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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, 1997
|_| 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 14, 1997: 11,459,927
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SOURCE MEDIA, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1997
PART I. FINANCIAL INFORMATION
Page Number
-----------
ITEM 1. Consolidated Financial Statements
Consolidated Balance Sheets (Unaudited)........................... 3
June 30, 1997 and December 31, 1996
Consolidated Statements of Operations (Unaudited)................. 5
Three and six months ended June 30, 1997 and 1996
Consolidated Statements of Cash Flows (Unaudited)................. 6
Six months ended June 30, 1997 and 1996
Notes to Consolidated Financial Statements........................ 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.....................................11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................18
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
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Source Media, Inc.
Consolidated Balance Sheets
(Unaudited)
December 31, June 30,
1996 1997
=========== ===========
Assets
Current assets:
Cash and cash equivalents $ 4,302,943 $ 8,626,528
Restricted investments 611,182 --
Trade accounts receivable, less allowance
for doubtful accounts of $62,504 and $27,313
in 1996 and 1997, respectively 956,078 1,305,542
Deferred expenses 729,819 802,745
Prepaid expenses and other current assets 1,167,201 800,634
----------- -----------
Total current assets 7,767,223 11,535,449
Property and equipment, net:
Production equipment 1,997,838 2,106,333
Computer equipment 1,240,259 928,785
Other equipment 1,672,048 2,586,429
Furniture and fixtures 51,304 364,963
----------- -----------
Net property and equipment 4,961,449 5,986,510
Intangible assets, net:
Patents 591,518 10,454,808
Goodwill 474,838 237,080
Contract rights 1,121,000 934,167
----------- -----------
Net intangible assets 2,187,356 11,626,055
Other non-current assets 980,745 1,028,988
----------- -----------
Total assets $15,896,773 $30,177,002
=========== ===========
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Source Media, Inc.
Consolidated Balance Sheets (continued)
(Unaudited)
December 31, June 30,
1996 1997
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Trade accounts payable $ 917,462 $ 985,525
Accrued payroll 420,926 371,451
Other accrued liabilities 1,483,373 2,019,140
Amounts payable related to acquisitions 1,350,000 750,000
Unearned income 3,976,244 3,178,042
Current portion of capital lease obligations 85,683 21,493
------------ ------------
Total current liabilities 8,233,688 7,325,651
Long-term debt, net of discount 4,612,021 18,279,791
Capital lease obligations, less current portion 22,706 12,214
Minority interests in consolidated subsidiaries 3,665,104 3,839,552
Note receivable and accrued interest from minority
stockholder, net of discount of $137,152
and $116,294 in 1996 and 1997, respectively (666,931) (695,226)
------------ ------------
2,998,173 3,144,326
Stockholders' equity:
Common stock, $.001 par value:
Authorized shares - 50,000,000
Issued shares - 10,327,041 and
11,737,331 in 1996 and
1997, respectively 10,327 11,737
Less treasury stock, at cost - 381,351 shares (3,757,641) (3,757,641)
Capital in excess of par value 60,815,785 73,332,581
Accumulated deficit (56,931,832) (68,026,716)
Foreign currency translation 3,737 (40,270)
Notes receivable and accrued interest
from stockholders (110,191) (104,671)
------------ ------------
Total stockholders' equity 30,185 1,415,020
------------ ------------
Total liabilities and stockholders' equity $ 15,896,773 $ 30,177,002
============ ============
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,
1996 1997 1996 1997
=========================== ===========================
<S> <C> <C> <C> <C>
Monetary revenues $ 2,304,488 $ 2,707,153 $ 4,586,356 $ 5,336,008
Nonmonetary revenues 2,795,808 1,723,237 5,674,981 3,410,757
--------------------------- ---------------------------
Total revenues 5,100,296 4,430,390 10,261,337 8,746,765
Monetary cost of sales 900,177 1,550,775 1,852,511 2,901,810
Nonmonetary cost of sales 2,795,808 1,723,237 5,674,981 3,410,757
--------------------------- ---------------------------
Total cost of sales 3,695,985 3,274,012 7,527,492 6,312,567
--------------------------- ---------------------------
Gross profit 1,404,311 1,156,378 2,733,845 2,434,198
Selling, general and administrative expenses 2,581,447 4,501,510 4,969,605 9,074,492
Amortization of intangible assets 257,834 1,018,740 515,668 1,843,612
Research and development expenses 1,429,330 1,065,554 2,650,803 1,844,467
--------------------------- ---------------------------
4,268,611 6,585,804 8,136,076 12,762,571
--------------------------- ---------------------------
Operating loss (2,864,300) (5,429,426) (5,402,231) (10,328,373)
Interest expense 187,751 772,848 192,710 980,375
Interest income (226,000) (103,070) (438,784) (155,249)
Other (income) expense (19,524) (43,650) (25,615) (49,644)
Minority interest in losses of consolidated subsidiaries (5,965) -- (109,324) (8,970)
--------------------------- ---------------------------
Net loss ($ 2,800,562) ($ 6,055,554) ($ 5,021,218) ($11,094,885)
=========================== ===========================
Net loss per common share ($0.28) ($0.53) ($0.51) ($0.99)
=========================== ===========================
Weighted average common shares outstanding 9,927,172 11,336,092 9,931,664 11,220,586
=========================== ===========================
</TABLE>
See accompanying notes.
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Source Media, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
1996 1997
============ ============
<S> <C> <C>
Operating Activities
Net loss ($ 5,021,218) ($11,094,885)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 419,386 1,038,309
Amortization of intangible assets 515,668 1,843,612
Non-cash interest expense -- 966,227
Provision for losses on accounts receivable 93,575 --
Minority interest in net losses (109,323) (8,970)
Write-off of debt issue costs -- 315,068
Warrants issued for services provided -- 279,571
Other, net (12,904) (22,775)
Changes in operating assets and liabilities:
Trade accounts receivable (79,013) (349,464)
Prepaid expenses and other current assets 269,536 364,456
Deferred expenses 149,346 (70,815)
Trade accounts payable (273,028) 68,063
Accrued payroll (63,352) (49,475)
Other accrued liabilities (58,978) 36,831
Unearned income (119,347) (798,202)
------------ ------------
Net cash used in operating activities (4,289,652) (7,482,449)
Investing Activities
Capital expenditures (481,289) (1,452,188)
Acquisition of equipment and contract rights -- (600,000)
------------ ------------
Net cash used in investing activities (481,289) (2,052,188)
Financing Activities
Net proceeds from issuance of long-term debt and warrants 4,606,163 13,922,625
Proceeds from issuance of common stock and exercise
of stock options 75,088 121,523
Payments on capital lease obligations (115,744) (74,682)
Other (30,042) (67,237)
------------ ------------
Net cash provided by financing activities 4,535,465 13,902,229
Effect of exchange rate changes on cash and cash equivalents 25,790 (44,007)
------------ ------------
Net increase (decrease) in cash and cash equivalents (209,686) 4,323,585
Cash and cash equivalents at beginning of period 17,479,223 4,302,943
------------ ------------
Cash and cash equivalents at end of period $ 17,269,537 $ 8,626,528
============ ============
</TABLE>
See accompanying notes.
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Source Media, Inc.
Notes to Consolidated Financial Statements (Unaudited)
Unless the context otherwise requires, (a) all references to the "Company" or
"Source" include Source Media, Inc. and its wholly-owned subsidiaries, IT
Network, Inc. ("IT") and Interactive Channel Technologies Inc. ("ICT"), which
was formerly known as Cableshare Inc., and (b) all references to the Company's
activities, results of operations or financial condition prior to June 23, 1995
relate to IT.
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 for the periods indicated.
The balance sheet at December 31, 1996 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, 1996.
2. Accumulated Depreciation and Amortization
Accumulated depreciation of property and equipment at June 30, 1997 and
December 31, 1996, was $4.6 million and $3.6 million, respectively. Accumulated
amortization of intangible assets at June 30, 1997 and December 31, 1996, was
$7.4 million and $5.5 million, respectively.
3. 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.
Convertible securities and stock options are not included in the net loss per
common share calculation for each period because they are anti-dilutive. In
February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS No. 128),
which the Company will be required to adopt in the fourth quarter of 1997. The
Company anticipates that the adoption of SFAS No. 128 will have no impact on its
reporting of net loss per common share for 1997 or prior years.
4. Contingencies
Lerch. On December 15, 1993, Marvin Lerch, the former Chief Executive
Officer and a former shareholder of ICT, and certain of his relatives who are
also former ICT shareholders,
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commenced a legal proceeding in Ontario, Canada in the Ontario Court (General
Division) against Source and certain executive officers of Source and a director
of ICT on the grounds that the defendants took actions intended to depress the
value of ICT to allow Source to acquire a portion of ICT at a favorable price.
The plaintiffs seek, among other things, orders that certain actions by ICT's
board were invalid; a declaration that ICT's board was incapable of managing its
affairs due to conflicts of interest; an injunction against Source from voting
its ICT shares for three years; purchase by the defendants of the plaintiffs'
ICT shares for Cdn$20 per share or exchange of the plaintiffs' ICT shares for
Source Common Shares of equal value; and damages in the amount of Cdn$8 million
to compensate the plaintiffs for the reduced value of their ICT shares and
damages in the amount of Cdn$6 million to compensate Mr. Lerch for the loss of
certain ICT stock options. ICT disputes all of the claims and no trial date has
as yet been set. The plaintiffs have amended their statement of claim for
punitive damages in the amounts of Cdn$1 million against Source and an aggregate
of Cdn$2 million against certain officers of Source. Although the ultimate
outcome of this action cannot be determined at this time, management believes
the claims are without merit and intends to vigorously defend its positions. In
addition, management believes the ultimate outcome of these actions will not
have a material impact on the consolidated financial condition or results of
operations of Source.
Little. On January 17, 1997, William T. Little, a stockholder of Source
and former director of IT , and a trust of which Mr. Little is the trustee,
commenced a legal proceeding in the United States District Court, Western
District of Michigan, against the Company and certain of its executive officers
and directors, alleging that he and various convertible noteholders converted
their notes based upon misrepresentations by IT and those officers and
directors. The plaintiff claims that he suffered damages in excess of $26
million because an alleged promise was made that IT would engage in a public
offering of its stock for approximately $56 per share, which did not occur. The
plaintiff further claims that IT offered to issue to him, during the time he was
serving as a director of IT, an unspecified number of shares of IT common stock
in consideration of his release of any claims related to such alleged
misrepresentations and that IT agreed to pay him and other noteholders an
unspecified amount in equivalent interest relating to the conversion of notes.
Although the ultimate outcome of this action cannot be determined at this time,
the Company disputes all of the plaintiff's claims as meritless and intends to
vigorously assert its position in this litigation. In addition, management
believes the ultimate outcome of this action will not have a material impact on
the consolidated financial condition or results of operations of the Company.
The Company and each of the defendants have filed answers denying the
plaintiff's allegations. Certain of the individual defendants also have made
counterclaims against Mr. Little for breach of fiduciary duty during his tenure
as a director of the Company and are seeking exemplary and punitive damages.
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 condition.
8
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5. Acquisitions
In January 1997, the Company acquired all of the outstanding shares of ICT
held by minority interest shareholders in exchange for approximately 1,390,000
shares of the Company's common stock, making ICT a wholly-owned subsidiary of
the Company. The Company also issued options to purchase 177,000 shares of the
Company's common stock at exercise prices ranging from $1.43 to $4.96 per share
to certain employees and directors of ICT in exchange for their outstanding
options to purchase ICT common shares, and incurred cash expenses related to the
acquisition of approximately $675,000. The aggregate purchase price for the
acquisition of the ICT minority interest was approximately $11.2 million, and
the acquisition was accounted for by the purchase method of accounting. The
purchase price was allocated primarily to patents, which are being amortized
over a five year period.
The following represents the unaudited pro forma results of operations as
if the above acquisition had occurred as of January 1, 1996, after giving effect
to certain adjustments, including amortization of intangibles resulting from the
allocation of the purchase price. Pro forma results for the six months ended
June 30, 1997 would not have differed materially from the actual results.
Six Months Ended
June 30, 1996
-------------
(In thousands, except
per share amount)
Total revenues $10,261
Gross profit 2,734
Operating loss (6,524)
Net loss (6,252)
Net loss per common share (0.55)
The pro forma results given above are not necessarily indicative of what
actually would have occurred if the acquisition had been in effect during the
period presented, and is not intended to be a projection of future results or
trends.
6. Long-Term Debt and Notes Payable
On April 3, 1996, the Company issued a senior note (the "First Tranche
Note") in the principal amount of $5.0 million and a warrant (the "First Tranche
Warrant") which entitled the holder thereof to purchase 500,000 shares of the
Company's common stock at a purchase price of $10.21 per share. On September 30,
1996 and March 31, 1997, the Company issued additional senior notes in the
amounts of $326,806 and $350,090, respectively, for the payment of interest on
the First Tranche Note. The First Tranche Note and the additional senior notes
(collectively, the "Aggregate First Tranche Notes") were due on March 31, 2001
and bore interest at the rate of 13% per annum through March 31, 1998 and 12%
thereafter. The estimated fair market value of the First Tranche Warrant was
credited to capital in excess of par value and the First Tranche
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Note was recorded at a corresponding discount. The discount on the First Tranche
Note was being amortized to interest expense using the effective interest rate
method over the stated term of the First Tranche Note, resulting in an effective
interest rate of 16.2%. As of December 31, 1996, the carrying value of the
Aggregate First Tranche Notes, which had no public market, approximated their
fair market value, which was estimated using a discounted cash flow analysis.
On April 9, 1997, the Company received cash proceeds of approximately
$13.9 million, net of related fees and expenses, upon the issuance of additional
senior notes (the "Second Tranche Notes") in the principal amount of $15.0
million and additional warrants (the "Second Tranche Warrants") entitling the
holders thereof to purchase in the aggregate 2,000,000 shares of the Company's
common stock at a purchase price of $6.00 per share at any time until their
expiration on March 31, 2004. Additionally, in connection with the issuance of
the Second Tranche Notes and the Second Tranche Warrants, the Aggregate First
Tranche Notes and the First Tranche Warrant were amended and restated to terms
identical to those of the Second Tranche Notes and the Second Tranche Warrants,
respectively. The amended Aggregate First Tranche Notes and the Second Tranche
Notes (collectively, the "Aggregate Tranche Notes") are due on March 31, 2002
and bear interest at the rate of either: (i) 12% per annum through March 31,
1999 if paid in cash, or (ii) 13% per annum through March 31, 1999 if paid
through the issuance of additional notes, and 12% thereafter. At the option of
the Company, interest payments may be made through the issuance of additional
senior notes; however, to the extent interest payments are made through the
issuance of additional senior notes, additional warrants to purchase .125 of the
Company's common stock at a purchase price of $6.00 per share must also be
issued to the holders of the Aggregate First and Second Tranche Notes for each
dollar of principal amount of such senior notes. On March 31, 2001, the Company
must make a prepayment of the notes equal to 33.33% of the then outstanding
principal (together with accrued interest to date on such principal amount). The
notes are secured by a lien on all of the Company's assets. Except for the
required prepayment described above, the note agreement provides for a
prepayment penalty and customary covenants and events of default.
The amendment of the Aggregate First Tranche Notes and First Tranche
Warrant has been accounted for as the extinguishment and replacement of the
existing senior notes and the cancellation of the existing warrants and issuance
of new warrants due to the significance of the modification to the terms of the
senior notes and warrant. The extinguishment of the Aggregate First Tranche
Notes resulted in a loss of approximately $315,000, which has been included in
other (income) expense. The estimated fair market value of the amended First
Tranche Warrant and the Second Tranche Warrant was credited to capital in excess
of par value and the Aggregate Tranche Notes were recorded at a corresponding
discount. The discount on the Aggregate Tranche Notes is being amortized to
interest expense using the effective interest rate method over the stated term
of the Aggregate Tranche Notes resulting in an effective interest rate of 15.4%.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Unless the context otherwise requires, (a) all references to the "Company" or
"Source" include Source Media, Inc. and its wholly-owned subsidiaries, IT
Network, Inc. ("IT") and Interactive Channel Technologies Inc. ("ICT"), which
was formerly known as Cableshare Inc., and (b) all references to the Company's
activities, results of operations or financial condition prior to June 23, 1995
relate to IT.
Forward Looking Information and Risk Factors
The Company or its representatives may make forward looking statements,
oral or written, including statements in this report's Management's Discussion
and Analysis of Financial Condition and Results of Operations, press releases
and filings with the Securities and Exchange Commission about confidence and
strategies and plans and expectations about demand, demand and acceptance of new
and existing products, potential acquisitions, potential for profits and returns
on investments in products and markets that are forward looking statements
involving risks and uncertainties that could significantly impact the Company.
Although the Company believes that the expectations reflected in these forward
looking statements are reasonable, there can be no assurance that the actual
results or developments anticipated by the Company will be realized or, even if
substantially realized, that they will have the expected effects on its business
or operations. Among the factors that could cause actual results to differ
materially from the Company's expectations are its need for additional
financing, general economic conditions, the projected and historical losses of
the Company, evolving nature of its business, limited access to channels,
uncertainty of subscriber acceptance of the Interactive Channel, possible
unavailability of programming, possible obsolescence of the Company's
technology, sources and degrees of competition, possible unavailability of
equipment and other factors discussed from time to time in the Company's Annual
Report on Form 10-K and other Securities and Exchange Commission filings.
General
Source Media, Inc., is a provider of information and services to consumers
through the television and telephone. In September 1996, in Colorado Springs,
Colorado, the Company commercially introduced the Interactive Channel, its
television programming service which provides a range of on-demand information
and services to consumers utilizing cable television and telephone lines. In
November 1996, the Company also commercially introduced the Interactive Channel
in Denton, Texas. Source utilizes the interactive television system of its
wholly-owned Canadian subsidiary, Interactive Channel Technologies Inc., to
deliver the Interactive Channel. Source has announced distribution agreements
for the Interactive Channel with three cable operators, Marcus Cable Company,
L.P., Cablevision Systems Corporation and Century Communications Corporation,
and is currently offering the Interactive Channel on the systems of two of these
operators. The Interactive Channel offers over 80 interactive programs including
on-demand local and national news, sports and weather, home shopping with
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companies such as J.C. Penney, Hallmark Connections and Waldenbooks, interactive
Yellow Pages, television and movie guides, travel information and games.
Since 1988, the Company has been delivering audiotext information to
consumers through the touch-tone telephone. Through its IT Network 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. Source's principal IT Network telephone
business product, called the Network Guide, consists of approximately 800
specific information topics listed in a stand-alone insert generally bound in
the front of Yellow Pages directories distributed by certain Regional Bell
Operating Companies or their affiliates or other Yellow Pages publishers
(collectively, "Directory Publishers").
The Company has earned monetary revenues through advertising sponsorships
in the Network Guide, 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 three to 12 months). The Company also has
earned monetary revenues from sales of audiotext services, principally its
Consumer Tips service, to certain Directory Publishers. The Company is beginning
to earn a significant percentage of its monetary revenues by acting as a sales
agent for advertising in directories published by Directory Publishers and
providing audiotext services in those directories.
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 and sports programming on the IT Network telephone business in
exchange for promotional messages on the IT Network telephone business and print
advertisements in the 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 Company expects that nonmonetary revenues as a percentage of total
revenues will continue to decline in the future as the Company earns a higher
percentage of its revenues as a service provider or sales agent rather than from
sales of advertising in the Network Guide.
On January 14, 1997, the Company acquired all of the outstanding shares
that it did not already own of ICT in exchange for approximately 1,390,000
shares of the Company's common stock, making ICT a wholly-owned subsidiary of
the Company. ICT owns the patented technology utilized by the Company for the
Interactive Channel and provides research and development services for the
Company. The Company's historical consolidated results of operations and
financial condition include ICT as the Company owned a majority interest in ICT
before the acquisition of the remaining interest.
Three Months Ended June 30, 1997 and 1996
Monetary revenues increased 17 percent to $2.7 million for the quarter
ended June 30, 1997. The net increase of $403,000 was related to an increase of
$1.1 million attributable to the
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Company's audiotext services as a result of new services contracts recently
acquired from The Reuben H. Donnelly Corporation ("Donnelly") and GTE
Directories Corporation ("GTE"). This increase was partially offset by declines
of (i) $335,000 attributable to the Network Guide product, (ii) $259,000
attributable to ICT and (iii) $61,000 attributable to the Company's Consumer
Tips service.
The decline in Network Guide monetary revenues primarily reflects the
termination of distribution in 19 designated market areas ("DMAs"), 11 of which
are located within the Ameritech region, five within the Southwestern Bell
region and three within the DonTech region. Total Network Guide revenues in the
19 terminated DMAs were $49,000 for the quarter ended June 30, 1997 and $505,000
for the quarter ended June 30, 1996. Network Guide revenues within the Company's
other 35 existing DMAs declined slightly during the second quarter of 1997
compared with the same period in 1996. These declines were partially offset by
increasesd revenues totaling $324,000 related to 17 new 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. The Company's agreement with Ameritech was terminated
by Ameritech, and the Company's Network Guide has not been included in any
Ameritech Yellow Pages directories published after September 1996. Accordingly,
revenues in those Ameritech DMAs will end in the third quarter of 1997 due to
the conclusion of revenue from Network Guide contracts in effect prior to the
termination of the Ameritech agreement. Total monetary revenues for both the
Network Guide and Consumer Tips products in the Ameritech region accounted for
approximately seven and 27 percent of the Company's monetary revenues in the
second quarter of 1997 and 1996, respectively. On February 5, 1996, Source
initiated litigation against Ameritech in Texas state court related to the
termination. In June 1997, in connection with the settlement of the litigation,
the Company and Ameritech entered into a definitive agreement pursuant to which
the Company will be the exclusive audiotext sales agent and service provider in
up to 38 Ameritech Yellow Pages directories for a three year period commencing
in the fourth quarter of 1997.
The Company expects to partially offset 1997 declining revenue associated
with the Ameritech with revenues generated through (i) its sales agency
agreement with Donnelly to sell advertising in the Network Guide in Yellow Pages
published by Donnelly in six top-100 DMAs in the mid-Atlantic region, (ii) its
purchase of certain assets from Donnelly and a related audiotext service
contract with Donnelly under which the Company will provide audiotext services
in Yellow Pages published by Donnelly in eight top-100 DMAs located throughout
the United States, (iii) its sales agency agreement with GTE to sell advertising
in the Network Guide in Yellow Pages published by GTE in four top-100 DMAs
located throughout the United States, (iv) its purchase of certain assets from
GTE and a related audiotext service contract with GTE under which the Company
will provide audiotext services in Yellow Pages published by GTE in nine top-100
DMAs located throughout the United States, and (v) its agreement with Southern
New England Telephone ("SNET") to sell advertising in the Network Guide in
Yellow Pages published by SNET in one top-100 DMA located in the northeastern
United States.
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The decrease in ICT's revenues in the second quarter of 1997 compared with
the same period in 1996 reflects certain hardware and software sales in
connection with a trial of Interactive Channel technology in 1996.
The decline in Consumer Tips revenues is the result of the February 1996
termination of the Company's agreement with Ameritech. Ameritech Consumer Tips
revenues ended completely in the second quarter of 1996.
Nonmonetary revenues and nonmonetary cost of sales declined 38 percent to
$1.7 million for the quarter ended June 30, 1997 from $2.8 million for the
quarter ended June 30, 1996. Substantially all of this $1.1 million decrease in
nonmonetary revenues and nonmonetary cost of sales occurred because of the
termination of distribution agreements in certain DMAs and because, in other
DMAs, the Company reduced the amount of space devoted to information provided by
media sponsors for lesser amounts of promotional advertising.
Monetary cost of sales increased 72 percent to $1.6 million, for the
quarter ended June 30, 1997 from $900,000 for the quarter ended June 30, 1996.
This increase resulted from operating personnel salaries, depreciation expenses
and various other operating expenses totaling $590,000 attributable to the
Interactive Channel's operations in Colorado Springs and Denton as well as
increased operating personnel salaries incurred by the IT Network telephone
business to support new services and advertising contracts acquired from
Donnelly and GTE. In the prior period, costs incurred by the Interactive Channel
were classified as research and development in nature, as the Interactive
Channel had not been commercially deployed.
Selling, general and administrative expenses, including amortization of
intangible assets, increased 94 percent to $5.5 million for the quarter ended
June 30, 1997 from $2.8 million for the quarter ended June 30, 1996. This
increase resulted from certain programming, personnel salaries, subscriber
acquisition, travel and various other Interactive Channel expenses totaling $1.8
million as well as increased operating, customer service, sales, marketing and
administrative expenses incurred by the IT Network telephone business to support
new services and advertising contracts acquired from Donnelly and GTE.
Amortization of intangible assets increased by $761,000 during the second
quarter of 1997 as a result of the amortization of patents related to the
Company's acquisition of the remaining shares of ICT during the first quarter of
1997 as well as the amortization of certain contract rights acquired from
Donnelly and GTE.
Research and development expenses declined 25 percent to $1.1 million for
the quarter ended June 30, 1997 from $1.4 million for the quarter ended June 30,
1996. This decrease reflects lower Interactive Channel development expenses
following the commercial introduction of the Interactive Channel.
Other Income and Expenses. Net interest expense was $670,000 for the
quarter ended June 30, 1997 compared with net interest income of $38,000 for the
quarter ended June 30, 1996, reflecting interest expense on higher debt balances
outstanding during the second quarter of 1997. Other (income) expense for the
three months ended June 30, 1997 includes $356,000 of
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income related to the sale by the Company of certain warrants to its issuer as
well as $315,000 of expense due to the extinguishment of the Aggregate First
Tranche Notes.
Six Months Ended June 30, 1997 and 1996
Monetary revenues increased 16 percent to $5.3 million for the six months
ended June 30, 1997. The net increase of $750,000 was related to an increase of
$2.0 million attributable to the Company's audiotext services as a result of new
services contracts acquired from Donnelly and GTE. This increase was partially
offset by declines of (i) $560,000 attributable to the Network Guide product,
(ii) $481,000 attributable to ICT and (iii) $213,000 attributable to the
Company's Consumer Tips service.
The decline in Network Guide monetary revenues primarily reflects the
termination of distribution in 19 DMAs, 11 of which are located within the
Ameritech region, five within the Southwestern Bell region and three within the
DonTech region. Total Network Guide revenues in the 19 terminated DMAs were
$169,000 for the six months ended June 30, 1997 and $1.1 million for the six
months ended June 30, 1996. Network Guide revenues within the Company's other 35
existing DMAs declined slightly during the first half of 1997 compared with the
same period in 1996. These declines were partially offset by increasesd revenues
totaling $532,000 related to 17 new DMAs.
The decrease in ICT's revenues in the first six months of 1997 compared
with the same period in 1996 reflects a portion of the one-time license fee paid
in 1996 to ICT by GTE Corporation and GTE MainStreet for the use of ICT's United
States patents as part of an agreement to end litigation between ICT and GTE as
well as certain hardware and software sales made in connection with a trial of
Interactive Channel technology.
The decline in Consumer Tips revenues is the result of the February 1996
termination of the Company's agreement with Ameritech. Ameritech Consumer Tips
revenues ended completely in the second quarter of 1996.
Nonmonetary revenues and nonmonetary cost of sales declined 40 percent to
$3.4 million for the six months ended June 30, 1997 from $5.7 million for the
six months ended June 30, 1996. Substantially all of this $2.3 million decrease
in nonmonetary revenues and nonmonetary cost of sales occurred because of the
termination of distribution agreements in certain DMAs and because, in other
DMAs, the Company reduced the amount of space devoted to information provided by
media sponsors for lesser amounts of promotional advertising.
Monetary cost of sales increased 57 percent to $2.9 million, for the six
months ended June 30, 1997 from $1.9 million for the quarter ended June 30,
1996. This increase resulted from operating personnel salaries, depreciation
expenses and various other operating expenses totaling $1.1 million attributable
to the Interactive Channel's operations in Colorado Springs and Denton. In the
prior period, costs incurred by the Interactive Channel were research and
development in nature, because the Interactive Channel had not been commercially
deployed.
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<PAGE>
Selling, general and administrative expenses, including amortization of
intangible assets, increased 99 percent to $10.9 million for the six months
ended June 30, 1997 from $5.5 million for the six months ended June 30, 1996.
This increase resulted from certain programming, personnel salaries, subscriber
acquisition, travel and various other Interactive Channel expenses totaling $3.8
million as well as increased operating, customer service, sales, marketing and
administrative expenses incurred by the IT Network telephone business to support
new services and advertising contracts acquired from Donnelly and GTE.
Amortization of intangible assets increased by $1.3 million during the second
quarter of 1997 as a result of the amortization of patents related to the
Company's acquisition of the remaining shares of ICT during the first quarter of
1997 as well as the amortization of certain contract rights acquired from
Donnelly and GTE.
Research and development expenses declined 30 percent to $1.8 million for
the six months ended June 30, 1997 from $2.7 million for the six months ended
June 30, 1996. This decrease reflects lower Interactive Channel development
expenses following the commercial introduction of the Interactive Channel.
Other Income and Expenses. Net interest expense was $825,000 for the six
months ended June 30, 1997 compared with net interest income of $246,000 for the
six months ended June 30, 1996, reflecting interest expense on higher debt
balances outstanding during the first half of 1997 compared to interest income
on the proceeds from a public offering of the Company's common stock in December
1995 during the first six months of 1996. Other (income) expense for the first
six months of 1997 includes $356,000 of income related to the sale by the
Company of certain warrants to its issuer as well as $315,000 of expense due to
the extinguishment of the Aggregate First Tranche Notes.
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 IT Network telephone business and to develop, conduct trials and
commercially launch the Interactive Channel. As of June 30, 1997, the Company
had an accumulated deficit of approximately $68.0 million and had used
cumulative net cash in operations of $44.8 million. The difference at June 30,
1997 between the accumulated deficit and cumulative net cash used in operations
since inception was attributable to (i) $21.2 million of nonmonetary charges
related to financing incentives, write-down of intangible assets, depreciation
and amortization and other non-cash expenses and (ii) $2.0 million of unearned
income, accounts payable and accrued liabilities in excess of accounts
receivable, prepaid expenses and inventory. Source expects that these losses
will increase throughout 1997 as a result of, among other things, its continuing
expenditures relating to its efforts to commercially introduce, deploy and
enhance the Interactive Channel. Source expects to continue to incur operating
losses through 1997 in excess of the amount of the operating losses experienced
in past years and may incur operating losses at similar or greater levels
thereafter.
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Since its inception, the Company has financed its operations primarily
through an aggregate $65.7 million raised from various financing activities,
including the incurrence of debt and issuance of the Company's common and
preferred stock.
In December 1996, the Company acquired certain audiotext servicing assets
from GTE for an aggregate purchase price of $1.8 million, of which $600,000 was
paid in both December 1996 and May 1997 and $600,000 is payable in August 1997.
The Company may consider additional strategic acquisitions in either of its
lines of business from time to time. Although there can be no assurance that the
Company will consummate any such transactions, to the extent that it does so,
such acquisitions would require the Company to expend funds, issue additional
equity securities or incur additional debt. The incurrence of additional
indebtedness by the Company could result in a substantial portion of the
Company's operating cash flow being dedicated to the payment of principal and
interest on such indebtedness, could render the Company more vulnerable to
competitive pressures and economic downturns and could impose restrictions on
the Company's operations. In addition, the Company's ability to acquire
businesses is restricted under the terms of its agreements with its senior
lenders.
On April 3, 1996, the Company issued a senior note (the "First Tranche
Note") in the principal amount of $5.0 million and a warrant (the "First Tranche
Warrant") which entitled the holder thereof to purchase 500,000 shares of the
Company's common stock at a purchase price of $10.21 per share. On September 30,
1996 and March 31, 1997, the Company issued additional senior notes in the
amounts of $326,806 and $350,090, respectively, for the payment of interest on
the First Tranche Note. The First Tranche Note and the additional senior notes
(collectively, the "Aggregate First Tranche Notes") were due on March 31, 2001
and bore interest at the rate of 13% per annum through March 31, 1998 and 12%
thereafter.
On April 9, 1997, the Company received cash proceeds of approximately
$13.9 million net of fees and expenses associated with the transaction upon the
issuance of additional senior notes (the "Second Tranche Notes") in the
principal amount of $15.0 million and warrant (the "Second Tranche Warrants")
entitling the holders thereof to purchase in the aggregate 2,000,000 shares of
the Company's common stock at a purchase price of $6.00 per share at any time
until their expiration on March 31, 2004. Additionally, in connection with the
issuance of the Second Tranche Notes and the Second Tranche Warrants, the
Aggregate First Tranche Notes and the First Tranche Warrant were amended and
restated to terms identical to those of the Second Tranche Notes and the Second
Tranche Warrants, respectively. The amended Aggregate First Tranche Notes and
the Second Tranche Notes are due on March 31, 2002 and bear interest at the rate
of either: (i) 12% per annum through March 31, 1999 if paid in cash, or (ii) 13%
per annum through March 31, 1999 if paid through the issuance of additional
notes, and 12% thereafter. At the option of the Company, interest payments may
be made through the issuance of additional senior notes; however, to the extent
interest payments are made through the issuance of additional senior notes,
additional warrants to purchase .125 of the Company's common stock at a purchase
price of $6.00 per share must also be issued to the holders of the Aggregate
First and Second Tranche Notes for each dollar of principal amount of such
senior notes. On March 31, 2001, the Company must make a prepayment of the notes
equal to 33.33% of the then outstanding principal (together with accrued
interest to date on such principal amount). The
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<PAGE>
notes are secured by a lien on all of the Company's assets. Except for the
required prepayment described above, the note agreement provides for a
prepayment penalty and customary covenants and events of default. The Company
also granted 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 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 IT Network telephone business, (iii) the levels of advertising
expenditures necessary to increase awareness of the Interactive Channel, (iv)
the extent of market acceptance of such products, (v) the funds required by ICT
and the Company to fund their costs of litigation, (vi) potential acquisitions
or asset purchases and (vii) competitive factors. Following the issuance of the
Second Tranche Notes, the Company believes its current resources will be
sufficient to meet the Company's anticipated cash needs for working capital and
other capital expenditures related to the further development of the Interactive
Channel in the Company's existing markets and the further development of its
telephone business through the end of 1997. However, the Company may seek
additional funds or enter into other arrangements that could allow it to pursue
a more extensive business plan, including the possible deployment of the
Interactive Channel in additional markets and the consideration of potential
acquisitions in its IT Network telephone business. If cash generated by
operations is insufficient to satisfy the Company's liquidity requirements, the
Company may attempt to sell additional equity securities or incur additional
indebtedness. To the extent that future financing requirements are satisfied
through the issuance of equity securities, Source's shareholders may experience
dilution. The incurrence of additional debt financing could result in a
substantial portion of Source's operating cash flow being dedicated to the
payment of principal and interest on such indebtedness, could render Source more
vulnerable to competitive pressures and economic downturns and could impose
restrictions on Source's operations.
Net Operating Loss Carryforwards
At December 31, 1996, IT had net operating loss carryforwards of
approximately $42.2 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. Consequently, the Company's utilization of pre-1996 net operating losses
is limited to approximately $3.5 million in a given year.
Part II - Other Information
Item 1 - Legal Proceedings
Lerch. On December 15, 1993, Marvin Lerch, the former Chief Executive
Officer and a former shareholder of ICT, and certain of his relatives who were
also former ICT shareholders, commenced a legal proceeding in Ontario, Canada in
the Ontario Court (General Division) against Source and certain executive
officers of Source and a director of ICT on the grounds that
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<PAGE>
the defendants took actions intended to depress the value of ICT to allow Source
to acquire a portion of ICT at a favorable price. The plaintiffs seek, among
other things, orders that certain actions by ICT's board were invalid; a
declaration that ICT's board was incapable of managing its affairs due to
conflicts of interest; an injunction against Source from voting its ICT shares
for three years; purchase by the defendants of the plaintiffs' ICT shares for
Cdn$20 per share or exchange of the plaintiffs' ICT shares for Source Common
Shares of equal value; and damages in the amount of Cdn$8 million to compensate
the plaintiffs for the reduced value of their ICT shares and damages in the
amount of Cdn$6 million to compensate Mr. Lerch for the loss of certain ICT
stock options. ICT disputes all of the claims and no trial date has as yet been
set. The plaintiffs have amended their statement of claim for punitive damages
in the amounts of Cdn$1 million against Source and an aggregate of Cdn$2 million
against certain officers of Source. Although the ultimate outcome of this action
cannot be determined at this time, management believes the claims are without
merit and intends to vigorously defend its position. In addition, management
believes the ultimate outcome of these actions will not have a material impact
on the consolidated financial condition or results of operations of Source.
On January 25, 1994, Mr. Lerch also commenced a proceeding against ICT and
several persons who are, or have been, officers and directors of ICT claiming
wrongful termination of Mr. Lerch's employment with ICT and seeking damages in
the amount of Cdn$350,000. ICT denied the claim. The trial of this action began
in London, Ontario on April 23, 1996 and was completed May 3, 1996. Judgment was
rendered against ICT in the amount of Cdn$200,000. ICT's appeal of this decision
was initially denied but a review before a three judge panel resulted in ICT
being allowed to continue its appeal.
Little. On January 17, 1997, William T. Little, a stockholder of Source
and former director of IT , and a trust of which Mr. Little is the trustee,
commenced a legal proceeding in the United States District Court, Western
District of Michigan, against the Company and certain of its executive officers
and directors, alleging the he and various convertible noteholders converted
their notes based upon misrepresentations by IT and those officers and
directors. The plaintiff claims that he suffered damages in excess of $26
million because an alleged promise was made that IT would engage in a public
offering of its stock for approximately $56 per share, which did not occur. The
plaintiff further claims that IT offered to issue to him, during the time he was
serving as a director of IT, an unspecified number of shares of IT common stock
in consideration of his release of any claims related to such alleged
misrepresentations and that IT agreed to pay him and other noteholders an
unspecified amount in equivalent interest relating to the conversion of notes.
Although the ultimate outcome of this action cannot be determined at this time,
the Company disputes all of the plaintiff's claims as meritless and intends to
vigorously assert its position in this litigation. In addition, management
believes the ultimate outcome of this action will not have a material impact on
the consolidated financial condition or results of operations of the Company.
The Company and each of the defendants have filed answers denying the
plaintiff's allegations. Certain of the individual defendants also have made
counterclaims against Mr. Little for breach of fiduciary duty during his tenure
as a director of the Company and are seeking exemplary and punitive damages.
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Bauer. In November 1996, Jeanna Bauer, a former employee of IT, commenced
a proceeding in the United States District Court for the Southern District of
Ohio, Western District at Dayton, against IT , alleging discrimination on the
basis of sex and pregnancy and seeking reinstatement and compensatory damages in
the amount of $250,000 and an equivalent amount of punitive damages. The Company
denies the charges of discrimination and contends that it provided the plaintiff
the standard six week maternity leave, even though the plaintiff did not
technically qualify for such leave. The Company has filed a counterclaim against
the plaintiff seeking reimbursement of funds advanced to the plaintiff, but
never repaid. The Company intends to vigorously assert its position in this
litigation. No trial date has yet been set. In addition, management believes the
ultimate outcome of these actions will not have a material impact on the
consolidated financial condition or results of operations of Source.
Others. The Company is aware of certain claims against the Company and ICT
that have not developed into litigation, or if they have, are dormant. Unnamed
shareholders of ICT advised the ICT directors in June 1995 that they questioned
certain of the directors' actions under Ontario law. ICT's attorney responded to
the shareholders' substantive points and the shareholders have not taken further
action.
Further, the Company and ICT 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 21, 1997
("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 8,360,127
Abstain or Authority Withheld 214,923
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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.
For 8,360,377
Abstain or Authority Withheld 214,673
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 8,360,377
Abstain or Authority Withheld 214,673
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 8,398,893
Abstain or Authority Withheld 176,157
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 8,398,893
Abstain or Authority Withheld 176,157
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 8,398,663
Abstain or Authority Withheld 176,387
Proposal to elect Robert H. Alter to serve as a director of the Company
for the ensuing year and until his successor is elected and qualified.
For 8,398,663
Abstain or Authority Withheld 176,387
Proposal to elect Robert J. Cresci to serve as a director of the Company
for the ensuing year and until his successor is elected and qualified.
For 8,398,893
Abstain or Authority Withheld 176,157
Proposal to amend the 1995 Nonqualified Stock Option Plan for Non-Employee
Directors:
For 3,166,525
Against 201,460
Abstain 27,596
Proposal to amend the 1995 Performance Equity Plan:
For 3,118,017
Against 243,430
Abstain 34,134
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Proposal to approve the Employee Stock Purchase Plan:
For 3,206,462
Against 157,079
Abstain 32,040
Proposal to ratify the appointment of Ernst & Young LLP as independent
auditors for the Company for the 1997 fiscal year:
For 8,552,404
Against 5,547
Abstain 17,093
Item 5 - Other information - not applicable
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits -
10.1 Audiotex Agreement by and between the Company and
Ameritech Publishing, Inc., dated June 30, 1997.
10.2 Amendment to Distribution Agreement by and between the
Company and Cablevision Systems Corporation, dated May 22,
1997.
(b) Reports on Form 8-K during the three months ended June 30, 1997 -
not applicable
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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 14, 1997 By: /s/ Michael G. Pate
----------------------------
Michael G. Pate
Chief Financial Officer and
Treasurer
(Principal Financial Officer
and Duly Authorized Officer)
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AUDIOTEX AGREEMENT
This Audiotex Agreement, effective June 30, 1997 ("Agreement"), is entered
into between IT NETWORK, INC., a Texas corporation and a wholly-owned subsidiary
of Source Media, Inc. ("ITN"), and AMERITECH PUBLISHING, INC., a Delaware
corporation, doing business as AMERITECH ADVERTISING SERVICES ("AAS"), for the
purpose of providing AAS with the services as described in this Agreement (the
"Services"), and as more fully set forth in Article II of this Agreement . The
parties, intending to be legally bound, agree as follows:
ARTICLE 1
DEFINITIONS
I.1 For the purposes of this Agreement, the following terms and all other terms
defined in this Agreement shall have the meaning so defined unless the context
clearly indicates otherwise. A term defined in the singular shall include the
plural and vice verse when the context so indicates.
"Affiliate(s)" means any organization or entity owning a
majority of the outstanding common stock
and voting stock of ITN and/or AAS; (ii)
any other corporation of which a majority
of the outstanding common stock and the
voting stock is owned by the parent of ITN
and/or AAS; and (iii) any other legal
business entity of which at least fifty
percent is owned by ITN and/or AAS.
"Information" means specifications, drawings, sketches,
models, manuals, samples, tools, computer
programs, technical information, and other
confidential business, customer or
personnel information or data, whether
written, oral or otherwise.
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"Services" means all services described in this
Agreement furnished by ITN to AAS under
this Agreement.
"Directory or Directories" means issues of AAS Yellow or co-bound
White and Yellow Page Directories in
Michigan, Indiana, Ohio, Wisconsin and as
specifically set forth on Attachment B
attached hereto and made a part of this
Agreement.
"Audiotex" means storage and retrieval of recorded
information.
ARTICLE II
SERVICES
II.1 Services and Responsibilities
ITN shall provide the Services described below concerning Front of Book
("FOB") Local and National Yellow Pages Advertising and related responsibilities
at no charge to AAS. All Services shall be performed by ITN in accordance with
the terms and conditions of this Agreement. As used herein, the term "Services"
shall include, but not be limited to, all labor or materials, or both, furnished
by ITN.
ITN will purchase from AAS: FOB Local and National Yellow Pages
Advertising information pages per directory at the number of pages, rates, terms
and directory locations listed on Attachment B for the purpose of listing ITN's
Audiotex service. ITN will sell and produce the Audiotex Services listed in the
AAS Directories. ITN will promote its Audiotex Services by soliciting
advertisers for the Audiotex FOB pages purchased from AAS and sponsors for the
audio portion of the Audiotex service itself.
ITN Responsibilities
ITN will have the option to purchase 12 or 16 FOB pages from AAS, provided
however that ITN has the option to purchase a minimum of 8 pages in markets with
a distribution of
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500,000 or less, as indicated on Attachment B. ITN will place its orders for FOB
pages by the due date for each Directory as specified on Attachment B for the
first directory cycle and thereafter as specified by AAS. Failure to place an
order by a due date will result in no FOB audiotex pages being printed in the
Directory. ITN will supply AAS with final art for advertisers' print
advertisements as specified in Attachment C, Advertisement Preparation and
Production Printing Specifications attached hereto and made a part thereof. In
addition, ITN will submit the FOB page template design to AAS for its approval,
which shall not be unreasonably withheld.
ITN is responsible for producing Audiotex messages for FOB Local and
National Yellow Advertising information pages in Directories included on
Attachment B and for all Audiotex production and costs including but not limited
to phone lines and Audiotex content as well as associated equipment, programming
and maintenance. ITN will not provide Audiotex service to information providers
publishing unlawful, discriminatory, or sexually explicit messages.
disconnecting these unlawful, discriminatory or sexually explicit messages at
its own cost, provided that unlawful, discriminatory or sexually explicit
messages existing on the date of this Agreement shall be deleted at the cost of
AAS. ITN shall provide AAS with monthly reports relating to caller statistics or
other matters relevant to AAS's reasonable concerns under this Agreement.
ITN shall be responsible for all costs and expenses with respect to all
Services performed under this Agreement, unless otherwise provided herein, pay
the fees specified on Attachment B (50% of fees due upon order placement based
on the number of Directories delivered in the prior year and the remainder when
initial delivery of each Directory commences) and pay real estate lease expenses
for any equipment not located on AAS premises identified on Attachment D-2. ITN
shall be responsible to purchase or lease audiotex equipment currently used by
AAS from Ameritech Credit Corporation. ITN will provide hosting and service
bureau services for AAS' 1997 Cleveland "Cleveline" FOB audiotex service.
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AAS shall send ITN a monthly invoice for page costs, offsetting any amount
due against any credit remaining to ITN, as provided below. ITN will remit
payment to AAS for all amounts due under each invoice within thirty (30) days of
the invoice. Payments received more than 30 days after the invoice date will be
subject to interest at the rate of one and one-half percent (11/2%) per month on
the entire unpaid balance.
AAS Responsibilities
AAS is responsible for final editorial and design approval to determine
that all print advertising submitted by ITN is consistent with AAS Ethics,
Publishing and Premium Space Policies. AAS standards as published of the
Directories, provided however that AAS shall maintain the general design and
impression of print advertisements submitted by ITN and shall not modify the
general design or impression without the prior approval of ITN which shall not
be unreasonably withheld. AAS is responsible for printing and distributing
Directories. AAS may change publication or delivery dates or content for the
Directories, and AAS may change the ITN order due dates specified on Attachment
B. ITN will forward its Audiotex content information on RC color separated
camera ready pages with two (2) sets of color laser proofs. AAS will produce,
bind and distribute designated directories during the first year at the per
Directory fees designated on Attachment B. For each year thereafter, AAS will
increase the per page fee for each Directory by the lesser of AAS' actual per
page cost increase for expenses of publishing the Directory or 5%. As a credit
against the per page fees, ITN will receive an initial one-time credit of
$450,000. For each purchase of FOB pages by ITN, the total per page charges
shall accrue against the credit amount until it is exhausted. After exhaustion,
ITN will initiate paying the per page charges as designated on Attachment B for
the initial Directory cycle and as subsequently adjusted.
AAS shall provide ITN with lease space at no charge for the audiotex
equipment ITN leases or purchases from Ameritech Credit Corporation at existing
AAS locations where space is available identified on Attachment D-1 and D-2 .
For space where the audiotex equipment resides on third party premises
identified on Attachment D-1 and/or D-2, AAS will assign to ITN the
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responsibility for leases for space on such third party premises. In addition,
AAS will ensure that upon payment of the purchase price, ITN will acquire all
hardware and operational software and/or license for use of software for the
audiotex equipment currently used by AAS and identified on Attachment E and that
the purchase price will be no more than $70,000 and no less than $50,000.
Regardless of whether ITN purchases or leases the audiotex equipment identified
on Attachment E, ITN will take such equipment "as is", "with all faults" and
without warranty. AAS MAKES NO REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED,
OF ANY KIND WITH RESPECT TO THE EQUIPMENT. AAS MAKES NO REPRESENTATION OR
WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE AND EXPRESSLY
EXCLUDES SUCH WARRANTIES. AAS and ITN shall mutually agree as to the location of
all Audiotex Services equipment, provided however that if ITN decides to
relocate the equipment from its location on the execution date of this
Agreement, ITN shall be responsible for renting, leasing, otherwise acquiring
space for the equipment at a new location, maintaining such new location and
paying all associated costs and expenses.
AAS is also responsible for assigning to ITN telephone numbers and
telecommunication services identified on Attachment F currently in use for
audiotex services in the AAS Directories, and commencing on the publication of
each Directory under this Agreement, ITN shall be responsible for paying the
telephone costs for the numbers and telecommunication services identified on
Attachment F associated with that Directory which are assigned to ITN.
II.2 Warranties for Services
a. ITN hereby warrants and represents that all Services provided under
this Agreement shall be performed in a professional manner, promptly and with
diligence, in accordance with the description of such Services in this
Agreement, including the Attachments. ITN further warrants that neither ITN nor
its representatives and employees shall represent themselves as employees of
AAS, but shall represent themselves only as employees of ITN. ITN represents
that in providing Services, it will not disparage AAS or attempt to reduce AAS'
revenues.
5
<PAGE>
b. AAS shall notify ITN of any instance where such Services are considered
to be unsatisfactory. Upon receipt of any such notice, ITN shall, at no
additional charge to AAS, take prompt action to correct such unsatisfactory
Services.
c. ITN will use its best efforts to assure that advertising copy is
accurate and in accordance with current AAS Ethics, Publishing and Premium Space
Policies. Without in any way limiting the obligations set forth in the section
entitled "Indemnification," each party agrees to absorb the cost of all
adjustments that are required to be made because of advertising and copy errors
which are exclusively the fault of such party.
II.3 Termination and Cancellation
a. Agreement
Unless terminated as specified below, this Agreement shall be
effective for three directory cycles (three years) beginning with the 1997
Toledo and Indianapolis Directories. The Agreement may continue thereafter if
both parties mutually agree to extend the Agreement. Upon termination, ITN shall
continue to provide Services for the life of each Directory.
b. Default
AAS may terminate this Agreement for a Directory prior to the
publication of three (3) editions of the Directory only for the gross negligence
or willful default by ITN of the performance of its duties under this Agreement
and such gross negligence or willful default has not been cured within thirty
(30) days of written notice by AAS to ITN. .
c. General
(1) Upon termination, cancellation or expiration of this Agreement,
ITN shall promptly deliver to AAS all of AAS's data and property of whatever
kind furnished to ITN by AAS in connection with or as a result of the
performance of Services under this Agreement, re-assign audiotex telephone
numbers and telecommunication services to AAS to extent requested by AAS.
(2) The terms, conditions and warranties contained in this Agreement
that by their sense and context are intended to survive the performance thereof
by either or both parties under this Agreement shall so survive the completion
of performance, cancellation or termination of this Agreement.
6
<PAGE>
II.4 Exclusive Market Rights
It is expressly understood that this Agreement grants to ITN the exclusive
right to provide to AAS the types of FOB services which are the subject of this
Agreement.
ARTICLE III
GENERAL TERMS AND CONDITIONS
III.1 Term of Agreement
This Agreement shall become effective as of the date first above written
and, unless sooner terminated or canceled as provided in Article III.3 above,
shall remain in full force and effect for an initial term of three (3) directory
cycles (three years) for each directory listed on Exhibit B beginning with the
1997 Toledo and Indianapolis Directories, unless extended by a writing signed by
both parties.
III.2 Taxes
a. ITN shall bear the cost of all taxes, import and export duties, and
other governmental fees of whatever nature applicable to the Services hereunder.
b. ITN Agrees to pay, and to hold AAS harmless from and against, any
penalty, interest, additional tax or other charge that may be levied or assessed
as a result of the delay or failure of ITN for any reason to pay any tax or file
any return or information required by law, rule or regulation or by this
Agreement to be paid or filed by ITN.
III.3 Independent Contractor
ITN declares and represents that ITN is engaged in an independent business
and will perform its obligations under this Agreement as an independent
contractor and not as the agent or employee of AAS; that the persons performing
Services on behalf of ITN are not agents or employees of AAS; that ITN has and
retains the right to exercise full control of and supervision over its
performance of its obligations under this Agreement and full control over the
employment, direction, compensation and discharge of all employees assisting in
the performance of such
7
<PAGE>
obligations; that ITN will be solely responsible for all matters relating to
payment of such employees, including compliance with Workers' Compensation,
unemployment, disability insurance, Social Security, withholding and all other
federal, state and local laws, rules and regulations governing such matters; and
that ITN will be responsible for its acts and those of its agents, employees and
contractors during the performance of its obligations under this Agreement.
III.4 Indemnification
Each party ("Indemnifying Party") shall indemnify the other party and its
Affiliates, and its and their respective officers, directors, agents and
employees, and each of them from and against any loss, cost, damage, claim,
expense (including independent attorney's fees) or liability, including, but not
limited to, liability as a result of injury to or death of any person or damage
to or loss or destruction of any property arising out of or resulting from or in
connection with the performance of this Agreement and caused by the acts or
omissions of the Indemnifying Party or a contractor or an agent of the
Indemnifying Party or an employee of any one of them, in any way arising out of
the performance by any one of them of this Agreement, except to the extent that
such loss, cost, damage, claim, expense or liability arises from the negligence
or willful misconduct of the non-Indemnifying Party or its employees. As used in
the preceding sentence, the words "any person" shall include, but shall not be
limited to, a contractor or an agent of either party, and an employee of either
party, or any such contractor or agent and the word "any property" shall
include, but shall not be limited to, property of either party or any such
contractor or agent or an employee of any of them. Upon request of the
non-Indemnifying Party, the Indemnifying Party , at no cost or expense to the
non-Indemnifying Party , defend any suit or other legal proceeding asserting a
claim for any loss, damage or liability specified above, and the Indemnifying
Party shall pay any costs and independent attorney's fees that may be incurred
by the non-Indemnifying Party in connection with any such claim or suit or in
enforcing the indemnity granted above, provided, however, that the Indemnifying
Party shall also keep the non-Indemnifying Party fully informed as to the
progress of opportunity to participate on an equal basis with the Indemnifying
Party in any such defense.
8
<PAGE>
III.5 Insurance
Each party shall maintain in full force and effect general liability
insurance, endorsed to specifically cover its indemnity obligations hereunder,
in amounts acceptable to the other party, plus, if applicable, Workers'
Compensation Insurance covering Vendor's full liability under the Workers'
Compensation laws applicable to work being performed under this Agreement. Such
insurance shall remain in full force and effect as long as AAS may have any
potential liability with respect to this Agreement.
At a party's request, the other party shall provide the requesting party
with proof of compliance with the insurance provisions of this section
(including copies of all polices and endorsements, if required by AAS).
III.6 Access
a. AAS shall permit ITN reasonable access to the equipment sites used in
connection with providing Audiotex under this Agreement where the equipment
resides on AAS premises.
b. The employees and agents of ITN while on the premises of the equipment
shall comply with all site rules and regulations, including, where required by
government regulations, submission of satisfactory clearance from the US
Department of Defense and other governmental authorities concerned.
c. Release Void
AAS shall not require wavers or releases of any personal rights from
representatives of ITN in connection with visits to its premises.
III.7 Information
No Information obtained by a party ("Requesting Party") from the other
party ("Non-Requesting Party") under this Agreement or in contemplation of this
Agreement shall become the Requesting Party's property. All copies of such
Information in written, graphic or other tangible form shall be returned to the
Non-Requesting Party upon request. Unless such
9
<PAGE>
Information was previously known to the Requesting Party free of any obligation
to keep it confidential or until such Information is subsequently made public by
the Non-Requesting Party or a third party, the Requesting Party shall keep it
confidential, shall use it only in performing under this Agreement, shall not
reproduce, copy or disclose it to others and may use it for other purposes only
upon such terms as may be agreed upon in writing. The Non-Requesting Party shall
have the right to review and approve the procedures for handling such
Information and may make such inspections as the Non-Requesting Party deems
necessary to assure that such Information s being property protected.
III.8 Assignment
a. Except as otherwise expressly provided in this Agreement and except as
to corporate Affiliates, neither party shall assign its rights or delegate its
duties under this Agreement without prior written consent of the other party,
which consent shall not be unreasonably withheld; provided, however, that either
party may, at any time and without the other's prior written consent, assign its
rights and delegate its duties either in whole or in part under this Agreement
to (a) any present or future Affiliate of the assigning party, or (b) to any
other company if such assignment to such other company will, in the assigning
party's opinion, assist in the implementation of any law or ruling issued in any
form whatsoever by a judicial or other government authority. The assigning party
shall give the other party written notice of any such assignment. In the event
of such assignment, the assigning party shall be released and discharged, to the
extent of such assignment, from all further obligations under this Agreement.
Any attempted assignment or delegation in contravention of this sub-article (a)
shall be void and of no effect.
b. Subject to the provisions of sub-article (a) above, this Agreement
shall inure to the benefit of and be binding upon the respective successors and
assigns, if any, of the parties to this Agreement.
III.9 Notices
Except as otherwise specified in this Agreement, all notices or other
communications
10
<PAGE>
hereunder shall be deemed to have been duly given when made in writing and
delivered in person, sent by telefax with confirmation of receipt indicated or
deposited in any form of United States mail having a return receipt, postage
prepaid, return receipt requested or delivered prepaid to an express messenger
service where delivery can be traced and verified (such as, but not limited to,
Airborne Express, DHL Worldwide Express, Federal Express, etc.) and addressed as
follows:
TO ITN: TO AAS:
------- -------
IT NETWORK, INC AMERITECH ADVERTISING SERVICES
5601 EXECUTIVE DRIVE 100 EAST B IG BEAVER ROAD
IRVING, TEXAS 75038 TROY, MICHIGAN 48083
ATTN: W. SCOTT BEDFORD ATTN: DIRECTOR OF BRAND MARKETING
The address to which notices or communications may be given to ether party may
be changed by written notice given by such party to the other pursuant to this
article.
III.10 Publicity
Each party shall submit to the other party all advertising, sales
promotion and other publicity relating to the subject matter of this Agreement
in which the other party's name or names are mentioned or language, signs,
markings or symbols are used. Neither party shall use or publish or such
advertising, sales promotion or publicity matter without the other party's prior
written approval
III.11 Compliance With Laws
Each party shall comply with all applicable federal, state and local laws,
regulations and codes, including but not limited to, the procurement of permits,
certificates and licenses when needed, in the performance of this Agreement.
Each party shall indemnify and hold the other party harmless against any loss,
damage or liability that may be sustained by reason of the indemnifying party's
failure to comply with such federal, state and local laws, regulations and
codes.
11
<PAGE>
III.12 No Third Party Beneficiaries
Except as otherwise provided in this Agreement, the provisions of this
Agreement are for the benefit of the parties to this Agreement and not for any
other person.
III.13 Waivers of Default
Waiver by either party of any default by the other party shall not be
deemed a waiver by the non-defaulting party of any other default.
III.14 Amendments
No provisions of this Agreement shall be deemed waived, amended or
modified by either party, unless such waiver, amendment or modification is in
writing and signed by both parties.
III.15 Non-Discrimination
Attachment A is attached hereto, made a part of this Agreement and incorporated
by reference in this Agreement. As used in Attachment A, "Contractor" shall mean
ITN.
III.16 Headings
The article, section and paragraph headings contained in this Agreement
are for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
III.17 Governing Law
This Agreement shall be governed by the substantive laws of the State of
Michigan. Any dispute under this Agreement shall be submitted to arbitration
under the rules of the American Arbitration Association in Troy, Michigan.
III.18 Remedies Cumulative
Any right of termination or other remedies prescribed in this Agreement
are cumulative and are not intended to be exclusive of any other remedies to
which the injured party may be entitled at law or in equity (including, but not
limited to, the remedies of specific performance and cover) in case of any
breach or threatened breach by the other party of any provision of this
12
<PAGE>
Agreement, unless such other remedies which are prescribed in this Agreement are
specifically limited or excluded by this Agreement. The use of one or more
available remedies shall not bar the use of any other remedy for the purpose of
enforcing the provisions of this Agreement; provided, however, that a party
shall not be entitled to retain the benefit of inconsistent remedies.
III.19 Severability
If any of the provisions of this Agreement shall be invalid or
unenforceable, such invalidity or unenforceability shall not invalidate or
render unenforceable the entire Agreement, but rather the entire Agreement shall
be construed as if not containing the particular invalid or unenforceable
provision or provisions, and the rights and obligations of the parties shall be
construed and enforced accordingly.
III.20 Patents
No licenses, express or implied, under any patents or copyrights owned by
either party are granted to the other party under this Agreement.
ARTICLE IV
ENTIRE AGREEMENT
This Agreement, including all Attachments attached to or referenced in
this Agreement, and all proposals, descriptions, drawings, specifications,
marketing materials, and other literature published by either party in
connection with or in contemplation of this Agreement shall constitute the
entire agreement between ITN and AAS with respect to the subject matter.
(SIGNATURE PAGE FOLLOWS)
13
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their respective duly authorized representatives.
IT NETWORK, INC. AMERITECH PUBLISHING, INC. doing
business as AMERITECH ADVERTISING
SERVICES
By: By:
-------------------------------- --------------------------------
Print Name: Print Name:
------------------------ ------------------------
Title: Title:
----------------------------- -----------------------------
Date Signed: Date Signed:
----------------------- -----------------------
14
<PAGE>
Attachment A
NON-DISCRIMINATION PROVISIONS
During the performance of this Agreement, Supplier agrees to comply with
the following provisions, to the full extent that this Agreement is subject
thereto: Executive Order No. 11246, Executive Order No. 11625, Executive Order
No. 12138, Section 503 of the Rehabilitation Act of 1973, the Vietnam-Era
Veteran's Readjustment Assistance Act of 1974, the Illinois Human Rights Act,
the Indiana Civil Rights Law, the Michigan Civil Rights Act, the Ohio Fair
Employment Practice Law, the Wisconsin Fair Employment Act, the rules,
regulations and relevant orders of the agencies enforcing said Orders and
Statutes or charged with administering affirmative action/non-discrimination
requirements applicable to government contractors or subcontractors, and any
other applicable Federal, State, or local law imposing obligations on government
contractors or subcontractors.
Monetary amounts, contractual or purchasing relationships, and/or the
number of Supplier's employees, determine which provisions are applicable.
CLAUSES REQUIRED BY FEDERAL LAW
The following clauses are deemed part of this Agreement in accordance with
the table set forth below.
- --------------------------------------------------------------------------------
ANNUAL CONTRACT
VALUE CLAUSES
- --------------------------------------------------------------------------------
1 2 3 4 5 6
- --------------------------------------------------------------------------------
Less than $2,500 x(a) x(a) x(b)
- --------------------------------------------------------------------------------
$2,500 or More x(a) x(a) x(b) x
- --------------------------------------------------------------------------------
$10,000 or More x x x(b) x x
- --------------------------------------------------------------------------------
$50,000 or More x x x(c) x(b) x x
- --------------------------------------------------------------------------------
(a) Applies only to depositories of government funds or financial institutions
issuing U.S. savings bonds and notes.
(b) Applies only to depositories of government funds or financial institutions
issuing U.S. savings bonds and notes and which have 50 or more employees and are
prime contractors or first-tier subcontractors.
(c) Applies only to businesses having 50 or more employees.
(d) Applies only to businesses having 50 or more employees and which are prime
contractors or first-tier subcontractors.
Clause 1: Equal Employment Opportunity
The Equal Employment Opportunity Clause set forth in Part 202 of Executive
Order 11246 and reiterated at 41 C.F.R. Part 60-1.4(a), is hereby incorporated
by reference pursuant to 41 C.F.R. Part 60-1.4(d).
Clause 2: Certification of Non-segregated Facilities
The Supplier certifies that it does not and will not maintain any
facilities it provides for its employees in a segregated manner, or permit its
employees to perform their services at any location under its control, where
segregated facilities are maintained; and that it will obtain a similar
certification, prior to the award of any nonexempt subcontract.
Clause 3: Certification of Affirmative Action Programs
The Supplier affirms that it has developed and is maintaining Affirmative
Action Plans as required by Parts 60-2, 60-250, and 60-741 of Title 41 of the
Code of Federal Regulations.
Clause 4: Certification of filing of Employers Information Reports
1
<PAGE>
The Supplier agrees to file annually on or before the 31st day of March
complete and accurate reports of Standard Form 100 (EEO-a) or such forms as may
be promulgated in its place.
Clause 5: Employment of Veterans
The Affirmative Action For Disabled Veterans and Veterans of the Vietnam
Era Clause, set forth in 41 C.F.R Part 60-250.4 is hereby incorporated by
reference pursuant to 41 C.F.R. Part 60-250.22.
Clause 6: Employment of the Handicapped
The Affirmative Action Clause For Handicapped Workers set forth at 41
C.F.R. Part 60-741.4 is hereby incorporated by reference pursuant to 41 C.F.R.
Part 60-741.22.
ADDITIONAL FEDERAL CLAUSES
If this Agreement offers further subcontracting opportunities, the
following clause is hereby made a material term of this Agreement:
Utilization of Small Business Concerns and Small
Disadvantaged Business Concerns (Feb. 1990)
(a) It is the policy of the United States that small business concerns and
small business concerns owned and controlled by socially and economically
disadvantaged individuals shall have the maximum practicable opportunity to
participate in performing contracts let by and Federal agency, including
contracts and subcontracts for subsystems, assemblies, components, and related
services for major systems. It is further the policy of the United States that
its prime contractors establish procedures to ensure the timely payment of
amounts due pursuant to the terms of their subcontracts with small business
concerns and small business concerns owned and controlled by socially and
economically disadvantaged individuals.
(b) Supplier hereby agrees to carry out this policy in the awarding of
subcontracts to the fullest extent consistent with efficient contract
performance. Supplier further agrees to cooperate in any studies or surveys as
may be conducted by the United States Small Business Administration or the
awarding agency of the United States as may be necessary to determine the extent
of Supplier's compliance with this clause.
(c) As used in this contract, the term "small business concern" shall mean
a small business as defined pursuant to section 3 of the Small Business Act and
relevant regulations promulgated pursuant thereto. The term "small business
concern owned and controlled by socially and economically disadvantaged
individuals" shall mean a small business concern -
(1) Which is at least 51 percent unconditionally owned by one or more
socially and economically disadvantaged individuals; or, in the case of any
publicly owned business, at least 51 per centum of the stock of which is
unconditionally owned by one of more socially and economically disadvantaged
individuals; and
(2) Whose management and daily business operations are controlled by one
or more of such individuals. This term also means a small business concern that
is at least 51 per cent unconditionally owned by an economically disadvantaged
Indian tribe or Native Hawaiian Organization, or a publicly owned business
having at least 51 percent of its stock unconditionally owned by one of these
entities which has its management and daily business controlled by members or an
economically disadvantaged Indian tribe or a Native Hawaiian Organization, and
which meets the requirements of 13 C.F.R. part 124. The Supplier shall presume
that socially and economically disadvantaged individuals include Black
Americans, Hispanic Americans, Native Americans, Asian-Pacific Americans,
Subcontinent Asian Americans, and other minorities, or any other individual
found to be disadvantaged by the Administration pursuant to section 8(a) of the
Small Business Act. The Supplier shall presume that socially and economically
disadvantaged entities also include Indian Tribes and Native Hawaiian
Organizations.
(d) Suppliers acting in good faith may rely on written representations by
their subcontractors regarding their status as either a small business concern
or a small business concern owned and controlled by socially and economically
disadvantaged individuals.
[end of clause]
2
<PAGE>
If the value of the goods or services to be provided by Supplier under
this Agreement is $500,000 or more, Supplier further agrees that it shall adopt
a Small Business and Small Disadvantaged Business Subcontracting Plan as
described in the clause set forth at Part 1, Section 52.219-9 of Title 48 of the
Code of Federal Regulations.
STATE CLAUSES
If this Agreement relates to services to be performed for the state of
Illinois, its political subdivisions, or any municipal corporation within
Illinois, the Equal Employment Opportunity clause set forth at 44 Ill. Adm. Code
Part 750, Appendix A shall be deemed incorporated herein by reference pursuant
to the language thereof.
If this Agreement relates to services to be performed for the state of
Michigan or its political subdivisions, the value of the contract is at least
$5000, and Supplier has at least three (3) employees, the Non-discrimination
Clause for All State Contractors adopted by the State Administrative Board on
January 17, 1967, as amended, shall be deemed incorporated herein by reference
pursuant to the language thereof.
3
<PAGE>
Attachment B
1997 DIRECTORY MANUFACTURING COSTS
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
CIRCULATION Page ORDER DUE
STATE DIRECTORY IN ISSUE COST PER Count DATE/FINAL
THOUSANDS* MONTH THOUSAND COLOR Due Date ART**
===================================================================================================================
<C> <C> <S> <C> <C> <C> <C> <C> <C>
1 I ANDERSON 77,152 3 3.04 2 10/12/97 11/12/97
- -------------------------------------------------------------------------------------------------------------------
2 I EVANSVILLE 237,433 3 2.4 2 10/21/97 11/21/97
- -------------------------------------------------------------------------------------------------------------------
3 I EVANSVILLE MIDI 25,948 3 5.28 2 10/21/97 11/21/97
- -------------------------------------------------------------------------------------------------------------------
4 I INDIANAPOLIS 1,030,700 10 2.38 4 6/17/97 7/17/97***
- -------------------------------------------------------------------------------------------------------------------
5 I MUNCIE 103,915 3 3.04 2 10/21/97 11/12/97
- -------------------------------------------------------------------------------------------------------------------
6 I SOUTH BEND 238,400 3 2.57 4 11/10/97 12/10/97
- -------------------------------------------------------------------------------------------------------------------
7 I SOUTH BEND MIDI 103,000 3 4.02 4 11/10/97 12/10/97
- -------------------------------------------------------------------------------------------------------------------
8 M ANN ARBOR 265,000 11 2.99 2 7/25/97 8/25/97***
- -------------------------------------------------------------------------------------------------------------------
9 M BATTLE CREEK AREA 100,000 11 3.76 2 8/1/97 8/29/97***
- -------------------------------------------------------------------------------------------------------------------
10 M DETROIT 768,000 9 2.43 2 4/28/98 5/28/98
- -------------------------------------------------------------------------------------------------------------------
11 M DOWNRIVER AREA 210,000 4 2.6 2 11/22/97 12/22/97
- -------------------------------------------------------------------------------------------------------------------
12 M EAST AREA 457,000 11 2.7 2 7/14/97 8/14/97***
- -------------------------------------------------------------------------------------------------------------------
13 M FLINT AREA 325,000 8 2.71 2 4/19/98 5/18/98
- -------------------------------------------------------------------------------------------------------------------
14 M GRAND RAPIDS AREA 456,571 1 2.29 2 8/24/97 9/24/97
- -------------------------------------------------------------------------------------------------------------------
15 M GRAND RAPIDS MIDI 55,082 1 2.89 2 8/24/97 9/24/97
- -------------------------------------------------------------------------------------------------------------------
16 M GRAND TRAVERSE AREA 140,000 5 2.87 4 1/18/98 2/18/98
- -------------------------------------------------------------------------------------------------------------------
17 M GRAND TRAVERSE MIDI 41,200 5 4.03 4 1/18/98 2/18/98
- -------------------------------------------------------------------------------------------------------------------
18 M JACKSON 125,000 8 3.14 2 4/7/98 5/7/98
- -------------------------------------------------------------------------------------------------------------------
19 M KALAMAZOO 217,000 8 2.96 2 3/24/98 4/24/98
- -------------------------------------------------------------------------------------------------------------------
20 M KALAMAZOO MIDI 49,775 9 3.67 2 3/24/98 4/24/98
- -------------------------------------------------------------------------------------------------------------------
21 M LANSING AREA 350,000 6 2.43 2 2/19/98 3/19/98
- -------------------------------------------------------------------------------------------------------------------
22 M MIDLAND 68,000 8 4.05 2 5/18/98 6/18/98
- -------------------------------------------------------------------------------------------------------------------
23 M MONROE CARLETON 61,000 1 3.77 2 9/23/97 10/23/97
- -------------------------------------------------------------------------------------------------------------------
24 M NORTH OAKLAND/PONTIAC 300,000 4 2.44 2 12/6/97 1/6/98
- -------------------------------------------------------------------------------------------------------------------
25 M NORTH WOODWARD 389,000 4 2.46 2 11/22/97 12/22/97
- -------------------------------------------------------------------------------------------------------------------
26 M SAGINAW 245,000 6 2.7 2 2/20/98 3/20/98
- -------------------------------------------------------------------------------------------------------------------
27 M WEST NORTHWEST 342,000 4 2.7 2 11/17/97 12/17/97
- -------------------------------------------------------------------------------------------------------------------
28 O AKRON 450,000 12 2.65 2 7/26/98 8/25/98
- -------------------------------------------------------------------------------------------------------------------
29 O CANTON 218,000 6 2.71 2 2/25/98 3/25/98
- -------------------------------------------------------------------------------------------------------------------
30 O CLEVELAND 1,190,000 5 2.28 2 12/23/97 1/23/98
- -------------------------------------------------------------------------------------------------------------------
31 O COLUMBUS 946,200 7 2.34 2 4/1/98 5/1/98
- -------------------------------------------------------------------------------------------------------------------
32 O DAYTON 607,500 2 2.44 2 10/7/97 11/7/97
- -------------------------------------------------------------------------------------------------------------------
33 O TOLEDO 460,000 10 2.62 2 7/18/97 8/15/97***
- -------------------------------------------------------------------------------------------------------------------
34 O YOUNGSTOWN 343,000 3 2.87 2 11/12/97 12/12/97
- -------------------------------------------------------------------------------------------------------------------
35 W FOX CITIES 210,000 9 3.11 4 5/2/98 6/2/98
- -------------------------------------------------------------------------------------------------------------------
36 W GREEN BAY 208,000 12 2.98 4 06/31/98 7/31/98
- -------------------------------------------------------------------------------------------------------------------
37 W MADISON 400,957 1 2.31 4 9/14/97 10/14/97
- -------------------------------------------------------------------------------------------------------------------
38 W MILWAUKEE YP 955,000 8 2.48 4 4/6/98 5/6/98
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
* CIRCULATION - Estimated 1997 Total Circulation-Initial and Secondary
Delivery
** ESTIMATED DUE DATES - 1998 Directory Schedule not yet released from
Manufacturing
*** DIRECTORIES TO BEGIN WITH 1997 ISSUES - all others to begin with the 1998
issues
<PAGE>
ATTACHMENT C
ADVERTISEMENT PREPARATION AND PRODUCTION
PRINTING SPECIFICATIONS
ITN agrees to follow the Advertisement Preparation and Production Printing
Specifications as herein defined for publication in Directories of Ameritech in
accordance with Aas's standards and guidelines.
1. Art & Text Specifications
a. 1000 (or higher) dpl on Resin Coated photographic paper.
b. No paste-ups. Nothing should be affixed to the surface of the page.
c. There is a 1/16" separation required between different colors. In
defined color ads, the 1/16" color separation requirement can be
replaced with a 2 pt. black line surrounding and separating colors.
d. All palette colors and green illustration elements and text require
a minimum 3 pt. thickness, text size must be 12 pt. or larger.
e. Provide color separated resin coated paper, with two sets of camera
ready proofs.
f. CYMK only. No pantone.
g. No process color photographs.
2. RC Paper Preparation
Dot Pattern:
a. Veloxes must contain a 85 line screen using a hard round dot with
black at a 45 degree screen angle, cyan at a 75 degree screen angle,
magenta at a 105 degree screen angle, and yellow at a 90 degree
screen angle. Tonal range is 15%-85%.
Print Density:
a. A maximum overall print density of 220% is required with only one
color as a solid. Two or more secondary colors should not exceed
150% together (i.e.: directory red is 100% magenta and 50% yellow).
Any single color not intended to print solid should not exceed 70%.
Actual dot percentages will increase for black and decrease for cyan,
magenta, and yellow. GCR is used for process color.
Front of Book Local and National Yellow Pages Advertising cannot be run
with color bars. Therefore quality of color reproduction of 4-color
halftones, 4-color ads, or 4-color logos cannot be guaranteed.
Note: Resin coated paper must be supplied by ITN. Aas will not be
responsible for poor printing quality due to poor resin coated paper.
Complaints on printing quality due to poor resin coated paper will be
directed to ITN. Printing problems due to poor quality of the resin coated
paper will be documented by ITN and presented to Aas at a pre-arranged
meeting.
<PAGE>
3. Typography
a. Fine type should be submitted as 1-color copy only and should not be
reversed out of the background.
b. Reverse type should not be smaller than 10 points and should be
reversed out of areas having a minimum of a 50% tone value of any
one color of magenta, cyan, or black 50%.
c. Maximum tint background for surprint type is 30%.
4. Production Printing
Paper, Ink:
a. Paper is 22#. Ink is cold set. The process is offset.
Dot Gain:
a. Expect midtone dot gains of 25-30% in each color; quartertone dot
gains of 0% in each color; and three quartertone dot gains of 30-40%
in each color.
Printing Tone:
a. First printing tone will be 15%.
Quality of reproduction for any materials that do not comply with these
specifications will not be guaranteed.
5. Audiotex Page Specifications
1. Section will be placed at the end of "Front of Book" and before
subject indices.
2. Design and Text Requirements for each Audiotex Page: The disclaimer
statement: "The information services on this page are created and
provided by IT Network and are not associated in any way with
Ameritech PagesPlus(R) Yellow Pages. For questions, comments, or
advertising information, call 1-800-950-4483" will be in 8pt or
larger text.
3. ITN will provide appropriate disclaimer statements for health and
legal guides and others, as required.
4. "IT NETWORK" logo must appear prominently on each page.
5. Aas will not provide color proof of final pages for ITN's approval.
6. ITN pages design must be consistent with Aas template or the ITN
pages will not be forwarded to the printer. General ITN FOB pages
design and general content will be reviewed and approved by Aas by
the Audiotex product manger.
7. Aas retains the right to change the type of medium for printing with
60 days notice to ITN.
8. Audiotex Title and Cover Pages: Title page will be prepared by ITN
and is included in the page count limitation. It will separate
Audiotex from access pages and will include name of section,
instructions on section use and table of contents (in alphabetical
order).
9. IT Network FOB pages will not include any Internet or Auto Guide
content per agreed to term sheet.
<PAGE>
ATTACHMENT D-1
Ameritech advertising services
Audiotex Only Real Estate Leases
<TABLE>
<CAPTION>
Location Address Mo. Rent Lease Exp. Comments Mgmt. Co./Payee
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Sterling Hts. 39093 Van Dyke Ave. [ILLEGIBLE] 7/31/98 Sterling Manor
Traverse City 745 Garfield Ave. (Audiotex Tower) $185 6/30/97 Mth-to-Mth Northern Radio of Michigan (WHLT)
====================================================================================================================================
Evansville 2813 E. Lincoln Ave. $200 1/31/96 [ILLEGIBLE] Corp.
====================================================================================================================================
Akron 610 S. Main St $275 11/1/97 Canal Place, Ltd
Cleveland 2000 E. Ninth St. $656 3/31/96 Ostendorf-Morris Co.
Columbus 2900 Corporate Exchange Dr., $365 5/31/99 Eastrich No. 167, C/O John Buck Co.
Youngstown 680 Boardman $36[ILLEGIBLE] 10/31/[ILLEGIBLE] Wolfe, Evans & Co.
====================================================================================================================================
Green Bay 211 N. Broadway [ILLEGIBLE] 6/30/97 Commercial Horizons, Inc.
Madison [ILLEGIBLE] S. Yellowstone Dr. $292 11/30/97 Vantage Place II C/O the Shaw Company
<CAPTION>
Location Mgmt. Address Contact/Phone No.
===============================================================================================================
<S> <C> <C>
Sterling Hts. P.O. Box 32153, Fraser, MI 48232 Kim Corrado (610) 415-0035
Traverse City 746 Garfield Ave., Traverse City, MI 49084 [ILLEGIBLE] (610) 911-7630
===============================================================================================================
Evansville P.O. Box 92471, Chicago, IL 60676-2471 Bob Leonard (812) 464-6038
===============================================================================================================
Akron 540 S. Main St., Akron, OH [ILLEGIBLE] Ken Roberts (218) 434-6656
Cleveland P.O. Box 5919-C, Cleveland, OH [ILLEGIBLE] Claudia [ILLEGIBLE] (216) 661-5671
Columbus P.O. Box 182039, Dept. 90, Columbus, OH 43218-[ILLEGIBLE] Winnie [ILLEGIBLE] (614) 882-4142
Youngstown 660 Boardman - Canfield Rd., Youngstown, OH 44512 David Wolfe (216) 758-2937
===============================================================================================================
Green Bay 1600 River Pines Dr, Green Bay, WI 54310 Barbara Patton (414) 391-1191
Madison [ILLEGIBLE] W. Broadway, Ste. 104, Madison, WI 53719 Pat Schwartz (608) 221-8022
</TABLE>
<PAGE>
ATTACHMENT D-2
Ameritech advertising services
Combined Functions (Sales and Audiotex) Real Estate Leases
<TABLE>
<CAPTION>
Location Address Lease Exp. Comments Mgmt. Co./Payee
===============================================================================================================
<S> <C> <C> <C> <C>
Grand Rapids 2401 Camelot Ct. 6/30/00 2401 Camelot Partners
Kalamazoo 1341 [ILLEGIBLE], Ste. 7108 11/30/98 [ILLEGIBLE] Management
Lansing 1046 [ILLEGIBLE], Ste. 6 6/30/99 First Capital Lansing Prop.
Livonia 14155 Farmington Rd. 6/31/99 Livonia Metro Plex
Saginaw 1901 Towne Ctr., Ste. 300 7/31/99 Towne Centre Investments
Traverse City 745 Garfield 6/30/98 MLD, Inc/McCarthy-Tomga Co., Inc.
Troy 100 E. Big Beaver 6/30/00 APEX Mgmt., Inc.
===============================================================================================================
Indianapolis 1099 Meridian, Ste. 400 4/30/97 Mth-to-Mth REI Real Estate Svcs.
===============================================================================================================
Dayton 3055 Katlering Blvd., Ste. 100 11/30/97 Point West III Ltd. Partnership
Toledo 3103 Executive Pkwy. 10/31/99 Blue Cross/Blue Shield of Ohio
===============================================================================================================
Brookfield 200 S. Executive Dr. 4/30/98 The [ILLEGIBLE] Funds
<CAPTION>
Location Mgmt. Address Contact/Phone No.
======================================================================================================================
<S> <C> <C>
Grand Rapids 6274 28th St., SE, Grand Rapids, MI 49508 Deborah [ILLEGIBLE] (616) 682-0890
Kalamazoo 4341 S. [ILLEGIBLE], Ste. 2200, Kalamazoo, MI 49008 Brian Evans (616) 343-0308
Lansing 6810 S. Cedar, Ste. 3C, Lansing, MI 46911 Don [ILLEGIBLE] (517) [ILLEGIBLE] -4340
Livonia 13980 Farmington Rd., Livonia, MI 46154 Dick Barker [ILLEGIBLE] 425-6854
Saginaw 4901 Towne Ctr., Ste. 110, Saginaw, MI 40604 Janet Goodchild (617) 791-1099
Traverse City 416 E. Front St., Traverse City, MI 49684 Stan [ILLEGIBLE] (616) 941-7630
Troy 100 E. Big Beaver, Ste. 100, Troy, MI [ILLEGIBLE] Debbie Bachman (610) 524-1633
======================================================================================================================
Indianapolis P.O. Box 66340, Indianapolis, IN 46266 Carolyn Godby (317) 630-3125
======================================================================================================================
Dayton Eleven W. Monument Bldg, 8th Flr., Dayton, OH 45439 Janet [ILLEGIBLE] (513) 222-1285
Toledo P.O. Box 943, Toledo, OH [ILLEGIBLE] Carol [ILLEGIBLE] (419) 473-7100
======================================================================================================================
Brookfield 200 Executive Dr. P.O. Box 75687, Chicago, IL 60675-5867 Marcie [ILLEGIBLE] (414) 289-0302
</TABLE>
<PAGE>
ATTACHMENT E
AUDIOTEX EQUIPMENT INFORMATION AND CONFIGURATIONS
<TABLE>
<CAPTION>
====================================================================================================================================
QUANTITY DESCRIPTION LOCATIONS
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
26 Custom Voiceprint Systems Akron Livonia
-24-48 ports per node Ann Arbor/Troy Madison
-486 mhz cpu NW/Birmingham/Troy Milwaukee
-16mb RAM Claw/BTB/Troy Pontiac/Troy
-Floppy disk drive Cleveland Saginaw
-Color monitor Columbus South Bend
-19.2 trailblazer modem Dayton Sterling Heights
-4 port serial card Downriver/Troy Toledo
-Keyboard Evansville Traverse City
-High performance BUS design Flint/Troy WnW/Troy
-Ind. mounting cabinets Grand Rapids Youngstown
-2.2Gb DAT tape drive Green Bay
-2.4Gb SCSI drive Indianapolis
-Uninterruptible power supply Kalamazoo
-Voiceprint software Lansing
====================================================================================================================================
2 Risc 6000's Both in Wichita
====================================================================================================================================
21 Digital Satellites Akron Grand Rapids Lansing Sterling Heights Troy/Nwd2
-1.2 meter satellite dish Brookfield Green Bay Livonia Traverse City Youngstown
-digital receiver license Cleveland Indianapolis Moraine/Dayton Toledo 3 not installed
-LNB and 2400 baud modem Columbus Kalamazoo Saginaw Troy/Claw1
====================================================================================================================================
</TABLE>
<PAGE>
AUDIOTEX SYSTEM AND SATELLITE EQUIPMENT INFORMATION
- --------------------------------------------------------------------------------
NUM LOCATION STATE SYSTEM ASSET SATELLITE ABR#
- --------------------------------------------------------------------------------
1 South Bend IN Yes 2035 No N/A
2 Troy/Claw1/SH MI Yes 3196 Yes 4477
3 Troy/Down1 MI Yes 3287 No N/A
4 Indianapolis IN Yes 1222 Yes 12689
5 Green Bay WI Yes 1995 Yes 5011
6 Traverse City MI Yes 3284 Yes 10120
7 Akron OH Yes 3283 Yes 12650
8 Moraine/Dayton OH Yes 1997 Yes 7352
9 Evansville IN Yes 3280 No N/A
10 Cleveland OH Yes 2032 Yes 12658
11 Brookfield WI Yes 2033 Yes 12683
12 Serling Heights MI Yes 2017 Yes 12633
13 Youngstown OH Yes 3285 Yes 12653
14 Kalamazoo MI Yes 1994 Yes 12641
15 Columbus OH Yes 2031 Yes 12638
16 Livonia MI Yes 1993 Yes 12665
17 Lansing MI Yes 1212 Yes 12669
18 Saginaw MI Yes 3282 Yes 12659
19 Toledo OH Yes 3279 Yes 12706
20 Troy/Ann1 MI Yes 3228 No N/A
21 Troy/Flint1 MI Yes 3286 No N/A
22 Troy/Nwd2/Troy MI Yes 3281 Yes 12656
23 Troy/Pont1 MI Yes 3229 No N/A
24 Troy/West1 MI Yes 3227 No N/A
25 Grand Rapids MI Yes 2018 Yes 12644
26 Madison WI Yes 2034 No N/A
27 Wichita KS Risc 6000 2007 No N/A
28 Wichita KS Risc 6000 4257 No N/A
<PAGE>
ATTACHMENT F
Ameritech advertising services
Audiotex Telephone Line Information
<TABLE>
<CAPTION>
LOCATION ADDRESS MONTHLY COST* SERVICE ACCOUNT SUMMARY
====================================================================================================================================
<S> <C> <C> <C>
Ann Arbor 2360 Green $ 384 (2) T-1 [ILLEGIBLE], (32) DID Trunks
Birmingham 30150 Telegraph $ 1,298 (2) T-1 [ILLEGIBLE], (40) DID Trunks, (2) [ILLEGIBLE]
lines - (local presence required for billing)
Flint G-5097 [ILLEGIBLE] $ 636 (1) T-1 [ILLEGIBLE], (24) DID Trunks, (1) [ILLEGIBLE]
- (local presence required for billing)
Grand Rapids 2401 Camelot Ct., S.E. $ 2,998 (47) Centrex, (4) MB lines, (8) FX lines from Holland to
Grand Rapids, (8) FK from Grand Haven to Grand
Rapids
Kalamazoo 4041 S. [ILLEGIBLE] Ste. 1108 $ 2,870 (43) Centrex, (5) MB lines, (16) FX lines from Battle
Creek to Kalamazoo
Lansing 1048 [ILLEGIBLE] $ 3,030 (49) Centrex, (4) MB lines, (16) FX lines from Jackson to
Lansing
Livonia 14155 Farmington $12,768 (1) T-1, (16) DID Trunks, (42) Centrex, (4) MB lines,
(32) FX lines from Detroit to Livonia - (local
presence required for billing)
Pontiac 35 W. Huron $ 961 (2) T-1 [ILLEGIBLE], (32) DIO Trunks, (1) Centrex -
(local presence required for billing)
Saginaw [ILLEGIBLE] Towne Centre, Ste 300 $ 796 (27) Centrex, (4) RCF lines from Midland to Saginaw
Sterling Hts. [ILLEGIBLE] Van Dyke Ave., Ste 104A $ 129 (1) Centrex, (4) MB lines
Traverse City 746 Oarfield Ave. $ 570 (28) Centrex
Troy 100 E. Big Beaver, Ste. 126 $ 7,696 (9) T-1 [ILLEGIBLE], (6) MB lines, (1) RCF line from
Monroe to Troy
Wyandotle 140 Elm $ 684 (1) T-1 [ILLEGIBLE], (57) DID Trunks, (1) Centrex -
(local presence required for billing)
====================================================================================================================================
Evansville 2613 E. Lincoln Ave. $ 7,007 (26) Centrex - RCF to Central Office
Indianapolis 1899 N. Meridian $ 7,700 (102) Centrex, (18) RCF lines from Anderson to
Indianapolis, (12) RCF lines from [ILLEGIBLE] to
Indianapolis
South Bend 1401 Prarie $ 1,646 (1) Local Loop [ILLEGIBLE], (40) Centrex
====================================================================================================================================
Akron 640 S. Main St., Ste 1742 $ 1,634 (27) Centrex, ([ILLEGIBLE]) FX lines from [ILLEGIBLE] to
Akron
Cleveland 2000 E. Ninth St., 827 $ 2,382 (108) Centrex
Columbus 2500 Corporate Exchange Dr., Ste 310 $ 1,926 ([ILLEGIBLE]) Centrex
Dayton 3055 Kettering Blvd., Ste 100, Moraine $ 1,201 (44) Centrex
Toledo [ILLEGIBLE] Executive Parkway, Ste 304 $ 700 (27) Centrex
Youngstown 860 Boardman - Canfield Rd., Ste 103 $ 727 (28) Centrex
====================================================================================================================================
Green Bay 211 N. Broadway, Ste 216 $ 4,370 ([ILLEGIBLE]) Centrex, (24) FX lines from Appleton to
Green Bay
Milwaukee-
Brookfield 200 S. Executive Dr., Ste 209A $ 1,361 ([ILLEGIBLE]) Centrex, (7) [ILLEGIBLE] lines
Madison 437 S. Yellowstone Dr., Ste 209A $ 1,608 (1) Local Loop Circuit, (27) Centrex
</TABLE>
* Includes recurring monthly charges plus useage.
<PAGE>
INTERACTIVE CHANNEL
AMENDMENT TO DISTRIBUTION AGREEMENT
The Agreement between Cablevision Systems Corporation, et. al. ("CSC") and IT
Network ("IT") dated November 16, 1995, (the "Agreement"), is hereby amended as
follows:
1. All Terms used in this Amendment which are defined in the Agreement shall
have the same meaning herein as in the Agreement.
2. Effective upon execution, the parties agree as follows:
a) Section 2 shall be replaced in its entirety with the following:
2. PHASE I - OPERATIONAL BURN-IN
2.1 IT and CSC agree that the goal of the operational burn-in phase is to
prove to both parties' satisfaction that the IC technology performs
adequately in a multi-user, simultaneous usage environment over CSC's
two-way cable plant using set top boxes as defined below, without
interfering with CSC's other services and operations.
2.2 IT agrees to provide CSC, at no cost to CSC, with up to 100 IT owned or
licensed sidecar set top boxes (the "Set Tops") for use until such time as
this Agreement is terminated and/or CSC elects to purchase other customer
interface equipment as may be available in the future.
2.3 IT will deliver the Set Tops to CSC within three weeks after the signing
of this Agreement.
2.4 There will be a 90 day operational burn-in period during which no License
Fee shall be due from CSC, nor shall CSC charge any fee for the IC
service. The 90 day operational burn-in period will begin after all Set
Tops have been deployed in customers' homes, and may be extended or
reduced by mutual written agreement, but such extension or reduction shall
not alter the Term of this Agreement. CSC will be responsible for the
installation of up to 100 Set Tops in homes or offices. CSC and IT will
each provide appropriate technical support during this period.
2.5 Before the 90 day operational burn-in period, IT shall pay for, provide,
install and maintain, at a co-location with the CSC system headend, an IC
headend to provide IC Programming and CSC shall allow such co-location.
b) Section 3 shall be replaced in its entirety with the following:
3. PHASE II - LAUNCH
3.1 Subject to IT and CSC's mutual satisfaction with the operational burn-in
phase, CSC agrees to launch the IC service in its cable systems listed on
Exhibit B and/or such other CSC Systems with at least 40,000 subscribers
as determined by CSC in its sole discretion. IT shall provide IC headends
to CSC for all such launches at IT's sole cost.
3.2 Upon CSC's request and in accordance with CSC's delivery schedule, IT
agrees to provide up to 5,000 Set Tops and remote controls at no charge to
CSC for use until such time as this Agreement is terminated and/or CSC
elects to purchase other customer interface equipment as may be available
in the future.
3.3 If CSC terminates this Agreement, then it shall return the Set Tops to IT
within 90 days.
3.4 Phase II will continue for a period of sixty months from the beginning of
the Operational Burn-In phase. Subsequent to the initial twelve months of
phase II, CSC shall have the right to discontinue carriage of IC with 30
days' notice to IC. At the conclusion of the initial sixty-month period of
the Agreement, CSC shall have the right to renew the Agreement on the same
terms and conditions outlined herein for an additional sixty month period.
<PAGE>
3.5 IT agrees to sell remote controls to CSC which will be used in the CSC Set
Tops. CSC agrees to pay, and IT agrees to provide at this price,
additional remote controls as needed, at $15.00 each. In the event that
IT's cost from its technology sourcing company for the remote control
falls below $15.00, IT shall provide such remote controls at cost to CSC.
c.) Effective upon execution, Section 12 shall be replaced in its entirety
with the following:
12. This agreement shall encompass CSC's standard exclusivity, non-recourse
and several liability provisions (Exhibit A). The parties agree to
negotiate a full Affiliation Agreement including the terms contained
herein.
d.) Effective upon execution, a new Section 13 shall be added, to read as
follows:
12. IT grants CSC the exclusive rights to distribute IC in all markets served
by CSC. In the event that CSC has not launched IC in a market in which
another potential IC provider wishes to launch the service, CSC shall have
the right of first refusal to either launch IC or to waive its exclusive
right to IC in that market. In each market in which IC is deployed, this
right shall expire two years from the date on which IC is launched.
e.) Effective upon execution, a new Exhibit B shall be added, a sample of
which is attached hereto as Exhibit 1.
Except as amended by the foregoing, the Agreement dated November 16, 1995, shall
remain in full force and effect.
Agreed and Accepted for IT Network: Agreed and Accepted for Cablevision
Systems Corporation, et. al.:
/s/ John Reed /s/ CSC
- ----------------------------------- -----------------------------------
Name Name
President Vice President
- ----------------------------------- -----------------------------------
Title Title
5/22/97 5/21/97
- ----------------------------------- -----------------------------------
Date Date
<PAGE>
Exhibit 1
Name & Address of Cable System Number of Subscribers Dated Added
- ------------------------------ --------------------- -----------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 8,626,528
<SECURITIES> 0
<RECEIVABLES> 1,305,542
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 11,535,449
<PP&E> 10,601,818
<DEPRECIATION> 4,615,308
<TOTAL-ASSETS> 30,177,002
<CURRENT-LIABILITIES> 7,325,651
<BONDS> 18,279,791
0
0
<COMMON> 11,737
<OTHER-SE> 1,403,283
<TOTAL-LIABILITY-AND-EQUITY> 30,177,002
<SALES> 8,746,765
<TOTAL-REVENUES> 8,746,765
<CGS> 6,312,567
<TOTAL-COSTS> 12,762,571
<OTHER-EXPENSES> (213,863)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 980,375
<INCOME-PRETAX> (11,094,885)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,094,885)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,094,885)
<EPS-PRIMARY> (0.99)
<EPS-DILUTED> (0.99)
</TABLE>
