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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
JUNE 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 AUGUST 12, 1996: 9,934,011
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SOURCE MEDIA, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1996
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page Number
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<S> <C>
ITEM 1. Consolidated Financial Statements
Consolidated Balance Sheets (Unaudited) .................. 3
June 30, 1996 and December 31, 1995
Consolidated Statements of Operations (Unaudited) ........ 5
Three and six months ended June 30, 1996 and 1995
Consolidated Statements of Cash Flows (Unaudited) ........ 6
Six months ended June 30, 1996 and 1995
Notes to Consolidated Financial Statements ............... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ............................ 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ........................................ 19
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 ...... 20
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, JUNE 30,
1995 1996
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $17,479,223 $17,269,537
Trade accounts receivable, less allowance
for doubtful accounts 1,076,239 1,061,676
Prepaid expenses and other current assets 892,234 622,698
Deferred expenses 889,393 740,047
----------- -----------
Total current assets 20,337,089 19,693,958
Property and equipment:
Production equipment 2,421,816 2,251,641
Computer equipment 927,672 1,457,690
Other equipment 960,446 1,168,708
Furniture and fixtures 120,544 123,747
----------- -----------
4,430,478 5,001,786
Accumulated depreciation 2,670,017 3,089,403
----------- -----------
Net property and equipment 1,760,461 1,912,383
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 5,026,102
----------- -----------
Net intangible assets 2,097,692 1,582,024
Other non-current assets -- 374,145
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Total assets $24,195,242 $23,562,510
=========== ===========
</TABLE>
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SOURCE MEDIA, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996
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<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 1,296,516 $ 1,023,486
Accrued payroll 258,734 195,382
Other accrued liabilities 1,650,091 1,591,113
Unearned income 4,724,957 4,605,612
Current portion of capital lease obligations 184,175 173,259
------------ ------------
Total current liabilities 8,114,473 7,588,852
Long-term debt, net of discount -- 4,255,420
Capital lease obligations, less current portion 35,039 20,231
Minority interests in consolidated subsidiaries 3,618,629 3,509,305
Note receivable and accrued interest from minority
stockholder, net of discount of $178,866 and
$158,009 in 1995 and 1996, respectively (610,175) (638,512)
------------ ------------
3,008,454 2,870,793
Stockholders' equity:
Common stock, $.001 par value:
Authorized shares - 50,000,000
Issued shares - 10,303,605 and 10,315,362 in 1995
and 1996, respectively 10,304 10,315
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 60,746,256
Accumulated deficit (43,076,663) (48,097,881)
Foreign currency translation (34,619) (8,829)
Notes receivable and accrued interest
from stockholders (301,575) (65,006)
------------ ------------
Total stockholders' equity 13,037,276 8,827,214
------------ ------------
Total liabilities and stockholders' equity $ 24,195,242 $ 23,562,510
============ ============
</TABLE>
See accompanying notes.
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SOURCE MEDIA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1995 1996 1995 1996
----------------------------- -----------------------------
<S> <C> <C> <C> <C>
Monetary revenues $ 2,389,283 $ 2,304,488 $ 4,704,850 $ 4,586,356
Nonmonetary revenues 4,132,377 2,795,808 8,900,994 5,674,981
----------------------------- -----------------------------
Total revenues 6,521,660 5,100,296 13,605,844 10,261,337
Monetary cost of sales 1,287,560 900,177 2,616,328 1,852,511
Nonmonetary cost of sales 4,132,377 2,795,808 8,900,994 5,674,981
----------------------------- -----------------------------
Total cost of sales 5,419,937 3,695,985 11,517,322 7,527,492
----------------------------- -----------------------------
Gross profit 1,101,723 1,404,311 2,088,522 2,733,845
Selling, general and administrative expenses 2,004,176 2,581,447 3,985,755 4,969,605
Amortization of intangible assets 257,834 257,834 515,669 515,668
Research and development expenses 849,996 1,429,330 1,546,916 2,650,803
----------------------------- -----------------------------
3,112,006 4,268,611 6,048,340 8,136,076
----------------------------- -----------------------------
Operating loss (2,010,283) (2,864,300) (3,959,818) (5,402,231)
Interest expense 165,463 187,751 325,355 192,710
Interest income (21,494) (226,000) (41,993) (438,784)
Other (income) expense (18,736) (19,524) (4,708) (25,615)
Minority interest in losses of consolidated subsidiaries (304,805) (5,965) (375,395) (109,324)
Charges related to financing incentives 1,371,875 -- 1,581,250 --
----------------------------- -----------------------------
Net loss (3,202,586) (2,800,562) (5,444,327) (5,021,218)
Preferred stock dividends 445,658 -- 832,651 --
Net loss attributable to common shareholders $ (3,648,244) $ (2,800,562) $ (6,276,977) $ (5,021,218)
============================= =============================
Net loss per common share $ (0.75) $ (0.28) $ (1.34) $ (0.51)
============================= =============================
Weighted average common shares outstanding 4,840,437 9,927,172 4,674,849 9,931,664
============================= =============================
</TABLE>
See accompanying notes.
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SOURCE MEDIA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1995 1996
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<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (5,444,327) $ (5,021,218)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 443,906 419,386
Amortization of intangible assets 515,669 515,668
Provision for losses on accounts receivable 67,336 93,575
Minority interests in net losses (375,395) (109,323)
Charges related to financing incentives 1,581,250 --
Interest receivable from stockholders and minority interests (37,647) (12,989)
Other amortization charges, net 57,185 85
Changes in operating assets and liabilities:
Trade accounts receivable 87,917 (79,013)
Prepaid expenses and other current assets 63,598 269,536
Deferred expenses 133,712 149,346
Trade accounts payable 81,299 (273,028)
Accrued payroll 61,577 (63,352)
Other accrued liabilities 88,810 (58,978)
Other accrued liabilities to related parties (109,414) --
Unearned income (297,800) (119,347)
------------ ------------
Net cash used in operating activities (3,082,324) (4,289,652)
INVESTING ACTIVITIES
Capital expenditures (155,435) (481,289)
------------ ------------
Net cash used in investing activities (155,435) (481,289)
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 (1,105,315) --
Redemption of HBAC shares (527,220) --
Payments on debt (4,050,000) --
Payment of fees and expenses associated with
issuance of debt and warrant -- (393,836)
Payments on capital lease obligations (83,128) (115,744)
Proceeds from issuance of common stock 244,230 75,088
Other -- (30,043)
------------ ------------
Net cash provided by financing activities 6,194,956 4,535,465
Effect of exchange rate changes on cash and cash equivalents (37,534) 25,790
Net increase (decrease) in cash and cash equivalents 2,919,663 (209,686)
Cash and cash equivalents at beginning of period 127,010 17,479,223
------------ ------------
Cash and cash equivalents at end of period $ 3,046,673 $ 17,269,537
============ ============
</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"). 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 June 30,
1995 was $(0.45). Supplemental net loss per common share for the six months
ended June 30, 1995 was $(0.77). Supplemental net loss per common share and
supplemental weighted average common shares outstanding (7,023,825 for the
quarter ended June 30, 1995 and 6,881,970 for the six months ended June 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 shares equal to that portion of the common shares held by HBAC
stockholders assumed to have been issued in order to repay the
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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
In April 1996, the Company issued senior notes in the aggregate 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 in the aggregate principal amount of $5.0 million may
be issued on or before April 3, 1997 provided certain conditions are met. In
connection with this commitment, if certain conditions are met, the Company is
also 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, whether or not the Company issues any additional
notes. The notes 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). 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-dilutive 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. 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
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defendants and Cdn $6,000,000 in damages for losses of stock options
allegedly caused by the actions of the defendants.
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 result of
operations of the Company.
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.
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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, through its wholly-owned subsidiary IT Network, Inc. ("IT"),
is a provider of information and services to consumers through the television
and telephone. 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 and development expenses related to the
Interactive Channel and the Company's 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 pending introduction of the Interactive Channel.
The Company intends to devote its resources towards the development of the
Interactive Channel and its On-Line Telephone Business and has elected to
discontinue its on-line personal computer services.
The Company has earned monetary revenues through advertising sponsorships
in 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"). 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 provide the Company with advertising time on
their stations and update local news, weather
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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 RBOC agreements with Southwestern Bell Yellow
Pages, Inc. ("Southwestern Bell") and Ameritech Advertising Services
("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, 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 is presently in discussions with Cableshare regarding the
possibility of the Company acquiring the outstanding shares of Cableshare
stock that it does not already own. The discussions to date between the two
companies have been tentative and preliminary, and agreement-in-principle has
not been reached between the companies on essential commercial terms and
conditions. Any such transaction would depend on the negotiation of a mutually
satisfactory definitive agreement containing such terms and conditions,
obtaining applicable governmental and regulatory approval, and the approval of
Cableshare's stockholders other than the Company. The Company has not made a
specific proposal.
On June 23, 1995, IT merged with a wholly-owned subsidiary of HBAC.
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.
RESULTS OF OPERATIONS
Three Months Ended June 30, 1996 and 1995
Monetary revenues declined four percent to $2.3 million for the
quarter ended June 30, 1996 from $2.4 million for the quarter ended June 30,
1995. The net decline of $85,000 included declines of $270,000 attributable to
the Company's Consumer Tips service and $257,000 attributable to the Network
Guide product. These declines were partially offset by increases of $190,000
in Cableshare revenues, $128,000 in revenues attributable to product
development trials of the Interactive Channel and $124,000 related to the
Company's other
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audiotext services and the Company's recently discontinued on-line
personal computer services.
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. 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 decline in Network Guide monetary revenues primarily reflects the
termination of distribution of the Network Guide in seven designated market
areas ("DMAs"), six of which are located within the Southwestern Bell region.
Total Network Guide revenues within the seven terminated DMAs were $28,000 for
the quarter ended June 30, 1996 and $320,000 for the quarter ended June 30,
1995. In addition, the Company experienced lower sales of advertising
contracts associated with uncertainties relating to the termination of the
Ameritech agreement. However, these decreases in revenues were partially
offset by a net increase in Network Guide monetary revenues among the
Company's 47 other DMAs.
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 Company does not
expect the Network Guide to be 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. The Company expects to partially offset such revenue declines in
future periods with revenues generated through 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 major DMAs on
the east coast. Total monetary revenues for the both the Network Guide and
Consumer Tips products in the Ameritech region were $470,000 for the quarter
ended June 30, 1996 and $810,000 for the quarter ended June 30, 1995.
The increase in Cableshare's revenues in the second quarter of 1996
compared with the same period in 1995 reflects certain hardware and software
sales to Southern Development & Investment Group, Inc. related to a trial of
Interactive Channel technology.
Nonmonetary revenues and nonmonetary cost of sales declined 32 percent to
$2.8 million for the quarter ended June 30, 1996 from $4.1 million for the
quarter ended June 30, 1995. Substantially all of this $1.3 million decline in
nonmonetary revenues and nonmonetary cost of sales occurred because of the
termination of distribution agreements in certain DMAs
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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 Southwestern Bell's decision
not to renew its distribution agreements for the Network Guide and Ameritech's
termination of its agreement with the Company, the Company expects its
nonmonetary revenues and nonmonetary cost of sales to decline substantially in
1996.
Monetary cost of sales declined 30 percent to $900,000, or 39 percent of
monetary revenues, for the quarter ended June 30, 1996 from $1.3 million, or
54 percent of monetary revenues, for the quarter ended June 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 second 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 $487,000 and $509,000, respectively, a four percent decline, reflecting
lower monetary revenues in those RBOC regions pursuant to revenue sharing
agreements, (ii) Yellow Pages purchase expenses of $139,000 and $339,000,
respectively, a 59 percent decline, reflecting the termination of distribution
in certain DMAs in 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, (iii) operations personnel salaries of $113,000 and $141,000,
respectively, a 20 percent decline, and (iv) telephone line charges of $64,000
and $96,000, respectively, a 33 percent decline, primarily reflecting fewer
DMAs in the Southwestern Bell region.
Selling, general and administrative expenses, including amortization of
intangible assets increased 26 percent to $2.8 million for the quarter ended
June 30, 1996 from $2.3 million for the quarter ended June 30, 1995. This
increase resulted primarily from $340,000 of increased expenses associated
with the Company's recently discontinued on-line personal computer services as
well as increased subscriber acquisition costs in preparation for the
commercial introduction of the Company's Interactive Channel.
Research and development expenses increased 68 percent to $1.4 million
for the quarter ended June 30, 1996 from $850,000 for the quarter ended June
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, (ii) the modification
of the Cableshare on-line television technology to operate on a UNIX-based
platform, and (iii) the development of a Windows-based media presentation
workstation.
Other. Net interest income was $38,000 for the quarter ended June 30,
1996 compared with net interest expense of $144,000 for the quarter ended June
30, 1995, reflecting interest
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earned on the proceeds from a public offering of the Company's common
stock in December 1995. Charges related to financing incentives for the
quarter ended June 30, 1995 included $1.4 million related to the issuance of
warrants in January and May 1995.
Six Months Ended June 30, 1996 and 1995
Monetary revenues declined three percent to $4.6 million for the six
months ended June 30, 1996 from $4.7 million for the six months ended June 30,
1995. The net decline of $118,000 included declines of $588,000 attributable
to the Network Guide product and $403,000 attributable to the Company's
Consumer Tips service. These declines were partially offset by increases of
$459,000 in Cableshare revenues, $222,000 in revenues related to the Company's
other audiotext services and recently discontinued on-line personal computer
services and $192,000 in revenues attributable to product development trials
of the Interactive Channel. The decline in Network Guide monetary revenues
primarily reflects the termination of distribution in seven DMAs, six of which
are located within the Southwestern Bell region. Total Network Guide revenues
within the seven terminated DMAs were $58,000 for the six months ended June
30, 1996 and $604,000 for the six months ended June 30, 1995.
Additionally, there was a net decline in Network Guide monetary revenues
among the Company's 47 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. The Company expects to partially offset such revenue declines
in future periods with revenues generated through its recently-signed sales
agency agreement with Donnelly to sell the Network Guide in Yellow Pages
published by Donnelly in four major DMAs on the east coast. Total monetary
revenues for both the Network Guide and Consumer Tips products in the
Ameritech region were $1.1 million for the six months ended June 30, 1996 and
$1.6 million for the six months ended June 30, 1995.
The increase in Cableshare's revenues in the second quarter 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 to end
litigation between Cableshare and GTE as well as certain hardware and software
sales to Southern Development related to a trial of Interactive Channel
technology.
Nonmonetary revenues and nonmonetary cost of sales declined 36 percent to
$5.7 million for the six months ended June 30, 1996 from $8.9 million for the
six months ended June 30, 1995. Substantially all of this $3.2 million decline
in nonmonetary revenues and
14
<PAGE> 15
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 Southwestern Bell's decision not to renew its
distribution agreements for the Network Guide and Ameritech's termination of
its agreement with the Company, the Company expects its nonmonetary revenues
and nonmonetary cost of sales to decline substantially in 1996.
Monetary cost of sales declined 29 percent to $1.9 million, or 40 percent
of monetary revenues, for the six months ended June 30, 1996 from $2.6
million, or 56 percent of monetary revenues, for the six months ended June 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 region. Monetary cost of sales for the first six 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 $939,000 and $1,043,000, respectively, a 10 percent decline, reflecting
lower monetary revenues in those RBOC regions pursuant to revenue sharing
agreements, (ii) Yellow Pages purchase expenses of $283,000 and $698,000,
respectively, a 59 percent decline, reflecting the termination of distribution
in certain DMAs in 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, (iii) operations personnel salaries of $254,000 and $301,000,
respectively, a 16 percent decline, (iv) telephone line charges of $132,000
and $183,000, respectively, a 30 percent decline, primarily reflecting fewer
DMAs in the Southwestern Bell region, and (v) satellite transmission charges
of $101,000 and $182,000, respectively, a 44 percent decline.
Selling, general and administrative expenses, including amortization of
intangible assets increased 20 percent to $5.5 million for the six months
ended June 30, 1996 from $4.6 million for the six months ended June 30, 1995.
This increase resulted primarily from $577,000 of increased expenses
associated with the Company's recently discontinued on-line personal computer
services as well as increased subscriber acquisition costs in preparation for
the commercial introduction of the Company's Interactive Channel.
Research and development expenses increased 81 percent to $2.7 million
for the six months ended June 30, 1996 from $1.5 million for the six months
ended June 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,
(ii) the modification of the Cableshare on-line television technology to
operate on a UNIX-based platform and (iii) the development of a Windows-based
media presentation workstation.
15
<PAGE> 16
Other. Net interest income was $246,000 for the six months ended June 30,
1996 compared with net interest expense of $283,000 for the quarter ended June
30, 1995, reflecting interest earned on the proceeds from a public offering of
the Company's common stock in December 1995, as well as the absence in 1996 of
certain debt outstanding. Charges related to financing incentives for the six
months ended June 30, 1995 included $1.6 million related to the issuance of
warrants in January and May 1995.
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 June 30, 1996, the Company had an accumulated
deficit of approximately $48.1 million and had used cumulative net cash in
operations of $29.0 million. The difference at June 30, 1996 between the
accumulated deficit since inception and cumulative net cash used in operations
since inception was attributable to (i) $15.1 million associated with
nonmonetary charges related to financing incentives, write-down of intangible
assets, depreciation and amortization and other non-cash expenses and (ii)
$4.0 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 $17.3 million at June 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 the Company's 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.
In April, 1996, the Company entered into a Note Agreement (the "Senior
Note Agreement") with Northstar Advantage High Total Return Fund ("Northstar")
pursuant to which the Company issued senior notes in the aggregate principal
amount of $5,000,000 and a warrant entitling the holder thereof to purchase
500,000 shares of Common Stock at a purchase price of $10.21 per share.
Additional notes in the aggregate principal amount of $5,000,000 may be issued
to Northstar on or before April 3, 1997 provided certain conditions are met.
In connection with this commitment, if such conditions are met, the Company is
also obligated to issue a second warrant to Northstar entitling the holder to
purchase up to 500,000 shares of Common Stock at a purchase price of $10.21
per share, whether or not the Company
16
<PAGE> 17
issues any additional notes. The notes are due on March 31, 2001 and bear
interest at the rate of 13% 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). 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 Cableshare and the 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-dilutive provisions. The Company also granted the
holders of the warrants demand and "piggyback" registration rights covering
the shares of Common Stock issuable upon exercise of the warrants.
During the twelve months ending December 31, 1996, the Company intends to
invest at least $2.5 million in additional property and equipment, primarily
related to the anticipated introduction of the Interactive Channel. As of
February 21, 1996, the Company caused the issuance of a letter of credit in
the amount of $818,000 to an Asian manufacturer in connection with the
production of cable television set-top boxes. As of July 18, 1996, the Company
caused the issuance of an additional letter of credit in the amount of
$625,000 to the same Asian manufacturer for additional set-top boxes.
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, of which $4.0
million had already been paid as of August 1, 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.
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 Note Agreement, will be
sufficient to finance the commercial introduction of the Interactive Channel
on several United States cable systems beginning in the third quarter 1996 and
the further deployment and 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. Thereafter, if cash generated by
operations is
17
<PAGE> 18
insufficient to satisfy the Company's liquidity requirements, the Company may
attempt to sell additional equity securities or incur additional debt.
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.
18
<PAGE> 19
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. On May 17, 1994, William T. Little, a stockholder and former
director of the Company, represented in a letter to the Company that a
potential lawsuit existed by various convertible noteholders, alleging that
they converted their notes based upon misrepresentations by the Company. In
September 1995, Mr. Little subsequently claimed in writing 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.
19
<PAGE> 20
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 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
Source Media, Inc. held its Annual Meeting of Stockholders on May 22,
1996 ("Annual Meeting").
Proxies for the Annual Meeting were solicited pursuant to Regulation 14
under the Securities Exchange Act of 1934; there was no solicitation in
opposition to management's nominees for directors as listed in the
Proxy Statement for the Annual Meeting.
Briefly described below are the matters voted upon at the Annual
Meeting and the number of votes for, against and abstaining with
respect to such matters.
Proposal to elect Timothy P. Peters to serve as a director of the
Company for the ensuing year and until his successor is elected and
qualified.
For 8,016,019
Against 0
Abstain or Authority Withheld 15,400
Proposal to elect William S. Bedford to serve as a director of the
Company for the ensuing year and until his successor is elected and
qualified.
20
<PAGE> 21
For 8,016,019
Against 0
Abstain or Authority Withheld 15,400
Proposal to elect John J. Reed to serve as a director of the Company
for the ensuing year and until his successor is elected and qualified.
For 8,016,019
Against 0
Abstain or Authority Withheld 15,400
Proposal to elect David L. Kuykendall to serve as a director of the
Company for the ensuing year and until his successor is elected and
qualified.
For 8,015,519
Against 0
Abstain or Authority Withheld 15,900
Proposal to elect Alan M. Flaherty to serve as a director of the
Company for the ensuing year and until his successor is elected and
qualified.
For 8,016,019
Against 0
Abstain or Authority Withheld 15,400
Proposal to elect John F. Baring to serve as a director of the Company
for the ensuing year and until his successor is elected and qualified.
For 8,019,019
Against 0
Abstain or Authority Withheld 12,400
Proposal to elect Rhodric C. Hackman to serve as a director of the
Company for the ensuing year and until his successor is elected and
qualified.
For 8,019,519
Against 0
Abstain or Authority Withheld 11,900
Proposal to elect Michael J. Marocco to serve as a director of the
Company for the ensuing year and until his successor is elected and
qualified.
For 8,016,019
Against 0
Abstain or Authority Withheld 15,400
Proposal to elect James L. Greenwald to serve as a director of the
Company for the ensuing year and until his successor is elected and
qualified.
For 8,015,519
Against 0
Abstain or Authority Withheld 15,900
21
<PAGE> 22
Proposal to approve the 1995 Nonqualified Stock Option Plan for
Non-Employee Directors:
For 6,570,863
Against 50,950
Abstain 22,563
Proposal to amend the 1995 Performance Equity Plan:
For 6,581,370
Against 50,090
Abstain 12,916
Proposal to ratify the appointment of Ernst & Young LLP as independent
auditors for the Company for the 1996 fiscal year:
For 8,009,765
Against 7,600
Abstain 5,054
Item 5 - Other Information - not applicable
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits:
10.1 Sales Agency Agreement by and between The Reuben H. Donnelly
Corporation and IT Network, Inc., dated May 20, 1996.
10.2 License Agreement by and between WinStar New Media Co., Inc.
and Source Media, Inc., dated June 6, 1996.
11.1 Computation of Supplemental Earnings Per Share.
27 Financial Data Schedule.
(b) Reports on Form 8-K during the three months ended June 30, 1996.
Form 8-K filed April 23, 1996 regarding charter affiliation agreement
with Century Communications Corporation.
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: August 12, 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 INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- - ------ -----------
<S> <C>
10.1 Sales Agency Agreement by and between The Reuben H. Donnelly
Corporation and IT Network, Inc., dated May 20, 1996.
10.2 License Agreement by and between WinStar New Media Co., Inc.
and Source Media, Inc., dated June 6, 1996.
11.1 Computation of Supplemental Earnings Per Share.
27 Financial Data Schedule.
</TABLE>
<PAGE> 1
EXHIBIT 10.1
IT NETWORK/ REUBEN H. DONNELLEY SALES AGENCY AGREEMENT
THIS AGREEMENT, entered into this ____ day of ____________, 1996, by
and between The Reuben H. Donnelley Corporation, ("Donnelley"), a Delaware
corporation, located at 287 Bowman Ave., Purchase, NY, 10577, and IT Network,
Inc., ("ITN") a Source Media Company, 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 desires to
include audiotext in such directories; and
WHEREAS, ITN has the expertise to provide static content for audiotext
pages and to sell advertising sponsorships in connection therewith;
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. "Directories" shall be the telephone
directories set forth in Attachment A hereto. Attachment A
may be amended to either increase or decrease the directories
covered by this Agreement by mutual agreement of the the
Parties in writing.
b. The "System" is technology provided by
Donnelley in which recorded audio messages can be entered,
stored and retrieved to be transmitted to persons who, by
using a touchtone phone, call the telephone number listed in
the Directories and retrieve desired stored and entered
information by dialing an access code.
c. "Issue Life" shall mean the period of time
between the distribution of the directory and the distribution
of the subsequent directory or eighteen (18) months, whichever
is shorter.
d. "Common Interest Information" includes, but
is not limited to the General Programming section of the ITN
Summer 1995 Programming Catalog (Appendix B) as well as such
other common interest static content information as may be
mutually agreed upon in writting and included in Appendix B
(the "Common Interest Information.")
<PAGE> 2
e. "Net Revenues" are the total revenues billed for
sales of audiotext services by ITN less (i) third party agency
commissions, (ii) pricing discounts and (iii) uncollectables.
2. Effective Date, Term. This Agreement becomes
effective on May 20, 1996, and remains in effect for the issue
life of Directories published prior to December 31, 1999,
unless it is extended by mutual written agreement of the
parties.
3. ITN Responsibilities.
a. During the term of this Agreement, ITN shall
provide audiotext static content, sell and market advertising
messages on said programming, conduct advertiser service for
said audiotext and conduct all billing and collection for
audiotext accounts for all contracted directories. All
advertising messages sold by ITN shall be on ITN contract
forms. Changes to advertiser messages shall not occur more
than once per month except upon the mutual agreement between
the Parties.
b. ITN shall provide to Donnelley the number of
pages desired in each directory and a diskette with electronic
files, in such format as prescribed by Donnelley, for
production of said pages and ad stats or other production art
for any print ads on said pages for production purposes within
an agreed number of days before the publication date. ITN
will be responsible for the actual transfer and all reasonable
costs associated with the transfer of all ITN static content
to designated Donnelley equipment. ITN shall transfer ITN
static content by CD ROM or DAT tape transfer (format to be
determined by Donnelley). ITN will be responsible for all
costs associated with the content feeds to any OAG travel
guide sold by ITN and published in Donnelley directories in
different markets.
4. Donnelley's Responsibilities. During the term of
this Agreement, Donnelley shall be responsible for and pay all costs and
expenses associated with: (a) the audiotext system equipment, phone lines,
programming, voicing of advertiser messages, loading and all system management
staff (b) producing, printing, binding and distributing audiotext pages in
designated directories (c) layout and proofs of said pages to ITN prior to
printing (d) monthly call reports for all audiotext codes in a digital ASCII
spreadsheet, database file or such format as may be agreed upon by the Parties,
to include the following fields: Book, Category, Sub-Category, Title, Code
and Count, and in a separate file, advertiser information, including direct
connect reports, on a monthly basis, timely turnaround on new advertiser or
custom content service orders and custom service repair orders.
2
<PAGE> 3
5. Control of Audiotex Messages/Programming. ITN shall
formulate all policies relating to the wording, production and sponsorship of
the Audiotex messages. Such policies shall be in effect for all contracts
executed by ITN and customer. However, all policies so formulated shall be
subject to and consistent with Donnelley's reasonable standards as publisher of
the Directories related to this Agreement.
6. Ownership. The Audiotex messages, Common Interest
Information, and the customer contracts are the property of ITN, except with
respect to certain Common Interest Information, which ITN procures from others
pursuant to license agreements. ITN represents to Donnelley that it has the
right to use the copyrighted work which comprises the Common Interest
Information as it is used in the System.
7. Cost of Services. Each party shall independently
bear the cost and expense of services it provides under the terms of this
Agreement.
8. Compensation.
a. New Accounts. Donnelley will pay to ITN a
fee of XX% of Net Revenues in each market where 0 to 99% of
the market goal is achieved as shown in Attachment A. In
markets where 100% or greater of market goal is met, Donnelley
will retroactively pay ITN an additional X% of Net Revenues
for that market, and XX% of Net Revenues thereafter until the
next directory cycle.
b. Existing Accounts. ITN will receive
customer contracts and point of contacts for Donnelley's
current audiotext customers (Appendix C). Starting with the
August, 1996 publication of the Washington Suburban directory,
as contracts with existing advertisers expire, ITN will offer
renewals to these customers on ITN contract forms. Such
revenues are not included in the market goals set forth in
Appendix A. Donnelley will pay a fee of XX% of Net Revenue
for these customers as they renew.
c. Administration. ITN will remit to
Donnelley, on a monthly basis, Donnelley's share of the Net
Revenues collected in the previous month. Such payments will
be remitted to Donnelley offices on or before the 20th of each
month for the previous month's collections. Client adjustments
due to equipment failure or system operation failures, will be
agreed upon by ITN and Donnelley and deducted from Donnelley's
portion. Customer service adjustments due to sales or
marketing activites by ITN will be agreed upon by ITN and
Donnelley and deducted from ITN's portion.
3
<PAGE> 4
9. Donnelley Right to Reject. In the event Donnelley
determines that any Common Interest Information that is on the System is
objectionable for any reasonable reason as set forth below and notifies ITN,
ITN shall have the right to cure, remove or revise such Common Interest
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, or (iv) any material which, in the reasonable opinion of Donnelley,
is likely to damage the reputation of Donnelley. ITN's refusal to cure,
remove or revise such information within two business days of notice of
Donnelley's objection will be considered a material breach of this Agreement
10. 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 of Audiotex messages or the System, it
is recognized that suits may be instituted or claims filed against either of
the parties with respect to the production of the Audiotex message or the
System. 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 shall bear each Party's 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.
11. Termination. This Agreement may terminate
(although certain obligations shall continue as provided) prior to the end of
its term if:
a. either party materially breaches this
Agreement and such material breach has not been cured 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:
i. terminate this Agreement upon notice to the
other party effective on the first date on which the next
directory is to be issued; or
ii attempt to have this Agreement specifically
performed or to pursue other equitable or legal remedies with
respect to such material breach instead of terminating this
Agreement. 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.
4
<PAGE> 5
b. On and after the date on which this Agreement
terminates, unless termination was pursuant to Subsection a above, the
parties expressly agree that the responsibilities of each shall
continue, notwithstanding the termination of this Agreement, until
such time as a new directory, under this Agreement, is distributed
which contains no Common Interest Information provided by ITN.
12. Audit.
a. Upon reasonable notice and during reasonable
business hours, Donnelley may audit ITN's records to the
extent they pertain to sales, 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 system operation, ad production and statistics
reporting, pertaining to the terms of 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.
13. Confidentiality. In order to emphasize and to
maintain the high level of confidentiality of the projects that the ITN will be
assigned, ITN agrees as follows:
a. All information regarding Donnelley, as well
as entities that Donnelley has dealings with and any of their
present or future affiliates (including without limitation
records, clients, customer lists, data, documents, methods,
and procedures) compiled by, obtained by, furnished to or
otherwise discussed or disclosed to ITN without distinction as
to whether such communication or conveyance was written,
printed, electronic, pictorial, verbal, or other, is
acknowledged by ITN to be confidential and proprietary
information which is the exclusive property of Donnelley
(herein "Confidential Material").
b. ITN will not use or allow the use for any
purpose of any portion of the Confidential Material, or notes,
summaries or other material derived from the Confidential
Material, except for the purposes directly in support of or in
connection with the projects assigned by to ITN.
5
<PAGE> 6
c. ITN will not disclose or allow disclosure of
the Confidential Materials to anyone, other than individuals
who Donnelley has identified as having executed a
confidentiality agreement acceptable to Donnelley and then
only on a need to know basis after disclosure that the
information is Confidential Material subject to the
individual's confidentiality agreement.
d. At the request of Donnelley, ITN will
promptly return all Confidential Material and will return or
destroy all notes prepared by ITN in connection with the
Confidential Material; and shall provide, or cause to be
provided, an Affidavit to the effect that the foregoing has
been accomplished.
e. The provisions of this Agreement shall
terminate or be inoperative as to such portions of the
Confidential Material which (i) become generally available to
the public; (ii) were known to ITN on a nonconfidential basis
prior to its disclosure to it by Donnelley, its agents,
advisors, or representatives; or (iii) becomes available to
ITN on a nonconfidential basis from a source (other than
Donnelley) which is entitled to disclose same.
f. The projects assigned to ITN themselves are
to be treated as confidential. All Confidential Materials are
to be kept separate from other documents and marked or labeled
as confidential. Discussions of projects assigned to ITN
should not take place in the presence of an individual not
authorized and identified to ITN as having executed a
confidentiality agreement acceptable to Donnelley. If asked
about an assigned project by someone not authorized (or who
the ITN does not know to be authorized) to have access to the
assigned project materials, ITN will decline comments or will
respond as specifically directed by Donnelley.
g. Without prejudice to rights and remedies
otherwise available, ITN agrees that Donnelley shall be
entitled to equitable relief, including relief by way of
injunction, if ITN breaches or threatens to breach any of the
provisions of this Agreement. ITN understands and agrees that
no failure or delay by Donnelley in exercising any right,
power, or privilege hereunder shall operate as a waiver
thereof and that no single or partial exercise thereof shall
preclude any other or further exercise thereof or the exercise
of any other right, power, or privilege hereunder or otherwise
available under applicable law.
h. The confidentiality provisions of this
Agreement shall continue until terminated in writing by
Donnelley. The obligation to protect the confidentiality of
Confidential Material received prior to such termination shall
survive the termination of this Agreement.
6
<PAGE> 7
14. Trade Secret. ITN acknowledges that in the course
of its retention by Donnelley, it is likely to have had access to and acquire
knowledge of information, including formulas, patterns, combinations, programs,
devices, 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 Donnelley that are reasonable under the
circumstances to maintain their secrecy such that this information constitutes
trade secrets that are proprietary to Donnelley. ITN 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 Donnelley which ITN may use, prepare or come
in contact with during its retention by Donnelley, shall be and remain the sole
property of Donnelley. ITN shall not assert any claim or interest of an
intellectual (i.e. copyright, patent or trademark) or proprietary nature in the
work product prepared by it pursuant to this Agreement. All proprietary and
intellectual rights associated with the work product prepared for and provided
to Donnelley by ITN shall be the property of Donnelley.
15. Independent Contractor. ITN undertakes the
furnishing of services and performance of its obligations under this Agreement
as an independent contractor. ITN's personnel participating in the performance
of this Agreement shall remain ITN's employees. There shall be no
employer-employee relationship between ITN's employees and Donnelley, and
between Donnelley's employees and ITN.
16. 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.
17. Copyrights, Service Marks and Trademarks. Donnelley
shall retain all ownership and control of the Touch Four copyright on the
directory pages. Donnelley through this agreement grants to ITN a royalty-free
license to use certain Donnelley copyrights, service marks or trademarks in the
marketing and sales promotion of the System, including the right to affix these
service marks or trademarks to advertising and promotional materials.
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
mailed. Any notices, consents or other communications hereunder shall be sent
as follows (unless such addresses are modified by either of the parties):
7
<PAGE> 8
If to Donnelley:
-----------------
Jack McDonald
General Counsel
& Senior Vice President
R. H. Donnelley
287 Bowman Ave
Purchase, NY 10577
and to;
Vice President, Marketing
R. H. Donnelley
287 Bowman Ave
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. Rights of Parties to Information. This Agreement and all
material provided by and to each party under this Agreement is confidential to
the parties, is to be treated in the utmost of confidence, and its contents are
to be disclosed only as required by law or permitted by this Agreement.
Donnelley hereby expressly consents to the reference of this
Agreement and description of the terms and provisions of this Agreement only to
the extent required by law in any public securities filing made by ITN or in
any disclosure documents prepared by ITN in connection with the offer and/or
sale of its securities. Any such reference and description of the terms and
provisions of this Agreement will be subject to prior written approval by
Donnelley.
20. Force Majeure. 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.
8
<PAGE> 9
21. 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.
22. 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.
23. 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.
24. Binding Effect. This Agreement shall be binding upon and
shall inure to the benefit of the parties and their respective successors and
assigns.
25. 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 hereto.
26. Governing Law. The validity, performance, construction and
effect of this Agreement shall be governed by the laws of the State of New
York.
27. Entire Agreement. This Agreement constitutes the entire
Agreement between the parties hereto 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, including, but not limited to, all pre-existing
agreements between ITN and Donnelley for the provision of Audiotext services in
the Donnelley region (collectively "Prior Agreements"), with the sole exception
of a non-disclosure Agreement signed between the Parties on _____ and attached
here as Attachment C.
IN WITNESS WHEREOF, the parties have cause their respective
representatives duly authorized to sign this Agreement on their behalf.
9
<PAGE> 10
The Reuben H. Donnelley Corporation
By:_______________________________
Title:____________________________
IT NETWORK
By:_______________________________
Title:____________________________
10
<PAGE> 11
APPENDIX "B"
ITN Summer Programming Catalog
11
<PAGE> 1
EXHIBIT 10.2
As of June 6, 1996
Source Media, Inc.
8140 Walnut Hill Lane, Suite 1000
Dallas, TX 75231
Gentlemen:
This will acknowledge and confirm the terms pursuant to which Source Media,
Inc. ("Licensor") has agreed to license WinStar New Media Company, Inc. and/or
its affiliates ("Company") the right to utilize the programming service and
technology of The Interactive Channel ("IC"), a patented platform for
interactive television services owned by IT Network, Inc., a wholly owned
subsidiary of Licensor, as more fully set forth in Schedule A, attached hereto
and forming a part hereof.
1. Rights Granted: Licensor hereby grants to Company a license to utilize the
services, products and technology of IC in "Wireless Distribution," as
hereinafter defined, in the United States, its territories and possessions and
Canada ("Territory"). Wireless Distribution means any and all forms of
over-the-air and/or wireless distribution using any frequency of the spectrum,
method or media, including but not limited to MDS, MMDS, 28 Ghz frequency, 38
Ghz frequency, conventional broadcast and satellite distribution, but excluding
cable television system distribution. The license granted to Company hereunder
for (i) Wireless Distribution using 37-40 Ghz frequency ("38 Ghz Wireless
Distribution") shall be exclusive to Company in the United States, its
territories and possessions, and nonexclusive in Canada, and (ii) all other
forms of Wireless Distribution ("Non-38 Ghz Wireless Distribution") shall be
nonexclusive to Company in the Territory. Company shall have the right to
sublicense the rights granted in the license hereunder, without limitation;
provided, however, that Company shall have the right to sublicense the
services, products and technology of IC in forms of Non-38 Ghz Wireless
Distribution only to the extent that any such sublicense is in furtherance of
Company's reasonable commercial efforts and consistent with Company's
reasonable business judgment to develop and/or implement 38 Ghz Wireless
Distribution.
2. Term: An initial period of 5 years. Company shall have an option,
exercisable by notice to Licensor no later than January 22, 2001, to extend the
Term of the Agreement for an additional period of 5 years. Thereafter, Company
shall have options exercisable on or before March 22 of the fifth year of any
such 5-year period, each to extend the Term by a successive 5-year period.
3. License Fees: In consideration of the rights granted herein, Company shall
pay Licensor the following sums ("License Fees"):
<PAGE> 2
2
(i) $0.20 per month for each consumer subscriber, and
(ii) 5% of Company's monthly "Adjusted Gross Revenue" for each
business-to-business installation. Adjusted Gross Revenue shall
be defined in a manner that includes as deductions from Company's
gross revenues all deductions enumerated in Schedule B, attached
hereto and forming a part hereof, and that is no less favorable
than that contained in Schedule B, save for the different
percentage of gross revenue specified. Licensor warrants and
represents that the definition of revenues set forth in Schedule
B is substantially similar to that currently in force in
Licensor's agreement with Cableshare.
The License Fees shall be payable no later than 60 days following the end of
any calendar quarter in which Company has generated revenue from engaging in
Wireless Distribution to any consumer or business-to-business installation.
4. Minimum Guarantee: In the event that Company exercises its option pursuant
to paragraph 2 to extend the term of the Agreement for an additional period of
5 years ("Years 6 - 10"), Company shall pay Licensor License Fees of no less
than the following amount ("Minimum Guarantee") in each contract year as
follows:
<TABLE>
<S> <C>
Year 6 $50,000
Year 7 $50,000
Year 8 $150,000
Year 9 $250,000
Year 10 $250,000
</TABLE>
In Year 11, if any, and any subsequent year, the Guarantee shall be increased
by the sum of $50,000 over the preceding year, up to a maximum of $500,000 per
year in Year 15, if any. If the License Fees payable pursuant to paragraph 3
hereof are less that the Minimum Guarantee, the difference shall be paid by
Company within 60 days following the end of such contract year.
Notwithstanding the foregoing, in any year of Year 6 - Year 16, if any, in
which the License Fee is less than the Minimum Guarantee, Company may elect not
to pay Licensor the Minimum Guarantee in any such year. If Company so elects,
then Company's license hereunder shall become nonexclusive as to 38 Ghz
Wireless Distribution in the Territory for any succeeding years of the Term.
Upon 15 business days' prior notice, Licensor may audit the books and records
of Company with respect to the accuracy of the License Fee paid by Company.
Licensor may request an audit more than one time in any calendar year. Any
audit shall be conducted at the Company's offices during normal business hours
and at Licensor's expense. In the event of a discrepancy in favor of Licensor
which exceeds 5%, Company shall reimburse Licensor's actual, substantiated,
out-of- pocket cost for the audit and pay Licensor the amount of any
discrepancy.
<PAGE> 3
3
5. Services of Licensor: During the Term hereof, Licensor shall make
available to Company products and/or services set forth in Schedule A on the
following basis:
(a) For Part II, IC Interactive System Hardware, Company's cost shall
not exceed Licensor's actual, auditable, out-of-pocket costs, with a
mark-up of 7-1/2%, notwithstanding any provision in Part II to the
contrary;
(b) For Part III, IC Interactive System, in each local area where
Company or any of its affiliates or desingees holds a license for
providing telecommunications services in the 38 Ghz band ("Licensed
Area"), there shall be a cost to Company of $22,500 for the first
headend software unit in any Licensed Area, $1,500 for each additional
headend in a Licensed Area using a headend software unit, and $100 for
each copy of ITN authorizing software provided to Company by Licensor.
Company shall pay costs due Licensor within 30 days of delivery of
software. All costs payable to Licensor pursuant to this subparagraph
5 (b) shall be deemed an advance against and recoupable from any
License Fees otherwise owed Licensor hereunder. There shall be no
other costs to Company for the IC Interactive System except those
provided in subparagraph 5(b), notwithstanding any provision in Part
III to the contrary; and
(c) For Part IV, Training, the cost to Company shall be Licensor's
actual, out-of-pocket, direct costs for personnel, calculated on a
per-diem basis, plus an amount equal to 15% of such the per-diem
personnel costs, representing Licensor's overhead, notwithstanding any
provision in Part IV to the contrary.
Licensor warrants and represents that the costs charged to Company pursuant to
subparagraphs 5(a), (b) and 5(c) hereof shall be at least as favorable to
Company as those charged by Licensor to its most favored licensee and/or
customer. In no event shall Company have any obligation to utilize any of the
products and/or services specified in Schedule A. In the event that Licensor
should develop and offer to sell to third parties any additional products,
services and/or technologies applicable to any aspect of the products, services
and/or technologies licensed hereunder, Licensor shall make any such products,
services, or technologies available to Company on the foregoing basis.
6. Press Releases: Promptly following the execution of this Agreement, the
parties shall mutually agree on any press release with respect to the
transaction which is the subject of this Agreement.
7. Warranties and Representations: Each party warrants and represents that it
has the right to enter into this Agreement, to grant all rights granted herein,
and to perform all of its obligations hereunder and that the party's exercise
of its rights hereunder shall not violate the rights of any third party,
including but not limited to patent or trademark. Each party shall indemnify
and hold harmless the other against any claims, damages, liabilities, costs and
expenses, including but not limited to reasonable counsel fees, resulting from
or arising out of the breach by the indemnifying party of any warranty,
representation or agreement herein.
<PAGE> 4
4
8. Information: Licensor retains all right, title and interest in and to any
software, programming, trademarks and/or technology use for the IC interactive
system and licensed to Company under this Agreement. Company will not permit
the software, programming, trademarks and/or technology to be copied or
disclosed to any third party, except pursuant to a valid sublicense under this
Agreement.
Each party, and its employees, agents and representatives, shall maintain in
confidence the terms and conditions of this Agreement, including all data or
information, whether oral or written, provided by one party to the other party,
or acquired or developed pursuant to this Agreement ("Information") and shall
not provide such information to any third party unless:
(a) with the consent of the party originally providing the
Information;
(b) to the extent necessary to comply with law or a valid court order;
(c) as part of the party's normal reporting or review procedures to
its parent company, its financiers or their duly appointed
representatives, its auditors or attorneys, provided that the parent
company, financiers or their duly appointed representatives, auditors
or attorneys agree to be bound by the obligations of this paragraph 8;
or
(d) in order to enforce the party's rights under this Agreement.
9. Termination of Exclusivity: In the event that Company has not engaged in
meaningful deployment of 38 Ghz Wireless Distribution by the end of Year 9 or
any subsequent year of the Term, if any, Licensor shall have the right upon one
year's prior written notice to Company to be given not earlier that the first
day of Year 10 ("Notice Period"), to cause Company's license thereof to become
nonexclusive; provided, however, that such notice shall have no effect if,
during the Notice Period following Company's receipt of such notice, Company
has commenced meaningful deployment of 38 Ghz Wireless Distribution. In the
event that Licensor exercises its foregoing right and Company has not commenced
meaningful deployment of 38 Ghz Wireless Distribution during the Notice Period,
Company shall have no further obligation to pay a Minimum Guarantee hereunder.
10. Standard Provisions: This Agreement shall be governed by and construed
according to the laws of the State of New York applicable to contract made and
to be fully performed therein. Licensor hereby consents to and submits to the
jurisdiction of the federal and state courts located in the State of New York.
The rights granted to Company hereunder are of a special and unique character
which gives them a peculiar value, the loss of which cannot reasonable or
adequately be compensated for in damages in an action at law, and the breach by
Licensor of any provisions contained in this Agreement will cause Company
irreparable injury and damage. Company shall be entitled, as a matter of
right, to seek injunctive and other equitable relief to prevent the violation
of any of the provisions of this Agreement by Licensor. Neither this
provision, nor the exercise by Company of any of its rights hereunder shall
constitute a waiver by Company of any other rights which it may have to damages
or otherwise.
<PAGE> 5
5
While it is the desire of the parties hereto to enter into a more formal
agreement, containing the terms and conditions set forth herein as well as
other provisions standard in agreements of this nature, unless and until such
an agreement is executed, this Agreement shall be binding in all respects and
constitute the entire understanding between the parties with respect to the
subject matter hereof.
Please sign below to indicate your acceptance of the foregoing.
Very truly yours,
WINSTAR NEW MEDIA CO., INC. ACCEPTED & AGREED:
SOURCE MEDIA INC.:
By:
------------------------
By:
------------------------
<PAGE> 6
SCHEDULE A
(Attached to and forming a part of the Agreement dated as of June 6, 1996,
between WinStar New Media Co., Ltd. and Source Media, Inc.)
INTERACTIVE CHANNEL PRODUCTS AND SERVICES
I. Introduction
IT Network, Inc. (ITN), a wholly-owned subsidiary of Source Media,
Inc., and it's research and development company Cableshare (CSH) have
developed a patented platform for Interactive Television services -
The Interactive Channel (IC) that allows cable subscribers to
simultaneously select and view presented audio and video
presentations. The presentations are multiplexed and only need a
regular 6MHz cable bandwidth.
Subscribers direct Interactive sessions with an infrared remote
control by selecting menu items listed on their television screens.
The Interactive Receiver sends the control messages over the telephone
line to the Presentation System (Headend computer). This computer
interprets the message, assembles the requested presentation, and
returns the video image over the CATV network and the audio through
the telephone line. Once the video and audio signals are received,
the signals are combined and displayed on the television set.
II. IC Interactive System Hardware
ITN Interactive Television products provide a complete multimedia
interactive television system. This system consists of three key
components: the Interactive Receiver or Interactive Set-Top Box, the
Presentation System, and the Media Production Workstation.
A. The Presentation System (Headend)
The IC Presentation System resides at the cable system headend. The
system can be modularly expanded to handle larger numbers of
concurrent users, with all users reaching different information at the
same time.
1. Unix System Components
a. System & Application Server
b. Digital Video Subsystem
c. Digital Audio Subsystem (PC/Unix)
d. Miscellaneous Standard Hardware
1
<PAGE> 7
SCHEDULE A
2. Unix System Cost
<TABLE>
Systems:
<S> <C> <C> <C> <C> <C> <C> <C>
System 12 24 32 48 96 192 384 500
by Users Est. Est. Est.
Total Cost (USSK)
Max # of IC
Subscribers 240 480 640 960 1920 3840 7680 10,000
</TABLE>
(Assuming 5% peak usage)
TABLE: IC UNIX PRESENTATION SYSTEM - SYSTEMS BY CONCURRENT
USERS
3. Installation Per Unix System
B. The Interactive Receiver
The Interactive Receiver receives and displays the requested interactive
television programming on users' TV screen. ITN's ITV server solution supports
a variety of subscriber terminal.
<TABLE>
<CAPTION>
ITN/CSH Interactive Receivers Available Time
<S> <C>
Phase A/Analog Receiver June 96
Phase B/Analog Receiver Q4 96
Sidecar for GI, S-A Decoder Q1 97
Sidecar for Any MPEG Decoder Q1 97
</TABLE>
2
<PAGE> 8
SCHEDULE A
TABLE: ITN INTERACTIVE SET-TOP BOX COST ESTIMATES - PHASES A & B,
SIDECAR
C. The Media Production Workstation
Programming is created and modified using a Media Production Workstation (MPW)
which is software based and operates on a personal computer. From an equipment
stand point, the whole MPW system is divided into two segments: hardware and
software. Hardware can be secured off the shelf. The system utilizes two
kinds of software: proprietary software provided by ITN and off-the-shelf
multimedia software.
Bundles PCs and ITN software
(ITN Authoring software only)
III. IC Interactive System
Together with bundled IC hardware, ITN will provide ITV server
operating software, ITV client operating software, remote management
and updated software, software training and documentation, software
support, enhancement/updates, and maintenance.
A. IC System Software License, in accordance with the terms of
the Agreement. Including maintenance, update and telephone
support.
3
<PAGE> 9
SCHEDULE A
B. IC Programming License
(Distribution restricted to IC infrastructure)
Basic Templates included:
1. Navigation System
2. Main Menu
3. News-on-Demand
4. Advertisements
5. Electronic Programming Guide Module
6. Home Shopping Catalog
7. Educational Programming
8. Electronic Yellow Pages Module
9. Games (Trivia, Time Zone, Word Trap)
Optional Application Templates (Not included in IC Programming
License):
Each application will be delivered with complete navigation to
interface with the system and with basic screens or menus
consistent with the "look and feel" found on existing IC
programming.
1. Movie-On-Demand
2. On Line Information Services (Stock Quotes, etc.)
3. Distance Learning
4. Authoring Navigational Software
IV. Training
A. Training Courses
<TABLE>
<S> <C> <C>
1. MPW Training:
Media Production Workstation......................................................ITN-100
2. Application Training:
a. Introduction for Application Development......................................ITN-150
b. Advanced Application Development..............................................ITN-151
3. System Training:
a. Configuring a ITN/CSH System..................................................ITN-200
b. Maintaining a ITN/CSH System..................................................ITN-201
4. Marketing and Customer Service Training:
</TABLE>
4
<PAGE> 10
SCHEDULE A
<TABLE>
<S> <C> <C>
a. Model Subscriber Acquisition Campaign for Launch Period......................ITN-301
b. Marketing Support Procedures includes collateral material....................ITN-302
c. Subscriber Service Procedures includes collateral material...................ITN-303
</TABLE>
B. Training Fees
All training is provided either at IT Network, Inc., Dallas, Texas,
USA or Cableshare, Inc., London, Ontario, Canada. Training fees are
based on maximum class capacity of 10 trainees.
1. System, MPW and Application Training
2. Application Development and Consulting
3. Marketing and Customer Service Training
5
<PAGE> 11
SCHEDULE B
(Attached to a forming a part of the Agreement dated as of June 6, 1996,
between WinStar New Media Co. Inc. and Source Media Inc.)
Definition from Agreement between Cableshare and IT Network, Inc., revised for
Agreement between WinStar New Media Co. Inc. and Source Media, Inc.:
"Revenue" means gross revenues, exclusive of value added taxes, gross
receipts taxes or similar taxes, derived by Company from operating or
sub-licensing a wireless system utilizing Interactive Channel
programming services and technology, determined on the basis of
generally accepted accounting principles.
<PAGE> 1
EXHIBIT 11.1
SOURCE MEDIA, INC
COMPUTATION OF SUPPLEMENTAL LOSS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1995 1996 1995 1996
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Weighted average IT shares outstanding 4,555,301 9,927,172 4,531,494 9,931,664
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 2,062,740 -- 2,034,580 --
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 342,554 -- 284,106 --
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 63,230 -- 31,790 --
----------- ----------- ----------- -----------
Weighted average common shares 7,023,825 9,927,172 6,881,970 9,931,664
Net loss $(3,202,586) $(2,800,562) $(5,444,327) $(5,021,218)
Plus impact of interest expense related to the $4.1 million of IT
debt and related accrued interest repaid with the proceeds of the $ 76,035 -- $ 130,979 --
merger
Loss for per share computations $(3,126,551) $(2,800,562) $(5,313,348) $(5,021,218)
=========== =========== =========== ===========
Supplemental net loss per common share $ (0.45) $ (0.28) $ (0.77) $ (0.51)
=========== =========== =========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 17,269,537
<SECURITIES> 0
<RECEIVABLES> 1,061,676
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,362,745
<PP&E> 5,001,786
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0
0
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</TABLE>
