used in operations
since inception was attributable to (i) $15.5 million associated with
nonmonetary charges related to financing incentives, write-down of intangible
assets, depreciation and amortization and other non-cash
17
<PAGE> 18
expenses and (ii) $3.6 million reflecting unearned income, accounts payable and
accrued liabilities in excess of accounts receivable, prepaid expenses and
inventory. The Company expects to continue to incur negative cash flow from
operating activities at least through 1997.
The Company's primary source of liquidity is its cash and cash
equivalents, which totaled $12.2 million at September 30, 1996. Since its
inception, the Company has financed its operations primarily through an
aggregate $50.4 million from various financing activities, including the
incurrence of debt and issuance of common and preferred stock. In June 1995,
the Company consummated the Merger whereby $7.2 million of cash, net of
redemptions and expenses, became available to the Company. In connection with
the Merger, $4.1 million of debt, and accrued interest thereon, was retired and
all of the Company's preferred stock was converted into common stock. In
December 1995, the Company completed a public offering of 2,350,000 shares of
Common Stock for net proceeds of $21,850,000, of which the Company used
approximately $3.0 million to repurchase shares of Common Stock from a
stockholder.
On April 3, 1996, the Company issued a senior note (the "First Tranche
Note") in the principal amount of $5.0 million and a warrant entitling the
holder thereof to purchase 500,000 shares of the Company's common stock at a
purchase price of $10.21 per share. Additional notes (the "Second Tranche
Note") in the aggregate principal amount of up to $5.0 million may be issued on
or before April 3, 1997 provided certain conditions are met. On September 30,
1996, the Company issued an additional senior note in the amount of $326,806
for the payment of interest on the First Tranche Note. This note has terms
identical to the First Tranche Note. In connection with this transaction, if
certain conditions are met and the Company elects to issue the Second Tranche
Note, the Company will be obligated to issue a second warrant entitling the
holder to purchase up to an additional 500,000 shares of the Company's common
stock at a purchase price of $10.21 per share. All notes issued in connection
with this transaction are due on March 31, 2001 and bear interest at the rate
of 13% per annum through March 31, 1998 and 12% thereafter. On March 31, 2000,
the Company must make a prepayment of the notes equal to 33.33% of the then
outstanding principal (together with interest accrued to date on such principal
amount). Through March 31, 1998, at the option of the Company, interest
payments may be made through the issuance of additional notes. The notes are
secured by a lien on all of the Company's assets, including its shares of stock
of its majority-owned subsidiary, Cableshare Inc. ("Cableshare"), an Ontario,
Canada corporation, and a licensing agreement with Cableshare. Except for the
required prepayment described above, the note agreement provides for a
prepayment penalty and customary covenants and events of default. The warrants
contain standard anti-dilution provisions. The Company also granted the holders
of the warrants demand and "piggyback" registration rights covering the shares
of the Company's common stock issuable upon exercise of the warrants.
During the remaining three months of 1996, the Company intends to
invest at least $600,000 in additional property and equipment, primarily
related to the introduction of the Interactive Channel. During February and
July 1996, the Company caused the issuance of
18
<PAGE> 19
letters of credit totaling approximately $1.4 million to an Asian manufacturer
in connection with the production of cable television set-top boxes. As of
September 30, 1996, approximately $477,000 was payable under these letters of
credit, which the Company expects to pay prior to December 31, 1996.
In connection with the proposed Cableshare transaction, the Company
anticipates paying approximately $500,000 in legal, printing and other
transaction costs.
In February 1996, the Company entered into an agreement with
Cableshare which grants to the Company the exclusive right to market
Cableshare's patents and software in the development and operation of the
Interactive Channel for a one-year period, renewable annually upon mutual
agreement of the parties. The license also commits Cableshare to develop a new
set-top box, a UNIX-based platform and user-friendly applications and
production system. The Company is obligated to pay $4.75 million for the
development projects, all of which has been paid as of October 15, 1996.
Cableshare will also receive a payment for the equipment sold as a result of
the Company's marketing of the Interactive Channel. The new license replaces
the Company's obligations under the previous license to make payments and
achieve certain subscriber levels. On October 31, 1996, the Company extended
the agreement through May 1997, and agreed to purchase a minimum of $300,000 of
development services per month from Cableshare commencing November 1, 1996.
The Company's future capital requirements will depend on many factors,
including, but not limited to, (i) the success and timing of the development,
introduction and deployment of the Interactive Channel, (ii) the operating
results of its On-Line Telephone Business, (iii) the levels of advertising
required to attain a competitive position in the marketplace for its products,
(iv) the extent of market acceptance of such products, (v) the funds required
by Cableshare and the Company to fund their costs of litigation, and (vi)
competitive factors. The Company believes its current resources, together with
the additional funds that may be available under the Senior Note Agreement,
will be sufficient to finance the commercial introduction of the Interactive
Channel on several United States cable systems, including the Colorado Springs
system which was launched in September 1996, and the further enhancement of the
Interactive Channel during 1997, and to meet the Company's anticipated cash
needs for working capital and other capital expenditures through the end of
1997. However, the Company does not believe that these sources of funds will be
sufficient to allow the Company to further expand the Interactive Channel
beyond those several United States cable systems nor pursue other strategic and
programming initiatives should the opportunity arise in 1997. Furthermore,
there can be no assurances that additional funds will be available under the
Senior Note Agreement. Accordingly, the Company anticipates that it may attempt
to sell additional equity securities or incur additional debt in the first half
of 1997.
19
<PAGE> 20
NET OPERATING LOSS CARRYFORWARDS
At December 31, 1995, IT had net operating loss carryforwards of
approximately $28.8 million for United States income tax purposes, which begin
to expire in 2003. The Internal Revenue Code of 1986 imposes limitations on the
use of net operating loss carryforwards if certain stock ownership changes
occur. As a result of the Merger, an ownership change occurred that will cause
the Company's utilization of net operating losses to be limited to
approximately $3.5 million in a given year.
20
<PAGE> 21
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Lerch. On December 15, 1993, Marvin Lerch, the former Chief Executive
Officer and a shareholder of Cableshare, and certain of his relatives who are
also shareholders of Cableshare, commenced a legal proceeding in Ontario,
Canada in the Ontario Court (General Division) against the Company and certain
executive officers of the Company and a director of Cableshare on the grounds
that the defendants took actions intended to depress the value of Cableshare to
allow the Company to acquire the remainder of Cableshare at a favorable price.
The plaintiffs seek, among other things, orders that certain actions by
Cableshare's board are invalid; a declaration that Cableshare's board is
incapable of managing its affairs due to conflicts of interest; an injunction
against the Company from voting its Cableshare shares for three years; purchase
by the defendants of the plaintiffs' Cableshare shares for Cdn $20 per share or
exchange of the plaintiffs' Cableshare shares for shares of Common Stock of
equal value; and damages in the amount of Cdn $8 million to compensate the
plaintiffs for the reduced value of their Cableshare shares and damages in the
amount of Cdn $6 million to compensate Mr. Lerch for the loss of certain
Cableshare stock options. Cableshare disputes all of the claims, and no trial
date has been set.
On January 24, 1994, Mr. Lerch commenced a proceeding against
Cableshare claiming a wrongful termination of Mr. Lerch's employment with
Cableshare and seeking damages in the amount of Cdn $350,000. Cableshare has
denied the claim. A seven day trial, before a judge, was completed on May 1,
1996. A decision by the judge is pending.
Little. William T. Little, a stockholder and former director of the
Company, has represented in letters to the Company that a potential lawsuit
existed by various convertible noteholders, alleging that they converted their
notes based upon misrepresentations by the Company. Mr. Little claims that the
Company offered to issue to Mr. Little, during the time he was serving as a
director of the Company, 171,000 shares of Common Stock in consideration of his
release of any claims related to such alleged misrepresentations. In addition,
Mr. Little has claimed that the Company agreed to pay him approximately $81,000
relating to the conversion of certain convertible notes held by Mr. Little. The
Company disputes all such claims by Mr. Little.
Revenue Canada. Revenue Canada, the Canadian taxing authority, sent a
notice of reassessment to Cableshare on June 10, 1993 which, if valid, could
reduce Cableshare's investment tax credits by Cdn $1.9 million. Cableshare
disputes such reassessment. In addition, Revenue Canada had demanded repayment
from Cableshare of refundable tax credits paid for the 1988 fiscal year
totaling Cdn $315,000, plus interest of Cdn $441,000 (totaling approximately
$555,000 U.S.). Cableshare has provided for the demanded repayment, including
interest, in its 1995 financial statements.
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<PAGE> 22
Others. The Company has instituted litigation against Ameritech in the
district court for Dallas County, Texas, alleging, among other claims, that
Ameritech breached its agreement with the Company, that Ameritech converted
property and business owned by the Company and that Ameritech breached its
fiduciary responsibility to the Company. The case is presently involved with
preliminary proceedings.
The Company is aware of certain claims against the Company and
Cableshare that have not developed into litigation, or if they have, are
dormant. Unnamed shareholders of Cableshare advised the Cableshare directors in
June 1995 that they questioned certain of the directors' actions under Ontario
law. Cableshare's attorney responded to the shareholders' substantive points
and the shareholders have not taken further action. In June 1989, Barry Walker
commenced a proceeding in Ontario, Canada against Cableshare claiming wrongful
termination of Mr. Walker's employment with Cableshare and seeking damages in
the amount of Cdn $560,000 plus interest and costs. Cableshare denied the
claims and this matter has been inactive since at least June 1992.
Further, the Company and Cableshare are parties to ordinary routine
litigation incidental to their business, none of which is expected to have a
material adverse effect on the Company's results of operations or financial
condition.
Item 2 - Changes in Securities - not applicable
Item 3 - Defaults Upon Senior Securities - not applicable
Item 4 - Submission of Matters to a Vote of Security Holders - not applicable
Item 5 - Other Information - not applicable
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits:
*10.1 Services Agreement dated October 21, 1996 by and between The
Reuben H. Donnelly Corporation and IT Network, Inc.
11.1 Computation of Supplemental Loss Per Common Share
27 Financial Data Schedule
(b) Reports on Form 8-K during the three months ended September
30, 1996 - not applicable
- --------------
* Confidential treatment has been requested for certain portions of this
Exhibit. Accordingly, those portions have been omitted from the filed copy
and filed separately with the Securities and Exchange Commission.
22
<PAGE> 23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
as amended, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
SOURCE MEDIA, INC.
(Registrant)
Date: November 8, 1996 By: /s/ Michael G. Pate
----------------------------
Michael G. Pate
Chief Financial Officer and
Treasurer
(Principal Financial Officer and
Duly Authorized Officer)
23
<PAGE> 24
EXHIBIT
NUMBER INDEX TO EXHIBITS
- ------- -----------------
*10.1 Services Agreement dated October 21, 1996 by and between The
Reuben H. Donnelley Corporation and IT Network, Inc.
11.1 Computation of Supplemental Loss Per Common Share
27 Financial Data Schedule
- ---------
* Confidential treatment has been requested for certain portions of this
Exhibit. Accordingly, those portions have been omitted from the filed copy and
filed separately with the Securities and Exchange Commission.
<PAGE> 1
EXHIBIT 10.1
SERVICES AGREEMENT
THIS SERVICES AGREEMENT (the "Agreement"), entered into this 21st day
of October, 1996, by and between The Reuben H. Donnelley Corporation,
("Donnelley"), a Delaware corporation, located at 287 Bowman Avenue, Purchase,
NY, 10577, and IT Network, Inc., ("ITN") a wholly-owned subsidiary of Source
Media, Inc., and a Texas corporation located at 8140 Walnut Hill, Dallas, TX,
75231. (Collectively, the "Parties" or individually a "Party".)
WHEREAS, Donnelley publishes yellow page directories and sells yellow
pages advertising in directories published by certain telephone companies and
Donnelley desires to assure the provision of audiotext services in the
directories identified on Appendix A ("Directories"); and
WHEREAS, ITN has the expertise and experience to provide a full-range of
audiotext services, including network content development and broadcasting,
advertising production, customer service, network operations and system service
and maintenance ("Services"); and
WHEREAS, Donnelley wishes to acquire Services from ITN for the Directories
and ITN wishes to provide Services for Donnelley ;
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained in this agreement, Donnelley and ITN agree as follows:
1. DEFINITIONS. The following definitions shall be applicable in
connection with this Agreement:
a) "AMOUNT FOR SERVICES" shall mean the total due for Services
in any month.
CONFIDENTIAL
<PAGE> 2
SERVICE AGREEMENT
10/17/96
PAGE 2
b) "AUDIOTEXT" shall mean recorded information prepared and
transmitted via the System and/or the Network and any reference to
the System and/or the Network shall mean the Audiotext System and/or
Audiotext Network.
c) "AUDIOTEXT INFORMATION" shall mean all common interest static
or broadcast audio information prepared by ITN or obtained by ITN
under license with third parties, including all advertising
messages produced by ITN under this Agreement, which information is
entered, stored and retrieved for transmission over the System to
telephone callers using a touch-tone telephone who call the
telephone numbers and codes listed in the Directories and retrieve
desired information by dialing an access code.
d) "CUSTOMER SERVICE" refers to preparing copy, scripting,
producing and loading advertising slots on the system. It does not
include handling claims relating to errors or omissions from
advertisers.
e) "DIRECTORIES" shall mean the telephone directories set forth
on Appendix A, attached to this Agreement and incorporated in it by
this reference. Appendix A may be amended by Donnelley to either
add or delete the Directories covered by this Agreement.
f) A "FIELD SITE" is a physical location where one or more
servers physically reside.
g) "NETWORK" shall mean the central computer operated by ITN and
all Field Site locations, as defined below, used to create and
transmit Audiotext Information.
CONFIDENTIAL
<PAGE> 3
SERVICE AGREEMENT
10/17/96
PAGE 3
h) "SERVICES" shall mean the full range of audiotext services
including, but not limited to, network content development,
broadcasting, advertising production, customer service, network
operations and System service and maintenance.
i) The "SYSTEM" shall mean all of the assets used to prepare and
transmit Audiotext Information.
2. EFFECTIVE DATE, TERM. The initial term of this Agreement becomes effective
on ***, 1996, and remains in effect for the issue life of all Directories
published prior to ***, 1999, however, if ITN meets all of the Key Performance
Indicators (identified and defined in Section 4) for each year of the initial
term, the Agreement will be automatically extended for *** more years, to
include the issue life of all Directories published prior to ***. In the event
that ITN fails to meet the Key Performance Indicators during the *** years after
the initial term of the Agreement (if there has been an extension of the initial
term), then such failure shall constitute a material breach of this Agreement.
3. ITN RESPONSIBILITIES. During the Term of this Agreement, ITN shall be
responsible for providing to Donnelley all Audiotext Services requested by
Donnelley in the following areas: ***, as set forth specifically below:
a) Network Content Development and Broadcasting
i) ITN shall be responsible for ***
CONFIDENTIAL
<PAGE> 4
SERVICE AGREEMENT
10/17/96
PAGE 4
b) Advertising Production and Customer Service
***
CONFIDENTIAL
<PAGE> 5
SERVICE AGREEMENT
10/17/96
PAGE 5
***
c) Network Operations - ITN shall operate and manage the Network to
provide consistent and high quality Audiotext Services. This shall
include:
***
CONFIDENTIAL
<PAGE> 6
SERVICE AGREEMENT
10/17/96
PAGE 6
***
d) System Service - Operation of the System and the Field Sites will be
consistent with industry standards including***
e) Content Assignment - Within ten (10) working days of the execution
of this Agreement, ITN will notify Donnelley as to which (if any) of
the***
CONFIDENTIAL
<PAGE> 7
SERVICE AGREEMENT
10/17/96
PAGE 7
f) Transition Period - In order to facilitate the transition of the
audiotext services covered by this Agreement, Donnelley will ***
4. KEY PERFORMANCE INDICATORS. There are four (4) Key Performance Indicators
("KPIs") upon which the automatic extension of this Agreement for an additional
two years are contingent and thereafter will constitute a material breach of
this Agreement if they each are not met. However, ITN is granted thirty (30)
days to cure a material failure to meet any of the following KPIs:
***
CONFIDENTIAL
<PAGE> 8
SERVICE AGREEMENT
10/17/96
PAGE 8
5. DONNELLEY'S RESPONSIBILITIES.
***
CONFIDENTIAL
<PAGE> 9
SERVICE AGREEMENT
10/17/96
PAGE 9
e) Transition Period. Commencing with the effective date of this
Agreement and continuing until ***, 1997, unless sooner
terminated by the Parties, Donnelley will facilitate the transition
of audiotext services covered by this Agreement, by ***
f) Leased Equipment. The equipment shown on Appendix C is used
to support audiotext services to the publishers also shown on
Appendix C. This equipment is leased by Donnelley pursuant to leases
that expire on the dates shown in Appendix C. Until the date on
which the leases expire, Donnelley shall ***
6. CONTROL OF AUDIOTEXT SLOTS/PROGRAMMING. At Donnelley's direction, ITN shall
formulate policies relating to the wording, production, distribution and
sponsorship of the Audiotext Information. Such policies shall be in effect for
all contracts executed between ITN
CONFIDENTIAL
<PAGE> 10
SERVICE AGREEMENT
10/17/96
PAGE 10
and audiotext advertising customers. All policies formulated by ITN shall be
consistent with the standards of the publisher of the Directories and subject
to approval by Donnelley. ITN will modify these policies as requested in
writing by Donnelley.
7. OWNERSHIP. ***
8. COST OF SERVICES. Unless otherwise provided under this Agreement, each
party shall independently bear the cost and expense complying with its
obligations under the terms of this Agreement.
9. COMPENSATION. The compensation due ITN each month during the Term of this
Agreement, shall be determined as set forth below:
a) Fixed Monthly Amount -
Each month during the initial Term of this Agreement, the amount for
that month is indicated on Appendix D, attached to this Agreement
and by this reference incorporated in it (the "Fixed Monthly Amount"
for the specific month).
b) Amounts for Services -
The charge for Services requested by Donnelley and performed by ITN
shall be:
i) ***
CONFIDENTIAL
<PAGE> 11
SERVICE AGREEMENT
10/17/96
PAGE 11
ii) The charge for all *** provided by ITN in accordance with
this Agreement is $***.
iii) The charge for all *** provided by ITN in
accordance with this Agreement is $***.
iv) The charge for all *** provided by ITN in
accordance with this Agreement is $***.
c) For each month while this Agreement is in effect, Donnelley shall pay
ITN the greater of the fixed monthly amount for that month set forth
on Appendix D or the total Amount for Services as determined under
Article 9(b).
CONFIDENTIAL
<PAGE> 12
SERVICE AGREEMENT
10/17/96
PAGE 12
d) ITN warrants that ***
CONFIDENTIAL
<PAGE> 13
SERVICE AGREEMENT
10/17/96
PAGE 13
10. INVOICING AND PAYMENT.
a) By the 15th day of each calendar month (or the next following
business day if the 15th of the month is a Saturday, Sunday or legal
holiday), ITN shall invoice Donnelley for the Compensation due for
the previous month. Each invoice shall itemize separately the Fixed
Amount and the Amount for Services. The invoice shall include
instructions to transmit the amount to be paid to ITN.
b) Donnelley shall pay ITN the amount invoiced within forty-five (45)
days after receipt of the invoice. Any amounts not paid by Donnelley
to ITN by the due date shall accrue interest at the rate of one and
one-half percent (1-1/2%) per month, compounded monthly from the date
the amount were due until paid. Acceptance by ITN of any payment after
the due date shall not constitute a waiver of any rights under this
Agreement and the payment of an invoice by Donnelley shall not
constitute acceptance or waiver of any rights or claim that Donnelley
may have with respect to this Agreement or ITN's performance of its
obligations.
11. DONNELLEY RIGHT TO REJECT. In the event Donnelley determines that any
Audiotext Information on the System is objectionable for any reasonable reason
as set forth below and notifies ITN, ITN shall have the obligation to cure the
objected to matter by electing to, remove or revise such Audiotext Information
within two (2) business days of notice of Donnelley's objections. Programming
may be considered objectionable if it is; (i) of inadequate transmission
quality as determined by Donnelley or (ii) containing objectionable program
material. Objectionable program material shall include (i) material prohibited
by applicable federal, state, or local law, (ii) material which contains
obscene, indecent, lewd, lascivious, or sexually explicit content, as
determined by Donnelley (iii) material containing profanity, (iv) any material
which, in the reasonable opinion of Donnelley, is likely to damage the
reputation of Donnelley, or (v) is objectionable to the publishers of the
Directories that are Donnelley's clients or partners. ITN's
CONFIDENTIAL
<PAGE> 14
SERVICE AGREEMENT
10/17/96
PAGE 14
refusal to cure, remove or revise such information within five business days of
notice of Donnelley's objection will be considered a material breach of this
Agreement
12. INDEMNIFICATION AND THIRD-PARTY CLAIMS. While neither Donnelley nor ITN
insures or guarantees that there will be no errors, failures or omissions in
the production or transmission of Audiotext Information of the System, the
Parties acknowledge that suits may be instituted or claims filed against either
of the Parties with respect to the production or transmission of the Audiotext
Information or operation of the System and/or Network. In such event, ITN and
Donnelley agree that the Party primarily responsible, as mutually agreed upon
by the Parties, for the error will indemnify, defend and hold harmless the
other Party from any liability to any third Party resulting to such Party. ITN
and Donnelley shall fully cooperate in the defense of third-party claims and
lawsuits. In the event that responsibility for the third-party claims and
lawsuits cannot be allocated primarily to one Party, ITN and Donnelley each
shall bear their own costs, including attorney's fees, of defending such claims
or lawsuits and shall negotiate in good faith a reasonable allocation of said
responsibility for third-party liability. Nothing in the foregoing shall be
deemed or interpreted as limiting the rights of either Party to seek such legal
or equitable relief as it determines to be appropriate from the other Party.
13. TERMINATION. This Agreement may terminate (although certain obligations
shall continue as provided) prior to the end of its term if either Party
materially breaches this Agreement and such material breach has not been cured
(where feasible) within thirty (30) days of the breaching Party's receipt of
written notice of the material breach from the other Party. If the breach has
not been cured, the non-breaching Party has the right to (1) terminate this
Agreement upon notice to the other Party effective with the publication of the
successor Directory to any Directories in canvass or such earlier date as the
non-breaking party may select, provided that adequate arrangements have been
made to assure that audiotext advertiser obligations have been and will met,
(2) attempt to have this Agreement specifically performed, or (3) to pursue
other equitable or legal remedies with respect to such material breach instead
of terminating this Agreement.
CONFIDENTIAL
<PAGE> 15
SERVICE AGREEMENT
10/17/96
PAGE 15
Termination of this Agreement pursuant to this provision shall not preclude any
legal or equitable remedies otherwise available for any material breach of this
Agreement.
a) In the event that this Agreement is terminated as the result
of breach by ITN, ITN on termination, will supply Donnelley with such
customer records, advertising and any other material that is needed
to continue providing audiotext services in support of Directories
then in publication or in canvass.
14. AUDIT.
a) Upon reasonable notice and during reasonable business hours,
Donnelley may audit ITN's records to the extent the records pertain
to sales, customer service, billing and collections of accounts
pursuant to this Agreement.
b) Upon reasonable notice and during reasonable business hours, ITN may
audit Donnelley's records which pertain to phone line operation for
audiotext services offered pursuant to this Agreement.
c) If a dispute arises as a result of an audit, and the dispute cannot
be resolved, the Party having requested an audit shall engage, at its
expense, a mutually acceptable independent nationally recognized
accounting firm to audit the other Party's records. The results of
such independent audit shall be binding on both Parties, and the
Party not prevailing in the dispute shall be required to
reimburse the Party prevailing, of any expense of the audit.
15. TRADE SECRETS. Each Party acknowledges that in the course of its
performance of responsibilities under this Agreement, the Party is likely to
have had access to and acquire knowledge of information, including formulas,
patterns, combinations, programs, devices,
CONFIDENTIAL
<PAGE> 16
SERVICE AGREEMENT
10/17/96
PAGE 16
methods, techniques or processes that derive independent economic value, actual
or potential, from not being generally known to the public or to other persons
who can obtain economic value from its disclosure or use; and, are the subject
of efforts by the Party that are reasonable under the circumstances to maintain
their secrecy such that this information constitutes trade secrets that are
proprietary to the Party owning such Secrets. Each Party further acknowledges
that any conveyance, transfer or communication in any manner of such trade
secrets to third parties whether directly or indirectly would be improper and
that such transferal would constitute a misappropriation of the trade secret
that would occasion all available legal sanctions for such misappropriation of
a trade secret. All records, files, drawings, documents, models, equipment and
the like relating to the businesses of a Party which the other Party may use,
prepare or come in contact with during the performance of this Agreement, shall
be and remain the sole property of the Party owning such secret All
proprietary and intellectual rights associated with the work product prepared
by a Party under this Agreement shall be the property of the preparing Party.
16. INDEPENDENT CONTRACTOR. Each Party undertakes its responsibilities under
this Agreement as an independent contractor. A Party's personnel participating
in the performance of this Agreement shall remain that Party's employees.
There shall be no employer-employee relationship between the employees of one
Party and the other Party.
17. EQUAL OPPORTUNITY. ITN shall comply as required by law with all applicable
portions of the non-discrimination compliance provisions appended to this
Agreement and labeled "non-discrimination provision" and if requested by
Donnelley shall sign and return to Donnelley a non-discrimination compliance
certificate.
18. NOTICES. Any notice or agreement shall be in writing and shall be
conclusively deemed to have been received and to be effective on the date on
which received at the office of the recipient, or if sent by registered or
certified mail, on the third business day after the day on which it was
CONFIDENTIAL
<PAGE> 17
SERVICE AGREEMENT
10/17/96
PAGE 17
mailed. Any notices, consents or other communications hereunder shall be sent
as follows (unless such addresses are modified by either of the parties):
If to Donnelley:
-----------------
John P. McDonald and to Joseph A. DeBlasio
General Counsel Vice President
& Senior Vice President The Reuben H. Donnelley Corporation
The Reuben H. Donnelley Corporation 287 Bowman Avenue
287 Bowman Ave Purchase, NY 10577
Purchase, NY 10577
If to ITN:
-----------
Scott Bedford
Chief Operating Officer
IT Network, Inc.
One Glen Lakes
8140 Walnut Hill Lane #1000
Dallas, Texas 75231
19. ITN EQUIPMENT LOCATED AT DONNELLEY SITES ***.
CONFIDENTIAL
<PAGE> 18
SERVICE AGREEMENT
10/17/96
PAGE 18
20. PUBLIC STATEMENTS. ITN shall not originate any written or oral statement,
news release, or other public announcement or publication, relating to its
retention by Donnelley or relating to Donnelley, its subsidiaries, its
customers, its personnel, or agents without the prior written approval of
Donnelley through its authorized representative. ITN also agrees that he will
not use in any public written or oral statement, news release, or other public
announcement or publication, the indicia or name of Donnelley, or of any of its
subsidiaries, its customers, its personnel, or agents without the prior written
consent of Donnelley through its authorized representative.
21. FORCE MAJEURE.
a) If any Party hereto shall be prevented from performing any of its
obligation under this Agreement because of any act of God, lockout,
strike or other labor dispute, riot or civil commotion, act of public
enemy, law, order or act of government, whether federal, state or
local, or other similar event beyond the Party's control, hereafter
referred to as a "force majeure event," then that Party shall be
excused from performing any of its obligations which are so
prevented. However, the Party so excused is responsible for
performing those obligations, of which it had been relieved due to
the force majeure event, as soon as the force majeure event has
ceased to prevent the Party's performance.
b) Donnelley's obligation under this Agreement to remit payment for
invoices issued by ITN shall not be excused by any force majeure
event, provided however that ITN shall proportionately reduce the
invoice to Donnelley to account for the day(s) and/or the
Directory(ies) for which the Audiotext Information was not available.
And, similarly the Initial Term Amount will be reduced
proportionately to account for the day(s) and/or Directory(ies) for
which the Audiotext Information was not available.
CONFIDENTIAL
<PAGE> 19
SERVICE AGREEMENT
10/17/96
PAGE 19
22. AMENDMENT AND MODIFICATION. No amendment or modification of any terms,
conditions or provisions of this Agreement, shall be valid or of any effect
except when an amendment or modification is in writing and signed by the
parties.
23. ASSIGNMENT. Neither Party may assign this Agreement, without the express
prior written consent of the other which consent will not be unreasonably
withheld. Notwithstanding the above, either Party may assign this Agreement to
a parent, to wholly-owned affiliates or to an affiliate wholly-owned by a
parent so long as the original Party remains obligated for all obligations set
forth in this Agreement.
24. WAIVER. The failure of ITN or Donnelley at any time to require performance
by the other Party of any provision of this Agreement shall not affect the
Party's right to require such performance at any time thereafter, nor shall the
waiver by either Party of a breach of any provision of this Agreement
constitute a waiver of any succeeding breach of the same or any other
provision.
25. BINDING EFFECT. This Agreement shall be binding upon and shall inure to
the benefit of the Parties and their respective successors and assigns.
26. SEVERABILITY. If any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision will be ineffective only to
the extent of such prohibition or invalidity, without invalidating the
remainder of such provision or the remaining provisions of this Agreement,
provided that the provision held to be invalid is not material to the operation
of this Agreement or the intentions of the Parties.
CONFIDENTIAL
<PAGE> 20
SERVICE AGREEMENT
10/17/96
PAGE 20
27. GOVERNING LAW. The validity, performance, construction and effect of this
Agreement shall be governed by the laws of the State of New York and the site
of any controversy, claim, arbitration or litigation shall be in Westchester
County, New York.
28. ENTIRE AGREEMENT. This Agreement constitutes the entire Agreement between
the Parties and supersedes all prior agreements, representations, warranties,
statements, promises, information, arrangements, and understandings, whether
oral, written, express or implied with respect to the subject matter hereof,
with the sole exception of a non-disclosure Agreement signed between the
Parties on May 20, 1996.
IN WITNESS WHEREOF, the Parties have cause their respective
representatives duly authorized to sign this Agreement on their behalf.
THE REUBEN H. DONNELLEY CORPORATION
By:
---------------------------------
Title:
------------------------------
IT NETWORK, INC.
By:
---------------------------------
William Scott Bedford
Title: Chief Operating Officer
CONFIDENTIAL
<PAGE> 21
APPENDIX A
REUBEN H. DONNELLEY
AUDIOTEX OPERATIONS
ASSET INVENTORY -- OWNERSHIP
<TABLE>
<CAPTION>
# OF
SITE NODE SERIAL # ITEM
---- ---- -------- ----
<S> <C> <C> <C>
***
</TABLE>
<PAGE> 22
<TABLE>
<CAPTION>
# OF
SITE NODE SERIAL # ITEM
---- ---- -------- ----
III. STUDIO EQUIPMENT
<S> <C> <C> <C>
***
</TABLE>
<PAGE> 23
ASSET INVENTORY - BOOKS AND PERIODICALS
----------------------------------------
***
<PAGE> 24
APPENDIX B
SOFTWARE
<TABLE>
<CAPTION>
ITEM NAME STATUS
- ---- ---- ------
<S> <C> <C>
***
</TABLE>
<PAGE> 25
APPENDIX C
REUBEN H. DONNELLEY
<TABLE>
<CAPTION>
CLIENT DIRECTORY
- ---------------------------------- ----------------------------------
<S> <C>
***
</TABLE>
<PAGE> 26
APPENDIX A
REUBEN H. DONNELLEY
AUDIOTEX OPERATION OUTSOURCING
CLIENT & DIRECTORY LIST
-----------------------
October 9, 1996
CLIENT DIRECTORY
-------------------------- ----------------------------
***
<PAGE> 27
CLIENT & DIRECTORY LIST
PAGE 2
***
<PAGE> 28
APPENDIX B
AUDIOTEXT CONTENT PROVIDERS
AGREEMENTS TO BE ASSIGNED OR CANCELLED
<TABLE>
<CAPTION>
NAME DESCRIPTION
---- -----------
<S> <C>
***
</TABLE>
<PAGE> 29
APPENDIX C
REUBEN H. DONNELLEY
AUDIOTEX OPERATIONS
LEASED SERVERS
<TABLE>
<CAPTION>
SITE PUBLISHER SERIAL # # OF ITEM
- ---- --------- -------- ---------
<S> <C> <C> <C>
***
</TABLE>
<PAGE> 30
APPENDIX D
GUARANTEED PAYMENT SCHEDULE
Fixed Monthly Amounts
FROM DONNELLEY TO SOURCE MEDIA
<TABLE>
<CAPTION>
PAYMENT # DATE AMOUNT
--------- ---- ------
<S> <C> <C> <C>
YEAR ONE: 1 01-Nov-96 $ ***
2 01-Dec-96 ***
3 01-Jan-97 ***
4 01-Feb-97 ***
5 01-Mar-97 ***
6 01-Apr-97 ***
7 01-May-97 ***
8 01-Jun-97 ***
9 01-Jul-97 ***
10 01-Aug-97 ***
11 01-Sep-97 ***
12 01-Oct-97 ***
YEAR TWO: 13 01-Nov-97 $ ***
14 01-Dec-97 ***
15 01-Jan-98 ***
16 01-Feb-98 ***
17 01-Mar-98 ***
18 01-Apr-98 ***
19 01-May-98 ***
20 01-Jun-98 ***
21 01-Jul-98 ***
22 01-Aug-98 ***
23 01-Sep-98 ***
24 01-Oct-98 ***
YEAR THREE: 25 01-Nov-98 $ ***
26 01-Dec-98 ***
27 01-Jan-99 ***
28 01-Feb-99 ***
29 01-Mar-99 ***
30 01-Apr-99 ***
31 01-May-99 ***
32 01-Jun-99 ***
33 01-Jul-99 ***
34 01-Aug-99 ***
35 01-Sep-99 ***
36 01-Oct-99 ***
</TABLE>
<PAGE> 1
EXHIBIT 11.1
SOURCE MEDIA, INC.
COMPUTATION OF SUPPLEMENTAL LOSS PER COMMON SHARE
<TABLE>
<CAPTION>
Three months ended Sept. 30, Nine months ended Sept. 30,
---------------------------- ---------------------------
1995 1996 1995 1996
------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Weighted average IT shares outstanding 3,917,669 9,934,238 2,275,776 9,932,528
Net effect of common shares that would have been outstanding
upon the conversion of IT's preferred shares, assuming the
merger took place at the beginning of the respective periods - - 1,029,910 -
Net effect of additional shares equal to that portion of the shares
held by HBAC stockholders assumed to have been issued in order
to repay $4.1 million of IT debt and related accrued interest
outstanding for each period - - 164,048 -
Net effect of HBAC shares assumed at the date of the merger,
less shares assumed necessary to repay $4.1 million of IT debt
and related accrued interest outstanding for each period - - 131,740 -
----------- ----------- ----------- -----------
Weighted average common shares 3,917,670 9,934,238 3,601,474 9,932,528
Net loss $(2,176,175) $(4,147,180) $(7,620,502) $(9,168,398)
Plus impact of interest expense related to the $4.1 million of IT
debt and related accrued interest repaid with the proceeds of the - - $ 130,979 -
merger
Loss for per share computations $(2,176,175) $(4,147,180) $(7,489,523) $(9,168,398)
=========== =========== =========== ===========
Supplemental net loss per common share $ (0.56) $ (0.42) $ (2.08) $ (0.92)
=========== =========== =========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 12,159,425
<SECURITIES> 0
<RECEIVABLES> 1,048,609
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,513,668
<PP&E> 6,069,710
<DEPRECIATION> 3,315,340
<TOTAL-ASSETS> 19,154,715
<CURRENT-LIABILITIES> 7,001,803
<BONDS> 4,580,365
0
0
<COMMON> 10,317
<OTHER-SE> 4,626,738
<TOTAL-LIABILITY-AND-EQUITY> 19,154,715
<SALES> 14,447,319
<TOTAL-REVENUES> 14,447,319
<CGS> 10,748,998
<TOTAL-COSTS> 13,269,063
<OTHER-EXPENSES> (762,961)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 360,617
<INCOME-PRETAX> (9,168,398)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,168,398)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,168,398)
<EPS-PRIMARY> $(0.92)
<EPS-DILUTED> $(0.92)
</TABLE>
