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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 11, 1997
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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SOURCE MEDIA, INC.
(Exact name of Registrant as specified in its charter)
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DELAWARE 13-3700438
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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4825
(Primary Standard Industrial Classification Code Number)
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5400 LBJ FREEWAY, SUITE 680 TIMOTHY P. PETERS
DALLAS, TEXAS 75240 5400 LBJ FREEWAY, SUITE 680
(Address, including zip code, and DALLAS, TEXAS 75240
telephone number, including area code, (972) 701-5400
of Registrant's principal executive offices) (Name, address, including zip code, and telephone
number, including area code, of agent for service)
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Copies to:
MICHAEL L. BENGTSON
MARK C. GUNNIN
GRANT C. LIGHTLE
THOMPSON & KNIGHT, P.C.
1700 PACIFIC AVENUE, SUITE 3300
DALLAS, TEXAS 75201
(214) 969-1700
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
TITLE OF EACH CLASS OF MAXIMUM MAXIMUM
SECURITIES TO BE AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
REGISTERED REGISTERED PER SHARE OFFERING PRICE REGISTRATION FEE
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13 1/2% Senior PIK Preferred Stock................ 800,000 shares $25.00 $20,000,000 $5,900.00
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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Information contained herein is subject to change, completion or amendment
without notice. These securities may not be sold nor may an offer to buy be
accepted prior to the time the Prospectus is delivered in final form. Under
no circumstances shall this Prospectus constitute an offer to sell or the
solicitation of an offer to buy, nor shall there be any sale of these
securities in any jurisdiction in which such offer, solicitation or sale
would be unlawful prior to registration or qualification under the
securities laws of any such jurisdiction.
SUBJECT TO COMPLETION DATED DECEMBER 10, 1997
PROSPECTUS
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[SOURCE MEDIA LOGO] SOURCE MEDIA, INC.
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OFFER TO EXCHANGE ITS 13 1/2% SENIOR PIK PREFERRED STOCK THAT HAS BEEN
REGISTERED
UNDER THE SECURITIES ACT OF 1933 FOR ANY AND ALL OF ITS OUTSTANDING
13 1/2% SENIOR PIK PREFERRED STOCK
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Source Media, Inc., a Delaware corporation (the "Company"), hereby offers,
upon the terms and subject to the conditions set forth in this Prospectus (as
the same may be amended or supplemented from time to time, this "Prospectus")
and in the accompanying Letter of Transmittal (the "Exchange Offer"), to
exchange (i) its 13 1/2% Senior PIK Preferred Stock (the "Exchange Preferred
Stock") for a like amount of its outstanding 13 1/2% Senior PIK Preferred Stock
(the "Outstanding Preferred Stock"), of which 800,000 shares are outstanding as
of the date hereof. The form and the terms of the Exchange Preferred Stock will
be the same in all material respects as the form and terms of the Outstanding
Preferred Stock, except that (i) the Exchange Preferred Stock will be registered
under the Securities Act of 1933, as amended (the "Securities Act"), and hence
will not bear legends restricting the transfer thereof and (ii) holders of the
Exchange Preferred Stock will not be entitled to certain rights of holders of
Outstanding Preferred Stock under the Registration Rights Agreement dated
October 30, 1997 (the "Registration Rights Agreement"). See "The Exchange
Offer -- Purpose and Effect of the Exchange Offer" and "Description of Exchange
Preferred Stock."
The Outstanding Preferred Stock was issued and sold in a transaction exempt
from the registration requirements of the Securities Act and may not be offered
or sold in the United States unless so registered or pursuant to an applicable
exemption under the Securities Act. The Exchange Preferred Stock is being
offered herewith in order to satisfy certain obligations of the Company
contained in the Registration Rights Agreement. Based on no-action letters
issued by the staff of the Securities and Exchange Commission (the "Commission")
to third parties, the Company believes that the Exchange Preferred Stock to be
issued pursuant to the Exchange Offer may be offered for resale, resold and
otherwise transferred by holders thereof (other than (i) a broker-dealer who
purchases such Exchange Preferred Stock from the Company to resell pursuant to
Rule 144A or any other available exemption under the Securities Act, or (ii) a
person that is an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act), without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such
Exchange Preferred Stock is acquired in the ordinary course of such holders'
business and such holders have no arrangement with any person to participate in
the distribution of such Exchange Preferred Stock. However, the Company has not
sought a no-action letter with respect to the Exchange Offer and there can be no
assurance the staff of the Commission would make a similar determination with
respect to the Exchange Offer. Eligible holders wishing to accept the Exchange
Offer must represent to the Company that such conditions have been met. Each
broker-dealer that receives Exchange Preferred Stock for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Preferred Stock. The
Letter of Transmittal states that by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. A broker-dealer may
nonetheless be deemed to be an "underwriter" under the Securities Act
notwithstanding such disclaimer. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of Exchange Preferred Stock received in exchange for Outstanding
Preferred Stock where such Outstanding Preferred Stock was acquired by such
broker-dealer as a result of market-making activities or other trading
activities. The Company has agreed that, for a period of 180 days after the
Expiration Date (as defined herein), it will make this Prospectus available to
any broker-dealer for use in connection with any such resale. See "Plan of
Distribution."
(Continued on next page)
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SEE "RISK FACTORS" BEGINNING ON PAGE 18 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH THE ACQUISITION OF THE
EXCHANGE PREFERRED STOCK.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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THE DATE OF THIS PROSPECTUS IS , 1998.
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Holders of Outstanding Preferred Stock whose Outstanding Preferred Stock is
not tendered and accepted in the Exchange Offer will continue to hold such
Outstanding Preferred Stock and will be entitled to all the rights and
preferences and will be subject to the limitations applicable thereto under the
applicable Certificate of Designations. Following consummation of the Exchange
Offer, the holders of Outstanding Preferred Stock will continue to be subject to
the existing restrictions upon transfer thereof and the Company will have no
further obligation to such holders to provide for the registration under the
Securities Act of the Outstanding Preferred Stock held by them.
The Preferred Stock will pay dividends at the rate of 13 1/2% of the
liquidation preference per annum, payable quarterly, commencing February 1,
1998. The Preferred Stock must be redeemed on or prior to November 1, 2007. At
any time and from time to time on or prior to November 1, 2000, the Company may,
subject to certain requirements, redeem up to 35% of the Preferred Stock, with
the cash proceeds of one or more Equity Offerings (as defined) at a redemption
price equal to 113.5% of the liquidation preference together with accumulated
and unpaid dividends. Upon the occurrence of a Change of Control (as defined),
the Company will be required to make an offer to repurchase the Preferred Stock
at a price equal to 101% of the liquidation preference thereof, together with
accumulated and unpaid dividends, if any, to the date of repurchase. There can
be no assurance that the Company will have funds available to repurchase the
Preferred Stock upon the occurrence of a Change of Control. See "Description of
Exchange Preferred Stock -- Redemption -- Optional Redemption Upon Equity
Offering" and "Risk Factors -- Change of Control." Other than change of control
provisions and other restrictive covenants, including limitations on
indebtedness and restricted payments, as applicable, the Certificate of
Designations does not contain any provisions that afford holders of the
Preferred Stock protection in the event of a highly leveraged or other
transaction that may adversely affect such holders. See "Description of Exchange
Preferred Stock" and "Risk Factors -- Substantial Leverage; Ability to Service
Debt" and "-- Change of Control."
The Exchange Preferred Stock ranks, and the Outstanding Preferred Stock will
rank, with respect to dividend rights and rights on liquidation, winding-up and
dissolution of the Company, senior to all classes of common stock and to all
other classes of preferred stock of the Company subject to certain exceptions.
The Exchange Offer is not conditioned on any minimum amount of Outstanding
Preferred Stock being tendered for exchange. The Company will accept for
exchange any and all validly tendered Outstanding Preferred Stock not withdrawn
prior to 5:00 p.m., New York City time, on , 1997 unless extended by
the Company, (the "Expiration Date"). Tenders of Outstanding Preferred Stock may
be withdrawn at any time prior to the Expiration Date. The Exchange Offer is
subject to certain customary conditions. See "The Exchange Offer -- Conditions."
The Company has agreed to pay all expenses incident to the Exchange Offer. The
Company will not receive any proceeds from the Exchange Offer.
Shares of the Outstanding Preferred Stock constitute securities for which
there is no established trading market. Any Outstanding Preferred Stock not
tendered and accepted in the Exchange Offer will remain outstanding. The Company
does not currently intend to list the Exchange Preferred Stock on any securities
exchange. To the extent that any Outstanding Preferred Stock is tendered and
accepted in the Exchange Offer, a holder's ability to sell untendered
Outstanding Preferred Stock could be adversely affected. No assurances can be
given as to the liquidity of the trading market for either the Outstanding
Preferred Stock or the Exchange Preferred Stock.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OUTSTANDING PREFERRED STOCK IN ANY
JURISDICTION IN WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE
IN COMPLIANCE WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Prospectus.
Except as otherwise specified or dictated by context, (a) all references to
"Brite" refer to the Electronic Publishing Division of Brite Voice Systems,
Inc., (b) all references to "VNN" refer to Voice News Network, Inc., (c) all
references to the "Acquisitions" refer to the acquisition of certain of the
assets of Brite and VNN in October 1997, (d) all references to the "Offering"
refer to the offering of the Company's 12% Senior Secured Notes due 2004 (the
"Notes") and Units consisting of the Company's Outstanding Preferred Stock and
Warrants, (e) all references to the "Transactions" refer to the Acquisitions and
the Offering and (e) all references to the "Company" or "Source" include Source
Media, Inc. and its wholly-owned subsidiaries, SMI Holdings, Inc. (formerly
known as IT Network, Inc.) ("Holdings"), Interactive Channel Technologies, Inc.
("ICT"), IT Network, Inc. ("IT Network") and Interactive Channel, Inc.
("Interactive Channel"). "EBITDA" refers to earnings before interest, taxes,
depreciation and amortization. Capitalized terms not elsewhere defined, certain
industry and technical terms and company names referred to herein are more
precisely identified or defined in "Glossary of Certain Definitions."
THE COMPANY
Source Media is a leader in providing on-demand information, services and
programming through the telephone and cable television, delivered over the
Company's proprietary digital operating systems to mass market consumers through
its two operating subsidiaries, IT Network and Interactive Channel. IT Network
is a leading provider of on-demand information through advertiser-sponsored
telephone hotlines advertised in over 100 million Yellow Pages annually and over
24 million newspapers daily. Interactive Channel provides on-demand information
and services and can provide Internet access to the cable television industry
over existing cable infrastructure and telephone lines.
IT NETWORK
Overview
IT Network is the nations' leading provider of voice information services
through telephone directories and newspapers with a market share which the
Company believes is 10 times its closest competitor in terms of distribution.
The Company also provides related support services to a majority of its Yellow
Pages directory and newspaper Publisher Partners. The Company sells advertising
and provides related support services to in excess of 8,000 advertising clients
who pay to sponsor and deliver a promotional message before and after the
delivery of the voice information services. The Company is the sole provider of
voice information services to eight of the nine largest Yellow Pages directory
publishers in the country and believes that it is the only voice information
services provider capable of delivering national scope advertising to the mass
market in telephone directories and newspapers through one source. During the
last twelve months the Company estimates that it has fulfilled over 400 million
requests for information.
The Company and its Publisher Partners place inserts in high circulation
publications including more than 500 Yellow Pages directories and 280 daily
newspapers. The Publisher Partners, who include Ameritech, Bell Atlantic,
BellSouth, Pacific Bell, US West, The Washington Post, The Chicago Sun Times,
The San Francisco Chronicle, The Boston Herald and Newsday, distribute their
publications in over 150 designated marketing areas ("DMAs") in 46 states. The
inserts invite consumers to call a specific local phone number at no additional
charge for access to useful voice information on over 800 regularly-updated
topics ranging from general information, such as local news, sports and weather
updates, to home repair, travel, legal, health and other more specific topics
including stock quotes. The Company's voice information system enables callers
to navigate to specific topics with a four digit code and often allows the
consumer to obtain additional information or talk directly to the advertiser at
the push of a button.
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IT Network generates revenues through the following sources:
- Advertising sales -- direct sales of advertising sponsorships for voice
information.
- Advertiser management -- services provided to Publisher Partners for
voice information advertising accounts sold by the Publisher Partners to
increase customer satisfaction and renewal rates.
- Systems management -- technical programming and maintenance of the voice
information systems of Publisher Partners and other businesses in local
markets.
- Voice information content -- broadcast of voice information, such as
local and national news, weather, sports and stock market information, to
the system of a client, typically a Publisher Partner, via satellite or
phone line transmission.
Source believes that IT Network's products and services provide value to:
- Consumers by providing them easy access to a wide variety of information
through advertiser sponsored local calls and, in some cases, the
opportunity to directly access the advertisers to obtain additional
information, place orders or schedule appointments;
- Local and national advertisers by providing them with a cost-effective
medium to target over 100 million households, offices and hotel rooms in
the United States through its Yellow Pages distribution and over 24
million households daily through newspaper inserts to subscribers who, by
selecting the topic, have already indicated an interest in the subject of
the advertisement; and
- Publisher Partners by promoting usage of their directories and
newspapers, which drives advertising rates as well as providing
incremental advertising revenue streams.
The Telephone Acquisitions
On October 30, 1997, the Company purchased certain of the electronic
publishing assets of Brite for $35.6 million and certain of the electronic
publishing assets of VNN for $9.0 million. The Acquisitions have established the
Company as the dominant national provider of voice information services to
telephone directories and newspapers with a market share in excess of 60% of
Yellow Pages that provide interactive advertising and in excess of 43% of all
daily U.S. newspapers in terms of circulation. As a result of the combination of
the businesses of the top three providers of such information and services, the
Acquisitions have added 111 Yellow Pages directories and 280 newspapers to the
Company's distribution channels. The Acquisitions have brought in excess of
6,000 clients to the Company's existing advertising base of over 2,000 clients.
Additionally, the Company believes that the Acquisitions have strengthened
IT Network's competitive position by providing it with (i) an expanded market
presence establishing it as the dominant domestic provider of voice information
services through the Yellow Pages and newspapers, capable of providing
advertisers with one source for national voice information distribution; (ii) an
increased customer base from which it can leverage complementary product and
service offerings; (iii) substantial synergies through the elimination of
redundant overhead expenses; and (iv) significant operating leverage as the
Company more fully utilizes its existing state-of-the-art facilities.
IT Network would have had $19.6 million of pro forma monetary revenues and
$7.2 million in Pro Forma EBITDA for the twelve months ended December 31, 1996
and $19.7 million in pro forma monetary revenues and $7.3 million in Pro Forma
EBITDA for the first nine months of 1997. The Company believes that there is
substantial opportunity to grow IT Network's revenue base and continue to
improve its cash flow.
INTERACTIVE CHANNEL
Overview
Interactive Channel's Cable SuperSites Network ("Cable SuperSites")
supplies programming and services which allow a subscriber to access on-demand
local and national news, weather, sports and school information, view
programming guides and purchase goods, and can allow a subscriber to browse the
Internet, send and receive e-mail and access a variety of other offerings over
existing cable infrastructure and telephone lines. Cable SuperSites sells
interactive advertising space on screens using text, voice and pictures. Cable
SuperSites is broadcast by cable operators utilizing the Company's proprietary
two-way operating system,
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SourceWare. Management believes that SourceWare is the only commercially
deployable system providing two-way frames, audio and text over existing digital
and analog cable infrastructure. SourceWare enables any cable television system
equipped with compatible advanced analog or digital set-top boxes to deliver
two-way, on-demand programming with the touch of a television remote. In less
than one second, Cable SuperSites subscribers can access interactive programming
delivered over the cable system to their television.
Programming
Cable SuperSites is a cable network that offers cable operators three
programming groups: LocalNet, CableNet and Internet Access.
LocalNet. LocalNet provides a variety of local and national information
on-demand, including local and national news, weather and sports, stock quotes,
local school information such as lunch menus, sports schedules and homework and
artwork, on-line home shopping with companies such as JC Penney, Hallmark
Connections and Waldenbooks, interactive Yellow Pages, television and movie
guides, travel information, games and a variety of other features.
CableNet. CableNet enables other cable channels and advertisers to become
interactive. Consumers can toggle back and forth between a cable channel and an
advertiser's interactive programs. This programming will enable a viewer to
preview future channel program offerings and a summary of recent and future
programs and to view and purchase merchandise offered by the cable channel or an
advertiser. For example, by pressing a button, consumers can move between the
channel itself and the interactive programming provided by a cable channel or
its advertiser. The Company currently has agreements to offer this service for
CourtTV, Bravo and the Independent Film Channel and is in discussions with 26
additional cable channels.
The Company believes LocalNet and CableNet on-demand information, which can
be delivered over existing cable infrastructure, will appeal to the mass market
because it is:
- easier to access than through a personal computer;
- less expensive than using a personal computer and/or modem; and
- significantly faster than delivery of Internet content over standard
telephone lines.
Internet Access. Internet Access can be delivered over Cable SuperSites to
subscribers through the television without the need for a personal computer or
other additional equipment. Full Internet browsing and e-mail capabilities can
be delivered by cable operators over existing cable infrastructure and telephone
lines to mass market consumers using an alphanumeric remote control. The Company
believes that Internet Access can provide cable operators with a competitive
advantage over current satellite television services.
SourceWare and Subscriber Equipment
SourceWare is the Company's proprietary operating system based on patented
technology and is the only commercially deployable system providing two-way
frames, audio and text over existing cable infrastructure. In addition to
significant amounts spent by previous developers of the Company's patents, the
Company has spent $40.9 million for the acquisition and development of its
technology. Consumers require set-top boxes compatible with Cable SuperSites to
access the network. Thus, the widespread distribution of Cable SuperSites
requires the adoption of advanced analog or digital set-top boxes as the
industry standard. Paul Kagan Associates estimates that approximately 22.5
million advanced analog and digital set-top boxes will have been installed by
2002, and the Company believes that 19 million of these boxes will be Cable
SuperSites compatible.
NextLevel (formerly General Instruments), the market leader in cable
set-top box manufacturing with a 50% market share in advanced analog set-top
boxes and a 70% market share in digital set-top boxes, and the Company have
executed an agreement for NextLevel to manufacture advanced analog and digital
set-top boxes that are compatible with Cable SuperSites. The Company is working
with Scientific Atlanta, the
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second-largest manufacturer, to make Scientific Atlanta's new generations of
advanced analog and digital set-top boxes Cable SuperSites compatible.
Distribution
Source has signed distribution agreements for Cable SuperSites with three
top cable operators, Cablevision, Marcus and Century, and is currently
commercially offering Cable SuperSites on the systems of two of these companies.
Cable SuperSites is capable of being delivered to over 63 million cable
subscriber households nationwide over existing cable infrastructure. The
commercial deployment of Cable SuperSites in Century's Colorado Springs market
demonstrated the viability of the SourceWare operating system, high levels of
subscriber usage and high ratings. Cable SuperSites achieved viewership which
would have ranked it 12th in popularity, ahead of notable channels such as The
Disney Channel, E! and CNBC. The Company is currently in discussion with nine of
the top 10 domestic cable operators (including Cablevision, Marcus and Century)
for carriage of Cable SuperSites. The Company intends to seek distribution as
part of a cable operator's premium tiered programming offering.
The Company believes that Cable SuperSites and SourceWare provide value to:
- Cable operators by providing them with opportunities for attractive
incremental revenue streams, such as a percentage of revenues from cable
subscriber fees, Internet Access and e-mail, on-line electronic retailing
and advertising revenues, in a market characterized by slowing subscriber
growth and limited revenue per subscriber growth. Additionally, Cable
SuperSites' local programming content and Internet Access can provide
cable operators with an enhanced product offering easily utilized by the
average television viewer.
- Local and national advertisers by providing them with an attractive,
cost-effective medium to access a targeted audience.
- Consumers by providing them with easy access to on-demand local
information, convenient on line shopping as well as user-friendly enhanced
services that it can provide, such as Internet Access and e-mail.
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BUSINESS STRENGTHS
IT Network
Acquisitions Create Significant Synergy and Growth Opportunity. Building on
the successful acquisitions from GTE and Donnelley, the Brite and VNN
Acquisitions have established the Company as the dominant player in the voice
information services market and provide significant cost reductions for the
combined businesses and revenue growth opportunities. The Company has identified
approximately $5.9 million, on an annualized basis, in cost savings from the
elimination of redundant fixed operating, sales, facilities and infrastructure
expenses. In addition, the Company believes that complementary product
offerings, national reach and incremental service offerings will enable the
Company to cross-sell products and services to existing customers and increase
its appeal to new customers.
Stable Cash Flow and Margins. IT Network would have had pro forma monetary
revenues and a Pro Forma EBITDA of $19.7 million and $7.3 million, respectively,
for the first nine months of 1997, and a margin of 37%. The Company believes IT
Network has significant opportunities to increase revenues and EBITDA margins
driven by increasing consumer demand for on-demand information services and the
Company's expanded product and service offerings for its advertising clients.
Long-term Relationships with Major Publisher Partners. The Company has
long-term relationships with many of its top Publisher Partners, including:
BellSouth, Ameritech, Pacific Bell, Bell Atlantic, US West, RH Donnelley, The
Washington Post, The Chicago Sun Times, The San Francisco Chronicle, Newsday and
The Boston Herald and other major newspapers. Source believes that the quality
of its service, the value added to its Publisher Partners, and the strength of
its publisher sales and support teams have contributed to these customer
relationships.
Dominant Market Share and National Scope. The Company has over a 60% share
of the U.S. Yellow Pages telephone directories with voice information offerings
and a 43% share of all U.S. daily newspapers in terms of circulation. In
addition, the Company's coverage of 150 DMAs (including 91 of the top 100) in 46
states provides local advertisers with an attractive cost-effective medium to
reach a targeted customer base and national advertisers with the only national
voice information advertising alternative.
Ease of Use and Scope of the Distribution Network. The Company's voice
information is provided over standard touch-tone telephones at no additional
cost. The Company believes that mass market appeal and customer usage are
enhanced by the ease of use and widespread availability of its voice information
products combined with the quality of the content provided by IT Network. IT
Network's products reach over 100 million households, offices and hotel rooms in
the United States through Yellow Pages distribution and the readers of over 280
newspapers, with an aggregate daily circulation exceeding 24 million through
special inserts.
Market Opportunity. IT Network's services are currently distributed through
only 9% of the over 6,000 Yellow Pages directories and 19% of the approximately
1,500 daily newspapers nationwide. The remainder of the publishers either
provide their own advertising services in-house or do not offer voice
information products and services. The Company believes that by providing these
publishers with incremental revenue sources and outsourcing cost savings there
is a significant opportunity for Source to penetrate these distribution
channels.
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Interactive Channel
Successful Deployment. The Company has commercially launched Cable
SuperSites as a premium channel in two markets, including Colorado Springs.
Subscriber usage has been active, with 20% of subscribers using the service
daily and 75% tuning in weekly, achieving viewership which would have ranked it
12th in popularity, ahead of notable channels such as The Disney Channel, E! and
CNBC, demonstrating the network's popularity with subscribers.
Relationships with Top Cable Operators and Technology Providers. The
Company has entered into distribution agreements for the Cable SuperSites
network with three of the nation's top cable operators: Cablevision, Century and
Marcus. Source believes its agreement with NextLevel will enable the Company's
SourceWare operating system to be integrated into existing and future advanced
analog and digital boxes, providing cable operators and consumers with a
SourceWare compatible set-top box.
Proven, Patented Operating System. The Company believes the SourceWare
operating system is the only available system for providing two-way on-demand,
text and photographic quality images by sending frames over existing cable
infrastructure and telephone lines. The Company has invested $40.9 million in
the acquisition and development of this technology in addition to significant
amounts spent by previous developers of the Company's products. The Company
believes that inclusion of the SourceWare operating system in a cable operator's
set-top box will enable a cable operator to increase revenue, subscribers and
viewership, while providing an advantage over its competitors, such as secondary
"overbuild" cable companies, wireless cable and satellite television.
Local Content Provider. Cable SuperSites programming offers numerous local
features, including regularly-updated news, sports, weather and local school
information. With limited on-demand local content available in the majority of
cable markets the Company believes there is a large untapped demand for this
programming. Because Cable SuperSites can deliver appropriately modified
programming that was originally intended for broadcast over the Internet, much
of this programming is already available. The Company believes that Cable
SuperSites local offerings can create increased cable subscription and usage,
while providing cable operators with a significant advantage over its
competitors.
Market Opportunity. The Company believes the cable industry is
characterized by slowing subscriber growth potential and limited per subscriber
revenue growth. Thus, the Company believes Cable SuperSites offers an attractive
and unique opportunity for cable operators to incrementally increase revenues.
Currently there are 100 cable operators serving over 63 million cable
subscribers nationally, each of which is capable of receiving the Cable
SuperSites programming service over existing cable infrastructure.
Experienced Management Team. The Company's executive management team has
extensive experience in managing businesses and integrating acquisitions in the
telecommunications and cable television industries, respectively. Collectively,
the Company's top five executives have an average of over 12 years in either the
telecommunications, voice information services or cable television industries.
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BUSINESS STRATEGY
The Company's strategy for IT Network and Interactive Channel is to
capitalize on the growth in consumer demand for easy-to-use, on-demand
information sources and programming. The strategy for IT Network is to expand
its business through selling additional services to both its existing and
acquired client base. The strategy for the Interactive Channel is adoption of
its technology as a standard feature in cable industry set-top boxes and
widespread carriage of its Cable SuperSites programming package.
IT Network
Capitalize on Market Leadership to Increase Revenues. IT Network intends to
capitalize on the Acquisitions, which have more than doubled the market share of
IT Network while significantly enhancing its customer base, product and service
offerings and national scope. The Company believes that the Acquisitions will
allow it to cross-sell products and services to existing customers while
offering an expanded menu to new customers, which the Company expects will
result in increased revenues.
Market National Scope to National Advertisers. The Company believes it can
offer nationwide interactive advertising opportunities through "packaging" of
its historical Yellow Pages directory distribution with its acquired directory
and newspaper distribution. Before the consolidation achieved through the
Acquisitions, no voice information services provider was able to offer
advertising with a national scope. The Company believes it will be able to
provide a variety of "packages" which are attractive to major national
advertisers thereby bringing new customers to the voice information services
market.
Introduce New Interactive Programming. The Company intends to expand its
advertising sales revenue through continued development of new interactive
programming. Since 1989 the Company has produced innovative programs marketed
through its directory distribution channels. New products are developed to
address current, local demands such as the interactive employment guides which
were developed to address the tight hiring markets in many of the major cities
across the United States. The Company believes that many new products can be
introduced through its expansive distribution network of publishers and produced
within its existing facility.
Develop New Distribution Methods for Core Products. The Company has
successfully tested and is now launching a proprietary publication called Local
Source. Local Source is a free standing booklet of interactive information
similar to the guides the Company has traditionally published in a section bound
in the front of Yellow Page directories. In addition to the Company's
traditional offerings, Local Source contains numerous listings of local Internet
sites such as school systems, libraries and other web sites of general interest.
The booklet is distributed through a partnering arrangement with a local
newspaper. The Company believes Local Source is an attractive product for
newspapers wishing to offer a niche publication.
Provide Services to Internet Publishers. The Company believes the same type
of services it currently offers to print publishers are in demand by Internet
publishers. The need for content, advertising sales and support services will
expand as Internet use continues to grow. The Company intends to systematically
grow its client base of Internet publishers by offering existing services to new
customers as well as offering Internet-related services to the Company's
existing customers.
7
<PAGE> 11
Interactive Channel
Technology
Incorporate Technology within Industry-Standard Set-tops. The Company has
entered into an agreement with NextLevel, the industry leader in cable set-top
manufacturing with a market share in excess of 62%, to manufacture set-top boxes
that are compatible with the Company's SourceWare operating system. The
agreement contemplates that both advanced analog and digital set-top boxes will
be compatible, which will allow many cable operators to place an order for Cable
SuperSites compatible set-tops with their traditional supplier.
Reduce Technology Cost in Set-tops. The Company believes that it has
reduced the incremental cost of the technology within the advanced analog
set-top because of the introduction of the Company's new chip. This chip is
manufactured by LSI Logic at a cost of $16 and is currently included as part of
a $50 FEM. As new generations of advanced analog boxes are manufactured, the
Company expects the chip cost will be reduced to $10 and included in the
motherboard. Introduction of the Company's technology into digital set-tops can
be achieved with little or no incremental cost per set-top. The software
download can be accomplished easily by passing the programming over cablelines
to the digital boxes with no need for additional hardware.
Distribution
Pursue Tiered Carriage Agreements for Cable SuperSites. The Company intends
to seek tiered distribution agreements with leading cable companies in markets
across the United States to offer the Cable SuperSites in tiers of programming.
The tiered approach would provide significant distribution for Cable SuperSites
in each local market. Most cable companies offer a premium tiered service with a
penetration rate ranging from 31% of basic cable subscribers in systems with one
choice to 54% in systems with four tier choices. It is the Company's intent to
seek to offer its service within a premium tier.
Internet Access
Provide Internet Access to Subscribers over Cable Television. The Company
and Spyglass have modified Spyglass' custom software program to translate
Internet content into a format that is presentable over the Company's SourceWare
operating system. The Company is capable of providing Internet Access, including
full browsing capabilities and e-mail, through set-top boxes equipped with its
SourceWare operating system. The Company believes that this capability will be
attractive to cable operators because it can be offered over existing cable
infrastructure and there is no incremental cost to cable operators purchasing
set-top boxes compatible with Cable SuperSites.
Programming
Continue Development of Enhanced Programming Package. The Company intends
to further develop its programming package for, and is seeking to continually
add new content providers to, Cable SuperSites. Local content providers, such as
school systems and newspapers, will be afforded the opportunity to participate
in Cable SuperSites. The Company currently offers classified advertising and
catalog shopping and intends to offer automated sports scores.
Expand CableNet Programming. Cable SuperSites is capable of interacting
with all cable networks on a cable system. The Company intends to leverage this
capability to induce broadcast channels to offer interactive options within
their programming. Also, local advertisers can support their commercials with
additional information such as a real estate firm offering interactive tours of
homes. Currently, the Company has agreements with Bravo, CourtTV and the
Independent Film Channel to provide this service.
8
<PAGE> 12
THE EXCHANGE OFFER
Issuer..................... Source Media, Inc.
Outstanding Preferred
Stock...................... 800,000 shares of the Company's 13 1/2% Senior PIK
Preferred Stock (the "Outstanding Preferred Stock")
was sold by the Company on October 30, 1997, to
NatWest Capital Markets Limited ("NatWest") and
Prudential Securities Incorporated (collectively,
the "Initial Purchasers") pursuant to a Purchase
Agreement, dated October 23, 1997 (the "Purchase
Agreement"). The Initial Purchasers subsequently
resold the Outstanding Preferred Stock to qualified
institutional buyers pursuant to Rule 144A under
the Securities Act or institutional "accredited
investors" (as defined in Rule 501 (a)(1), (2), (3)
or (7) of Regulation D under the Securities Act) or
outside the United States in compliance with
Regulation S under the Securities Act.
Registration Rights
Agreement.................. Pursuant to the Purchase Agreement, the Company and
the Initial Purchasers entered into the
Registration Rights Agreement, which grants the
holders of the Outstanding Preferred Stock certain
exchange and registration rights. The Exchange
Offer is intended to satisfy such exchange and
registration rights which terminate upon the
consummation of the Exchange Offer.
Securities Offered......... 800,000 shares of the Company's 13 1/2% Senior PIK
Preferred Stock (the "Exchange Preferred Stock").
The Exchange Offer......... The Company is offering to exchange one share of
Exchange Preferred Stock for each share of
Outstanding Preferred Stock that is properly
tendered and accepted. The Company will issue
Exchange Preferred Stock on or promptly after the
Expiration Date. As of the date hereof, there are
800,000 shares of Outstanding Preferred Stock
outstanding. The terms of the Exchange Preferred
Stock are identical in all material respects to the
terms of the Outstanding Preferred Stock for which
they may be exchanged pursuant to the Exchange
Offer, except that the Exchange Preferred Stock is
freely transferable by holders thereof (other than
as provided herein), and are not subject to any
covenant restricting transfer absent registration
under the Securities Act. See "The Exchange Offer".
The Exchange Offer is not conditioned upon any
minimum amount of Outstanding Preferred Stock being
tendered for exchange.
Based on no-action letters issued by the staff of
the Commission to third parties with respect to
similar transactions, the Company believes that the
Exchange Preferred Stock issued pursuant to the
Exchange Offer in exchange for Outstanding
Preferred Stock may be offered for resale, resold
and otherwise transferred by holders thereof (other
than (i) a broker-dealer who purchases such
Exchange Preferred Stock from the Company to resell
pursuant to Rule 144A or any other available
exemption under the Securities Act, or (ii) a
person that is an "affiliate" of the Company within
the meaning of Rule 405 of the Securities Act)
without compliance with the registration and
prospectus delivery requirements of the Securities
Act, provided that such Exchange Preferred Stock is
acquired in the ordinary course of such holders'
business and such holders are not engaged in, have
no arrangement or understanding with any person to
participate in, and do not intend to engage in, any
distribution of the Exchange Preferred Stock.
However, the Company has not sought a no-action
letter with respect to the Exchange Offer and
9
<PAGE> 13
there can be no assurance that the staff of the
Commission would make a similar determination with
respect to the Exchange Offer. Each holder of
Exchange Preferred Stock, other than a
broker-dealer, must represent that such conditions
have been met. In addition, each broker-dealer that
receives Exchange Preferred Stock for its own
account pursuant to the Exchange Offer must
acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange
Preferred Stock. The Letter of Transmittal
accompanying this Prospectus states that by so
acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the
Securities Act. A broker-dealer may nonetheless be
deemed to be an "underwriter" under the Securities
Act notwithstanding such disclaimer. This
Prospectus, as it may be amended or supplemented
from time to time, may be used by a broker-dealer
in connection with resales of Exchange Preferred
Stock received in exchange for Outstanding
Preferred Stock where such Outstanding Preferred
Stock was acquired by such broker-dealer as a
result of market-making activities or other trading
activities. Pursuant to the Registration Rights
Agreement, the Company has agreed that, for a
period of 180 days after the Expiration Date, it
will make this Prospectus available to any
broker-dealer for use in connection with any such
resale. See "The Exchange Offer -- Purpose and
Effect of the Exchange Offer" and "Plan of
Distribution."
Any holder who tenders in the Exchange Offer with
the intention to participate, or for the purpose of
participating, in a distribution of the Exchange
Preferred Stock could not rely on the position of
the staff of the Commission enunciated in no-action
letters and, in the absence of an applicable
exemption, must comply with the registration and
prospectus delivery requirements of the Securities
Act in connection with any resale transaction.
Failure to comply with such requirements in such
instance may result in such holder incurring
liability under the Securities Act for which the
holder is not indemnified by the Company.
Expiration Date............ 5:00 p.m., New York City time, on ,
1998, unless the Exchange Offer is extended, in
which case the term "Expiration Date" means the
latest date and time to which the Exchange Offer is
extended. See "The Exchange Offer -- Expiration
Date; Extensions; Amendments".
Accumulated Dividends on
the
Exchange Preferred
Stock.................... Each share of Preferred Stock will be entitled to
dividends from the most recent date to which
dividends have been paid on the Outstanding
Preferred Stock or, if no dividends have been paid
on such Outstanding Preferred Stock, from October
30, 1997.
Exchange Date.............. As soon as practicable after the close of the
Exchange Offer, the Company will accept for
exchange all Outstanding Preferred Stock properly
tendered and not validly withdrawn prior to 5:00
p.m., New York City time, on the Expiration Date.
See "The Exchange Offer--Withdrawal of Tenders."
Conditions to the Exchange
Offer.................... The Exchange Offer is subject to customary
conditions, certain of which may be waived by the
Company. The Company reserves the right to
terminate or amend the Exchange Offer at any time
prior to the
10
<PAGE> 14
Expiration Date upon the occurrence of any such
condition. The Exchange Offer is not conditioned on
any minimum amount of Outstanding Preferred Stock
being tendered for exchange. See "The Exchange
Offer -- Conditions."
Consequences of Failure to
Exchange................. Any Outstanding Preferred Stock not tendered
pursuant to the Exchange Offer will remain
outstanding and continue to accumulate dividends.
Any such shares of Outstanding Preferred Stock will
remain "restricted securities" under the Securities
Act, subject to the transfer restrictions described
herein. As a result, the liquidity of the market
for such Outstanding Preferred Stock could be
adversely affected upon completion of the Exchange
Offer. See "Risk Factors -- Consequences of Failure
to Exchange" and "The Exchange
Offer -- Consequences of Failure to Exchange."
Certain Federal Income Tax
Considerations........... The exchange of the Outstanding Preferred Stock for
Exchange Preferred Stock by tendering holders
should not be a taxable exchange for U.S. Federal
income tax purposes, and such holders should not
recognize any taxable gain or loss for U.S. Federal
income tax purposes as a result of such exchange.
Holders should review the information set forth
under "Certain U.S. Federal Income Tax
Consequences" for a discussion of certain U.S.
Federal income tax consequences relating to the
Outstanding Preferred Stock and the Exchange
Preferred Stock prior to tendering the Outstanding
Preferred Stock in the Exchange Offer.
Use of Proceeds............ There will be no cash proceeds to the Company from
the Exchange Offer. See "Use of Proceeds."
PROCEDURES FOR TENDERING OUTSTANDING PREFERRED STOCK
Tendering Outstanding
Preferred Stock.......... Each beneficial owner owning interests in
Outstanding Preferred Stock ("Beneficial Owner")
through a DTC Participant (as defined) must
instruct such DTC Participant to cause Outstanding
Preferred Stock to be tendered in accordance with
the procedures set forth in this Prospectus and in
the applicable Letter of Transmittal. See "The
Exchange Offer -- Procedures for
Tendering -- Outstanding Preferred Stock held by
DTC."
Each participant (a "DTC Participant") in the
Depository Trust Company ("DTC") holding
Outstanding Preferred Stock through DTC must (i)
electronically transmit its acceptance to DTC
through the DTC Automated Tender Offer Program
("ATOP"), for which the transaction will be
eligible, and DTC will then edit and verify the
acceptance, execute a book-entry delivery to the
Exchange Agent's account at DTC and send an Agent's
Message (as defined herein) to the Exchange Agent
for its acceptance, or (ii) comply with the
guaranteed delivery procedures set forth in this
Prospectus and in the Letter of Transmittal. By
tendering through ATOP, DTC Participants will
expressly acknowledge receipt of the accompanying
Letter of Transmittal and agree to be bound by its
terms and the Company will be able to enforce such
agreement against such DTC Participants. See "The
Exchange Offer -- Procedures for
Tendering -- Outstanding Preferred Stock held
through DTC" and
11
<PAGE> 15
"-- Guaranteed Delivery Procedures -- Outstanding
Preferred Stock held through DTC."
Each Holder must (i) complete and sign a Letter of
Transmittal, and mail or deliver such Letter of
Transmittal, and all other documents required by
the Letter of Transmittal, together with
certificate(s) representing all tendered
Outstanding Preferred Stock, to the Exchange Agent
at its address set forth in this Prospectus and in
the Letter of Transmittal, or (ii) comply with the
guaranteed delivery procedures set forth in this
Prospectus. See "The Exchange Offer -- Procedures
for Tendering," "-- Exchange Agent" and
"-- Guaranteed Delivery Procedures -- Outstanding
Preferred Stock held by Holders."
By tendering, each holder will represent to the
Company that, among other things, (i) it is not an
affiliate of the Company, (ii) it is not a
broker-dealer tendering Outstanding Preferred Stock
acquired directly from the Company for its own
account, (iii) the Exchange Preferred Stock
acquired pursuant to the Exchange Offer is being
obtained in the ordinary course of business of such
holder and (iv) it has no arrangements or
understandings with any person to participate in
the Exchange Offer for the purpose of distributing
the Exchange Preferred Stock. See "The Exchange
Offer -- Procedures for Tendering."
Guaranteed Delivery
Procedures............... DTC Participants holding Outstanding Preferred
Stock through DTC who wish to cause their
Outstanding Preferred Stock to be tendered, but who
cannot transmit their acceptances through ATOP
prior to the Expiration Date, may effect a tender
in accordance with the procedures set forth in this
Prospectus and in the Letter of Transmittal. See
"Exchange Offer -- Guaranteed Delivery Procedures."
Holders who wish to tender their Outstanding
Preferred Stock but (i) whose Outstanding Preferred
Stock is not immediately available and will not be
available for tendering prior to the Expiration
Date, or (ii) who cannot deliver their Outstanding
Preferred Stock, the Letter of Transmittal or any
other required documents to the Exchange Agent
prior to the Expiration Date, may effect a tender
in accordance with the procedures set forth in this
Prospectus. See "The Exchange Offer -- Guaranteed
Delivery Procedures."
Withdrawal Rights.......... The tender of Outstanding Preferred Stock pursuant
to the Exchange Offer may be withdrawn at any time
prior to 5:00 p.m., New York City time, on the
Expiration Date, in accordance with the procedures
set forth in this Prospectus. See "The Exchange
Offer -- Withdrawal of Tenders."
Exchange Agent............. ChaseMellon Shareholder Services, L.L.C. is serving
as Exchange Agent in connection with the Exchange
Offer. See "The Exchange Offer -- Exchange Agent."
Shelf Registration
Statement.................. Under certain circumstances described in the
Registration Rights Agreement, certain holders of
Outstanding Preferred Stock (including holders who
are not permitted to participate in the Exchange
Offer or who may not freely resell Exchange
Preferred Stock received in the Exchange Offer) may
require the Company to file and use best efforts to
cause to become effective, a shelf registration
statement under the Securities Act, which would
cover resales of Outstanding Preferred Stock by
such
12
<PAGE> 16
holders. See "Exchange Offer -- Purpose and Effect
of the Exchange Offer."
THE EXCHANGE PREFERRED STOCK
Shares Offered............. 800,000
Liquidation Preference..... $25.00 per share, plus accumulated and unpaid
dividends
Optional Redemption........ At any time and from time to time on or prior to
November 1, 2000, the Company may, subject to
certain requirements, redeem up to 35% of the
Preferred Stock with cash proceeds from one or more
Equity Offerings at a redemption price equal to
113.50% of the liquidation preference thereof, plus
accumulated and unpaid dividends to the date of
redemption. After November 1, 2000 and prior to
November 1, 2002, the Preferred Stock is not
redeemable. On or after November 1, 2002, the
Company may redeem the Preferred Stock, in whole or
in part, at any time at the redemption prices set
forth herein, together with all accumulated and
unpaid dividends to the date of redemption.
Mandatory Redemption....... The Company is required, subject to certain
conditions, to redeem all of the Preferred Stock
outstanding on November 1, 2007 at a redemption
price equal to 100% of the liquidation preference
thereof, plus accumulated and unpaid dividends to
the date of redemption.
Dividends.................. At a rate equal to 13 1/2% per annum of the
liquidation preference per share, payable quarterly
beginning February 1, 1998 and accumulating from
the Preferred Stock Issue Date (as defined). The
Company, at its option, may pay dividends on any
Dividend Payment Date occurring on or before
November 1, 2002 either in cash or by the issuance
of additional Preferred Stock with a liquidation
preference equal to the amount of such dividends;
thereafter, dividends will be paid in cash. The
indenture under which the Notes were issued limits
the amount of cash dividends that may be paid on
the preferred stock of the Company, including the
Preferred Stock. See "Risk Factors -- Limitations
on Ability to Pay Dividends."
Dividend Payment Dates..... February 1, May 1, August 1 and November 1 of each
year (each, a "Dividend Payment Date").
Voting..................... The Outstanding Preferred Stock is, and the
Exchange Preferred Stock will be, non-voting,
except as otherwise required by law and except in
certain circumstances described herein, including
(i) amending certain rights of the holders of the
Preferred Stock and (ii) the issuance of any class
of equity securities that ranks on a parity with or
senior to the Preferred Stock. In addition, if the
Company (i) after November 1, 2002 fails to pay
cash dividends in any dividend period, (ii) fails
to make a mandatory redemption or an offer to
purchase upon a Change of Control, or (iii) fails
to comply with certain covenants or make certain
payments on its Indebtedness, holders of a majority
of the shares of the Preferred Stock, voting as a
class, will be entitled to elect two directors to
the Company's board of directors.
Ranking.................... The Outstanding Preferred Stock ranks, and the
Exchange Preferred Stock will rank, with respect to
dividend rights and rights on liquidation,
winding-up and dissolution of the Company, senior
to all classes of
13
<PAGE> 17
common stock and to all other classes of preferred
stock of the Company subject to certain exceptions.
See "Description of Preferred Stock -- Ranking."
Change of Control.......... Upon the occurrence of a Change of Control, the
Company will be required to make an offer to
repurchase the Preferred Stock at a price equal to
101% of the liquidation preference thereof, plus
accumulated and unpaid dividends to the date of
repurchase.
Restrictive Covenants...... The Certificate of Designation (as defined herein)
contains certain restrictive provisions that, among
other things, will limit (i) the incurrence of
additional indebtedness by the Company and its
subsidiaries, (ii) the issuance of preferred stock
of the Company's subsidiaries, (iii) payment of
dividends on, and redemption of, capital stock of
the Company and the redemption of certain
subordinated obligations of the Company, (iv)
investments, including investments over a certain
amount in Interactive Channel by the Company or any
Restricted Subsidiary, (v) transactions with
affiliates and (vi) consolidations, mergers and
transfers of all or substantially all of the assets
of the Company. However, all of the limitations and
prohibitions are subject to a number of important
qualifications and exceptions.
Absence of a Public Market
for the Exchange Preferred
Stock.................... The Exchange Preferred Stock is a new security and
there is currently no established market for the
Exchange Preferred Stock. The Exchange Preferred
Stock will generally be freely transferable
(subject to the restrictions discussed elsewhere
herein) but will be a new security for which there
will not initially be a market.
For more complete information regarding the Preferred Stock, see
"Description of Preferred Stock."
14
<PAGE> 18
RISK FACTORS
Prospective acquirors of the Exchange Preferred Stock should consider
carefully all of the information set forth in this Prospectus and, in
particular, should evaluate the specific factors set forth under "Risk Factors"
for risks involved with an acquisition of the Exchange Preferred Stock.
ORGANIZATIONAL STRUCTURE
The following table sets forth the Company's organizational structure.
Organizational Structure Chart
- ---------------
(1) ICT holds certain patents and licenses used to deliver Cable SuperSites and
performs research and development primarily for Interactive Channel.
(2) The guarantee executed by IT Network contains a covenant that restricts
payments of dividends on its capital stock to an amount sufficient to cover
debt service on the Notes, redemptions or repurchases of the Notes or the
Preferred Stock, dividends on the Preferred Stock and corporate overhead.
(3) The Certificate of Designation limits investments in Interactive Channel by
the Company and its subsidiaries.
15
<PAGE> 19
SUMMARY FINANCIAL DATA
The following summary financial data are derived from the consolidated
financial statements of the Company, Brite and VNN and the respective notes
thereto, as well as the selected financial and pro forma information included
elsewhere in this Prospectus. The pro forma consolidated statements of
operations data reflect the Transactions as if they had occurred on January 1,
1996. The pro forma consolidated balance sheet data reflect the Transactions as
if they had occurred on September 30, 1997. The pro forma consolidated financial
data are based on the assumptions and adjustments described in the accompanying
Notes to the Unaudited Pro Forma Condensed Consolidated Financial Statements and
do not purport to present the results of operations and financial position of
the Company as if the Transactions had actually occurred on such dates, nor are
they necessarily indicative of the results of operations that may be achieved in
the future. The information set forth below should be read in conjunction with
"Unaudited Pro Forma Condensed Consolidated Financial Statements," "Selected
Consolidated Financial Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial statements
and notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
---------------------- -------------------------------------
HISTORICAL PRO FORMA HISTORICAL PRO FORMA
---------- --------- ------------------------- ---------
1996 1996 1996 1997 1997
---------- --------- ----------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Monetary revenues...................................... $ 8,575 $ 20,662 $ 6,406 $ 7,988 $ 19,903
Nonmonetary revenues(1)................................ 9,944 9,944 8,041 4,928 4,928
-------- -------- ------- -------- --------
Total revenues................................. 18,519 30,606 14,447 12,916 24,831
Monetary cost of sales................................. 3,485 8,625 2,708 4,945 10,150
Nonmonetary cost of sales.............................. 9,944 9,944 8,041 4,928 4,928
-------- -------- ------- -------- --------
Total cost of sales............................ 13,429 18,569 10,749 9,873 15,078
Gross profit........................................... 5,090 12,037 3,698 3,043 9,753
Selling, general and administrative expenses........... 11,747 12,052 8,081 13,803 14,868
Amortization of intangible assets...................... 1,031 12,136 774 2,769 9,409
Research and development expenses...................... 6,332 6,332 4,414 2,682 2,682
-------- -------- ------- -------- --------
Operating loss................................. (14,020) (18,483) (9,571) (16,211) (17,206)
Interest (income) expense, net......................... (175) 11,985 (302) 2,423 10,347
Other (income) expense, net............................ 10 (36) (101) (60) (60)
-------- -------- ------- -------- --------
Net income (loss).............................. (13,855) (30,432) (9,168) (18,574) (27,493)
Preferred stock dividends.............................. -- 3,392 -- -- 2,821
-------- -------- ------- -------- --------
Net income (loss) attributable to common
stockholders................................. $(13,855) $(33,824) $(9,168) $(18,574) $(30,314)
======== ======== ======= ======== ========
OTHER DATA:
Monetary revenues:
ITN.................................................. $ 7,543 $ 19,630 $ 5,539 $ 7,741 $ 19,656
Interactive Channel.................................. 1,032 1,032 867 247 247
-------- -------- ------- -------- --------
Total monetary revenues........................ 8,575 20,662 6,406 7,988 19,903
EBITDA:(2)
ITN.................................................. 60 7,157 99 1,265 7,257
Interactive Channel.................................. (8,734) (8,734) (6,388) (9,752) (9,752)
Corporate............................................ (3,418) (3,372) (1,762) (3,334) (3,334)
-------- -------- ------- -------- --------
Total EBITDA................................... (12,092) (4,949) (8,051) (11,821) (5,829)
Depreciation and Amortization ("D & A"):
ITN.................................................. 361 9,653 238 868 7,855
Interactive Channel.................................. 1,577 3,845 1,181 3,462 3,462
-------- -------- ------- -------- --------
Total D & A.................................... 1,938 13,498 1,419 4,330 11,317
Capital expenditures:
ITN.................................................. 591 908 119 126 229
Interactive Channel.................................. 2,088 2,088 1,330 1,549 1,549
-------- -------- ------- -------- --------
Total capital expenditures..................... 2,679 2,996 1,449 1,675 1,778
Ratio of earnings to cover combined fixed charges and
preferred stock dividends(3)......................... nmf nmf nmf nmf nmf
</TABLE>
16
<PAGE> 20
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997
-------------------------
HISTORICAL PRO FORMA
----------- ----------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 4,158 $ 28,603
Restricted cash and restricted cash equivalents(4).......... -- 22,584
Working capital............................................. 944 24,389
Total assets................................................ 24,689 121,543
Long-term debt and capitalized lease obligations (including
current maturities)....................................... 19,525 100,055
Senior PIK Preferred Stock.................................. -- 13,321
Total stockholders' equity (capital deficiency)............. (4,240) (2,237)
</TABLE>
- ---------------
(1) Nonmonetary revenues and nonmonetary cost of sales associated with barter
transactions are included in the consolidated statements of operations at
the estimated fair values of advertising time and information content
received and represent the exchange of advertising time for information
content. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Note 2 of Notes to Consolidated Financial
Statements.
(2) EBITDA should not be considered in isolation from or as a substitute for net
income (loss), cash flows from operating activities or other consolidated
statement of operations or cash flows statement data prepared in accordance
with generally accepted accounting principles or as a measure of
profitability or liquidity.
(3) The ratio of earnings to cover combined fixed charges and preferred stock
dividends is not a meaningful figure due to the fact that in the periods
presented fixed charges, which include interest expense, and preferred stock
dividends, exceeded earnings by an amount equal to the net loss.
(4) The Company has placed approximately $22.6 million of the net proceeds from
the Offering, representing funds sufficient to pay the first four interest
payments on the Notes, into an Interest Escrow Account to be held by the
Escrow Agent for the benefit of the holders of the Notes.
17
<PAGE> 21
RISK FACTORS
Any investment in the Exchange Preferred Stock involves a high degree of
risk. Prospective purchasers of the Exchange Preferred Stock should carefully
consider the risk factors set forth below, as well as the other information
contained in this Prospectus. This Prospectus contains forward-looking
statements, which can be identified by the use of forward-looking terminology
such as "may," "expect," "project," "intend," "plan," "anticipate," "estimate,"
"goal" in connection therewith or comparable terminology. Actual results may
differ materially from those projected in the forward-looking statements as a
result of any number of factors, including risk factors set forth below.
SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE DEBT
The Company is highly leveraged and substantially all its assets are
subject to security interests securing the Notes. After giving pro forma effect
to the Transactions, the Company would have had total indebtedness at September
30, 1997 of approximately $100 million (99% of total capitalization excluding
the Preferred Stock). See "Capitalization" and "Unaudited Pro Forma Condensed
Consolidated Financial Statements."
The degree to which the Company is leveraged, together with the covenants
imposed by the Notes and the Preferred Stock, could have adverse consequences to
holders of the Notes, including the following: (i) substantial cash flow from
the Company's operations will be required for the payment of principal and
interest on its indebtedness and will not be available for other purposes; (ii)
the Company's ability to obtain additional financing in the future, whether for
acquisitions, capital expenditures, further development of Cable SuperSites,
refinancings or otherwise, may be impaired; (iii) the Company may be more
leveraged than certain of its competitors, which may place it at a competitive
disadvantage; (iv) the Indenture imposes significant financial and operating
restrictions; and (v) the Company's high degree of leverage makes it more
vulnerable to changes in economic conditions and may limit its ability to
withstand competitive pressures and technological developments, consummate
acquisitions and capitalize on significant business opportunities.
The Company will require substantial cash flow to meet its interest payment
obligations with respect to the Notes and any other borrowings. For the year
ended December 31, 1996 and nine months ended September 30, 1997, the Company's
Pro Forma EBITDA would have been $(3.0) million and $(5.8) million,
respectively. For the same periods, the Company's pro forma interest expense, as
adjusted to give effect to the Transactions, would have been $12.0 million and
$10.3 million, respectively. The Company's cash flow is dependent on the
Company's future performance and is subject to financial, economic and other
factors, some of which are beyond its control. If the Company is unable to
generate such cash flow from operations or otherwise to satisfy its interest
obligations on the Notes and other indebtedness, it may be required to refinance
all or a portion of such obligations or to sell assets. The Company expects that
any payment of the principal of any of the Notes or any other borrowings,
whether upon maturity, acceleration, redemption or other repurchase obligation,
such as a change of control, may have to be refinanced in whole or in part or
financed by the sale of assets or similar transactions. The Indenture contains
restrictions on the Company's ability to incur additional indebtedness and to
sell assets and, notwithstanding such restrictions, the Company may not be able
to effect a refinancing or sell assets on acceptable terms when needed.
HISTORICAL AND PROJECTED LOSSES
The Company has reported an operating loss and a net loss in each year
since its inception, including EBITDA of $(12.1) million, an operating loss of
$14.0 million and a net loss of $13.9 million in the year ended December 31,
1996. For the full year, the Company's operating losses were experienced in the
Interactive Channel and IT Network, although IT Network reached a break-even
position in the third and fourth quarters. While the Company expects its EBITDA
will improve as a result of the Acquisitions, the Company expects to continue to
incur substantial operating losses through 1998 and may incur substantial
operating losses thereafter. There can be no assurance that the Company will be
able to operate profitably at any time or that the Company will not require
additional funds to implement its business plan.
18
<PAGE> 22
NO PRIOR HISTORY OF COMBINED OPERATIONS; RISK OF CANCELLATION OF ACQUIRED
CONTRACTS
Prior to the Acquisitions, the operations of the Company, Brite and VNN
were conducted as separate and distinct businesses, each with its own management
team, sales force and operations. The Company intends to manage its operations
and the operations of Brite and VNN as an integrated entity. While the Company
believes, based on its history with prior acquisitions, that it can successfully
integrate the operations of Brite and VNN, there can be no assurance that this
will be the case. There also can be no assurance that the Company will be able
to realize expected operating and economic efficiencies following the
Acquisitions. Many of the customer contracts of Brite and VNN acquired by the
Company are either non-transferrable, or terminable at will or with little or no
notice. There can be no assurance that the customers under such contracts will
not terminate them or that the Company will be able to renew such contracts. In
addition, certain customer contracts of Brite acquired by the Company have
expired. The termination or non-renewal of such contracts would adversely affect
the Company's business.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, the Company will be required to
offer to repurchase all or a portion of the outstanding Notes or Preferred Stock
at 101% of, in the case of the Notes, the principal amount thereof, plus accrued
and unpaid interest to the date of repurchase, and, in the case of the Preferred
Stock, the liquidation preference plus accumulated and unpaid dividends. The
source of funds for any such payment at maturity or earlier repurchase will be
the Company's available cash or cash generated from operating or other sources,
including, without limitation, borrowings or sales of assets or equity
securities of the Company. There can be no assurance that sufficient funds will
be available to pay such principal, liquidation preference or to make any
required repurchase. If an offer to repurchase the Notes is required to be made
and the Company does not have available funds sufficient to pay for Notes
tendered for repurchase, an event of default would occur under the Indenture.
The occurrence of an event of default could result in acceleration of maturity
of the Notes. Similarly, if the Company is required to offer to repurchase the
outstanding Preferred Stock and the Company does not have available funds
sufficient to repurchase shares of the Preferred Stock tendered for repurchase,
a voting rights triggering event would occur under the Certificate of
Designation, giving the holders of Preferred Stock the right to elect two
directors. See "Description of Exchange Preferred Stock."
CONSEQUENCES OF A FAILURE TO EXCHANGE
The Outstanding Preferred Stock has not been registered under the
Securities Act or any state securities laws, and therefore, may not be offered,
sold or otherwise transferred except in compliance with the registration
requirements of the Securities Act and any other applicable securities laws, or
pursuant to an exemption therefrom or in a transaction not subject thereto, and
in each case in compliance with certain other conditions and restrictions,
including the right of the Company and the Transfer Agent (as defined) in
certain cases to require the delivery of opinions of counsel, certifications and
other information prior to any such transfer. Outstanding Preferred Stock that
remain outstanding after the consummation of the Exchange Offer will continue to
bear a legend reflecting such restrictions on transfer. In addition, upon
consummation of the Exchange Offer, holders of Outstanding Preferred Stock that
remains outstanding will not be entitled to any rights to have such Outstanding
Preferred Stock registered under the Securities Act or to any similar rights
under the Registration Agreement (subject to certain limited exceptions). The
Company currently intends to register under the Securities Act Outstanding
Preferred Stock that remain outstanding after consummation of the Exchange Offer
only if such Outstanding Preferred Stock is held by Initial Purchasers or
persons ineligible to participate in the Exchange Offer (other than due solely
to the status of such holder as an "affiliate" of the Company within the meaning
of Rule 405 under the Securities Act). If Outstanding Preferred Stock is
tendered and accepted in the Exchange Offer, the market for untendered
Outstanding Preferred Stock is likely to diminish; accordingly, holders who do
not tender their Outstanding Preferred Stock may encounter difficulties in
selling such notes following the Exchange Offer.
19
<PAGE> 23
ACCESS TO CHANNELS ON CABLE SYSTEMS AND UNCERTAINTY OF SUBSCRIBER ACCEPTANCE
The Company's ability to offer Cable SuperSites on any cable television
system depends on obtaining an agreement from the cable operator on terms
satisfactory to the Company. There is intense competition among suppliers of
programming for access to channels. The Company currently has three agreements
in place with cable operators and is providing programming in Colorado Springs,
Colorado and Denton, Texas. Two of these agreements may be terminated with
little or no notice. The Company expects that any future distribution agreements
may be terminated with little or no notice. The Company is in active discussions
to obtain channel access for Cable SuperSites with other cable systems. There
can be no assurances that such additional agreements will be entered into.
Even if the Company does have channel access, there can be no assurance
that a significant market for on-demand interactive television will develop or
that cable subscribers will use the television as a source of on-demand
information and services. In addition, the Interactive Channel will be competing
with other on-demand information and entertainment sources. This competition
includes services offering access to the Internet through the television. There
can be no assurance that Cable SuperSites will prove more desirable than such
services. If Cable SuperSites does not achieve market acceptance, Source will be
unable to implement its business strategy and Source's business will be
materially adversely affected.
EVOLVING NATURE OF BUSINESS; ACQUISITION RISKS
The on-line information and services industry is experiencing rapid change.
Products or technologies developed by others could render obsolete or otherwise
significantly diminish the value of the Company's products or technologies,
Interactive Channel or IT Network. The Company's future performance will depend
substantially on its ability to respond to competitive developments, to upgrade
its technologies and programming, to commercialize products and services
incorporating upgraded technologies and programming and to adapt its operational
and financial control systems as necessary to respond to continuing changes in
its businesses. There can be no assurance that the Company will be successful in
these efforts.
In addition, Source may consider strategic acquisitions in either of its
lines of business from time to time. Any assessment of potential acquisitions is
necessarily inexact and its accuracy is inherently uncertain. There can be no
assurances that management of Source would recognize the risks and uncertainties
associated with such an acquisition. In addition, the purchase price of any such
acquisitions would have to be funded either with Common Stock or cash. Future
issuances of Common Stock could have a dilutive effect on the Company's current
shareholders and any expenditure of cash could impair the ability of the Company
to service its debt or fund operations, or both, any of which could have a
material adverse effect on Source's business, financial condition and results of
operations.
AVAILABILITY OF PROGRAMMING
The success of the Interactive Channel is highly dependent on the
availability of high-quality programming applications. The Company depends on
independent programming sources, such as third-party suppliers, local media,
retailers and information service providers, to create, produce and update the
programming disseminated on Cable SuperSites at no, or minimal, cost to the
Company. There can be no assurance that Source will succeed in attracting and
retaining such independent programming sources. If independent programming
sources do not develop high quality, up-to-date information, shopping,
entertainment and other programming applications that are capable of being
delivered on Cable SuperSites and that appeal to subscribers, or if such
suppliers are unwilling to provide such applications to Source on terms
favorable to Source, Source would have to increase the extent to which it
supplements these independent programming services with its internal
programming, which would increase the cost of operating Cable SuperSites.
RELIANCE UPON PROPRIETARY TECHNOLOGY
Source often enters into confidentiality or license agreements with certain
of its employees, consultants and other outside parties, and generally seeks to
control access to and distribution of its proprietary information. Despite these
precautions, it may be possible for third parties to copy or otherwise obtain
and use
20
<PAGE> 24
Source's products or technology without authorization, or to independently
develop similar products and technology. In addition, effective copyright and
trade secret protection may be unavailable or limited in certain foreign
countries. There can be no assurance that the steps taken by Source will prevent
misappropriation of its technology or that litigation will not be necessary in
the future to enforce Source's intellectual property rights, to protect Source's
trade secrets, to determine the validity and scope of the proprietary rights of
others, or to defend against claims of infringement or invalidity. Such
litigation could result in the invalidation of Source's proprietary rights and,
in any event, could result in substantial costs and diversion of management
time, either of which could have a material adverse effect on Source's business.
UNAVAILABILITY OF EQUIPMENT; RELIANCE ON SOLE SUPPLIER
The Company and NextLevel have entered into an agreement to incorporate the
Company's SourceWare operating system in its advanced-analog and digital set-top
boxes. Although NextLevel has agreed to manufacture set-top boxes compatible
with the Company's technology, NextLevel has not agreed to manufacture such
units in any certain quantities. If NextLevel fails to incorporate the Company's
SourceWare operating system into its set-top boxes or fails to manufacture them
in sufficient quantities, the Company would be required to seek to enter into
such arrangement with a different set-top box manufacturer or continue to
purchase its own set-top boxes. Because NextLevel produces over 62% of the
United States' set-top boxes, an agreement with any other manufacturer would not
be as beneficial to the Company. In addition, if the Company were required to
purchase its own set-top boxes, the Company estimates that its capital costs
related to such purchases would increase significantly, compared to the
estimated cost of incorporating the Company's SourceWare operating system into
NextLevel's set-top boxes. If the Company is forced to pursue either of these
alternatives, its business prospects and financial condition would be materially
adversely affected.
To incorporate SourceWare technology in advanced analog set-top boxes
requires the addition of the Company's chip for such set-top boxes to access
Cable SuperSites. Consequently, such chip is likely to be a key factor in the
success of the Interactive Channel. LSI Logic is currently the only manufacturer
of these chips and is therefore the Company's sole supplier of this important
component. The Company has no guaranteed supply arrangements with LSI Logic, and
there can be no assurance that LSI Logic will be able to meet its requirements.
Unless alternative supply sources are identified for this chip, the Company
could be subject to pricing risks, delivery delays and quality control problems
or even unavailability of this component, any of which would have a material
adverse effect on the Company.
HOLDING COMPANY STRUCTURE
Source is a holding company with no business operations of its own. The
Company's only material assets are the direct and indirect equity interests in
its subsidiaries, through which the Company conducts its business operations.
Accordingly, Source will be dependent upon the earnings and cash flows of, and
dividends and distributions from, its direct and indirect equity interest in its
subsidiaries to pay its expenses, meet its obligations and pay interest and
principal on the Notes and dividends on the Preferred Stock. There can be no
assurance that these direct and indirect equity interests in Source's
subsidiaries will generate sufficient earnings and cash flows to pay dividends
to distribute funds to Source to enable Source to pay its expenses and meet its
obligations to pay interest and principal on the Notes and dividends on the
Preferred Stock.
RELIANCE ON KEY PERSONNEL
The Company's future performance depends in large part on the services of
certain executive officers and other key personnel, the loss of any one of which
could be detrimental to the Company's success. In addition, for the Company to
implement its strategy and continued development and growth, it will be
necessary for the Company to attract and retain qualified personnel in all
areas.
COMPETITION
In an industry characterized by extensive capital requirements and rapid
technological change, Source faces potential competition for the acceptance of
its on-line programming and services from a number of
21
<PAGE> 25
companies, most of which have significantly greater financial, technical,
manufacturing and marketing resources than Source and may be in a better
position to compete in the industry. In addition, Source faces competition for
advertiser revenues from other media, including radio, television, newspapers,
and magazines. Source believes that for the foreseeable future, public access to
on-line television will generally be through cable operators. Accordingly,
Source must compete with other providers of television programming to establish
relationships with cable operators to gain channel access.
In addition, certain RBOCs have provided voice information services in the
past. There can be no assurance that the RBOCs will not provide such services
again in the future. If one or more RBOCs were to begin providing such services,
the resulting competition could have a material adverse effect on the Company's
financial condition and results of operations.
GOVERNMENT REGULATION
The telecommunications and cable television industries are subject to
extensive regulation by federal, state and local governmental agencies. Existing
regulations were substantially affected by the passage of the Telecommunications
Act of 1996 ("1996 Telecom Act") in February 1996, which allowed cable
television companies and telephone companies both to enter and participate in
new lines of business. This introduced the possibility of new, non-traditional
competition for both cable television and telephone companies and resulted in
greater potential competition for Source. The outcome of federal and state
administrative proceedings may also affect the nature and extent of competition
that will be encountered by Source. In addition, future regulations may prevent
Source from generating revenues from sales of database information about
consumers obtained by Source from its television and telephone business.
BellSouth is also allowed to terminate its agreement with the Company if it
determines that regulatory changes would impact the Company's ability to perform
under such agreement. These competitive developments, as well as other
regulatory requirements relating to privacy issues, may have a material adverse
effect on Source's business.
LACK OF PUBLIC MARKET
The Outstanding Preferred Stock was issued to, and the Company believes is
currently owned by, a relatively small number of beneficial owners. The
Outstanding Preferred Stock has not been registered under the Securities Act and
will be subject to restrictions on transferability to the extent that they are
not exchanged for Exchange Preferred Stock. See "-- Consequences of a Failure to
Exchange." Although the Exchange Preferred Stock will generally be permitted to
be resold or otherwise transferred by the holders (who are not affiliates of the
Company) without compliance with the registration and prospectus delivery
requirements under the Securities Act, they will constitute a new issue of
securities with no established trading market. If the Exchange Preferred Stock
is traded after its initial issuance, it may trade at a discount from its
initial offering price, depending upon prevailing interest rates, the market for
similar securities and other factors including general economic conditions and
the financial condition of the Company. The Company does not intend to apply for
a listing or quotation of the Exchange Preferred Stock on any securities
exchange or stock market. Accordingly, there can be no assurance as to the
development or liquidity of any market for the Exchange Preferred Stock. The
liquidity of, and trading market for, the Preferred Stock also may be adversely
affected by general declines in the market for similar securities. Such a
decline may adversely affect such liquidity and trading markets independent of
the financial performance of, and prospects for, the Company.
Each broker-dealer that receives Exchange Preferred Stock for its own
account in exchange for Outstanding Preferred Stock, where such Outstanding
Preferred Stock was acquired by such broker-dealer as a result of market-making
activities or other trading activities, must acknowledge that it will deliver a
prospectus meeting the requirements of the Securities Act in connection with any
resale of such Exchange Preferred Stock. Subject to certain provisions set forth
in the Registration Agreement, the Company has agreed that, for a period of up
to 180 days after the consummation of the Exchange Offer, it will make this
Prospectus available to any Participating Broker-Dealer for use in connection
with any such resale. However, under certain circumstance, the Company has the
right to require that Participating Broker-Dealers suspend the resale of
Exchange Preferred Stock pursuant to this Prospectus. Notwithstanding that the
Company may cause the resale of Exchange Preferred Stock pursuant to this
Prospectus to be suspended, the Company has
22
<PAGE> 26
no obligation to extend the 180-day period referred to above during which
Participating Broker-Dealers are entitled to use this Prospectus in connection
with such resales. See "The Exchange Offer -- Resale of Exchange Preferred
Stock."
EXCHANGE OFFER ELIGIBILITY AND PROCEDURES
Any holder of the Outstanding Preferred Stock who is an "affiliate" of the
Company within the meaning of Rule 405 under the Securities Act or any
broker-dealer who purchased Outstanding Preferred Stock from the Company to
resell pursuant to Rule 144A or any other available exemption under the
Securities Act will not be permitted or entitled to tender such Outstanding
Preferred Stock in the Exchange Offer and must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
sale or other transfer of such Outstanding Preferred Stock unless such sale or
transfer is made pursuant to an exemption from such requirements. See "The
Exchange Offer -- Resale of Exchange Preferred Stock."
Each holder of Outstanding Preferred Stock who wishes to exchange its
Outstanding Preferred Stock for Exchange Preferred Stock in the Exchange Offer
will be required to make certain representations to the Company set forth in
"The Exchange Offer -- Purpose and Effect of the Exchange Offer."
Issuance of the Exchange Preferred Stock in exchange for the Outstanding
Preferred Stock pursuant to the Exchange Offer will be made only after timely
receipt by the Exchange Agent of the required documents. Therefore, holders of
the Outstanding Preferred Stock desiring to tender such Outstanding Preferred
Stock in exchange for Exchange Preferred Stock should allow sufficient time to
ensure timely delivery. The Company is under no duty to give notification of
defects or irregularities with respect to tenders of Outstanding Preferred Stock
for exchange. See "The Exchange Offer -- Procedures for Tendering."
23
<PAGE> 27
USE OF PROCEEDS
The net proceeds to the Company from the Offering are estimated to be
approximately $113.6 million after deducting the estimated fees and expenses of
$6.4 million payable by the Company. Of the net proceeds of the Offering, the
Company used (i) $35.6 million to fund the purchase price of the Brite
Acquisition, (ii) $9.0 million to fund the purchase price of the VNN
Acquisition, (iii) approximately $22.0 million to repay existing debt and (iv)
approximately $22.6 million to fund the Interest Escrow Account. Approximately
$24.4 million is intended to be used for general corporate purposes.
CAPITALIZATION
The following table sets forth the unaudited capitalization of the Company
as of September 30, 1997 (i) on an actual basis and (ii) giving pro forma effect
to the Transactions and the application of the estimated $113.6 million in net
proceeds from the Offering described under "Use of Proceeds." The table should
be read with "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the Financial Statements and notes thereto in this
Offering Memorandum.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997
-------------------------
ACTUAL PRO FORMA
---------- -----------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................... $ 4,158 $ 28,603
Restricted cash and restricted cash equivalents(1).......... -- 22,584
-------- --------
Total............................................. $ 4,158 $ 51,187
======== ========
Long-term debt, including current maturities:
Existing debt............................................. $ 19,470 --
Senior Secured Notes due 2004............................. -- $100,000
Capital lease obligations................................. 55 55
-------- --------
Total............................................. 19,525 100,055
Minority interests in consolidated subsidiaries............. 3,130 3,130
Senior PIK Preferred Stock.................................. -- 13,321
Stockholders' equity (capital deficiency):
Common Stock, $.001 par value (50,000,000 shares
authorized; 11,874,578 shares issued)(2)............... 12 12
Less treasury stock, at cost (381,351 shares)............. (3,758) (3,758)
Capital in excess of par value............................ 75,153 80,682(3)
Accumulated deficit and other............................. (75,647) (79,173)
-------- --------
Total stockholders' equity (capital deficiency)... (4,240) (2,237)
======== ========
Total capitalization.............................. $ 18,415 $114,269
======== ========
</TABLE>
- ---------------
(1) The Company has placed approximately $22.6 million of the net proceeds
realized from the Offering, representing funds sufficient to pay the first
four interest payments on the Notes, into an Interest Escrow Account to be
held by the Escrow Agent for the benefit of the holders of the Notes.
(2) Excludes 8,491,974 shares of Common Stock reserved for future issuance as of
September 30, 1997. Since September 30, 1997, the Company has (i) issued
86,763 shares of Common Stock in connection with the exercise of stock
options, (ii) cancelled stock options representing the right to purchase an
aggregate of 120,403 shares of Common Stock, (iii) issued warrants to
purchase 164,917 shares of Common Stock in connection with interest
paid-in-kind to existing Senior Secured Noteholders and (iv) issued 33,000
shares of Common Stock under terms of a settlement agreement. As of
September 30, 1997, 8,491,974 shares of Common Stock were reserved for
future issuance, consisting of (a) an aggregate of 1,752,078 shares subject
to options then outstanding at a weighted average exercise price of $6.27
per share, (b) 6,500,520 shares reserved for issuance upon the exercise of
warrants then outstanding at a weighted average exercise price of $8.06 per
share, (c) 206,376 shares reserved for issuance upon the exercise of certain
exchange rights and (d) 33,000 shares to be issued under terms of a
settlement agreement. See "Description of Capital Stock."
(3) Includes a $5.5 million change in capital in excess of par attributable to
issuance of the Warrants.
24
<PAGE> 28
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following Unaudited Pro Forma Condensed Consolidated Financial
Statements as of and for the nine-month period ended September 30, 1997 have
been derived from the unaudited consolidated financial statements of the Company
and the unaudited financial statements of Brite and VNN. The Unaudited Pro Forma
Condensed Consolidated Statements of Operations for the year ended December 31,
1996 are based on the historical audited consolidated financial statements of
the Company and the audited financial statements of Brite and VNN. The Unaudited
Pro Forma Condensed Consolidated Financial Statements give effect to the
Transactions and the application of the net proceeds therefrom and the January
14, 1997 purchase by the Company of all of the outstanding shares of ICT held by
the minority shareholders of ICT (the "ICT Purchase"), as described in the
accompanying Notes to the Unaudited Pro Forma Condensed Consolidated Financial
Statements.
The Unaudited Pro Forma Condensed Consolidated Balance Sheet as of
September 30, 1997 was prepared as though the Transactions occurred on such
date. The Unaudited Pro Forma Condensed Consolidated Statements of Operations
for the nine-month period ended September 30, 1997 and for the year ended
December 31, 1996 were prepared as if the Transactions and the ICT Purchase had
occurred as of January 1, 1996 and give effect to the elimination of certain
costs of sales and selling, general and administrative expenses.
The Unaudited Pro Forma Condensed Consolidated Financial Statements reflect
pro forma adjustments that are based upon available information and factually
supportable assumptions that the Company believes are reasonable and do not
necessarily reflect the results of operations or the financial position of the
Company that actually would have resulted had the Transactions or ICT Purchase
to which pro forma effect is given, been consummated as of the date or for the
periods indicated. In preparing the Unaudited Pro Forma Condensed Consolidated
Financial Statements, the Company believes it has utilized reasonable methods to
conform the basis of presentation.
The Acquisitions will be accounted for by the purchase method of
accounting, under which the purchase prices of Brite and VNN will be allocated
to the tangible and intangible assets and liabilities of Brite and VNN,
respectively, based upon their respective fair values. The Unaudited Pro Forma
Condensed Consolidated Financial Statements have been prepared based upon
certain assumptions made by management regarding the Transactions and a
preliminary estimate of the purchase price allocation. Actual accounting
adjustments for the Transactions may differ from the pro forma adjustments based
on the balances of the assets and liabilities of Brite and VNN and the final
purchase price allocation.
The Unaudited Pro Forma Condensed Consolidated Financial Statements and
accompanying notes should be read in conjunction with the historical financial
statements of the Company, Brite and VNN and other financial information
pertaining to the Company including "Use of Proceeds," "Capitalization" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere herein.
25
<PAGE> 29
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
HISTORICAL PRO FORMA
------------------------ ADJUSTING PRO FORMA
SOURCE BRITE VNN ENTRIES SOURCE
-------- ------ ---- --------- ---------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents............... $ 4,158 $ -- $ -- $24,445(1) $ 28,603
Restricted cash and restricted cash
equivalents.......................... -- -- -- 11,599(2) 11,599
Accounts receivable..................... 1,157 3,225 389 (3,614)(3) 1,157
Deferred expenses....................... 1,039 -- 27 (27)(3) 1,039
Prepaid expenses and other current
assets............................... 893 10 13 (23)(3) 893
-------- ------ ---- ------- --------
Total current assets............ 7,247 3,235 429 32,380 43,291
Noncurrent portion of restricted cash and
restricted cash equivalents............. -- -- -- 10,985(2) 10,985
Property and equipment, net............... 5,710 241 490 550(4) 6,991
Intangible assets, net.................... 10,757 286 -- 43,983(4) 55,026
Other non-current assets.................. 975 -- -- 4,275(5) 5,250
-------- ------ ---- ------- --------
Total assets.................... $ 24,689 $3,762 $919 $92,173 $121,543
======== ====== ==== ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
Current liabilities:
Trade accounts payable.................. $ 814 $ 394 $ 42 $ (436)(6) $ 814
Accrued payroll......................... 441 151 38 (189)(6) 441
Other accrued liabilities............... 1,433 24 11 (35)(7) 1,433
Amounts payable related to
acquisitions......................... -- -- -- 1,000(8) 1,000
Unearned income......................... 3,586 80 -- (80)(6) 3,586
Current portion of capital lease
obligations.......................... 29 -- -- -- 29
-------- ------ ---- ------- --------
Total current liabilities....... 6,303 649 91 260 7,303
Other non-current liabilities............. -- -- 58 (58)(6) --
Long-term debt, net of discount........... 19,470 -- -- 80,530(9) 100,000
Capital lease obligations................. 26 -- -- -- 26
Minority interests in consolidated
subsidiaries, net of note receivable and
accrued interest from minority
stockholder............................. 3,130 -- -- -- 3,130
Senior PIK Preferred Stock................ -- -- -- 13,321(10) 13,321
Stockholders' equity:
Common stock............................ 12 -- -- -- 12
Less treasury stock, at cost............ (3,758) -- -- -- (3,758)
Capital in excess of par value.......... 75,153 -- -- 5,529(10) 80,682
Retained earnings (accumulated
deficit)............................. (75,505) 3,113 770 (7,409)(11) (79,031)
Foreign currency translation............ (40) -- -- -- (40)
Notes receivable and accrued interest
from stockholders.................... (102) -- -- -- (102)
-------- ------ ---- ------- --------
Total stockholders' equity
(capital deficiency).......... (4,240) 3,113 770 (1,880) (2,237)
-------- ------ ---- ------- --------
Total liabilities and
stockholders' equity (capital
deficiency)................... $ 24,689 $3,762 $919 $92,173 $121,543
======== ====== ==== ======= ========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial
Statements
26
<PAGE> 30
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
---------------------------- ADJUSTING PRO FORMA
SOURCE BRITE VNN ENTRIES SOURCE
-------- ------ ------ --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Monetary revenues..................... $ 8,575 $9,412 $2,425 $ 250(12) $ 20,662
Nonmonetary revenues.................. 9,944 -- -- -- 9,944
-------- ------ ------ -------- --------
Total revenues.............. 18,519 9,412 2,425 250 30,606
Monetary cost of sales................ 3,485 4,685 1,592 (1,137)(13) 8,625
Nonmonetary cost of sales............. 9,944 -- -- -- 9,944
-------- ------ ------ -------- --------
Total cost of sales......... 13,429 4,685 1,592 (1,137) 18,569
Gross profit.......................... 5,090 4,727 833 1,387 12,037
Selling, general and administrative
expenses............................ 11,747 1,792 272 (1,759)(14) 12,052
Amortization of intangible assets..... 1,031 -- -- 11,105(15) 12,136
Research and development expenses..... 6,332 -- -- -- 6,332
-------- ------ ------ -------- --------
Operating income (loss)............... (14,020) 2,935 561 (7,959) (18,483)
Interest (income) expense, net........ (175) -- -- 12,160(16) 11,985
Other (income) expense, net........... 10 -- -- (46)(17) (36)
-------- ------ ------ -------- --------
Income (loss) before income taxes..... (13,855) 2,935 561 (20,073) (30,432)
Provision for income taxes............ -- -- 223 (223)(18) --
-------- ------ ------ -------- --------
Net income (loss)..................... (13,855) 2,935 338 (19,850) (30,432)
Preferred stock dividends............. -- -- -- 3,392(19) 3,392
-------- ------ ------ -------- --------
Net income (loss)
attributable to common
stockholders.............. $(13,855) $2,935 $ 338 $(23,242) $(33,824)
======== ====== ====== ======== ========
Net loss per common share... $ (1.39) $ (3.40)
======== ========
Weighted average common shares
outstanding......................... 9,935,455 9,935,455
======== ========
OTHER DATA:
Monetary revenues:
IT Network.......................... $ 7,543 $9,412 $2,425 $ 250 $ 19,630
Interactive Channel................. 1,032 -- -- -- 1,032
-------- ------ ------ -------- --------
Total monetary revenues..... $ 8,575 $9,412 $2,425 $ 250 $ 20,662
D&A:
IT Network.......................... 361 307 148 8,837 9,653
Interactive Channel................. 1,577 -- -- 2,268 3,845
-------- ------ ------ -------- --------
Total D&A................... 1,938 307 148 11,105 13,498
Capital expenditures:
IT Network.......................... 591 111 206 -- 908
Interactive Channel................. 2,088 -- -- -- 2,088
-------- ------ ------ -------- --------
Total capital
expenditures.............. 2,679 111 206 -- 2,996
Pro forma ratio of earnings to cover
combined fixed earnings and
preferred stock dividends: (20)..... nmf
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial
Statements
27
<PAGE> 31
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------------------- ADJUSTING PRO FORMA
SOURCE BRITE VNN ENTRIES SOURCE
---------- ------- ------ --------- ----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Monetary revenues................. $ 7,988 $ 9,804 $1,923 $ 188(12) $ 19,903
Nonmonetary revenues.............. 4,928 -- -- -- 4,928
---------- ------- ------ -------- ----------
Total revenues.......... 12,916 9,804 1,923 188 24,831
Monetary cost of sales............ 4,945 4,818 1,131 (744)(13) 10,150
Nonmonetary cost of sales......... 4,928 -- -- -- 4,928
---------- ------- ------ -------- ----------
Total cost of sales..... 9,873 4,818 1,131 (744) 15,078
Gross profit...................... 3,043 4,986 792 932 9,753
Selling, general and
administrative
expenses........................ 13,803 2,687 215 (1,837)(14) 14,868
Amortization of intangible
assets.......................... 2,769 -- -- 6,640(15) 9,409
Research and development
expenses........................ 2,682 -- -- -- 2,682
---------- ------- ------ -------- ----------
Operating income (loss)........... (16,211) 2,299 577 (3,871) (17,206)
Interest (income) expense, net.... 2,423 -- -- 7,924(16) 10,347
Other (income) expense, net....... (60) -- -- -- (60)
---------- ------- ------ -------- ----------
Income (loss) before income
taxes........................... (18,574) 2,299 577 (11,795) (27,493)
Provision for income taxes........ -- -- 231 (231)(18) --
---------- ------- ------ -------- ----------
Net income (loss)....... (18,574) 2,299 346 (11,564) (27,493)
Preferred stock dividends......... -- -- -- 2,821(19) 2,821
---------- ------- ------ -------- ----------
Net income (loss)
attributable to common
stockholders.......... $ (18,574) $ 2,299 $ 346 $(14,385) $ (30,314)
========== ======= ====== ======== ==========
Net loss per common
share................. $ (1.64) $ (2.68)
========== ==========
Weighted average Common Shares
outstanding..................... 11,292,655 11,292,655
========== ==========
OTHER DATA:
Monetary revenues:
IT Network...................... $ 7,741 $ 9,804 $1,923 $ 188 $ 19,656
Interactive Channel............. 247 -- -- -- 247
---------- ------- ------ -------- ----------
Total monetary
revenues.............. 7,988 9,804 1,923 188 19,903
D&A:
IT Network...................... 868 225 123 6,640 7,855
Interactive Channel............. 3,462 -- -- -- 3,462
---------- ------- ------ -------- ----------
Total D&A............... 4,330 225 123 6,640 11,317
Capital expenditures:
IT Network...................... 126 54 49 -- 229
Interactive Channel............. 1,549 -- -- -- 1,549
---------- ------- ------ -------- ----------
Total capital
expenditures.......... 1,675 54 49 -- 1,778
Pro forma ratio of earnings to
cover combined fixed earnings
and preferred stock dividends:
(20)............................ nmf
</TABLE>
See accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial
Statements
28
<PAGE> 32
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On January 14, 1997, the Company acquired all of the outstanding shares of
ICT held by minority shareholders in exchange for approximately 1,390,000 shares
of the Company's common stock, making ICT a wholly-owned subsidiary of the
Company. The Company also issued options to purchase 177,000 shares of the
Company's common stock at exercise prices ranging from $1.43 to $4.96 per share
to certain employees and directors of ICT in exchange for their outstanding
options to purchase ICT common shares, and incurred cash expenses related to the
transaction of approximately $801,000. The aggregate purchase price for the
acquisition of the ICT minority interest was approximately $11.3 million, and
the acquisition was accounted for by the purchase method of accounting.
On October 30, 1997, the Company acquired purchase certain of the voice
information services assets of Brite. The purchase price of the Brite
acquisition was approximately $35.6 million in cash. The Brite acquisition was
accounted for by the purchase method of accounting.
On October 30, 1997, the Company acquired the voice information services
assets of VNN. The purchase price of the VNN acquisition was $9.0 million in
cash. The VNN Acquisition is being accounted for by the purchase method of
accounting.
The Unaudited Pro Forma Condensed Consolidated Balance Sheet gives effect
to the following unaudited pro forma adjustments:
(1) Represents the (i) receipt of gross proceeds of $120.0 million from the
Offering, (ii) payment of $6.4 million issuance costs related to the
Offering, (iii) payment of approximately $44.6 million as the purchase
price in the Acquisitions, (iv) payment of approximately $22.0 million in
connection with the repayment of the Company's senior secured notes plus
accrued interest thereon and (v) deposit of approximately $22.6 million
into the Interest Escrow Account for the first four interest payments on
the Notes.
(2) Represents the establishment of the Interest Escrow Account to service the
first four interest payments of the Notes.
(3) Represents the elimination of Brite and VNN accounts receivable, deferred
expenses and prepaid expenses, which were not included in the purchased
assets of Brite and VNN.
(4) Represents the elimination of Brite's historical intangible assets of
$286,000 plus management's estimated value of property and equipment,
contract rights and goodwill based on a preliminary allocation of the
purchase price of the Acquisitions in accordance with the purchase method
of accounting as follows:
<TABLE>
<S> <C>
Initial purchase price...................................... $44,550,000
Estimated fees and expenses associated with exiting
activities, terminating employees and relocating certain
employees of the acquired companies....................... 1,000,000
-----------
Total purchase price.............................. $45,550,000
===========
</TABLE>
The Company is currently in the process of obtaining an independent
appraisal of the allocation of the purchase price. The preliminary
allocation is as follows:
<TABLE>
<CAPTION>
AMORTIZATION
DESCRIPTION BRITE VNN PERIOD
----------- ----------- ---------- ------------
<S> <C> <C> <C>
Property and equipment........................ $ 791,000 $ 490,000 3 years
Contract rights............................... 16,000,000 3,400,000 5 years
Goodwill...................................... 19,557,000 5,312,000 5 years
</TABLE>
(5) Represents the (i) write-off of the Company's historical deferred financing
fees of approximately $1.0 million which will be charged to earnings as an
extraordinary item upon the early repayment of its historical debt as part
of the Transactions plus (ii) the recording of deferred financing fees and
expenses associated with the Notes in the amount of approximately $5.3
million.
29
<PAGE> 33
(6) Represents the elimination of Brite and VNN accounts payable, accrued
payroll, unearned income and other non-current liabilities which were not
assumed in the purchase of Brite and VNN.
(7) Represents the elimination of Brite and VNN other accrued liabilities which
were not assumed in the purchase of Brite and VNN.
(8) Represents the accrual of $1.0 million of estimated costs associated with
exiting activities, terminating employees and relocating certain employees
of the acquired companies.
(9) Represents the (i) repayment of approximately $22.0 million of the
Company's senior secured notes, net of approximately $2.4 million of note
discount, as a result of the Offering and (ii) addition of $100.0 million
in Notes pursuant to the Offering.
(10) Represents the addition of $20.0 million in Preferred Stock pursuant to the
Offering, net of (i) warrants with an approximate value of $5.5 million
which is recorded against capital in excess of par value and (ii) financing
fees and expenses of approximately $1.2 million associated with the Units.
(11) Represents the (i) write-off of approximately $2.4 million of note discount
which will be charged to earnings as an extraordinary item in connection
with the repayment of approximately $22.0 million of the Company's senior
secured notes, (ii) write-off of approximately $1.0 million of the
Company's historical deferred financing charges and (iii) elimination of
substantially all of Brite and VNN historical retained earnings which were
not assumed as part of the Brite acquisition.
The Unaudited Pro Forma Condensed Consolidated Statements of Operations
give effect to the following unaudited pro forma adjustments:
(12) Represents rental revenues associated with certain voice information
services equipment purchased as part of the Transactions which are not
included in the historical revenues of Brite.
(13) Represents the (i) elimination of certain historical expenses totaling
$989,000 and $647,000 for the year ended December 31, 1996 and the nine
months ended September 30, 1997, respectively, associated with
subscriptions to certain wire services and programming transmission which
are non-recurring due to the termination of the related agreements upon
closing of the Transactions, and (ii) the elimination of certain historical
expenses associated with the allocation of general corporate overhead to
VNN by Tribune Media Services, Inc. totaling $148,000 and $97,000 for the
year ended December 31, 1996 and the nine months ended September 30, 1997,
respectively, which are non-recurring subsequent to the Transactions.
(14) Represents the elimination of certain historical expenses associated with
(i) allocation of general corporate overhead to Brite by Brite Voice
Systems, Inc., and to VNN by Tribune Media Services, Inc., totaling
$1,359,000 and $1,457,000 for the year ended December 31, 1996 and the nine
months ended September 30, 1997, respectively, which is non-recurring
subsequent to the Transactions, and (ii) rent, advertising and trade
promotional expenses totaling $400,000 and $380,000 for the year ended
December 31, 1996 and the nine months ended September 30, 1997,
respectively, which are non-recurring because these costs relate to
functions which will either be provided by existing Company personnel or
will not be required by the Company due to the termination of related
agreements or obligations upon closing of the Transactions.
(15) Represents (i) the amortization of intangible assets resulting from the
Acquisitions totaling $8,837,000 and $6,640,000 for the year ended December
31, 1996 and the nine months ended September 30, 1997, respectively, and
(ii) the amortization of intangible assets (patents) resulting from the ICT
Purchase totaling $2,268,000 for the year ended December 31, 1996. The
estimated value of the patents, $11.3 million, will be amortized over a
five-year period on the straight-line method.
(16) Represents pro forma interest expense and amortization of deferred
financing costs as shown below based upon pro forma debt levels and the
applicable interest rates. The table below presents pro forma
30
<PAGE> 34
interest expense, noted with the respective interest rates, and pro forma
amortization of deferred financing costs:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1996 SEPTEMBER 30, 1997
----------------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Senior Secured Notes (12%)............................ $12,000 $ 9,000
Reduction of interest expense on current notes
outstanding (13%)................................... (590) (1,638)
Pro forma amortization of deferred financing costs.... 750 562
------- -------
Total pro forma interest expense
adjustments............................... $12,160 $ 7,924
======= =======
</TABLE>
Pro forma interest expense does not include approximately $1.0 million and
$732,000 of interest income for the year ended December 31, 1996 and the
nine months ended September 30, 1997, respectively, which would have been
realized on the net excess proceeds of the Offering assuming the
Transactions had taken place on January 1, 1996.
(17) Represents the elimination of minority interest in the gains or losses of
consolidated subsidiaries resulting from the ICT Purchase.
(18) Represents the elimination of income tax provision due to the Company's net
operating loss carryforwards, which are available to reduce income tax
provisions.
(19) Represents (i) preferred stock dividends on the Preferred Stock at a rate
equal to 13.5% per annum per share, payable quarterly, (ii) amortization of
discount related to warrants associated with the Units, and (iii)
amortization of approximately $1.1 million in financing costs associated
with the issuance of the Units.
(20) The ratio of earnings to cover combined fixed charges and preferred stock
dividends is not a meaningful figure due to the fact that in the periods
presented fixed charges, which include interest expense and preferred stock
dividends, exceeded earnings by an amount equal to the net loss.
31
<PAGE> 35
SELECTED CONSOLIDATED FINANCIAL DATA
The historical statement of operations and balance sheet data as of and for
each of the years in the five-year period ended December 31, 1996 have been
derived from the Consolidated Financial Statements of the Company, which have
been audited by Ernst & Young LLP, independent auditors. The selected
consolidated financial data for the nine months ended September 30, 1996 and
1997 and as of September 30, 1997 have been derived from unaudited financial
statements included elsewhere herein. In the opinion of the Company's
management, the unaudited consolidated financial statements include all
adjustments consisting of normal recurring accruals and other adjustments as
discussed in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" necessary for the fair presentation of financial position
and of the results of operations for those periods. The results of operations
for the nine months ended September 30, 1997 may not be indicative of results
that may be expected for the full year ending December 31, 1997. The pro forma
consolidated statements of operations data reflect the Transactions and the ICT
Purchase as if they had occurred on January 1, 1996 and give effect to the
elimination of certain costs of sales and selling, general, and administrative
expenses. The pro forma consolidated balance sheet data reflect the Transactions
as if they had occurred on September 30, 1997.
The information contained in this section should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements of the Company and Notes
thereto and the "Unaudited Pro Forma Condensed Consolidated Financial
Statements" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
HISTORICAL PRO FORMA
--------------------------------------------------- ---------
1992 1993 1994 1995 1996 1996
------- -------- -------- -------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Monetary revenues........................................ $ 5,594 $ 6,431 $ 9,194 $ 9,342 $ 8,575 $ 20,662
Nonmonetary revenues(1).................................. 14,049 18,752 21,749 15,944 9,944 9,944
------- -------- -------- -------- -------- --------
Total revenues.................................... 19,643 25,183 30,943 25,286 18,519 30,606
Monetary cost of sales................................... 3,509 4,456 5,248 4,937 3,485 8,625
Nonmonetary cost of sales(1)............................. 14,049 18,752 21,749 15,944 9,944 9,944
------- -------- -------- -------- -------- --------
Total cost of sales............................... 17,558 23,208 26,997 20,881 13,429 18,569
Gross profit............................................. 2,085 1,975 3,946 4,405 5,090 12,037
Selling, general and administrative expenses............. 5,433 6,785 8,987 7,952 11,747 12,052
Amortization of intangible assets........................ 139 1,656 1,684 1,031 1,031 12,136
Research and development expenses........................ 220 1,339 2,706 3,750 6,332 6,332
Write-down of intangible expenses........................ -- -- 1,900 -- -- --
------- -------- -------- -------- -------- --------
Operating loss........................................... (3,707) (7,805) (11,331) (8,328) (14,020) (18,483)
Interest (income) expense, net........................... 615 227 296 137 (175) 11,985
Other (income) expense, net.............................. (19) (140) 1,230 (277) 10 (36)
Charges related to financing incentives.................. -- 2,026 -- 1,581 -- --
------- -------- -------- -------- -------- --------
Net loss.......................................... (4,303) (9,918) (12,857) (9,769) (13,855) (30,432)
Preferred stock dividends................................ -- 769 1,621 833 -- 3,392
------- -------- -------- -------- -------- --------
Net loss attributable to common stockholders...... $(4,303) $(10,687) $(14,478) $ 10,602) $(13,855) $(33,824)
======= ======== ======== ======== ======== ========
Net loss per common share......................... $ (1.20) $ (2.66) $ (3.22) $ (1.65) $ (1.39) $ (3.40)
======= ======== ======== ======== ======== ========
Weighted average common shares outstanding............... 3,599 4,022 4,498 6,413 9,935 9,935
======= ======== ======== ======== ======== ========
OTHER DATA:
Monetary revenues:
IT Network.............................................. $ 5,350 $ 6,370 $ 8,344 $ 9,339 $ 7,543 $ 19,630
Interactive Channel..................................... 244 61 850 3 1,032 1,032
------- -------- -------- -------- -------- --------
Total monetary revenues........................... 5,594 6,431 9,194 9,342 8,575 20,662
EBITDA:(2)
IT Network.............................................. (822) (2,895) (2,163) (298) 60 7,157
Interactive Channel..................................... (72) (382) (4,713) (4,445) (8,734) (8,734)
Corporate............................................... (2,310) (5,051) (4,890) (3,890) (3,418) (3,372)
------- -------- -------- -------- -------- --------
Total EBITDA...................................... (3,204) (8,328) (11,766) (8,633) (12,092) (4,949)
D & A:
IT Network.............................................. 315 342 470 458 361 9,653
Interactive Channel..................................... 170 1,790 1,946 1,374 1,577 3,845
------- -------- -------- -------- -------- --------
Total D & A....................................... 485 2,132 2,416 1,832 1,938 13,498
Capital expenditures:
IT Network.............................................. 136 881 195 17 591 908
Interactive Channel..................................... 666 448 217 241 2,088 2,088
------- -------- -------- -------- -------- --------
Total capital expenditures........................ 802 1,329 412 258 2,679 2,996
Ratio of earnings to cover combined fixed charges and
preferred stock dividends(3)............................ nmf nmf nmf nmf nmf nmf
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------
HISTORICAL PRO FORMA
------------------------- ---------
1996 1997 1997
----------- ----------- ---------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Monetary revenues........................................ $ 6,406 $ 7,988 $ 19,903
Nonmonetary revenues(1).................................. 8,041 4,928 4,928
------- -------- --------
Total revenues.................................... 14,447 12,916 24,831
Monetary cost of sales................................... 2,708 4,945 10,150
Nonmonetary cost of sales(1)............................. 8,041 4,928 4,928
------- -------- --------
Total cost of sales............................... 10,749 9,873 15,078
Gross profit............................................. 3,698 3,043 9,753
Selling, general and administrative expenses............. 8,081 13,803 14,868
Amortization of intangible assets........................ 774 2,769 9,409
Research and development expenses........................ 4,414 2,682 2,682
Write-down of intangible expenses........................ -- -- --
------- -------- --------
Operating loss........................................... (9,571) (16,211) (17,206)
Interest (income) expense, net........................... (302) 2,423 10,347
Other (income) expense, net.............................. (101) (60) (60)
Charges related to financing incentives.................. -- -- --
------- -------- --------
Net loss.......................................... (9,168) (18,574) (27,493)
Preferred stock dividends................................ -- -- 2,821
------- -------- --------
Net loss attributable to common stockholders...... $(9,168) $(18,574) $(30,314)
======= ======== ========
Net loss per common share......................... $ (0.92) $ (1.64) $ (2.68)
======= ======== ========
Weighted average common shares outstanding............... 9,933 11,293 11,293
======= ======== ========
OTHER DATA:
Monetary revenues:
IT Network.............................................. $ 5,539 $ 7,741 $ 19,656
Interactive Channel..................................... 867 247 247
------- -------- --------
Total monetary revenues........................... 6,406 7,988 19,903
EBITDA:(2)
IT Network.............................................. 99 1,265 7,257
Interactive Channel..................................... (6,388) (9,752) (9,752)
Corporate............................................... (1,762) (3,334) (3,334)
------- -------- --------
Total EBITDA...................................... (8,051) (11,821) (5,829)
D & A:
IT Network.............................................. 238 868 7,855
Interactive Channel..................................... 1,181 3,462 3,462
------- -------- --------
Total D & A....................................... 1,419 4,330 11,317
Capital expenditures:
IT Network.............................................. 119 126 229
Interactive Channel..................................... 1,330 1,549 1,549
------- -------- --------
Total capital expenditures........................ 1,449 1,675 1,778
Ratio of earnings to cover combined fixed charges and
preferred stock dividends(3)............................ nmf nmf nmf
</TABLE>
32
<PAGE> 36
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF SEPTEMBER 30,
------------------------------------------------ -------------------------
HISTORICAL HISTORICAL PRO FORMA
------------------------------------------------ ---------- ------------
1992 1993 1994 1995 1996 1997 1997
------- ------- -------- ------- ------- ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.......................... $ 297 $ 1,235 $ 127 $17,479 $ 4,303 $ 4,158 $28,603
Restricted cash and restricted cash
equivalents(4)................................... -- -- -- -- -- -- 22,584
Working capital (deficit).......................... (6,040) (3,329) (7,608) 12,223 (467) 944 24,389
Total assets....................................... 10,992 13,248 8,219 24,195 15,897 24,689 121,543
Long-term debt and capital lease obligations
(including current maturities)................... 4,917 701 653 219 4,720 19,525 100,055
Redeemable convertible preferred stock(5).......... -- 10,065 16,236 -- -- -- --
Senior PIK Preferred Stock......................... -- -- -- -- -- -- 13,321
Total stockholders' equity (capital deficiency).... (4,569) (8,202) (21,965) 13,037 30 (4,240) (2,237)
</TABLE>
- ---------------
(1) Nonmonetary revenues and nonmonetary cost of sales associated with barter
transactions are included in the consolidated statements of operations at
the estimated fair values of advertising time and information content
received and represent the exchange of advertising time for information
content. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Note 2 of Notes to Consolidated Financial
Statements.
(2) EBITDA should not be considered in isolation from or as a substitute for net
income (loss), cash flows from operating activities or other consolidated
statement of operations or cash flows statement data prepared in accordance
with generally accepted accounting principles or as a measure of
profitability or liquidity.
(3) The ratio of earnings to cover combined fixed charges and preferred stock
dividends is not a meaningful figure due to the fact that in the periods
presented fixed charges, which includes interest expense, and preferred
stock dividends, exceeded earnings by an amount equal to the net loss.
(4) The Company has placed approximately $22.6 million of the net proceeds
realized from the sale of the Offering, representing funds sufficient to pay
the first four interest payments on the Notes into an Interest Escrow
Account to be held by the Escrow Agent for the benefit of the holders of the
Notes.
(5) All of the outstanding redeemable convertible preferred stock was converted
to Common Stock as part of the Merger. See Note 1 of Notes to Consolidated
Financial Statements.
33
<PAGE> 37
FORWARD-LOOKING STATEMENTS
Certain statements in this Prospectus under the captions "Prospectus
Summary," "Use of Proceeds," "Risk Factors," "Unaudited Pro Forma Condensed
Consolidated Financial Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business" and elsewhere constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known and
unknown risks, uncertainties and other important factors that could cause the
actual results, performance or achievements of the Company, or industry results,
to differ materially from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such risks,
uncertainties and other important factors include, among others: ability to
secure distribution for the Cable SuperSites; failure to make available advanced
analog or digital set-top boxes incorporating the Company's technology; general
economic and business conditions; industry trends; competition; equipment costs
and availability; the loss of any significant customers; changes in business
strategy or development plans; availability, terms and deployment of capital;
availability of qualified personnel; changes in, or the failure or inability to
comply with, government regulation; and other factors referenced in this
Prospectus. See "Risk Factors." Forward-looking statements speak only as of the
date of this Prospectus. The Company expressly disclaims any obligation or
undertaking to disseminate any updates or revisions to any forward-looking
statement contained herein to reflect any change in the Company's expectations
with regard thereto or any change in events, conditions or circumstances on
which any such statement is based.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Source Media is a leader in providing on-demand information, services and
programming through the telephone and cable television, delivered over the
Company's proprietary digital operating systems to mass market consumers through
its two operating subsidiaries, IT Network and Interactive Channel. IT Network
is a leading provider of on-demand information through advertiser-sponsored
telephone hotlines advertised in over 100 million Yellow Pages annually and over
24 million newspapers daily. Interactive Channel provides on-demand information
and services and can provide Internet access to the cable television industry
over existing cable infrastructure and telephone lines.
IT Network is the nation's leading provider of voice information services
through telephone directories and newspapers with a market share which
management believes is 10 times its closest competitor in terms of distribution.
The Company also provides related support services to a majority of its Yellow
Pages directory and newspaper Publisher Partners. The Company sells advertising
and provides related support services to in excess of 8,000 advertising clients
who pay to sponsor and deliver a promotional message before and after the
delivery of the voice information services. The Company is the sole provider of
voice information services to eight of the nine largest Yellow Pages directory
publishers in the country and believes that it is the only voice information
services provider capable of delivering national scope advertising to the mass
market in telephone directories and newspapers through one source.
Interactive Channel's Cable SuperSites supplies programming and services
which allow a subscriber to access on-demand local and national news, weather,
sports and school information, view programming guides and purchase goods and
can allow a subscriber to browse the Internet, send and receive e-mail and
access a variety of other attractive offerings over existing cable
infrastructure and telephone lines. Cable SuperSites sells interactive
advertising space on screens using text, voice and pictures. Cable SuperSites is
broadcast by cable operators utilizing the Company's proprietary two-way
operating system, SourceWare. Management believes that SourceWare is the only
commercially deployable system providing two-way frames, audio and text over
existing cable infrastructure, both digital and analog. SourceWare enables any
cable television system equipped with compatible advanced analog or digital set
top boxes to deliver two-way, on-demand programming with the touch of a
television remote. In less than one second, Cable SuperSites subscribers can
access interactive programming delivered over the cable system to their
television.
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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 voice information services, principally
its Consumer Tips service, to certain Publisher Partners. 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 Publisher Partners and
providing voice information 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 voice information messages in exchange for promotional
messages 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
Cable SuperSites 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.
THE PERIOD-TO-PERIOD COMPARISONS SET FORTH BELOW DO NOT GIVE EFFECT TO THE
TRANSACTIONS AND ONLY REFLECT HISTORICAL INFORMATION OF THE COMPANY.
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Monetary revenues increased 25 percent to $8.0 million for the nine months
ended September 30, 1997 from $6.4 million for the nine months ended September
30, 1996. The net increase of $1.6 million was the result of an increase of $3.1
million attributable to the Company's voice information services related to new
service contracts acquired from Donnelly and GTE as well as the introduction of
the Company's LocalSource product. This increase was partially offset by
declines of (i) $710,000 attributable to the Network Guide product, (ii)
$620,000 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 20 DMAs, 14 of which are located within the
Ameritech region, three within the Southwestern Bell region and three within the
DonTech region. Total Network Guide revenues in the 20 terminated DMAs were
$275,000 for the nine months ended September 30, 1997 compared with $1.8 million
for the nine months ended September 30, 1996. Network Guide revenues within the
Company's other 30 existing DMAs declined slightly during the first nine months
of 1997 compared with the same period in 1996. These declines were partially
offset by increases of $905,000 related to 17 new DMAs.
The decrease in ICT's revenues in the first nine 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
ICT 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 39 percent to
$4.9 million for the nine months ended September 30, 1997 from $8.0 million for
the nine months ended September 30, 1996.
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Substantially all of this $3.1 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 83 percent to $4.9 million for the nine
months ended September 30, 1997 from $2.7 million for the nine months ended
September 30, 1996. This increase resulted from (i) operating personnel
salaries, depreciation expenses, and various other operating expenses totaling
$1.7 million attributable to Interactive Channel operations in Colorado Springs
and Denton, (ii) a $356,000 write-off of electronic components used by the
Company for building set-top boxes and (iii) increased operating personnel
salaries and various other operating expenses totaling $256,000 incurred by IT
Network to support new services and advertising contracts acquired from Donnelly
and GTE as well as its new LocalSource product. In the prior period, costs
incurred by Interactive Channel were research and development in nature, because
Cable SuperSites had not been commercially deployed.
Selling, general and administrative expenses, including amortization of
intangible assets, increased 87 percent to $16.6 million for the nine months
ended September 30, 1997 from $8.9 million for the nine months ended September
30, 1996. This increase resulted from (i) certain programming, personnel
salaries, subscriber acquisition, travel and various other Interactive Channel
expenses totaling $5.5 million, (ii) increased customer service, sales,
marketing and administrative expenses incurred by IT Network to support new
services and advertising contracts acquired from Donnelly and GTE as well as its
new LocalSource product and (iii) costs associated with, and settlement of, an
ongoing legal dispute in the third quarter of 1997. Amortization of intangible
assets increased by $2.0 million during the nine months ended September 30, 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. In the
prior period, costs incurred by Interactive Channel were research and
development in nature, because Cable SuperSites had not been commercially
deployed.
Research and development expenses declined 39 percent to $2.7 million for
the nine months ended September 30, 1997 from $4.4 million for the nine months
ended September 30, 1996. This decrease reflects lower Interactive Channel
development expenses following the commercial introduction of Cable SuperSites.
Other income and expenses. Net interest expense was $2.4 million for the
nine months ended September 30, 1997 compared with net interest income of
$301,000 for the nine months ended September 30, 1996, reflecting interest
expense on higher debt balances outstanding during the first nine months of 1997
as well as the approximate $1.1 million estimated fair market value of warrants
issued by the Company related to an interest payment in kind on an outstanding
senior debt security compared to net interest income generated from the proceeds
from a public offering of the Company's common stock in December 1995 during the
first nine months of 1996.
YEARS ENDED DECEMBER 31, 1996 AND 1995
Monetary revenues declined 8% to $8.6 million for the year ended December
31, 1996 from $9.3 million for the year ended December 31, 1995. The net decline
of $767,000 included declines of $1.5 million attributable to the Network Guide
product and $884,000 attributable to the Company's Consumer Tips service. These
declines were partially offset by (i) increases of $1.0 million in revenues
attributable to product development trials of Cable SuperSites and license fees
from ICT technology, and (ii) $597,000 related to the Company's other voice
information services.
The decline in Network Guide monetary revenues primarily reflects the
termination of distribution of the Network Guide in 18 DMAs, eight of which are
located within the Southwestern Bell region, six of which are located within the
Ameritech region, three of which are located within the DonTech region and one
of which is located in the BellSouth region. Total Network Guide revenues within
the 18 terminated DMAs were $1.1 million for the year ended December 31, 1996
and $2.8 million for the year ended December 31, 1995. These declines were
partially offset by increases of $137,000 related to 12 new DMAs in which the
Network Guide is distributed and $54,000 in the Company's other 41 existing
DMAs. In June 1997, the Company and
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Ameritech entered into a definitive agreement pursuant to which the Company will
be the exclusive voice information 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.
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 voice information 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 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 1997 due to the
conclusion of revenue from Network Guide contracts in effect prior to the
termination of the Ameritech agreement. In early 1997, in connection with the
pending settlement of litigation between the parties, the Company and Ameritech
agreed to enter into a definitive agreement pursuant to which the Company will
be the exclusive voice information sales and service provider in up to 38
Ameritech Yellow Pages directories for a three year period commencing in January
1998. Total monetary revenues for both the Network Guide and Consumer Tips
products in the Ameritech region accounted for approximately 20 and 32% of the
Company's monetary revenues in 1996 and 1995, respectively. The Company expects
to partially offset such revenue declines in future periods with revenues
generated through (i) its sales agency agreement with Donnelley to sell the
Network Guide in Yellow Pages published by Donnelley in five top-100 DMAs in the
mid-Atlantic region, (ii) its purchase of certain assets from Donnelley and a
related voice information service contract with Donnelley under which the
Company will provide voice information services in Yellow Pages published by
Donnelley in eight top-100 DMAs located throughout the United States, (iii) its
sales agency agreement with GTE to sell 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 voice information service
contract with GTE under which the Company will provide voice information
services in Yellow Pages published by GTE in 9 top-100 DMAs located throughout
the United States, and (v) its recently-signed sales agency agreement with SNET
to sell the Network Guide in Yellow Pages published by SNET in a top-100 DMA
located in the northeastern United States.
The decline in Consumer Tips revenues is the result of the February 1996
termination of the Company's agreement with Ameritech. Consumer Tips revenues,
which were $213,000 and $1.1 million for the years ended December 31, 1996 and
1995, respectively, ended completely in the second quarter of 1996.
Nonmonetary revenues and nonmonetary cost of sales declined 38% to $9.9
million for the year ended December 31, 1996 from $15.9 million for the year
ended December 31, 1995. Substantially all of this $6.0 million decline in
nonmonetary revenues and nonmonetary cost of sales occurred because of the
termination of distribution agreements in certain DMAs and because, in other
DMAs, the Company reduced the amount of space devoted to information provided by
media sponsors in its Network Guide and, accordingly, renewed its barter
contracts with such media sponsors for lesser amounts of promotional
advertising.
Monetary cost of sales declined 29% to $3.5 million for the year ended
December 31, 1996 from $4.9 million for the year ended December 31, 1995. In
certain regions, the Company has operated under comprehensive Network Guide
agreements whereby the Company has agreed to share a portion of its advertising
revenues with the Publisher Partner in return for pages in the Publisher
Partner's Yellow Pages directories and use of the Publisher Partner's voice
information equipment and telephone lines. As DMAs within a region become
governed by such a Network Guide agreement, the Company's monetary cost of sales
reflect increasing revenue sharing expense and declining Yellow Pages purchase
expense and telephone line charges in such region. Monetary cost of sales for
the years ended December 31, 1996 and December 31, 1995 was primarily comprised
of (i) revenue sharing expenses associated with Network Guide agreements with
Ameritech, DonTech and BellSouth of $1.9 million and $2.0 million, respectively,
a 9% decrease, resulting from lower monetary revenues in certain regions
pursuant to revenue-sharing operating agreements, (ii) operations personnel
salaries of $494,000 and $584,000, respectively, a 15% decrease, (iii) Yellow
Pages purchase expenses of $454,000 and $1.2 million, respectively, a 63%
decrease, reflecting the discontinuation of distribution in all eight DMAs
within the Southwestern Bell region as well as lower Yellow Pages purchase
prices and the Company's decision to purchase fewer pages in the Pacific Bell
region, (iv) telephone line
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charges of $292,000 and $369,000, respectively, a 21% decrease, primarily
reflecting fewer DMAs in the Southwestern Bell region, and (v) satellite
broadcasting charges of $141,000 and $357,000, respectively, a 60% decline,
reflecting the Company's decision in 1996 to update its voice information
systems via telephone lines rather than satellites. Monetary cost of sales
attributable to the Interactive Channel were minimal as the related revenues
primarily consisted of sales of programming and license fees.
Selling, general and administrative expenses, including amortization of
intangible assets increased 42% to $12.8 million for the year ended December 31,
1996 from $9.0 million for the year ended December 31, 1995. This increase
resulted primarily from increased subscriber acquisition costs associated with
the commercial introduction of Cable SuperSites. These costs included such items
as advertising agency creative fees, television production costs of commercials
and an infomercial, promotional, direct mail and newspaper advertising fees.
Research and development expenses increased 72% to $6.3 million for the
year ended December 31, 1996 from $3.8 million for the year ended December 31,
1995. This increase occurred due to (i) the addition of personnel by the Company
and by ICT to support business development activities as well as to continue the
development of cable converter boxes that were intended to be deployed in Cable
SuperSites subscriber households, (ii) the continued modification of Cable
SuperSites on-line television technology to operate on a UNIX-based platform
which increases the speed and capacity of Cable SuperSites headend equipment,
(iii) the continued development of a Windows-based media presentation
workstation that could be used by the Company and others to create and edit
programming for Cable SuperSites, and (iv) other related development activities
associated with the commercial introduction of Cable SuperSites.
Other Income and Expenses. Net interest income was $175,000 for the year
ended December 31, 1996 compared with net interest expense of $137,000 for the
same period in 1995, reflecting interest earned during 1996 on the proceeds from
a public offering of the Company's common stock in December 1995. The Company
incurred $1.6 million of charges related to financing incentives during 1995 as
a result of the issuance of certain warrants in January 1995 and in connection
with interim financings in May 1995.
YEARS ENDED DECEMBER 31, 1995 AND 1994
Monetary revenues increased 2% to $9.3 million for the year ended December
31, 1995 from $9.2 million for the year ended December 31, 1994. The net
increase of $148,000 included an increase of $1.2 million attributable to the
Network Guide product, partially offset by a decline of $847,000 in revenues
earned by ICT and a decline of $242,000 attributable to the Company's Consumer
Tips service. The increase in Network Guide monetary revenues was generated by
expansion in 19 new DMAs and slightly increased monetary revenues among the
Company's 37 other DMAs. Revenue increases in certain existing DMAs occurred
primarily because of (i) the creation of a sales force focusing exclusively on
selling health and legal advertising, (ii) the allocation of additional
resources to target national advertisers and (iii) the centralization of
customer service operations, which has allowed the sales force more time to
engage in selling activities. The decline in ICT's revenues in 1995 compared to
1994 reflects hardware sales and consulting services delivered by ICT in 1994 to
Bell Atlantic in connection with Bell Atlantic's interactive Yellow Pages trial,
which did not recur in 1995. Decreased Consumer Tips revenues in the BellSouth
region for the 1995 period, resulting from the non-renewal of the Company's
contract with BellSouth, were partially offset by increasing Consumer Tips
revenues in the Ameritech region. There were $13,000 in revenues recorded for
BellSouth Consumer Tips in the year ended December 31, 1995, compared with
$555,000 in the year ended December 31, 1994.
Nonmonetary revenues and nonmonetary cost of sales declined 27% to $15.9
million for the year ended December 31, 1995 from $21.7 million for the year
ended December 31, 1994. Substantially all of this $5.8 million decline occurred
because, in certain DMAs, the Company reduced the amount of space in its Network
Guide printed menu of available programming devoted to information provided by
media sponsors and, accordingly, renewed its barter contracts with such media
sponsors for lesser amounts of promotional advertising.
Monetary cost of sales declined 6% to $4.9 million for the year ended
December 31, 1995 from $5.2 million for the year ended December 31, 1994. In
certain regions, the Company has operated under
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comprehensive Network Guide agreements whereby the Company has agreed to share a
portion of its advertising revenues with the Publisher Partner in return for
pages in the Publisher Partner's Yellow Pages directories and use of the
Publisher Partner's voice information equipment and telephone lines. As DMAs
within a region become governed by such a Network Guide agreement, the Company's
monetary cost of sales reflect increasing revenue sharing expense and declining
Yellow Pages purchase expense and telephone line charges in such region.
Monetary cost of sales for the years ended December 31, 1995 and December 31,
1994 was primarily comprised of (i) revenue sharing expenses associated with
Network Guide agreements with Ameritech, DonTech and BellSouth of $2.0 million
and $1.9 million, respectively, an 8% increase, resulting from higher monetary
revenues in certain regions pursuant to revenue-sharing operating agreements,
(ii) Yellow Pages purchase expenses of $1.2 million and $1.2 million,
respectively, a 2% increase, reflecting lower Yellow Pages purchase expense in
those regions operating pursuant to revenue sharing agreements, offset by
increased Yellow Pages purchase expense attributable to the Company's expansion
in the Pacific Bell region, (iii) operations personnel salaries of $584,000 and
$812,000, respectively, a 28% decrease, reflecting certain cost-cutting measures
implemented by the Company in the last six months of 1994, (iv) telephone line
charges of $369,000 and $444,000, respectively, a 17% decrease reflecting
certain cost-cutting measures implemented by the Company in the last six months
of 1994 and (v) satellite broadcasting charges of $357,000 and $358,000,
respectively, nearly unchanged.
Selling, general and administrative expenses, including amortization of
intangible assets and write-down of intangible assets, declined 29% to $9.1
million for the year ended December 31, 1995 from $12.6 million for the year
ended December 31, 1994. This decline resulted primarily from (i) the
nonrecurrence of a $1.9 million write-down of intangible assets recorded during
the year ended December 31, 1994 to reflect impairment of the value of such
assets in that period, (ii) lower amortization of intangible assets of $653,000
resulting from such write-down, (iii) lower administrative expenses of $539,000
resulting from certain cost-cutting measures implemented by the Company in the
last six months of 1994, (iv) the nonrecurrence of $456,000 of expense incurred
in 1994 related to the issuance of warrants to an outside advisory committee
that assists the Company in certain matters and (v) the nonrecurrence of
$415,000 of expense incurred in 1994 related to a demand made by Revenue Canada
for repayment of certain refundable tax credits taken by ICT in 1988. These
declines were partially offset by increased administrative expenses during 1995
attributable to ICT.
Research and development expenses increased 39% to $3.8 million for the
year ended December 31, 1995 from $2.7 million for the year ended December 31,
1994. This increase was the result of the addition of personnel both within the
Company and at ICT required to support business development activities as well
as to begin development of cable converter boxes, the modification of Cable
SuperSites on-line television technology to operate on a UNIX-based platform,
and the development of a Windows-based media presentation workstation.
Other Income and Expenses. Net interest expense declined 54% to $137,000
for the year ended December 31, 1995 from $296,000 for the same period in 1994
as the Company fulfilled certain interest expense obligations effective in June
1995. The Company incurred $1.6 million of charges related to financing
incentives during 1995 as a result of the issuance of certain warrants in
January 1995 and in connection with interim financings in May 1995. Included in
other (income) expense for 1994 was a non-recurring expense of $1.4 million
related to a discontinued public offering.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has experienced substantial operating
losses and net losses as a result of its efforts to (i) develop, deploy and
support IT Network, (ii) acquire a controlling interest in ICT, and (iii)
develop, conduct trials and commercially launch Cable SuperSites. As of
September 30, 1997, the Company had an accumulated deficit of approximately
$75.5 million and had used cumulative net cash in operations of $48.6 million.
The difference at September 30, 1997 between the accumulated deficit and
cumulative net cash used in operations since inception was attributable
primarily to nonmonetary charges related to financing incentives, write-down of
intangible assets, depreciation and amortization and other non-cash expenses.
The Company expects that these losses will increase in the quarter ended
December 31,
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1997 as a result of, among other things, its continuing expenditures relating to
its efforts to commercially introduce, deploy and enhance Cable SuperSites,
non-recurring charges related to the early extinguishment of its April 1996
senior secured notes (the "Extinguished Aggregate Second Tranche Notes") and
non-recurring charges related to transition costs associated with the Brite and
VNN acquisitions. The Company may incur operating losses at similar or greater
levels in 1998, although it expects that cash used in operations will decline as
a result of the Brite and VNN acquisitions discussed below.
Since its inception through September 30, 1997, 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 stock. In April 1997, the Company issued $15.0 million of the
Extinguished Aggregate Second Tranche Notes and amended $5.8 in outstanding
Extinguished Aggregate Second Tranche Notes so that the terms would be identical
to the new Extinguished Aggregate Second Tranche Notes and also issued warrants
to purchase 2,500,000 shares of Common Stock at an exercise price of $6.00 per
share. As of September 30, 1997, the Company had cash and cash equivalents
totaling $4.2 million.
As of September 30, 1997, the Company had commitments to pay approximately
$330,000 to a manufacturer in connection with electronic components used in the
manufacturing of set-top boxes.
In October 1997, as part of the Offering, the Company issued its 12% Senior
Secured Notes due 2004 in the aggregate principal amount of $100 million. These
notes are secured by substantially all of the Company's and its subsidiaries'
assets and are guaranteed, fully and unconditionally, jointly and severally, by
all of the Company's subsidiaries on a senior secured basis. Interest on the
notes is due semiannually on May 1 and November 1. As part of the Offering, the
Company deposited funds sufficient to make the first four interest payments in
an interest escrow account.
The Company expects that during 1998, (i) depreciation and amortization
will increase by more than $7.0 million, (ii) net interest expense will increase
by more than $7.0 million, (iii) preferred stock dividends (which the Company
expects to pay in kind during the first five years subsequent after the
Offering) will increase by approximately $3.0 million and (iv) capital
expenditures will be approximately $8.0 million. The Interest Escrow Account
will be used to fund the first four interest payments. The Company believes its
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 Cable SuperSites and IT Network at least through 1999.
The Company's future capital requirements will depend on many factors,
including, but not limited to, (i) the operating results of IT Network,
including the Company's ability to successfully integrate the businesses
purchased through the Acquisitions into its existing business, (ii) the success
and timing of the development, introduction and deployment of Cable SuperSites,
(iii) the number of file servers and set-top boxes which the Company purchases
in support of Cable Supersites, (iv) the levels of advertising expenditures
necessary to increase awareness of Cable Supersites, (v) the extent of market
acceptance of such products, (vi) potential acquisitions or asset purchases and
(vii) competitive factors.
NET OPERATING LOSS CARRYFORWARDS
At December 31, 1996, Holdings had net operating loss carryforwards of
approximately $42.2 million for U.S. Federal income tax purposes, which begin to
expire in 2003. The Internal Revenue Code of 1986, as amended (the "Code"),
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.
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BUSINESS
GENERAL
Source Media is a leader in providing on-demand information, services and
programming through the telephone and cable television, delivered over the
Company's proprietary digital operating systems to mass market consumers through
its two operating subsidiaries, IT Network and Interactive Channel. IT Network
is a leading provider of on-demand information through advertiser-sponsored
telephone hotlines advertised in over 100 million Yellow Pages annually and over
24 million newspapers daily. Interactive Channel provides on-demand information
and services and can provide Internet access to the cable television industry
over existing cable infrastructure and telephone lines.
IT Network is the nations' leading provider of voice information services
through telephone directories and newspapers with a market share which
management believes is 10 times its closest competitor in terms of distribution.
The Company also provides related support services to a majority of its Yellow
Pages directory and newspaper Publisher Partners. The Company sells advertising
and provides related support services to in excess of 8,000 advertising clients
who pay to sponsor and deliver a promotional message before and after the
delivery of the voice information services. The Company is the sole provider of
voice information services to eight of the nine largest Yellow Pages directory
publishers in the country and believes that it is the only voice information
services provider capable of delivering national scope advertising to the mass
market in telephone directories and newspapers through one source.
Interactive Channel's Cable SuperSites supplies programming and services
which allow a subscriber to access on-demand local and national news, weather,
sports and school information, view programming guides and purchase goods and
can allow a subscriber to browse the Internet, send and receive e-mail and
access a variety of other attractive offerings over existing cable
infrastructure and telephone lines. Cable SuperSites sells interactive
advertising space on cable screens using text, voice and pictures. Cable
SuperSites is broadcast by cable operators utilizing the Company's proprietary
two-way operating system, SourceWare. Management believes that SourceWare is the
only commercially deployable system providing two-way audio and text frames over
existing digital and analog cable infrastructure. SourceWare enables any cable
television system equipped with compatible advanced analog or digital set-top
boxes to deliver two-way, on-demand programming with the touch of a television
remote. In less than one second, Cable SuperSites subscribers can access
interactive programming delivered over the cable system to their television.
On October 30, 1997, the Company purchased certain of the electronic
publishing assets of Brite for $35.6 million and certain of the assets of VNN
for $9.0 million. The Acquisitions have established the Company as the dominant
national provider of voice information services to telephone directories and
newspapers with a market share in excess of 60% of Yellow Pages that provide
interactive advertising and in excess of 43% of all daily U.S. newspapers in
terms of circulation. As a result of the combination of the businesses of the
top three providers of such information and services, the Acquisitions have
added 111 Yellow Pages directories and 280 newspapers to the Company's
distribution channels. The Acquisitions have brought in excess of 6,000 clients
to its existing advertising base of over 2,000 clients.
The Company's operations are conducted through its subsidiaries, IT
Network, Inc., Interactive Channel, Inc. and Interactive Channel Technologies
Inc. On January 14, 1997, Source acquired all of the outstanding shares of ICT
that it did not already own in exchange for 1,390,000 shares of Common Stock,
making ICT a wholly-owned subsidiary of the Company. ICT owns the patented
technology utilized by Source for the Cable SuperSites and provides research and
development services for Source. In October 1997, Holdings formed IT Network,
Inc. and Interactive Channel, Inc. as wholly-owned operating subsidiaries.
The Company is a Delaware corporation whose principal executive offices are
located at 5400 LBJ Freeway, Suite 680, Dallas, Texas 75240, and whose telephone
number is (972) 701-5400.
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BUSINESS STRENGTHS
IT Network
Acquisitions Create Significant Synergy and Growth Opportunity. Building on
the successful acquisitions from GTE and Donnelley, the Brite and VNN
Acquisitions establish the Company as the dominant player in the voice
information services market and provide significant cost reductions for the
combined businesses and revenue growth opportunities. The Company has identified
approximately $5.9 million, on an annualized basis, in cost savings from the
elimination of redundant fixed operating, sales, facilities and infrastructure
expenses. In addition, complementary product offerings, national reach and
incremental service offerings will enable the Company to cross-sell products and
services to existing customers and increase its appeal to new customers.
Stable Cash Flow and Margins. IT Network would have had pro forma monetary
revenues and Pro Forma EBITDA of $19.7 million and $7.3 million, respectively,
for the first nine months of 1997, and a margin of 37%. The Company believes IT
Network has significant opportunities to increase revenues and EBITDA margins
driven by increasing consumer demand for on-demand information services and the
Company's expanded product and service offerings for its advertising clients.
Long-term Relationships with Major Publisher Partners. The Company has
long-term relationships with many of its top Publisher Partners, including
BellSouth, Ameritech, Pacific Bell, Bell Atlantic, US West, RH Donnelley, The
Washington Post, The Chicago Sun Times, The San Francisco Chronicle, Newsday,
and The Boston Herald, and other major newspapers. Source believes that the
quality of its service, the value added to its Publisher Partners, and the
strength of its publisher sales and support teams have contributed to these
customer relationships.
Dominant Market Share and National Scope. Pro forma for the Acquisitions,
the Company has a 60% share of the U.S. Yellow Pages telephone directories with
voice information offerings and a 43% share of all U.S. newspapers in terms of
daily circulation. In addition, the Company's coverage of over 150 DMAs
(including 91 of the top 100) in 46 states provides local advertisers with an
attractive cost-effective medium to reach a targeted customer base and national
advertisers with the only national voice information services advertising
alternative.
Ease of Use and Scope of the Distribution Network. The Company's voice
information services is provided over standard touch-tone telephones at no
additional cost. The Company believes that mass market appeal and customer usage
are enhanced by the ease of use of its voice information services products and
widespread availability combined with the quality of the content provided by IT
Network. IT Network's products reach over 100 million households, offices and
hotel rooms in the United States through Yellow Pages distribution and the
readers of over 280 newspapers, with an aggregate daily circulation exceeding 24
million through special inserts.
Market Opportunity. IT Network's services are currently distributed through
only 9% of the over 6,000 Yellow Pages directories and 19% of the approximately
1,500 daily newspapers nationwide. The remainder of the publishers either
provide their own advertising services in-house or do not offer voice
information products and services. The Company believes that by providing these
publishers with incremental revenue sources and outsourcing cost savings there
is a significant opportunity for Source to penetrate these distribution
channels.
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Interactive Channel
Successful Deployment. The Company has commercially launched Cable
SuperSites as a premium channel in two markets, including Colorado Springs.
Subscriber usage has been active, with 20% of subscribers using the service
daily and 75% tuning in weekly, achieving viewership which would have ranked it
12th in popularity, ahead of notable channels such as The Disney Channel, E! and
CNBC, demonstrating the network's popularity with subscribers.
Relationships with Top Cable Operators and Technology Providers. The
Company has entered into distribution agreements for Cable SuperSites with three
of the nation's top cable operators: Cablevision, Century and Marcus. Source
believes its agreement with NextLevel will enable the Company's SourceWare
operating system to be integrated into existing and future advanced analog and
digital boxes, providing cable operators and consumers with a SourceWare
compatible set-top box.
Proven, Patented Operating System. The Company believes the SourceWare
operating system is the only available system for providing two-way on-demand,
text and photographic quality images by sending frames over existing cable
infrastructure and telephone lines. In addition to significant amounts spent by
previous developers of the Company's patents, the Company has spent $41.9
million for the acquisition and development of its technology through September
30, 1997, comprised of $19.7 million for the acquisition of ICT, $5.2 million
for capital expenditures and $17.0 million in research and development. The
Company believes that inclusion of the SourceWare operating system in a cable
operator's set-top box will enable a cable operator to increase revenue,
subscribers and viewership, while providing an advantage over its competitors,
such as secondary "overbuild" cable companies, wireless cable and satellite
television.
Local Content Provider. Cable SuperSites programming offers numerous local
features, including regularly-updated news, sports, weather and local school
information. With limited on-demand local content available in the majority of
cable markets, the Company believes there is a large untapped demand for this
programming. Because Cable SuperSites can deliver appropriately modified
programming that was originally intended for broadcast over the Internet, much
of this programming is already available. The Company believes that Cable
SuperSites local offerings can create increased cable subscription and usage,
while providing cable operators with a significant advantage over its
competitors.
Market Opportunity. The Company believes the cable industry is
characterized by slowing subscriber growth potential and limited per subscriber
revenue growth. Thus, the Company believes Cable SuperSites offers an attractive
and unique opportunity for cable operators to incrementally increase revenues.
Currently there are 100 cable operators serving over 63 million cable
subscribers nationally, each of which is capable of receiving Cable SuperSites
programming service over existing cable infrastructure.
Experienced Management Team. The Company's executive management team has
extensive experience in managing businesses and integrating acquisitions in the
telecommunications and cable television industries, respectively. Collectively,
the Company's top five executives have an average of over 12 years in either the
voice information services or cable television industries.
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BUSINESS STRATEGY
The Company's strategy for IT Network and Interactive Channel is to
capitalize on the growth in consumer demand for easy-to-use, on-demand
information sources and programming. The strategy for IT Network is to expand
its business through selling additional services to both its existing and
acquired client bases. The strategy for Interactive Channel is adoption of its
technology as a standard feature in cable industry set-top boxes and widespread
carriage of its Cable SuperSites' programming package.
IT Network
Capitalize on Market Leadership to Increase Revenues. IT Network intends to
capitalize on the Acquisitions, which have more than doubled the market share of
IT Network while significantly enhancing its customer base, product and service
offerings and national scope. The Acquisitions, will allow the Company to
cross-sell products and services to existing customers while offering an
expanded menu to new customers, which the Company expects will result in
increased revenues.
Market National Scope to National Advertisers. The Company believes it can
offer nationwide interactive advertising opportunities through "packaging" of
its historical Yellow Pages directory distribution with its acquired directory
and newspaper distribution. Before the consolidation achieved through the
Acquisitions, no voice information services provider was able to offer
advertising with a national scope. The Company believes it will be able to
provide a variety of "packages" which are attractive to major national
advertisers thereby bringing new customers to the voice information services
market.
Introduce New Interactive Programming. The Company intends to expand its
advertising sales revenue through continued development of new interactive
programming. Since 1989 the Company has produced innovative programs marketed
through its directory distribution channels. New products are developed to
address current, local demands such as the interactive employment guides which
were developed to address the tight hiring markets in many of the major cities
across the United States. The Company believes that many new products can be
introduced through its expansive distribution network of publishers and produced
within its existing facility.
Develop New Distribution Methods for Core Products. The Company has
successfully tested and is now launching a proprietary publication called Local
Source. Local Source is a free standing booklet of interactive information
similar to the guides the Company has traditionally published in a section bound
in the front of Yellow Page directories. In addition to the Company's
traditional offerings, Local Source contains numerous listings of local Internet
sites such as school systems, libraries and other web sites of general interest.
The booklet is distributed through a partnering arrangement with a local
newspaper. The Company believes Local Source is an attractive product for
newspapers wishing to offer a niche publication.
Provide Services to Internet Publishers. The Company believes the same type
of services it currently offers to print publishers are in demand by Internet
publishers. The need for content, advertising sales and support services will
expand as Internet use continues to grow. The Company intends to systematically
grow its client base of Internet publishers by offering existing services to new
customers as well as offering Internet-related services to the Company's
existing customers.
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Interactive Channel
Technology
Incorporate Technology within Industry-Standard Set-tops. The Company has
entered into an agreement with NextLevel, the industry leader in cable set-top
manufacturing with a market share in excess of 62%, to manufacture set-top boxes
that are compatible with the Company's SourceWare operating system. The
agreement contemplates that both advanced analog and digital set-top boxes will
be compatible, which will allow many cable operators to place an order for Cable
SuperSites compatible set-tops with their traditional supplier.
Reduce Technology Cost in Set-tops. The Company believes that it has
reduced the incremental cost of the technology within the advanced analog
set-top because of the introduction of the Company's new chip. This chip is
manufactured by LSI Logic at a cost of $16 and is currently included as part of
a $50 FEM. As new generations of advanced analog boxes are manufactured, the
Company expects the chip cost will be reduced to $10 and included in the
motherboard. Introduction of the Company's technology into digital set-tops can
be achieved with little or no incremental cost per set-top. The software
download can be accomplished easily by passing the programming over cablelines
to the digital boxes with no need for additional hardware.
Distribution
Pursue Tiered Carriage Agreements for Cable SuperSites. The Company intends
to seek tiered distribution agreements with leading cable companies in markets
across the United States to offer Cable SuperSites in tiers of programming. The
tiered approach would provide significant distribution for Cable SuperSites in
each local market. Most cable companies offer a premium tiered service with a
penetration rate ranging from 31% of basic cable subscribers in systems with one
choice to 54% in systems with four tier choices. It is the Company's intent to
seek to offer its service within a premium tier.
Internet Access
Provide Internet Access to Subscribers over Cable Television. The Company
and Spyglass have modified Spyglass' custom software program to translate
Internet content into a format that is presentable over the Company's SourceWare
operating system. The Company is capable of providing Internet Access, including
full browsing capabilities and e-mail, through set-top boxes equipped with its
SourceWare operating system. The Company believes that this capability will be
attractive to cable operators because it can be offered over existing cable
infrastructure and there is no incremental cost to cable operators purchasing
set-top boxes compatible with Cable SuperSites.
Programming
Continue Development of Enhanced Programming Package. The Company intends
to further develop its programming package for, and is seeking to continually
add new content providers to, Cable SuperSites. Local content providers, such as
school systems and newspapers, will be afforded the opportunity to participate
in the Cable SuperSites channel. The Company currently offers classified
advertising and catalog shopping and intends to offer automated sports scores.
Expand CableNet Programming. Cable SuperSites is capable of interacting
with all cable networks on a cable system. The Company intends to leverage this
capability to induce broadcast channels to offer interactive options within
their programming. Also, local advertisers can support their commercials with
additional information such as a real estate firm offering interactive tours of
homes. Currently, the Company has agreements with Bravo, CourtTV and the
Independent Film Channel to provide this service.
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INDUSTRY BACKGROUND
The Company believes that there is an opportunity for mass market use of
on-line interactive services, and the consumer demand for these services has
grown in recent years. The Company is seeking to take advantage of the perceived
opportunity by offering interactive, on-demand information services over the
telephone and television. The Company believes that it can accomplish this over
the telephone by offering useful, easy-to-access information and over the
television by offering a means by which interactive programming content can be
offered to consumers. This consumer demand is evidenced by the following
industry data. According to OPUS Research, the amount spent on Yellow Pages
advertising has grown from $9.8 billion in 1996 to a projected $11.9 billion in
1998 and is projected to grow to $14.1 billion in 2002. OPUS Research estimates
that $80 million was spent on interactive Yellow Pages advertising in 1996, $215
million will be spent in 1998 and $548 million will be spent in 2002. The Yellow
Pages Publishers Association also reports that of the approximately 6,000 Yellow
Pages directories published in 1996, 819 offered interactive advertisements. In
addition, OPUS Research reports that in 1994 $250 million was spent on
interactive advertising in newspapers, $287 million will be spent in 1998 and
$567 million will be spent in 2002. The telephone information services industry
has also experienced growth in the pay-per-call segment, in which "900" number
revenue has grown from $650 million in 1994 to a projected $950 million in 1998
and $1.3 billion in 2002.
The Company believes that, as consumers become more familiar with and
accustomed to interactive information services such as those found on the
Internet, they will expect these services in each communications medium. The
Company believes that this expectation will cause an increase in demand for
interactive, on-demand information services, including a demand for such
information and services over the telephone and television. Jupiter
Communications estimates that the number of Internet households worldwide will
grow from an estimated 23.4 million in 1996 to 66.6 million by 2000.
International Data Corporation estimates that Internet advertising will grow
from $180 million in 1996 to $2.9 billion in 2000 and that Internet commerce
will grow from $318 million in 1995 to $95.8 billion in 2000.
IT NETWORK
Overview
IT Network is the nations' leading provider of voice information services
through telephone directories and newspapers with a market share which
management believes is 10 times its closest competitor in terms of distribution.
The Company also provides related support services to a majority of its Yellow
Pages directory and newspaper Publisher Partners. The Company sells advertising
and provides related support services to in excess of 8,000 advertising clients
who pay to sponsor and deliver a promotional message before and after the
delivery of the voice information. The Company is the sole provider of voice
information services to eight of the nine largest Yellow Pages directory
publishers in the country and believes that it is the only voice information
services provider capable of delivering national scope advertising to the mass
market in telephone directories and newspapers through one source. During the
last twelve months the Company estimates that it has fulfilled over 400 million
requests for information.
The Company and its Publisher Partners place inserts in high circulation
publications including more than 500 Yellow Pages directories and 280 daily
newspapers. The Publisher Partners, who include Ameritech, Bell Atlantic,
BellSouth, Pacific Bell, US West, The Washington Post, Newsday, The Chicago Sun
Times, The San Francisco Chronicle, Newsday and The Boston Herald, distribute
their publications in over 150 DMAs in 46 states. The inserts invite consumers
to call a specific local phone number at no additional charge for access to
useful voice information on over 800 regularly-updated topics ranging from
general information, such as local news, sports and weather updates, to home
repair, travel, legal, health and other more specific topics including stock
quotes. The Company's voice information system enables callers to navigate to
specific topics with a four digit code and often allows the consumer to obtain
additional information or talk directly to the advertiser at the push of a
button.
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Products and Services
Network Guide. The Company's principal voice information product, the
Network Guide, is an eight to 16 page insert bound in the front of Yellow Pages
directories. The Network Guide contains a local phone number and list of
four-digit codes used to access regularly-updated advertiser-sponsored
information on over 800 topics ranging from general information, such as local
and national news, weather and sports, to more specific topics, such as health,
legal, travel and home repair.
Consumer Tips. Consumer Tips are advertiser-sponsored messages accessed
using a local phone number and 4-digit code interspersed throughout a Yellow
Pages directory. Consumer Tips are headings and related messages such as
plumbing, roofing and moving companies.
Local Source. Local Source is a guide of local business Internet addresses
for a specific community that is printed semi-annually and distributed in
newspapers as a stand-alone insert. The Company sells print and audio
advertising in Local Source.
Publisher Partner Support Services. The Company provides the following
services and support to its Publisher Partners who offer similar telephone
directory and newspaper voice information products and services:
- Sales Agency. The Company sells advertising on behalf of its Publisher
Partners that distribute similar voice information products.
- Advertiser Management. The Company provides support to the Publisher
Partners' advertising clients by providing advertisers with call
statistics and by updating their voice information advertisements on a
regular basis to increase advertiser satisfaction and renewal rates.
- Voice Information Content. The Company provides hundreds of daily
broadcast voice information content updates, such as national or local
news, to its Yellow Pages and newspaper Publisher Partners over satellite
or telephone lines. To date, this is the predominant service the Company
has provided to its newspaper Publisher Partners.
- Systems Management. The Company provides technical and maintenance of
voice information systems for certain of its Publisher Partners and their
local businesses.
New Products and Developments. The Company's marketing group develops
products and services to address local market trends. New products are developed
to address current, local demands such as the interactive Employment Guide which
was developed to address the tight hiring markets in many of the major cities
across the United States. Examples of such other new products are an expanded
Sports Guide and the Recipe Guide. Additionally, the Company is beginning to
market its voice information content for delivery over the Internet.
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Set forth below are examples of the Network Guide topics available to
consumers.
<TABLE>
<CAPTION>
NEWS & WEATHER INSURANCE & FINANCE TRAVEL GUIDE
-------------- ------------------- ------------
<S> <C> <C>
Local News Types of Life Insurance Coverage Finding the Lowest Fares
New Headlines Social Security Health Insurance Common Myths about the
World News How Is Your Auto Insurance Rate Travel Business
Local Weather Determined?
National Weather Overview Dow Jones Averages
</TABLE>
<TABLE>
<CAPTION>
SPORTS LEGAL HEALTH
------ ----- ------
<S> <C> <C>
Sports Scoreboard How to Choose an Attorney Causes of Alcoholism
Local Sports What to do if Injured Drug Abuse of Teens
NFL Report Physician Negligence Why Marriages Fail
TV Sports Events Product Liability Workaholic Behavior
Ski Report Stress Management
Muscles and Ligaments
Injuries
</TABLE>
Distribution
The Company's printed list of information topics, including the Network
Guide, Consumer Tips and Local Source, are delivered to consumers through
advertisements or inserts in Yellow Pages directories and/or local newspapers.
Through its arrangements with the Publisher Partners, the Company has been able
to (i) reduce its distribution costs and (ii) establish broad distribution of
its printed list of information topics to gain cost-efficient exposure. IT
Network's products and services are available in over 150 DMAs, in 46 states and
accessible through the Yellow Pages to over 100 million households, offices and
hotel rooms in the United States and through inserts in daily newspaper with an
aggregate circulation of over 24 million.
Pursuant to its agreements with its Yellow Pages Publisher Partners, the
Company sells advertising and provides advertiser management, systems management
and information services. The Company either purchases the pages for a flat fee
and retains all revenues in excess of that fee or splits the revenue with the
Yellow Pages Publisher Partner by retaining a percentage without purchasing the
pages. In revenue splitting arrangements, the amount retained by the Company
depends on the level of advertiser management, system management and information
content services provided to the Publisher and the amount charged for the
services. The Company's typical agreement with its Yellow Pages Publisher
Partners is three years in duration with a range of one to five years.
Pursuant to its agreements with its newspaper Publisher Partners, the
Company provides voice information content to newspaper publishers for a fee.
The fee is determined by the amount of content purchased, the size of the market
and the circulation of the newspaper. These agreements typically have a term of
one year.
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Yellow Pages. The following table provides information as of November 30,
1997 regarding the number and approximate distribution of directories in which
Source and Brite distribute voice information services or act as a sales agent
or service provider.
<TABLE>
<CAPTION>
PUBLISHER PARTNER NUMBER OF DIRECTORIES DISTRIBUTION
----------------- --------------------- ------------
<S> <C> <C>
GTE....................................................... 190 22,003,835
Ameritech................................................. 38 12,779,000
Pacific Bell.............................................. 37 14,253,940
BellSouth................................................. 35 13,579,835
SNET...................................................... 26 2,465,341
Bell Atlantic............................................. 18 6,657,829
RH Donnelley.............................................. 16 5,833,656
Sprint.................................................... 13 1,519,653
Cincinnati Bell........................................... 5 1,468,085
Brite Acquisition......................................... 111 18,000,000
Other Independents........................................ 31 2,274,642
--- -----------
Total........................................... 520 100,835,816
=== ===========
</TABLE>
Newspapers. The information services business that the Company acquired in
the Brite and VNN Acquisitions is used to provide voice information to a variety
of sources. Currently, the service is provided to over 280 daily newspapers with
an aggregate daily circulation of over 24 million representing 43% of U.S. daily
newspaper circulation. The Company's newspaper Publisher Partners include The
Washington Post, Newsday, The Chicago Sun Times, The San Francisco Chronicle,
The Boston Herald, The Houston Chronicle, The Miami Herald, The Atlanta
Constitution, The St. Louis Post-Dispatch, The Hartford Courant, The Orange
County Register, The Arizona Republic, The Indianapolis Star and The Fort Worth
Star-Telegram. Currently, contracts with newspapers generate approximately $500
to $2,500 per month.
Marketing Strategy to Constituents
Consumer. IT Network's strategy to attract consumers includes three primary
elements: (i) to provide easily accessed voice information on topics of interest
to consumers; (ii) to deliver a printed list of information topics to the
consumer's home for easy reference; and (iii) to promote to consumers the
availability and usefulness of its voice information services. By attracting
consumers to use the voice information products, the Company increases usage of
its Publisher Partners publications, which supports both interactive and
traditional advertising rates.
The Company continues to develop new voice information topics intended to
expand and diversify its consumer base. New topics that are currently being
provided include Local Source, a "Definitive Guide to Local Information and
Internet Services" that is being produced in conjunction with local newspaper
Publisher Partners. The Company is also developing topics such as an Employment
Guide, an expanded Sports Guide and a Recipe Guide.
In order to increase awareness, the Company has developed relationships
with local television and radio stations. These media sponsors promote the
Company's voice information services to their audiences and sponsor certain of
the information topics in the Network Guide. The Company utilizes local radio
and television personalities to provide the local news, sports and weather
programming on the Network Guide. Consequently, consumers accessing local sports
information on the Network Guide hear the voice of a local sportscaster.
Currently, all arrangements with media sponsors are nonmonetary, with the
Company exchanging advertising for production programming and promotion. As of
November 30, 1997, the Company had media relationships with over 35 radio
stations and 15 television stations, including two ABC affiliates, six CBS
affiliates, five NBC affiliates and one Fox affiliate, in the various markets in
which it distributed the Network Guide on such date. Media sponsors may also
participate in "custom pages," such as a music page offering information on
current musical hits.
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Advertisers. The Company believes IT Network attracts advertisers by
providing them with a cost-effective and efficient medium to target consumers.
In 1996, the Company fulfilled over 300 million consumer requests for voice
information. This medium provides advertisers with the opportunity to reach
those consumers who have indicated an interest in a particular product or
service by virtue of their call. The direct-connect feature of IT Network,
available with certain topics, allows callers to access sponsors directly to
obtain additional information, place orders or to schedule appointments.
Advertisers pay the Company for the right to sponsor and deliver a promotional
message before and after the delivery of specific voice information. Typically,
an average voice information sponsorship is paid in three installments, has a
cost of approximately $8,500 per page and a duration of one year. In some
instances, the Company's printed list of information topics includes a print
advertisement for the sponsor of a topic. The price of the print advertisement
is based on the costs of advertisements in the host directory. The Company has
over 8,000 advertising clients. The typical advertising client is a local
hospital or law firm. The Company's marketing efforts to advertisers combines a
national and local sales team consisting of 19 persons that is led by a Vice
President of Sales.
Publisher Partners. The Company believes that IT Network's products and
services are attractive to its Publisher Partners because they support usage of
the printed product, which supports advertising rates, and provides incremental
revenue streams through sales of new types of advertising and its advertising
support services. The Company is pursuing additional channels of distribution of
its printed list of information topics, such as additional daily and weekly
newspapers and other print publications. Through these alternate distribution
channels, the Company believes it may decrease its reliance on Yellow Pages
directories, thereby increasing its operating flexibility, and still improve
exposure of its printed information list to consumers. The Company also intends
to expand into new markets as it obtains agreements with advertisers or
customers sufficient to support the Company's operations in those markets. The
Company manages its relationships with its Publisher Partners with a market
manager assigned to each Publisher Partner to act as a liaison between the
Company and the Publisher Partner.
Programming and Technology
Local media personalities are able to update the local programming by using
any touch-tone telephone. Local news, weather and sports information typically
is provided by a local network television station, and a variety of concert, top
ten music lists and event information is provided by local radio stations.
The Company supports IT Network through a network that connects individual
computer systems in each of the local markets via telephone lines from the
Company's central administration facility in Irving, Texas. Multiple telephone
lines are connected to each system to process local calls. Using a wide variety
of telephony protocols including ISDN, WAN, FTP, frame relay and digital and
analog dial ups, the Company transmits updated information from its central
administration facility to individual markets throughout the day, seven days a
week. As part of the Brite Acquisition, the Company is acquiring Brite's
SatVision transmission system, consisting of four satellites to uplink satellite
transponders and satellite receivers.
Widely distributed information, such as national news, weather and sports,
is updated from the Company's headquarters. The Company obtains this information
from various sources such as United Press International. The Company's
copywriters prepare written scripts from the information, and the written
scripts are then used to produce recordings with mixed background music and
voice. The Company also edits and produces local advertisers' messages. The
finished audio recording is loaded into a central computer system and
transmitted to the individual markets throughout the day. The information is
available to callers immediately after it has been updated. A majority of the
voice information delivered by IT Network is produced at the Company's
headquarters.
REVENUE
The Company has earned monetary revenues through four major types of
service, each of which is necessary for a successful voice information product.
Advertising sales -- direct sales of advertising sponsorships for voice
information. Generally, the advertiser purchases a print advertisement as well
as audio advertisements played both before and after the desired
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audio content. Revenues are generated as a percentage of the advertising
contract. In most markets, the Company sells advertising on behalf of a
publisher as a sales agent. However, in some markets, the Company sells
advertising on its own behalf for print distribution, such as the Network Guide,
which it has purchased at a flat rate per page. The Company's advertising sales
consist of sales, of advertisements in the Network Guide, Consumer Tips and
Local Source.
Advertiser management -- services provided to Publisher Partners for voice
information advertising accounts sold by their internal sales force to increase
customer satisfaction and renewal rates. The service includes contacting the
advertising customer on a routine basis to provide call count statistics and
solicit any desired changes to the sponsors' audio message. Also included is the
production and loading of any updated audio messages. Billing is based upon the
number of clients and the desired frequency of advertiser contact.
Systems management -- technical programming and maintenance of the voice
information systems deployed in the local markets. This service is provided to
the owner of the audiotex system, which is generally the Yellow Pages publisher
or newspaper publisher. Billing for services is based upon the number and size
of the system being managed.
Voice information content -- broadcasting voice information content to the
system of a subscriber, typically one of the Company's Publisher Partners, via
satellite or phone line transmission. News, weather, stock market information
and sports updates are examples of information which is broadcast throughout the
day, seven days a week. Billing is based upon the size of the market and the
types of information provided.
THE TELEPHONE ACQUISITIONS
On October 30, 1997, Source purchased certain of the electronic publishing
assets of Brite for $35.6 million and all of the assets of VNN for $9.0 million.
The Acquisitions have established the Company as the dominant national provider
of voice information and services to telephone directories and newspapers with
market share in excess of 60% of Yellow Pages that provide interactive
advertising and 43% of all daily newspapers in terms of circulation as a result
of the combination of the businesses of the top three providers of such
information and services.
Brite derived revenues from all four of the Company's primary revenue
streams: advertiser sales, advertiser management, systems management and voice
information content, and VNN derived revenues from information services. Brite
provided voice information services to 111 directories with a distribution of
over 18 million. VNN and Brite provided voice information to 280 newspapers with
a daily circulation of over 24 million. The Acquisitions have brought in excess
of 6,000 clients to the Company's existing advertising base of 2,000 clients.
The Company believes that the Acquisitions have strengthened IT Network's
competitive position by providing it with (i) an expanded market presence
establishing it as the dominant domestic provider of voice information services
and information through the Yellow Pages and newspapers, capable of providing
advertisers with one source for national voice information distribution; (ii) an
increased customer base from which it can leverage complementary product and
service offerings; (iii) substantial synergies through the elimination of
redundant fixed operating expenses; and (iv) significant operating leverage as
the Company more fully utilizes its existing state-of-the-art facilities.
IT Network would have had $19.6 million of pro forma monetary revenues and
$7.2 million in Pro Forma EBITDA for the twelve months ended December 31, 1996
and $19.7 million in pro forma monetary revenues and $7.3 million in Pro Forma
EBITDA for the nine months ended September 30, 1997. The Company believes that
there is substantial opportunity to grow IT Network's revenue base and continue
to grow its cash flow.
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INTERACTIVE CHANNEL
Overview
Interactive Channel's Cable SuperSites supplies programming and services
which allow a subscriber to access on-demand local and national news, weather,
sports and school information, view programming guides and purchase goods, and
can allow a subscriber to browse the Internet, send and receive e-mail, and
access a variety of other attractive offerings, over existing cable
infrastructure and telephone lines. Cable SuperSites sells interactive
advertising space on screens using text, voice and pictures. Cable SuperSites is
broadcast by cable operators utilizing the Company's patented two-way operating
system, SourceWare. The Company believes that SourceWare is the only
commercially deployable system providing two-way frames, audio and text over
existing cable infrastructure, both digital and analog. SourceWare enables any
cable television system equipped with advanced analog or digital set-top boxes
to deliver two-way, on-demand programming with the touch of a television remote.
In less than one second, cable subscribers can access interactive programming
delivered over the cable system to their television. The Company has
distribution agreements with Century, Cablevision and Marcus and Cable
SuperSites is commercially available as a stand-alone premium channel in two of
these systems.
Cable SuperSites Distribution Plan
The Company's Cable SuperSites distribution plan consists of three
principal elements: subscriber equipment and technology, programming and
distribution.
SOURCEWARE AND EQUIPMENT
SourceWare is the Company's proprietary operating system based on patented
technology and the Company believes it is the only commercially deployable
system providing two-way frames, audio and text over existing cable
infrastructure. The widespread distribution of Cable SuperSites requires the
adoption of advanced analog or digital set-top boxes as the industry standard.
Subscribers will require set-top boxes compatible with Cable SuperSites to
access the network. Paul Kagan Associates estimates that approximately 22.5
million advanced analog and digital set-top boxes will have been shipped by
2002, of which the Company estimates that 19.1 million set-top boxes will be
compatible with Cable SuperSites.
To obtain access to Cable SuperSites on a cable system subscriber must
utilize a cable set-top box appropriately modified with SourceWare, the
subscriber's telephone line and an alphanumeric remote control. NextLevel
(formerly General Instruments), the market leader in cable set-top box
manufacturing with a 50% market share in advanced analog set-top boxes and a 70%
market share in digital set-top boxes, has agreed to manufacture advanced analog
and digital set-top boxes that are compatible with Cable SuperSites. The Company
is working with Scientific Atlanta, the second-largest manufacturer, to make
Scientific Atlanta's new generations of advanced analog and digital set-top
boxes compatible with Cable SuperSites.
Digital Set-top Boxes. In a digital cable system, a digital set-top box can
be made compatible with Cable SuperSites by downloading SourceWare from the
cable operator's head-end to the digital set-top box at no incremental cost.
- - NextLevel. NextLevel has agreed to distribute, sell, service and warranty
digital platforms that are compatible with the Company's proprietary
interactive television technologies. Cable SuperSites is commercially
available and being co-marketed with NextLevel for their DCT-1000 digital
set-top boxes. SourceWare requires only 64 kilobytes of the 700 kilobytes of
memory equipped in standard DCT-1000 digital set-top boxes. NextLevel has
established its Horizon Developers Program to attract additional programming
applications, all of which require memory, for use on its DCT-1000 platform.
These applications include SourceWare (64 kbts), Prevue (700 kbts), WINK
(300 kbts), ACTV, Cablesoft (300 kbts) and Worldgate.
- - Scientific Atlanta. Scientific Atlanta's Explorer digital set-top box is
designed to accommodate multiple third party applications. The Company and
Scientific Atlanta are currently performing the work necessary to ensure
that SourceWare is compatible with the Explorer operating system, and the
Company
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<PAGE> 56
expects that the Explorer will be compatible with Cable SuperSites. There is
a prototype of the Explorer that operates using SourceWare.
Advanced Analog Set-top Boxes. Cable SuperSites will also be available
through advanced analog set-top boxes. NextLevel and Scientific Atlanta share
equally the advanced analog set-top market. The Company's SourceWare technology
is compatible with NextLevel's existing CFT 2200 current advanced analog set-top
box through the use of an FEM inserted in the back of the set-top box.
- - NextLevel. For deployment in advanced analog cable systems, SourceWare
technology has been developed on a chip manufactured by LSI Logic. NextLevel
has agreed to manufacture its current generation of advanced analog set-top
boxes so that they are compatible with the use of an FEM. The FEM module is
available for production at an approximate cost of $50 which the Company has
assumed for the Distribution Plan that it will purchase.
NextLevel is currently developing its next generation advanced analog
set-top boxes, which are estimated to be commercially available by the
fourth quarter of 1998. NextLevel has agreed to manufacture these set-top
boxes so that they are compatible with Cable SuperSites at minimal
incremental cost to the purchaser. This will be accomplished by including
on the motherboard a chip manufactured to the Company's specifications by
LSI Logic at an estimated cost of $16 per chip. The Company estimates that
the cost of the new chip can be reduced to $10 by integrating discreet
functions onto the chip at a one-time cost to the Company of approximately
$150,000.
- - Scientific Atlanta. Scientific Atlanta is currently working on a next
generation advanced analog set-top box. During this design phase, the
Company is providing them with specifications to allow Scientific Atlanta to
make this new set-top compatible with Cable SuperSites and the Company
believes that the next generation of Scientific Atlanta set-top boxes will
be compatible with Cable SuperSites.
Head-end Equipment. To offer Cable SuperSites, the cable operator's local
facilities require a multimedia file server to be provided by the Company. The
multimedia file server is assembled by the Company from hardware and software
components utilizing the Unix operating system available from several sources.
All images to be broadcast on Cable SuperSites, together with their associated
audio segments, are digitized and stored in the multimedia file server at the
cable operator's facility. This computer equipment accesses the compressed
digitized picture and sound, decompresses the image and sound and transmits them
to the subscriber's television. The images are photographic quality images
created from photographs, slides or CD ROMs. The multimedia file server is
capable of transmitting still-frame images to the subscriber via various
distribution media, including coaxial cable, UHF, wireless cable or satellite.
PROGRAMMING
The Company believes that widespread distribution of Cable SuperSites by
cable operators in premium tiers can be achieved by delivering programming that
attracts viewers and achieves high subscriber ratings and usage. The Company
believes that subscribers enjoy Cable SuperSites because it provides them with
easy access to on-demand local information, convenient on-line shopping and can
provide as user-friendly enhanced services such as Internet Access and e-mail.
LocalNet. LocalNet provides a variety of local and national information
on-demand, including local and national news, weather and sports, stock quotes,
local school information such as lunch menus, sports schedules and homework and
artwork, on-line home shopping with companies such as JC Penney, Hallmark
Connections and Waldenbooks, interactive Yellow Pages, television and movie
guides, travel information, games, and a variety of other features. The
Company's local partners supply and update certain content in exchange for
advertising time spots to sell advertising ("ad avails"). Additionally, much of
Cable SuperSites' programming can be offered in multiple markets without
modification and other programming is created by inserting into pre-established
templates local information provided by a media partner, Yellow Pages publisher
or cable network. As a result, the Company believes that it will be able to
quickly assemble a programming package for new markets.
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<PAGE> 57
CableNet. CableNet enables other cable channels and advertisers to become
interactive. Consumers can toggle back and forth between a cable channel and an
advertiser's interactive programs. This programming will enable a viewer to
preview future channel program offerings and a summary of recent and future
programs and to view and purchase merchandise offered by the cable channel or an
advertiser. For example, by pressing a button, consumers can move between the
channel itself and the interactive programming provided by a cable channel or
its advertiser. The Company currently has agreements to offer this service for
CourtTV, Bravo and the Independent Film Channel and is in discussions with 26
additional cable channels.
Internet Access. Internet Access can be delivered over Cable SuperSites to
subscribers through the television without the need for a personal computer or
other additional equipment. Full Internet browsing and e-mail capabilities can
be delivered by cable operators over existing cable infrastructure and telephone
lines to mass market consumers using an alphanumeric remote control. Internet
Access can provide cable operators with a competitive advantage over current
satellite television services.
DISTRIBUTION
The Company's efforts to contract for distribution are concentrated because
ten cable operators control 60% of the 63 million cable subscribers. To offer
Cable SuperSites in a market, the Company must have a carriage or affiliation
agreement with the cable operator. These agreements authorize the cable operator
to sell and promote Cable SuperSites and contain standard industry terms and
conditions, such as pricing, revenue sharing and joint marketing arrangements.
The Company currently has agreements with three of the top ten cable operators,
and two of these, Century and Cablevision, contemplate distribution in multiple
markets.
Obtaining distribution from a cable operator typically consists of three
steps: (i) presentations and product demonstration to senior corporate and
system management, (ii) technical due diligence regarding system operations and
compatibility and (iii) financial and business negotiations. The Company intends
to seek distribution as part of a cable operator's tiered programming offering
in markets which have in excess of 20,000 subscribers. There are approximately
650 markets with an aggregate of 36 million subscribers in these markets.
The Company believes that it will be able to achieve widespread Cable
SuperSites distribution because it provides cable operators with an attractive
source of incremental revenue streams, such as a percentage of revenues from
cable subscriber fees, Internet Access fees, on-line electronic retailing and
advertising revenues, in a market characterized by slowing subscriber growth and
limited revenue per subscriber growth. Additionally, Cable SuperSites' local
programming content and Internet Access can provide cable operators with an
enhanced product offering giving them a competitive advantage over the satellite
television alternative.
PROPRIETARY RIGHTS AND INTELLECTUAL PROPERTY
Patents. The deployment and operation of Cable SuperSites utilizes
technology owned by ICT. The technology is the subject of three United States
patents issued to ICT expiring in 2005, 2007 and 2008, respectively, and two
Canadian patents. The Cable SuperSites patents issued in the United States
protect a system for delivering still-frame television images and accompanying
audio to television viewers in response to viewer requests. This protection
covers multiple transmission media, including UHF, microwave, cable line and
satellite. The patents cover technology within such a system that enables
different viewers to receive video images over different television channels. In
addition, the patents include protection for the implementation of an
interactive television system on a cable network.
The Company owns nine United States patents related to interactive home
shopping services. The patents have expiration dates from 2005 through 2010. The
Company's patents cover technology for the selection, storage, retrieval and
presentation of video and audio messages in the form of still-frame images
presented over an interactive cable television system. Although the Company has
utilized the technology covered by these nine patents in its initial commercial
introduction of the Cable SuperSites, the Company believes that one or more of
the patents may be utilized in connection with the development of future
applications for the Cable SuperSites.
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<PAGE> 58
Source relies on ICT for research and development of on-line television
services, the assembly of multimedia file servers and the development of certain
set-top box integrated circuits. ICT is currently developing a Windows-based
media production workstation that could be used by Source and others to create
and edit programming for the Cable SuperSites.
COMPETITION
In an industry characterized by significant capital requirements and rapid
technological change, the Company faces potential competition for the acceptance
of its on-demand programming and services from a number of companies, many of
which have significantly greater financial, technical, manufacturing and
marketing resources than the Company and may be in a better position to compete
in the industry. In addition, the Company faces competition for advertiser
revenues from other media, including radio, television, newspapers, and
magazines.
IT Network. The Company is aware of other companies currently offering some
of the information services provided by IT Network. Consumers can call a variety
of "900" services for information provided by, among others, Dow Jones &
Company, Inc., AT&T, GTE and certain major newspaper publishers. Callers are
generally charged for calls to these "900" services. In most of its markets, the
Company is aware of a number of companies, local newspapers or radio stations
that provide free on-demand telephone programming similar to that offered by IT
Network. Other competitors, such as some of the RBOCs, certain independent
directories and a subsidiary of Century Telephone Enterprises, and others have
indicated an intent to do so. These competitors may use RBOC or non-RBOC Yellow
Pages directories, newspapers, mailers or other print media to distribute guides
listing their programming services. In addition to these current providers of
on-demand telephone services, potential competitors include any information
service provider, as well as the RBOCs.
Interactive Channel. The Company believes that for the foreseeable future
consumer access to on-demand television would generally be through telephone
lines and cable systems. The Company believes that there are competitors
offering services similar to the Company's three types of Cable SuperSites
programming. Net Channel and WebTV offer Internet access through the television
but require a consumer to purchase hardware and are incompatible with standard
cable television. In addition, @Home offers Internet services through the cable
system but is incompatible with the television. Wink provides a silent text
overlay (with some graphics) displayed when a consumer presses a button on a
television remote control. The overlay can be timed to coordinate with broadcast
programming and is delivered over a vertical blanking interval. This service is
similar to the Company's CableNet programming but cannot provide sound and
provides only minimal graphics. Worldgate has announced that it is testing a
product that can deliver Internet access. The concept that Worldgate has
announced is similar to CableNet but does not have the local programming
component of LocalNet. GTE MainStreet is an on-demand navigational system being
commercially deployed in Clearwater, Florida, and Ventura, California, and
offers interactive programming over coaxial cable systems. As a result of the
settlement of patent litigation, the Company has licensed its technology to GTE
for a fee. GTE MainStreet does not provide Internet access or programming
similar to CableNet. Wink, Worldgate and GTE MainStreet are all available
without the purchase of additional equipment.
To the extent one or more competitors is successful in developing an
on-demand television service, the business of the Company could be materially
adversely affected. The Company believes that, for the foreseeable future, the
public's access to on-demand television will generally be achieved through cable
operators. Therefore, the Company must compete with other potential on-demand
television service providers, as well as other sources of programming, to
establish relationships with cable operators. In addition, the on-demand
television industry and Cable SuperSites face competition for consumer usage
from personal computer on-demand services. Many of those seeking to develop an
on-demand television service are also seeking to develop, or have shifted their
development efforts to, personal computer on-demand services, in particular,
those offered over the Internet's World Wide Web. Thus, the Company faces
competition in the interactive and on-line services market from companies in
both the on-demand television and on-demand personal computer services
industries.
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<PAGE> 59
EMPLOYEES
As of November 30, 1997, the Company had a total of 182 full- and part-time
employees. None of the Company's employees are subject to a collective
bargaining agreement. The Company has experienced no work stoppages and believes
that it has good relations with its employees.
REGULATORY MATTERS
The telecommunications and cable television industries are subject to
extensive regulation by federal, state and local governmental agencies. Existing
regulations were substantially affected by the passage of the 1996 Telecom Act
in February 1996. This legislation was implemented in administrative proceedings
conducted by the Federal Communications Commission ("FCC") and state regulatory
agencies.
Most current regulatory and legislative activity addresses how telephone
companies and cable television companies may enter new lines of business, the
manner in which they can participate in new lines of business and the rates they
can charge consumers. Local exchange carriers, including the RBOC's, will be
facing more serious competition and will be able to enter new markets. Cable
television companies are now also permitted to provide telephone service. The
outcome of pending federal and state administrative proceedings may also affect
the nature and extent of competition that will be encountered by the Company.
The on-line information and services industry is evolving and will be
affected in the future by laws, regulations and policies adopted at the federal,
state and local levels of government. There are many laws, regulations and
policies, both existing and proposed, at all levels of government that may
impact, in varying degrees, the manner in which the Company deploys Cable
Supersites and IT Network products and services. Neither the outcome of these
proposals, nor their impact upon the on-line information and services industry
in general or on the Company in particular, can be predicted at this time.
FACILITIES AND EQUIPMENT
The Company's corporate office is located in leased office space at 5400
LBJ Freeway, Suite 680, Dallas, Texas. Source leases approximately 16,200 square
feet of office space at 5400 LBJ Freeway for its corporate offices and Cable
SuperSites. This lease expires in September 2001. The Company also subleases
from GTE Directories Corporation approximately 18,500 square feet of office
space at 5601 Executive Drive, Irving, Texas, where it conducts IT Network
operations. This sublease expires in September 1999. The Company believes that
this state-of-the-art facility is one of the most advanced in the industry. The
Company also has offices in major DMAs where it maintains the on-line voice
response system that supports IT Network voice information services. The Company
has one sales office under a lease expiring in early 1998. Sales representatives
typically work out of their homes.
As part of the Brite Acquisition, the Company intends to lease
approximately 10,000 square feet at the Brite facilities in Wichita and will
acquire satellite transmission facilities. The Company believes that the
existing facilities are suitable to meet its requirements for the immediate
future. See "Business -- Cable SuperSites -- Equipment" for a discussion of
certain equipment related to Cable SuperSites.
LEGAL PROCEEDINGS AND CLAIMS
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, 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 Stock 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
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<PAGE> 60
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.
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 sought 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 denied and ICT has applied for review of this decision before a three judge
panel, which granted the Company leave to appeal the decision. A decision on the
Company's appeal is not expected for approximately two years.
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. 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.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the executive
officers and directors of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
<S> <C> <C>
Timothy P. Peters............... 40 Chairman of the Board and Chief Executive Officer
John J. Reed.................... 40 President and Director
W. Scott Bedford................ 40 Chief Operating Officer, Chief Financial Officer
and Treasurer
Daniel D. Maitland.............. 46 Executive Vice President and President of IT
Network
W. Thomas Oliver................ 55 Executive Vice President and President of
Interactive Channel
Maryann Walsh................... 49 General Counsel and Secretary
David L. Kuykendall............. 43 Director
James L. Greenwald.............. 70 Director
Michael J. Marocco.............. 38 Director
Robert H. Alter................. 68 Director
Robert J. Cresci................ 54 Director
Barry Rubenstein................ 54 Director
</TABLE>
Timothy P. Peters has served as a director of Holdings since its inception
in 1988 and was elected Chief Executive Officer in December 1992 and Chairman of
the Board of Holdings in August 1994. Mr. Peters was President of Holdings from
1988 to 1996. Mr. Peters has served as Chairman of the Board, Chief Executive
Officer and a director of the Company since June 23, 1995, the effective date of
the Merger and was President from that date until 1996. In 1986, Mr. Peters
founded Information Express, Co., an operator-assisted Yellow Pages company that
served the Denver area, where he acted as a Vice President from 1986 to 1988.
John J. Reed has served as a director of Holdings since its inception in
1988 and as President of Holdings since 1996. Mr. Reed has served as a director
of the Company since June 23, 1995, the effective date of the Merger and served
as Executive Vice President from that date until 1996, when he was appointed
President. From 1990 to December 1996, Mr. Reed served in various positions with
Holdings, including Executive Vice President of Sales and Marketing. Mr. Reed
was Chairman of the Board of ICT from November 1991 to October 1993. From 1986
to 1989, Mr. Reed was President of Reed & Associates, a Dallas-based real estate
brokerage and professional services firm, of which he is the sole shareholder.
Mr. Reed has conducted business through this firm from time to time since 1989.
W. Scott Bedford has served as Chief Operating Officer of Holdings since
December 1992 and has been acting Chief Financial Officer and Treasurer since
December 1997. Mr. Bedford has served as Chief Operating Officer since June 23,
1995, the effective date of the Merger and has been acting Chief Financial
Officer and Treasurer since December 1997. From 1988 to December 1992, Mr.
Bedford served in various positions with Holdings, including Executive Vice
President, Vice President of Sales and Secretary. From its inception in 1988 to
September 1997, Mr. Bedford served as a director of Holdings and from June 23,
1995 to September 1997 served as a director of the Company. From October 1993
until January 1997, Mr. Bedford served as Chairman of the Board of ICT.
Daniel D. Maitland has served as President of IT Network since October
1997, prior to which he had served as President of the Company's telephone
division since November 1996 and as an Executive Vice President of the Company
since September 1997. In 1986, Mr. Maitland founded BDR Audiotex Inc., a
telephone information services company. In 1990, that company was merged with
Perception Technology. Mr. Maitland became the Executive Vice President and
General Manager of Perception Electronic Publishing. In 1993, Perception
Technology merged with Brite Voice Systems.
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<PAGE> 62
W. Thomas Oliver has served as President of the Interactive Channel since
October 1997, prior to which he had served as President of the Company's
television division since June 1996 and as an Executive Vice President of the
Company since September 1997. Mr. Oliver was Executive Vice President of DMX
from 1994 to 1995; President and Chief Executive Officer of International
Cablecasting Technologies from 1987 to 1994 and a Senior Vice President of Home
Box Office from 1973 to 1987.
Maryann Walsh has served as General Counsel of the Company since January
1995 and Secretary of the Company since March 1995. Together with Mr. Peters,
she founded Information Express, Co. and served as its Corporate Counsel and
Secretary. In 1981, she worked for a law firm in London, England and most
recently was with a law firm in Jakarta, Indonesia from 1989 through 1994. She
was also a counsel with Mobil Oil Corporation in New York City and Denver and
handled U.S. Supreme Court and federal court matters for the U.S. Department of
Justice.
David L. Kuykendall has served as a director of the Company since 1993. He
has served as Senior Vice President and Chief Financial Officer of Freedom
Communications, Inc. ("Freedom") since 1993 and served as its Vice President and
Chief Financial Officer from 1990 to 1993 and as its Controller from 1989 to
1990. From 1986 to 1988, Mr. Kuykendall was a Senior Manager with Deloitte &
Touche LLP.
Michael J. Marocco has served as a director of the Company since May 1996.
Mr. Marocco is a Managing Director of Sandler Capital Management ("Sandler"), an
investment firm that specializes in media, entertainment, telecommunications and
information services industries, and has been associated with Sandler since
April 1989. Prior to that, Mr. Marocco was a Vice President at Morgan Stanley &
Co., Incorporated where he was involved in raising capital and merger and
acquisition transactions. Mr. Marocco serves as a director of YES! Entertainment
Corp. and numerous other private companies servicing the communications
industries, and is a limited partner of the 21st Century partnerships.
James L. Greenwald has served as a director of the Company since May 1996.
Mr. Greenwald has served as chairman emeritus of Katz Media Corporation
("Katz"), a communications representative firm, since August 1995. Mr. Greenwald
joined Katz in 1956 and has held various positions, including President of the
radio division from 1965 through 1970, Executive Vice President from 1970
through 1975, President from 1975 through 1982 and Chairman of the Board of
Directors and Chief Executive Officer from 1975 through 1994. Mr. Greenwald is a
director of Granite Broadcasting Company and Paxson Communications Corp., an
honorary trustee of the Foundation of American Women in Radio and Television and
past president of the International Radio and Television Foundation and the
Station Representatives Association.
Robert H. Alter has served as a director of the Company since May 1997. Mr.
Alter has served as the President of Alter Associates, Inc., a domestic and
international television consulting firm, since its founding in 1992. Mr. Alter
is currently Vice-Chairman and director of Cabletelevision Advertising Bureau,
with which he held the position of founding President and Chief Executive
Officer from 1981 to 1991. From November 1991 through December 1992, he was a
senior advisor to the Board of Star TV in Hong Kong. From 1958 through 1981, he
was employed with the Radio Advertising Bureau, where his last position was that
of Executive Vice President. Mr. Alter is a director of International Post,
Ltd., AdCom, Inc., The Taft Institute of Government, The International Council
of the National Academy of Television Arts and Science and The Young Adult
Institute and Mentor.
Robert J. Cresci has served as a director of the Company since May 1997.
Mr. Cresci is a Managing Director of Pecks, an investment management firm he
co-founded in September 1990 that specializes in the management of convertible
securities, both public and private, for pension funds. Prior to such time, Mr.
Cresci was a manager of the convertible securities group at Alliance Capital
Management, L.P. for a period of approximately five years; and, prior to joining
Alliance, Mr. Cresci was a Senior Vice President in the investment banking
division of Lehman Brothers. Mr. Cresci is a director of Bridgeport Machines,
Inc., EMI, Inc., Film Roman, Garnet Resources Corporation, GeoWaste
Incorporated, Hitox Corporation, Meris Laboratories, Arcadia Financial Ltd.,
Sepracor Inc., Vestro Natural Foods, Inc., Serv-Tech, Inc. and EIS
International, Inc.
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<PAGE> 63
Barry Rubenstein has served as a director of the Company since September
1997. In 1994, Mr. Rubenstein co-founded the 21st Century partnerships, of which
he is presently a principal. In 1992, Mr. Rubenstein co-founded Applewood
Associates, L.P., of which he is presently a principal. Prior to 1992, Mr.
Rubenstein was a founder of or founding consultant to Applied Digital Data
Systems, Inc., Novell, Inc., and Cheyenne Software, Inc. From 1983 to 1987, Mr.
Rubenstein held various positions with Cheyenne Software, Inc., including
President, Chief Executive Officer, Director and Chairman of the Board. Mr.
Rubenstein is a director of or advisor to Infonautics Corporation, Millwood
Press and several private technology companies.
CERTAIN TRANSACTIONS
In June 1993, John Reed, President and a director of the Company, exercised
an option he had received in 1989 to purchase an aggregate of 70,546 shares of
Common Stock at an aggregate price of $50,000, or approximately $0.71 per share.
Mr. Reed paid for the shares by delivering to the Company a nonrecourse
promissory note in the original principal amount of $50,000, bearing interest at
a rate of 10% per annum with all principal and interest payable in May 1995.
This note was cancelled and replaced by a similar note dated December 1, 1993 in
the principal amount of $52,083, and the shares of Common Stock were reissued as
of such date. As of May 1995, the repayment date was extended to May 31, 1997.
Effective May 15, 1997, the repayment date was extended to May 31, 1999. As of
November 30, 1997, the aggregate principal and accrued interest outstanding was
$72,102.
Robert J. Cresci, a director of the Company, is a Managing Director of
Pecks Management Partners Ltd., one of the lenders to the Company under the
senior secured notes issued in April 1997. The balance of the senior secured
notes, including accrued interest, held by Pecks Management Partners Ltd. as of
October 23, 1997 was $10.7 million. The Company used proceeds from the Offering
to repay Pecks Management Partners Ltd. and the other senior secured lenders.
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<PAGE> 64
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of December 1, 1997, by (i) each
person the Company knows to be the beneficial owner of 5% or more of the
outstanding shares of Common Stock, (ii) each named executive officer, (iii)
each director of the Company and (iv) all executive officers and directors of
the Company as a group. Except as indicated in the footnotes to this table and
pursuant to applicable community property laws, the Company believes that each
stockholder named in this table has sole investment and voting power with
respect to the shares set forth opposite such stockholder's name.
<TABLE>
<CAPTION>
COMMON STOCK
BENEFICIALLY OWNED
--------------------
BENEFICIAL OWNER NUMBER PERCENT
---------------- --------- -------
<S> <C> <C>
Timothy P. Peters(1)........................................ 650,698 5.62
8140 Walnut Hill Lane
Suite 1000
Dallas, TX 75231
21st Century Communications Partners, L.P.(2)............... 929,290 7.61
767 Fifth Avenue
New York, NY 10019
Freedom Communications, Inc.(3)............................. 738,094 6.32
17666 Fitch
Irvine, CA 92714
John J. Reed(4)............................................. 201,095 1.74
W. Scott Bedford(5)......................................... 472,551 4.08
David L. Kuykendall(6)...................................... 747,094 6.39
James L. Greenwald(7)....................................... 6,000 *
Michael J. Marocco(8)....................................... 1,398,366 11.16
Robert H. Alter(9).......................................... 3,000 *
Robert J. Cresci(10)........................................ 1,253,000 9.76
Barry Rubenstein (11)....................................... 1,562,267 12.38
Daniel D. Maitland(12)...................................... 40,000 *
W. Thomas Oliver(13)........................................ 75,000 *
Maryann Walsh............................................... 148,918 1.29
All current directors and executive officers as a group (12 5,187,411 36.69
persons)..................................................
</TABLE>
- ---------------
* Less than one percent.
(1) Includes 5,571 shares of Common Stock issuable upon exercise of options
exercisable within 60 days.
(2) Includes 635,949 shares of Common Stock issuable upon exercise of
exercisable warrants. See note 8 for certain information regarding Michael
J. Marocco, a director of the Company and limited partner of 21st Century
Communications Partners, L.P.
(3) See note 6 for certain information regarding David L. Kuykendall, a
director of the Company and Senior Vice President and the Chief Financial
Officer of Freedom Communications, Inc. ("Freedom"). Includes 100,000
shares of Common Stock issuable upon exercise of exercisable warrants.
(4) Includes 5,114 shares of Common Stock issuable upon exercise of options
exercisable within 60 days.
(5) Includes 5,114 shares of Common Stock issuable upon exercise of options
exercisable within 60 days.
(6) Includes (i) 638,094 shares of Common Stock beneficially owned by Freedom,
as to which Mr. Kuykendall, a Senior Vice President and the Chief Financial
Officer of Freedom, disclaims beneficial ownership (ii) 100,000 shares of
Common Stock issuable upon exercise of exercisable warrants beneficially
owned by Freedom, as to which Mr. Kuykendall disclaims beneficial
ownership, and (iii) 9,000 shares of Common Stock issuable upon exercise of
options exercisable within 60 days.
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(7) Includes 6,000 shares of Common Stock issuable upon exercise of options
exercisable within 60 days.
(8) Includes (i) 9,675 shares of Common Stock issuable upon exercise of
exercisable warrants and (ii) 6,000 shares of Common Stock issuable upon
exercise of options exercisable within 60 days. Through an affiliate, Mr.
Marocco is a general partner of Sandler, which through an affiliate is
managing general partner of 21st Century Communications Partners, L.P.,
21st Century Communications T-E Partners, L.P. and 21st Century
Communications Foreign Partners, L.P. Accordingly, also includes (iii)
293,341 shares of Common Stock and (iv) 635,949 shares of Common Stock
issuable upon exercise of exercisable warrants held by 21st Century
Communications Partners, L.P., (v) 99,772 shares of Common Stock and (vi)
216,374 shares of Common Stock issuable upon exercise of exercisable
warrants held by 21st Century Communications T-E Partners, L.P., (vii)
39,527 shares of Common Stock, and (viii) 85,615 shares of Common Stock
issuable upon exercise of exercisable warrants held by 21st Century
Communications Foreign Partners, L.P.
(9) Includes 3,000 shares of Common Stock issuable upon exercise of options
exercisable within 60 days.
(10) Includes 1,250,000 shares of Common Stock issuable upon the exercise of
exercisable warrants held by four funds of which Pecks serves as manager.
Mr. Cresci is a Managing Director of Pecks, but disclaims beneficial
ownership of all such shares. Also includes 3,000 shares of Common Stock
issuable upon exercise of options exercisable within 60 days.
(11) Includes (i) 16,125 shares of Common Stock issuable upon exercise of
exercisable warrants. Mr. Rubenstein is a general partner of Applewood
Associates, L.P. and Woodland Partners, L.P. Accordingly, also includes
(ii) 50,000 shares of Common Stock beneficially owned by Applewood
Associates, L.P. and (iii) 101,875 shares of Common Stock issuable upon
exercise of exercisable warrants held by Woodland Partners, L.P. as to
which he disclaims beneficial ownership except to the extent of his
pecuniary interest. Mr. Rubenstein is an officer and shareholder of
Infomedia Associates, Ltd., which is one of the general partners of 21st
Century Communications Partners, L.P., 21st Century Communications T-E
Partners, L.P. and 21st Century Communications Foreign Partners, L.P.
Accordingly, also includes (iv) 293,341 shares of Common Stock and (v)
635,949 shares of Common Stock issuable upon exercise of exercisable
warrants held by 21st Century Communications Partners, L.P., (vi) 99,772
shares of Common Stock and (vii) 216,374 shares of Common Stock issuable
upon exercise of exercisable warrants held by 21st Century Communications
T-E Partners, L.P., (viii) 39,527 shares of Common Stock, and (ix) 85,615
shares of Common Stock issuable upon exercise of exercisable warrants held
by 21st Century Communications Foreign Partners, L.P.
(12) Includes 40,000 shares of Common Stock issuable upon exercise of options
exercisable within 60 days.
(13) Includes 75,000 shares of Common Stock issuable upon exercise of options
exercisable within 60 days.
SHARES ELIGIBLE FOR FUTURE SALE
As of November 30, 1997, the Company had a total of 11,579,990 shares of
Common Stock outstanding. All of these shares outstanding after the offering are
freely tradeable without restriction or registration under the Securities Act,
to the extent held by persons other than "affiliates" of the Company as defined
under the Securities Act.
As of November 30, 1997, the Company had outstanding warrants, options and
exchange rights entitling the holders thereof to acquire an aggregate of
8,362,900 shares of Common Stock, of which warrants, options and exchange rights
covering 7,670,372 shares are currently exercisable or exchangeable, as
applicable. The Company is required to file and maintain the effectiveness of a
registration statement covering 2,326,500 shares of Common Stock issuable upon
exercise of certain of such warrants. Any of such 2,326,500 shares other than
those acquired by affiliates of the Company, would be freely tradeable following
the effectiveness of such registration statement.
An aggregate of 1,664,912 shares of Common Stock are reserved for issuance
upon the exercise of options that may be granted under the Company's stock
option plans and have been granted pursuant to the
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acquisition of ICT, of which options to purchase 1,044,088 shares have been
granted and are outstanding. See "Capitalization."
Various holders of Common Stock, warrants and Pocock Exchange Rights (as
defined) have "piggyback" and demand registration rights to register such Common
Stock and shares issuable upon exercise of such warrants and Pocock Exchange
Rights for public sale under the Securities Act. See "Description of Capital
Stock -- Registration Rights." The preparation and filing of any registration
statements filed in connection with the exercise of registration rights will be
at the expense of the Company.
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company is authorized to issue 50,000,000 shares of Common Stock, par
value $0.001 per share, and 1,000,000 shares of Preferred Stock, par value
$0.001 per share. As of November 30, 1997, there were outstanding 11,579,990
shares of Common Stock, held of record by 184 stockholders. In addition, as of
such date there were outstanding warrants and options (including replacement
options) entitling the holders thereof to purchase an aggregate of 8,156,524
shares of Common Stock and exchange rights entitling the holder to acquire
206,376 shares of Common Stock. On November 30, 1997, there were outstanding
800,000 shares of Preferred Stock.
COMMON SHARES
The holders of Common Stock are entitled to one vote for each share held of
record on all matters to be voted on by stockholders. There is no cumulative
voting with respect to the election of directors. The holders of Common Stock
are entitled to receive dividends when, as and if declared by the board of
directors out of funds legally available therefor. In the event of a
liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to a share ratably in all assets remaining available for
distribution to them after payment of liabilities and after provision has been
made for each class of stock, if any, having preference over the Common Stock.
Holders of Common Stock, as such, have no conversion, preemptive or other
subscription rights, and there are no redemption provisions applicable to the
Common Stock. All of the outstanding shares of Common Stock are fully paid and
nonassessable.
PREFERRED STOCK
The Company's Certificate of Incorporation authorizes the issuance of
1,000,000 shares of preferred stock with such designations, rights and
preferences as may be determined from time to time by the board of directors of
the Company. The only preferred stock outstanding is the Preferred Stock.
WARRANTS
The Company has outstanding warrants to purchase an aggregate of 7,112,436
shares of Common Stock. A brief description of such warrants follows.
Public Warrants. A total of 4,653,000 warrants (the "Public Warrants") are
currently outstanding, each of which entitles the registered holder to purchase
one-half of a share of Common Stock, 2,326,500 shares in the aggregate, at a
price of $11.00 per share, subject to adjustment in certain circumstances, at
any time until 5:00 p.m., New York City time, on June 23, 2000, at which time
the Public Warrants will expire. The Company may call the Public Warrants for
redemption, in whole or in part at a price of $0.01 per Public Warrant upon not
less than 30 days' prior written notice, provided that the last sale price of
Common Stock has been at least $20.00 ("Public Warrant Redemption Price") for
the 20 consecutive trading days ending on the third business day prior to the
date on which the notice of redemption is given. The holders of Public Warrants
have exercise rights until the close of business on the date fixed for
redemption. The holders of Public Warrants to not have the rights or privileges
of holders of Common Stock prior to the exercise of the Public Warrants.
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The exercise price, number of shares of Common Stock issuable on exercise
of the Public Warrants and Public Warrant Redemption Price are subject to
adjustment in certain circumstances including events of a stock dividend,
recapitalization, reorganization, merger or consolidation of the Company. The
Public Warrants, however, are not subject to adjustment for issuances of Common
Stock at a price below their exercise price.
The Company has the right, in its sole discretion, to decrease the exercise
price of the Public Warrants for a period of not less than 30 days on not less
than 30 days' prior written notice to the warrantholders and to extend the
expiration date of the Public Warrants on five business days prior written
notice to the warrantholders.
The Public Warrants were registered with the Commission under the
Securities Act and are currently traded on the OTC. The Company is required to
file with the Commission a current registration statement covering the shares of
Common Stock issuable upon exercise of such Public Warrants and maintain the
effectiveness of such registration statement during the period the Public
Warrants are exercisable. To date, the Company has not filed such a registration
statement.
The Company has also issued warrants to Hackman Baring & Co., Incorporated,
entitling Hackman, Baring & Co., Incorporated to purchase 25,000 shares of
Common Stock on the same terms as the Public Warrants, except that they are not
registered with the Commission.
Brenner Warrants. Pursuant to an agreement dated January 19, 1994, the
Company agreed to issue to Brenner Capital Corporation ("Brenner") warrants to
purchase 28,302 shares of Common Stock exercisable at a price of $10.60 per
share (the "Brenner Warrants"). In October 1997, the Brenner Warrants were
amended to be exercisable until June 23, 2007. The Brenner Warrants contain
anti-dilution provisions providing for adjustment of the exercise price upon the
occurrence of certain events including the issuance of shares of Common Stock or
other securities convertible into or exercisable for Common Stock at a price per
share less than the exercise price of the Brenner Warrants, or the market price
of the Common Stock, or in the event of any recapitalization, reclassification,
stock dividend, stock split, stock combination or similar transaction.
Accordingly, in January 1997, the Brenner Warrants were adjusted to provide for
the purchase of 68,493 shares of Common Stock exercisable at a purchase price of
$4.38 per share to reflect the issuance of Common Stock in connection with the
ICT acquisition.
VSD Warrants. Four individuals own warrants to purchase an aggregate of
83,085 shares of Common Stock at an exercise price of $10.80 per share, expiring
on February 1, 2001.
Smith Warrants. A revocable trust for Kevin F. Smith, Jr. and James A.
Smith, III owns warrants to purchase 10,079 shares of Common Stock at an
exercisable price of $18.60 per share, expiring on February 10, 1998.
Hartford and Dublind Warrants. Dublind Partners, Inc., an affiliate of
Dublind Securities, Inc., owns warrants to purchase 147,394 shares of Common
Stock, and Security Insurance Company of Hartford owns warrants to purchase
105,282 shares of Common Stock expiring on December 21, 2002. Pursuant to an
agreement entered into in September 1995, the exercise price of such warrants is
$10.50 per share.
Funding Warrants. In May 1995, IT Network issued warrants to purchase an
aggregate of 1,034,687 shares of Common Stock at an exercise price of $7.44,
exercisable until May 17, 2000 (the "Funding Warrants"). The holders of the
Funding Warrants have demand and "piggyback" registration rights with respect to
the securities into which the Funding Warrants are exercisable. The Funding
Warrants also contain anti-dilution provisions providing for adjustment of the
exercise price upon the occurrence of certain events including the issuance of
shares of Common Stock or other securities convertible into or exercisable for
Common Stock at a price per share less than the exercise price of the Funding
Warrants, or in the event of any recapitalization, reclassification, stock
dividend, stock split, stock combination or similar transaction. Accordingly, in
April 1997, the Funding Warrants were adjusted to provide for the purchase of
1,034,687 shares of Common Stock exercisable at a purchase price of $6.00 per
share to reflect the issuance of the Senior Secured Note Warrants.
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Senior Secured Note Warrants. In connection with the issuance of senior
secured notes in April 1996 and 1997, the Company issued warrants to the
noteholders entitling them to purchase 2,664,917 shares of Common Stock at an
exercise price of $6.00 per share, expiring on March 31, 2004 (the "Senior
Secured Note Warrants"). The holders of the Senior Secured Note Warrants have
demand and "piggyback" registration rights with respect to the securities into
which the Senior Secured Note Warrants are exercisable. The Senior Secured Note
Warrants also contain anti-dilution provisions providing for adjustment of the
exercise price and number of shares upon the occurrence of certain events
including the issuance of shares of Common Stock or other securities convertible
into or exercisable for Common Stock at a price per share less than the exercise
price of the Senior Secured Note Warrants, or in the event of any
recapitalization, interest payments on the existing senior secured notes may be
made through the issuance of additional senior notes.
Century and Freedom Warrants. In May 1997, the Company granted warrants to
each of its local partners in Colorado Springs, Freedom and Century, to purchase
100,000 shares at an exercise price of $6.41 per share, expiring on May 21,
2000.
October 1997 Warrants. In October 1997, as part of the Offering, the
Company issued warrants (the "October 1997 Warrants") to purchase an aggregate
of 447,000 shares of Common Stock at an exercise price of $0.01 per share at any
time prior to November 1, 2007. The Company has agreed to file a registration
statement covering resales of the Common Stock underlying the October 1997
Warrants by April 30, 1998 and to keep such registration statement effective
until at least October 30, 1999.
CABLESHARE REPLACEMENT OPTIONS
Pursuant to an agreement, each of the options for ICT Common Shares
outstanding at the effective time of the Arrangement between the Company and ICT
was exchanged for an option (a "Replacement Option") to purchase shares of
Common Stock. The Replacement Options represent the right to purchase 72,276
shares of Common Stock at a weighted average exercise price of $4.10 per share.
POCOCK EXCHANGE RIGHTS
In September 1992, IT Network issued certain exchange rights (the "Pocock
Exchange Rights") to Terrence H. Pocock pursuant to an agreement (the "Pocock
Agreement") between Mr. Pocock and IT Network and a subsidiary of IT Network
("CanSub"). Under the Pocock Agreement, Mr. Pocock exchanged 1,623,409 of
Cableshare's Class A Shares and 843,818 of Cableshare's Class B Shares for
1,535,821 Class Y shares of CanSub (the "Class Y Shares"). Mr. Pocock
subsequently transferred the Class Y Shares, the Pocock Exchange Rights and
certain other rights to his wife. In May 1993, in accordance with the Pocock
Agreement, IT Network loaned Mrs. Pocock $750,000, evidenced by a promissory
note due in May 2000, bearing interest at two percent per annum, secured by a
pledge of certain of the Class Y Shares and the Pocock Exchange Rights and
guaranteed by Mr. Pocock. The Pocock Exchange Rights entitle Mrs. Pocock to
exchange the Class Y Shares for 206,376 shares of Common Stock, without
additional material consideration to the Company, at any time through February
28, 2000.
TRANSFER AGENT
The transfer agent and registrar for the Common Stock is ChaseMellon
Shareholder Services, L.L.C. at its Dallas, Texas offices. The transfer agent
and registrar for the Public Warrants is Continental Stock Transfer and Trust
Company at its principal office in New York, New York.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Certificate of Incorporation provides that directors of the Company
shall not be personally liable to the Company or its stockholders for monetary
damages for breach of fiduciary duty as a director, except for liability (i) for
any breach of the directors' duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the
Delaware General Corporation Law (the "DGCL") relating to prohibited dividends
or distributions or the repurchase or redemption of stock, or (iv) for any
transaction from which the director
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derives an improper personal benefit. If the DGCL is amended to authorize
further elimination or limitation of directors' liability, then the liability of
directors of the Company shall automatically be limited to the fullest extent
provided by law. The Bylaws of the Company also contain provisions to indemnify
the directors, officers, employees or other agents. These provisions may have
the practical effect in certain cases of eliminating the ability of stockholders
to collect monetary damages from directors.
PROVISIONS WITH POSSIBLE ANTI-TAKEOVER EFFECTS
Provisions of the DGCL prohibit "business combinations" between the Company
and certain stockholders unless the established requirements are met.
Consequently, the business combination provisions of the DGCL may have the
effect of deterring merger proposals, tender offers or other attempts to effect
changes in control of the Company that are not negotiated with and approved by
the Board of Directors.
Additionally, the following provisions of the Company's Certificate of
Incorporation and Bylaws may be considered to have anti-takeover implications:
(a) the ability of the board to increase the number of directors and fill (but
only until the next annual meeting of stockholders) the vacancies resulting from
such increase; and (b) the ability of the board of directors to establish the
rights of, and to issue, substantial amounts of preferred stock without the need
for stockholder approval which preferred stock, among other things, may be used
to increase voting impediments with respect to changes in control of the Company
or to dilute the stock ownership of holders of shares of Common Stock seeking to
obtain control of the Company.
REGISTRATION RIGHTS
Various stockholders of the Company have certain demand and "piggyback"
registration rights with respect to a total of 1,949,704 shares of Common Stock.
In addition, the Company has granted demand and "piggyback" registration rights
to the holders of warrants and the Pocock Exchange Rights with respect to the
shares of Common Stock underlying such warrants and the 206,376 shares of Common
Stock underlying the Pocock Exchange rights.
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DESCRIPTION OF EXCHANGE PREFERRED STOCK
The summary contained herein of certain provisions of the Exchange
Preferred Stock to be issued by the Company does not purport to be complete and
is subject to, and is qualified in its entirety by reference to, all the
provisions of the Certificate of Designation of the Exchange Preferred Stock
(the "Certificate of Designation"), copies of which may be obtained from the
Company upon request. Definitions relating to certain capitalized terms are set
forth under "-- Glossary of Certain Definitions." Capitalized terms that are
used but not otherwise defined herein have the meanings assigned to them in the
Certificate of Designation, and such definitions are incorporated herein by
reference.
GENERAL
The Outstanding Preferred Stock is, and the Exchange Preferred Stock shall
be, designated as the "13 1/2% Senior PIK Preferred Stock due 2007," in each
case with a liquidation preference of $25 per share, plus not less than such
number of additional shares as may be issued in payment of dividends in the
event the Company elects to pay dividends on the Preferred Stock by issuing
additional shares of Preferred Stock. See "-- Dividends" below. The Exchange
Preferred Stock, when issued, will be fully paid and nonassessable and the
holders thereof will not have any subscription or preemptive rights in
connection therewith.
RANKING
The Outstanding Preferred Stock ranks, and the Exchange Preferred Stock
will rank, with respect to dividend rights and rights on liquidation, winding-up
and dissolution of the Company, senior to all classes of common stock and to
each other class of capital stock or series of preferred stock. The Company may
not authorize any new class of preferred stock that ranks senior or pari passu
to the Preferred Stock without the approval of the holders of at least a
majority of the shares of Preferred Stock then outstanding, voting or
consenting, as the case may be, as one class, provided, however, that the
Company can issue additional shares of Preferred Stock to satisfy dividend
payments on outstanding shares of Preferred Stock; and provided further,
however, that the Company can issue shares of preferred stock ranking pari passu
with the Preferred Stock if after giving effect thereto the Consolidated
Coverage Ratio is greater than 1.7 to 1.0.
DIVIDENDS
Holders of the outstanding shares of Preferred Stock will be entitled to
receive, when, as and if declared by the Board of Directors of the Company, out
of funds legally allocable therefor, dividends on the Preferred Stock at a rate
per annum equal to 13 1/2% on the then effective liquidation preference per
share of Preferred Stock, payable quarterly (each such quarterly period being
herein called a "Dividend Period"); provided that so long as a Voting Rights
Triggering Event (as defined below) shall have occurred and be continuing,
additional dividends will accumulate on the Preferred Stock at a rate per annum
equal to 2% of the liquidation preference per share of the Preferred Stock,
payable quarterly; and, provided further, that the regular dividend rate per
annum is subject to increase pursuant to the Registration Rights Agreement (any
such increase is an "Additional Dividend"). All dividends will be cumulative,
whether or not earned or declared, on a daily basis from the date of issuance
and will be payable quarterly in arrears on February 1, May 1, August 1 and
November 1 of each year (each a "Dividend Payment Date"), commencing on February
1, 1998, to holders of record on January 15, April 15, July 15 and October 15
immediately preceding the relevant Dividend Payment Date.
Dividends may be paid, at the Company's option, on any Dividend Payment
Date either in cash or by the issuance of additional shares of Preferred Stock
(and, at the Company's option, payment of cash in lieu of fractional shares)
having an aggregate liquidation preference equal to the amount of such
dividends; provided, however, that after November 1, 2002, the Company must pay
dividends in cash. In the event, that on or prior to November 1, 2002 dividends
are declared and paid through the issuance of additional shares of Preferred
Stock, as provided in the previous sentence, such dividends shall be deemed paid
in full and will not accumulate. The Company does not currently have a
sufficient number of authorized shares of preferred stock to pay dividends on
the Preferred Stock in additional shares of Preferred Stock on any quarterly
dividend date
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after May 1, 1999. The Company intends to seek approval from its stockholders at
its next annual meeting of an amendment to its certificate of incorporation to
increase the number of shares of authorized preferred stock to an amount
sufficient to allow it to pay such dividends in additional shares of Preferred
Stock.
No full dividends may be declared or paid or funds set apart for the
payment of dividends on any other class of capital stock or series of preferred
stock established hereafter by the Board of Directors of the Company ranking on
a parity with the Preferred Stock (collectively referred to as "Parity Stock")
for any period unless full cumulative dividends shall have been or
contemporaneously are declared and paid (or are deemed declared and paid) in
full or declared and, if payable in cash, a sum in cash sufficient for such
payment set apart for such payment on the Preferred Stock. If full dividends are
not so paid, the Preferred Stock will share dividends pro rata with the Parity
Stock. No dividends may be paid or set apart for such payment on any class of
capital stock or series of preferred stock ranking junior to the Preferred Stock
(collectively referred to as "Junior Stock") (except dividends on Junior Stock
payable in additional shares of Junior Stock) and no Junior Stock or Parity
Stock may be repurchased, redeemed or otherwise retired nor may funds be set
apart for payment with respect thereto, if full cumulative dividends have not
been paid in full (or deemed paid) on the Preferred Stock. Dividends on account
of arrears for any past Dividend Period and dividends in connection with any
optional redemption may be declared and paid at any time, without reference to
any regular Dividend Payment Date, to holders of record on such date, not more
than 45 days prior to the payment thereof, as may be fixed by the Board of
Directors of the Company. So long as any shares of the Preferred Stock are
outstanding, the Company shall not make any payment on account of, or set apart
for payment money for a sinking or other similar fund for, the purchase,
redemption or other retirement of, any Parity Stock or Junior Stock or any
warrants, rights, calls or options exercisable for or convertible into any
Parity Stock or Junior Stock, and shall not permit any corporation or other
entity directly or indirectly controlled by the Company to purchase or redeem
any Parity Stock or Junior Stock or any such warrants, rights, calls or options
unless full cumulative dividends determined in accordance herewith on the
Preferred Stock have been paid (or are deemed paid) in full.
REDEMPTION
Optional Redemption. At any time and from time to time on or prior to
November 1, 2000, the Company may, subject to certain requirements, redeem up to
35% of the Preferred Stock out of Net Cash Proceeds of one or more Equity
Offerings by the Company so long as there is a Public Market as at the time of
such redemption, at a redemption price equal to 113.50% of the liquidation
preference thereof, plus, without duplication, an amount in cash equal to all
accumulated and unpaid dividends (including an amount in cash equal to a
prorated dividend for the period from the immediately preceding Dividend Payment
Date to the redemption date). After November 1, 2000 and prior to November 1,
2002, the Preferred Stock is not redeemable. On or after November 1, 2002, the
Preferred Stock will be redeemable, at the Company's option, in whole at any
time or in part from time to time, at the following redemption prices (expressed
as a percentage of liquidation preference) if redeemed during the twelve-month
period commencing on November 1 of the applicable year set forth below plus,
without duplication, an amount in cash equal to all accumulated and unpaid
dividends (including an amount in cash equal to a prorated dividend for the
period from the immediately preceding dividend payment date to the redemption
date):
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2002........................................................ 106.75%
2003........................................................ 104.50%
2004........................................................ 102.25%
2005 and thereafter......................................... 100.00%
</TABLE>
Mandatory Redemption. The Preferred Stock is subject to mandatory
redemption (subject to the legal availability of funds therefor) in whole on
November 1, 2007, at a price equal to 100% of the then effective liquidation
preference thereof, plus, without duplication, all accumulated and unpaid
dividends to the date of redemption.
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In the event of redemption of fewer than all of the outstanding shares of
Preferred Stock, the Preferred Stock will be redeemed on a pro rata basis. The
Preferred Stock will be redeemable upon not less than 30 nor more than 60 days,
prior written notice, mailed by first class mail to a holder's last address as
it shall appear on the register maintained by the Transfer Agent of the
Preferred Stock. On and after any redemption date, dividends will cease to
accrue on the Preferred Stock or portions thereof called for redemption unless
the Company shall fail to redeem any such Preferred Stock.
LIQUIDATION PREFERENCE
Upon any voluntary or involuntary liquidation, dissolution or winding-up of
the Company, holders of Preferred Stock will be entitled to be paid out of the
assets of the Company available for distribution to stockholders, the then
effective liquidation preference (currently $25 per share of Preferred Stock),
plus, without duplication, an amount in cash equal to all accumulated and unpaid
dividends thereon to the date fixed for liquidation, dissolution or winding-up
(including an amount equal to a prorated dividend for the period from the last
Dividend Payment Date to the date fixed for liquidation, dissolution or
winding-up and including an amount equal to the redemption premium that would
have been payable had the Preferred Stock been the subject of an optional
redemption on such date), before any distribution is made on any Junior Stock,
including, without limitation, Common Stock of the Company. If, upon any
voluntary or involuntary liquidation, dissolution or winding-up of the Company,
the amounts payable with respect to the Preferred Stock and all other Parity
Stock are not paid in full, the holders of the Preferred Stock and the Parity
Stock will share equally and ratably in any distribution of assets of the
Company in proportion to the full liquidation preference to which each is
entitled.
The Certificate of Designation for the Preferred Stock does not contain any
provision requiring funds to be set aside to protect the liquidation preference
of the Preferred Stock, although such liquidation preference will be
substantially in excess of the par value of such shares of Preferred Stock. In
addition, the Company is not aware of any provision of Delaware law or any
controlling decision of the courts of the State of Delaware (the state of
incorporation of the Company) that requires a restriction upon the surplus of
the Company solely because the liquidation preference of the Preferred Stock
will exceed its par value. Consequently, there is no restriction upon the
surplus of the Company solely because the liquidation preference of the
Preferred Stock will exceed its par value, and there are no remedies available
to holders of the Preferred Stock before or after the payment of any dividend,
other than in connection with the liquidation of the Company, solely by reason
of the fact that such dividend would reduce the surplus of the Company to an
amount less than the difference between the liquidation preference of the
Preferred Stock and its par value.
VOTING RIGHTS
The holders of Preferred Stock, except as otherwise required under Delaware
law or as set forth below, are not entitled or permitted to vote on any matter
required or permitted to be voted upon by the stockholders of the Company.
The Certificate of Designation provides that if (i) after November 1, 2002,
any dividends on the Preferred Stock required to be paid in cash are in arrears
and unpaid; (ii) the Company is subject to a material default on its outstanding
indebtedness; (iii) the Company fails to redeem the Preferred Stock on or before
November 1, 2007 or fails to discharge any redemption obligation with respect to
the Preferred Stock; (iv) the Company fails to make a Change of Control offer if
such an offer is required by the provisions set forth under "-- Change of
Control" below or fails to purchase shares of Preferred Stock from holders who
elect to have such shares purchased pursuant to the Change of Control Offer; (v)
a breach or violation of any of the provisions described under the caption
"-- Certain Covenants" occurs and the breach or violation continues for a period
of 60 days or more after the Company receives notice thereof specifying the
default from the holders of at least 25% of the shares of Preferred Stock then
outstanding; or (vi) the Company fails to pay at the final stated maturity
(giving effect to any extensions thereof) the principal amount of any
Indebtedness of the Company or any Restricted Subsidiary of the Company, or the
final stated maturity of any such Indebtedness is accelerated, if the aggregate
principal amount of such Indebtedness, together with the aggregate principal
amount of any other such Indebtedness in default for failure to pay principal at
the final
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stated maturity giving effect to any extensions thereof) or which has been
accelerated, aggregates $3 million or more at any time, in each case, after a
20-day period during which such default shall not have been cured or such
acceleration rescinded, then the number of directors constituting the Board of
Directors of the Company will be adjusted to permit the holders of a majority of
the then outstanding shares of Preferred Stock, voting as a class, to elect two
directors to the Board of Directors of the Company. Such voting rights will
continue until such time as, in the case of a dividend default, all dividends in
arrears on the Preferred Stock are paid in full and, in all other cases, any
failure, breach or default giving rise to such voting rights is remedied or
waived by the holders of at least a majority of the shares of Preferred Stock
then outstanding, at which time the term of any directors elected pursuant to
the provisions of this paragraph shall terminate. Each such event described in
clauses (i) through (vi) above is referred to herein as a "Voting Rights
Triggering Event."
The Certificate of Designation will also provide that the Company will not
authorize any class or series of capital stock that ranks senior to the
Preferred Stock with respect to dividend distributions or distributions upon
liquidation, winding-up or dissolution (collectively referred to herein as
"Senior Stock") without the affirmative vote or consent of holders of at least a
majority of the shares of Preferred Stock then outstanding, voting or
consenting, as the case may be, as one class, unless after giving effect to the
issuance of any such preferred stock the Consolidated Coverage Ratio is greater
than 1.7 to 1.0. In addition, the Certificate of Designation provides that the
Company may not amend the terms of the Certificate of Designation without the
affirmative vote or consent of the holders of at least a majority of the then
outstanding shares of Preferred Stock, voting or consenting, as the case may be,
as one class.
Under Delaware law, holders of preferred stock, including the Preferred
Stock, are entitled to vote as a class upon a proposed amendment to the
certificate of incorporation, whether or not entitled to vote thereon by the
certificate of incorporation, if the amendment would increase or decrease the
par value of the shares of such class, or alter or change the powers,
preferences or special rights of the shares of such class so as to affect them
adversely.
CHANGE OF CONTROL OFFER
Within 20 days of the occurrence of a Change of Control, the Company shall
make an offer to purchase (the "Change of Control Offer") the outstanding
Preferred Stock at a purchase price equal to 101% of the liquidation preference
thereof plus, without duplication, an amount in cash equal to all accumulated
and unpaid dividends thereon (including (x) any Additional Dividends and (y) an
amount in cash equal to a prorated dividend for the period from the immediately
preceding dividend payment date to the Change of Control Payment Date (such
applicable purchase price being hereinafter referred to as the "Change of
Control Purchase Price")) in accordance with the procedures set forth in this
covenant.
Within 20 days of the occurrence of a Change of Control, the Company also
shall (i) cause a notice of the Change of Control to be sent at least once to
the Dow Jones News Service or similar business news service in the United States
and (ii) send by first-class mail, postage prepaid, to each holder of Preferred
Stock, at the address appearing on the stock books of the Company, a notice
stating:
(1) that the Change of Control Offer is being made pursuant to this
covenant and that all Preferred Stock tendered will be accepted for
payment, and otherwise subject to the terms and conditions set forth
herein;
(2) the Change of Control Purchase Price and the purchase date (which
shall be a Business Day no earlier than 20 Business Days from the date such
notice is mailed (the "Change of Control Payment Date"));
(3) that any Preferred Stock not tendered will continue to accumulate
dividends;
(4) that, unless the Company defaults in the payment of the Change of
Control Purchase Price, any Preferred Stock accepted for payment pursuant
to the Change of Control Offer shall cease to accumulate dividends after
the Change of Control Payment Date;
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(5) that holders accepting the offer to have their Preferred Stock
purchased pursuant to a Change of Control Offer will be required to
surrender their certificates representing Preferred Stock to the Company at
the address specified in the notice prior to the close of business on the
Business Day preceding the Change of Control Payment Date;
(6) that holders will be entitled to withdraw their acceptance if the
Company receives, not later than the close of business on the third
Business Day preceding the Change of Control Payment Date, a telegram,
telex, facsimile transmission or letter setting forth the name of the
holder, the number of shares of Preferred Stock delivered for purchase, and
a statement that such holder is withdrawing his election to have such
Preferred Stock purchased;
(7) that holders whose Preferred Stock is being purchased only in part
will be issued new certificates representing the number of shares of
Preferred Stock equal to the unpurchased portion of the certificates
surrendered; and
(8) any other procedures that a holder must follow to accept a Change
of Control Offer or effect withdrawal of such acceptance.
On the Change of Control Payment Date, the Company shall accept for payment
the Preferred Stock tendered pursuant to the Change of Control Offer and
promptly mail to each holder of Preferred Stock so accepted payment in an amount
equal to the purchase price for such Preferred Stock certificate equal to any
unpurchased shares represented by a certificate surrendered.
In the event that a Change of Control occurs and the holders of Preferred
Stock exercise their right to require the Company to purchase Preferred Stock,
if such purchase constitutes a "tender offer" for purposes of Rule 14e-1 under
the Exchange Act, at that time, the Company will comply with the requirements of
Rule 14e-1 as then in effect with respect to such repurchase and, in the event
of a conflict between the requirements of the Exchange Act and of the
Certificate of Designation, the provisions of the Exchange Act shall govern.
CERTAIN COVENANTS
The Certificate of Designation contains certain covenants including, among
others, the following:
Limitation on Indebtedness
(a) The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, Incur any Indebtedness; provided, however, that the Company and
any of its Restricted Subsidiaries may Incur Indebtedness if on the date thereof
the Consolidated Coverage Ratio would be greater than 2.0:1.
(b) Notwithstanding the foregoing paragraph (a), the Company and its
Restricted Subsidiaries may Incur the following Indebtedness:
(i) Indebtedness of the Company or any Restricted Subsidiary under
Bank Indebtedness and under standby letters of credit or reimbursement
obligations with respect thereto issued in the ordinary course of business
and consistent with industry practice, provided, however, that the
aggregate principal amount of any Indebtedness Incurred pursuant to this
clause (i) shall not exceed $10 million at any time outstanding;
(ii) Indebtedness represented by Capitalized Lease Obligations,
mortgage financings or purchase money obligations, in each case Incurred
for the purpose of financing all or any part of the purchase price or cost
of construction or improvement of property or equipment used in a Permitted
Business or Incurred to refinance any such purchase price or cost of
construction or improvement, in each case Incurred no later than 365 days
after the date of such acquisition or the date of completion of such
construction or improvement; provided, however, that the principal amount
of any Indebtedness Incurred pursuant to this clause (ii), together with
Indebtedness Incurred in connection with Sale/Leaseback Transactions in
accordance with the "Limitation on Sale/Leaseback Transactions" covenant,
shall not exceed $5 million at any time outstanding;
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(iii) Indebtedness of the Company owing to and held by any
Wholly-Owned Subsidiary or Indebtedness of a Restricted Subsidiary owing to
and held by the Company or any Wholly-Owned Subsidiary; provided, however,
that any subsequent issuance or transfer of any Capital Stock or any other
event which results in any such Wholly-Owned Subsidiary ceasing to be a
Wholly-Owned Subsidiary or any subsequent transfer of any such Indebtedness
(except to the Company or any Wholly-Owned Subsidiary) shall be deemed, in
each case, to constitute the Incurrence of such Indebtedness by the issuer
thereof;
(iv) Indebtedness represented by (w) the Notes, (x) the Guarantees,
(y) Existing Indebtedness and (z) any Refinancing Indebtedness Incurred in
respect of any Indebtedness described in this clause (iv) or Incurred
pursuant to paragraph (a);
(v) (A) Indebtedness of a Restricted Subsidiary Incurred and
outstanding on the date on which such Restricted Subsidiary was acquired by
the Company (other than Indebtedness Incurred in anticipation of, or to
provide all or any portion of the funds or credit support utilized to
consummate the transaction or series of related transactions pursuant to
which such Restricted Subsidiary became a Subsidiary or was otherwise
acquired by the Company); provided, however, that at the time such
Restricted Subsidiary is acquired by the Company, the Company would have
been able to Incur $1.00 of additional Indebtedness pursuant to paragraph
(a) above after giving effect to the Incurrence of such Indebtedness
pursuant to this clause (v) and (B) Refinancing Indebtedness Incurred by a
Restricted Subsidiary in respect of Indebtedness Incurred by such
Restricted Subsidiary pursuant to this clause (v);
(vi) Indebtedness (A) in respect of performance bonds, bankers'
acceptances and surety or appeal bonds provided by the Company or any of
its Restricted Subsidiaries to their customers in the ordinary course of
their business, (B) in respect of performance bonds or similar obligations
of the Company or any of its Restricted Subsidiaries for or in connection
with pledges, deposits or payments made or given in the ordinary course of
business in connection with or to secure statutory, regulatory or similar
obligations, including obligations under health, safety or environmental
obligations, (C) arising from Guarantees to suppliers, lessors, licensees,
contractors, franchises or customers of obligations (other than
Indebtedness) Incurred in the ordinary course of business and (D) under
Currency Agreements and Interest Rate Agreements; provided, however, that
in the case of Currency Agreements and Interest Rate Agreements, such
Currency Agreements and Interest Rate Agreements are entered into for bona
fide hedging purposes of the Company or its Restricted Subsidiaries (as
determined in good faith by the Board of Directors of the Company) and
correspond in terms of notional amount, duration, currencies and interest
rates as applicable, to Indebtedness of the Company or its Restricted
Subsidiaries Incurred without violation of the Indenture or to business
transactions of the Company or its Restricted Subsidiaries on customary
terms entered into in the ordinary course of business;
(vii) Indebtedness arising from agreements providing for
indemnification, adjustment of purchase price or similar obligations, or
from Guarantees or letters of credits, surety bonds or performance bonds
securing any obligations of the Company or any of its Restricted
Subsidiaries pursuant to such agreements, in each case Incurred in
connection with the disposition of any business assets or Restricted
Subsidiary of the Company (other than Guarantees of Indebtedness or other
obligations Incurred by any Person acquiring all or any portion of such
business assets or Restricted Subsidiary of the Company for the purpose of
financing such acquisition) in a principal amount not to exceed the gross
proceeds actually received by the Company or any of its Restricted
Subsidiaries in connection with such disposition; provided, however, that
the principal amount of any Indebtedness Incurred pursuant to this clause
(vii) when taken together with all Indebtedness Incurred pursuant to this
clause (vii) and then outstanding, shall not exceed $1 million;
(viii) Indebtedness consisting of (A) Guarantees by the Company or a
Subsidiary Guarantor of Indebtedness Incurred by a Wholly-Owned Subsidiary
without violation of the Certificate of Designation (so long as the Company
or such Subsidiary Guarantor, as the case may be, could have Incurred such
Indebtedness directly without violation of the Certificate of Designation)
and (B) Guarantees by a Restricted Subsidiary of Senior Indebtedness
Incurred by the Company without violation of the
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Certificate of Designation (so long as such Restricted Subsidiary could
have Incurred such Indebtedness directly without violation of the
Certificate of Designation);
(ix) Indebtedness arising from the honoring by a bank or other
financial institution of a check, draft or similar instrument issued by the
Company or its Restricted Subsidiaries drawn against insufficient funds in
the ordinary course of business in an amount not to exceed $250,000 at any
time, provided that such Indebtedness is extinguished within two business
days of its incurrence; and
(x) Indebtedness (other than Indebtedness described in clauses (i) -
(ix)) in a principal amount which, when taken together with the principal
amount of all other Indebtedness Incurred pursuant to this clause (x) and
then outstanding, will not exceed $4 million (it being understood that any
Indebtedness Incurred under this clause (x) shall cease to be deemed
Incurred or outstanding for purposes of this clause (x) (but shall be
deemed to be Incurred for purposes of paragraph (a)) from and after the
first date on which the Company or its Restricted Subsidiaries could have
Incurred such Indebtedness under the foregoing paragraph (a) without
reliance upon this clause (x)).
(c) The Company will not permit any Unrestricted Subsidiary to Incur any
Indebtedness other than Non-Recourse Debt.
Limitation on Restricted Payments
(a) The Company shall not, and shall not permit any of its Restricted
Subsidiaries, directly or indirectly, to (i) declare or pay any dividend or make
any distribution on or in respect of its Capital Stock (including any payment in
connection with any merger or consolidation involving the Company or any of its
Restricted Subsidiaries) except (A) dividends or distributions payable in its
Capital Stock (other than Disqualified Stock) or in options, warrants or other
rights to purchase such Capital Stock, and (B) dividends or distributions
payable to the Company or any of its Restricted Subsidiaries by any of its
Subsidiaries (and if the Subsidiary paying the dividend or making the
distribution is not a Wholly-Owned Subsidiary, to its other holders of Capital
Stock on a pro rata basis), (ii) purchase, redeem, retire or otherwise acquire
for value any Capital Stock of the Company held by Persons other than a
Wholly-Owned Subsidiary of the Company or any Capital Stock of a Restricted
Subsidiary of the Company held by any Affiliate of the Company, other than a
Wholly-Owned Subsidiary (in either case, other than in exchange for its Capital
Stock (other than Disqualified Stock)), (iii) purchase, repurchase, redeem,
defease or otherwise acquire or retire for value, prior to scheduled maturity,
scheduled repayment or scheduled sinking fund payment, any Subordinated
Obligations purchased in anticipation of satisfying a sinking fund obligation,
principal installment or final maturity, in each case due within one year of the
date of purchase, repurchase or acquisition) or (iv) make any Investment (other
than a Permitted Investment) in any Person (any such dividend, distribution,
purchase, redemption, repurchase, defeasance, other acquisition, retirement or
Investment as described in preceding clauses (i) through (iv) being referred to
as a "Restricted Payment"), if at the time the Company or such Restricted
Subsidiary makes such Restricted Payment:
(1) the Company shall have paid a dividend, on the most recent
Dividend Payment Date, by the issuance of additional Preferred Stock; or
(2) a Voting Triggering Event shall have occurred and be continuing
(or would result therefrom); or
(3) the Company is not able to Incur an additional $1.00 of
Indebtedness pursuant to paragraph (a) under "-- Limitation on
Indebtedness"; or
(4) the aggregate amount of such Restricted Payment and all other
Restricted Payments declared or made subsequent to the Preferred Stock
Issue Date would exceed the sum of (A) 50% of the Consolidated Net Income
accrued during the period (treated as one accounting period) from the first
day of the fiscal quarter beginning on or after the Preferred Stock Issue
Date to the end of the most recent fiscal quarter ending prior to the date
of such Restricted Payment as to which financial results are available (but
in no event ending more than 135 days prior to the date of such Restricted
Payment) (or, in case such Consolidated Net Income shall be a deficit,
minus 100% of such deficit); (B) the aggregate
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net proceeds received by the Company from the issue or sale of its Capital
Stock (other than Disqualified Stock) or other capital contributions
subsequent to the Preferred Stock Issue Date (other than net proceeds
received from an issuance or sale of such Capital Stock to (x) a Subsidiary
of the Company, (y) an employee stock ownership plan or similar trust or
(z) management employees of the Company or any Subsidiary of the Company);
provided, however, that the value of any non-cash net proceeds, shall be as
determined by the Board of Directors in good faith, except that in the
event the value of any non-cash net proceeds shall be $1 million or more,
the value shall be as determined in writing by an independent investment
banking firm of nationally recognized standing; (C) the amount by which
Indebtedness of the Company is reduced on the Company's balance sheet upon
the conversion or exchange (other than by a Restricted Subsidiary of the
Company) subsequent to the Preferred Stock Issue Date of any Indebtedness
of the Company convertible or exchangeable for Capital Stock of the Company
(less the amount of any cash, or other property, distributed by the Company
upon such conversion or exchange); and (D) the amount equal to the net
reduction in Investments (other than Permitted Investments) made after the
Preferred Stock Issue Date by the Company or any of its Restricted
Subsidiaries in any Person resulting from (i) repurchases or redemptions of
such Investments by such Person, proceeds realized upon the sale of such
Investment to an unaffiliated purchaser, repayments of loans or advances or
other transfers of assets by such Person to the Company or any Restricted
Subsidiary of the Company or (ii) the redesignation of Unrestricted
Subsidiaries as Restricted Subsidiaries (valued in each case as provided in
the definition of "Investment") not to exceed, in the case of any
Unrestricted Subsidiary, the amount of Investments previously included in
the calculation of the amounts of Restricted Payments; provided, however,
that no amount shall be included under this clause (D) to the extent it is
already included in Consolidated Net Income.
(b) Notwithstanding the foregoing, the Company shall not, and shall not
permit any of its Restricted Subsidiaries, to make Investments in Interactive
Channel, Inc. or Interactive Channel Technologies, Inc., if at the time of such
Investment:
(1) a Voting Triggering Event shall have occurred and be continuing
(or would result therefrom); or
(2) the aggregate amount of such Investment and all other Investments
in Interactive Channel, Inc. made subsequent to the Preferred Stock Issue
Date would exceed the sum of (A) $34.0 million; (B) 50% of the Adjusted
Consolidated Net Income accrued during the period (treated as one
accounting period) from the first day of the fiscal quarter beginning on or
after the Preferred Stock Issue Date to the end of the most recent fiscal
quarter ending prior to the date of such Investment as to which financial
results are available (but in no event ending more than 135 days prior to
the date such Restricted Payment) (or, in the such Adjusted Consolidated
Net Income shall be a deficit, minus 100% of such deficit); and (C) the
aggregate net proceeds received by the Company from the issue or sale of
its Capital Stock (other than Disqualified Stock) or other capital
contributions subsequent to the Preferred Stock Issue Date as calculated in
accordance with paragraph (a)(3)(B) above.
(c) The provisions of paragraph (a) shall not prohibit: (i) any purchase or
redemption of Capital Stock or Subordinated Obligations of the Company made by
exchange for, or out of the proceeds of the substantially concurrent sale of,
Capital Stock of the Company (other than Disqualified Stock and other than
Capital Stock issued or sold to a Subsidiary, an employee stock ownership plan
or similar trust or management employees of the Company or any Subsidiary of the
Company); provided, however, that (A) such purchase or redemption shall be
excluded in the calculation of the amount of Restricted Payments and (B) the Net
Cash Proceeds from such sale shall be excluded from clause (3)(B) of paragraph
(a); (ii) any purchase or redemption of Subordinated Obligations of the Company
made by exchange for, or out of the proceeds of the substantially concurrent
sale of, Subordinated Obligations of the Company in compliance with the
"Limitations on Indebtedness" covenant; provided, however, that such purchase or
redemption shall be excluded in the calculation of the amount of Restricted
Payments; and (iii) dividends paid within 60 days after the date of declaration
if at such date of declaration such dividend would have complied with this
provision; provided, however, that such dividend shall be included in the
calculation of the amount of Restricted Payments;
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provided, however, that in each case, no Voting Triggering Event shall have
occurred or be continuing at the time of such payment or as a result thereof.
(d) For purposes of determining compliance with the foregoing covenant,
Restricted Payments may be made with cash or non-cash assets, provided that any
Restricted Payment made other than in cash shall be valued at the fair market
value (determined, subject to the additional requirements of the immediately
succeeding proviso, in good faith by the Board of Directors) of the assets so
utilized in making such Restricted Payment, provided, further that (i) in the
case of any Restricted Payment made with capital stock or indebtedness, such
Restricted Payment shall be deemed to be made in an amount equal to the greater
of the fair market value thereof and the liquidation preference (if any) or
principal amount of the capital stock or indebtedness, as the case may be, so
utilized, and (ii) in the case of any Restricted Payment in an aggregate amount
in excess of $1 million, a written opinion as to the fairness of the valuation
thereof (as determined by the Company) for purposes of determining compliance
with the "Limitation on Restricted Payments" covenant in the Certificate of
Designation shall be issued by an independent investment banking firm of
national standing.
Limitation on Affiliate Transactions
(a) The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, enter into or conduct any transaction
or series of related transactions (including the purchase, sale, lease or
exchange of any property or the rendering of any service) with or for the
benefit of any Affiliate of the Company, other than a Wholly-Owned Subsidiary
(an "Affiliate Transaction") unless: (i) the terms of such Affiliate Transaction
are no less favorable to the Company or such Restricted Subsidiary, as the case
may be, than those that could be obtained at the time of such transaction in
arm's length dealings with a Person who is not such an Affiliate; (ii) in the
event such Affiliate Transaction involves an aggregate amount in excess of $1
million, the terms of such transaction have been approved by a majority of the
members of the Board of Directors of the Company and by a majority of the
disinterested members of such Board, if any (and such majority or majorities, as
the case may be, determines that such Affiliate Transaction satisfies the
criteria in (i) above); and (iii) in the event such Affiliate Transaction
involves an aggregate amount in excess of $2 million, the Company has received a
written opinion from an independent investment banking firm of nationally
recognized standing that such Affiliate Transaction is fair to the Company or
such Restricted Subsidiary, as the case may be, from a financial point of view.
(b) The foregoing paragraph (a) shall not apply to (i) any Restricted
Payment permitted to be made pursuant to the covenant described under
"-- Limitation on Restricted Payments," (ii) any issuance of securities, or
other payments, awards or grants in cash, securities or otherwise pursuant to,
or the funding of, employment arrangements, or any stock options and stock
ownership plans for the benefit of employees, officers and directors,
consultants and advisors approved by the Board of Directors of the Company,
(iii) loans or advances to employees in the ordinary course of business of the
Company or any of its Restricted Subsidiaries in aggregate amount outstanding
not to exceed $250,000 at any time, (iv) loans or advances to senior management
of the Company which loans and advances are secured by shares of Common Stock of
the Company owned by such senior management, in an aggregate amount outstanding
not to exceed $750,000, (v) any transaction between Wholly-Owned Subsidiaries,
(vi) indemnification agreements with, and the payment of fees and indemnities
to, directors, officers and employees of the Company and its Restricted
Subsidiaries, in each case in the ordinary course of business, (vii)
transactions pursuant to agreements in existence on the Preferred Stock Issue
Date which are (x) described in the Offering Memorandum related to the Offering
(which are also described in this Prospectus) or (y) otherwise, in the
aggregate, immaterial to the Company and its Restricted Subsidiaries taken as a
whole, (viii) any employment, non-competition or confidentiality agreements
entered into by the Company or any of its Restricted Subsidiaries with its
employees in the ordinary course of business, and (ix) the issuance of Capital
Stock of the Company (other than Disqualified Stock).
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Limitation on Issuances of Capital Stock of Restricted Subsidiaries
The Company will not permit any of its Restricted Subsidiaries to issue any
Capital Stock to any Person (other than to the Company or a Wholly-Owned
Subsidiary of the Company) or permit any Person (other than the Company or a
Wholly-Owned Subsidiary of the Company) to own any Capital Stock of a Restricted
Subsidiary of the Company, if in either case as a result thereof such restricted
Subsidiary would no longer be a Restricted Subsidiary of the Company; provided,
however, that this provision shall not prohibit (x) the Company or any of its
Restricted Subsidiaries from selling or otherwise disposing of all of the
Capital Stock of any Restricted Subsidiary or (y) the designation of a
Restricted Subsidiary as an Unrestricted Subsidiary in compliance with the
Certificate of Designation.
Limitation on Sale/Leaseback Transactions
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, enter into, Guarantee or otherwise become liable with
respect to any Sale/Leaseback Transaction with respect to any property or assets
unless (i) the Company or such Restricted Subsidiary, as the case may be, would
be entitled to pursuant to the Certificate of Designation Incur Indebtedness
secured by a Permitted Lien on such property or assets in an amount equal to the
Attributable Indebtedness with respect to such Sale/Leaseback Transaction, (ii)
the Net Cash Proceeds from such Sale/Leaseback Transaction are at least equal to
the fair market value of the property or assets subject to such Sale/Leaseback
Transaction (such fair market value determined, in the event such property or
assets have a fair market value in excess of $500,000, no more than 30 days
prior to the effective date of such Sale/Leaseback Transaction, by the Board of
Directors of the Company as evidenced by a resolution of such Board of
Directors), and (iii) the Indebtedness Incurred in connection with such
Sale/Leaseback Transaction, together with Indebtedness Incurred in accordance
with (ii) of paragraph (b) of the "Limitation on Indebtedness" covenant, does
not exceed $5 million at any time outstanding.
SEC Reports
The Company will file with the Trustee and provide to the holders of the
Preferred Stock within 15 days, after it files them with the Commission, copies
of the annual reports and of the information, documents and other reports (or
copies of such portions of any of the foregoing as the Commission may by rules
and regulations prescribe) which the Company files with the Commission pursuant
to Section 13 or 15(d) of the Exchange Act. In the event that the Company is not
required to file such reports with the Commission pursuant to the Exchange Act,
the Company will nevertheless deliver such Exchange Act information to the
holders of the Preferred Stock within 15 days after it would have been required
to file it with the Commission.
Conduct of Business
The Company will not permit IT Network, Inc. to directly or indirectly
engage in any business other than the provision of voice information services,
including the services described in this Prospectus. The Company will conduct
all of its interactive television business through Interactive Channel, Inc.,
Interactive Technologies, Inc. and any of their Wholly-Owned Subsidiaries.
Merger and Consolidation
The Company shall not consolidate with or merge with or into, or convey,
transfer or lease all or substantially all of its assets to, any Person, unless:
(i) the resulting, surviving or transferee Person (the "Successor Company")
shall be a corporation, partnership, trust or limited liability company
organized and existing under the laws of the United States of America, any State
thereof or the District of Columbia and the Successor Company (if not the
Company) shall expressly assume the Company's obligations under the Preferred
Stock; (ii) immediately after giving effect to such transaction (and treating
any Indebtedness that becomes an obligation of the Successor Company or any
Subsidiary of the Successor Company as a result of such transaction as having
been incurred by the Successor Company or such Restricted Subsidiary at the time
of such transaction), no Voting Triggering Event shall have occurred and be
continuing; (iii) immediately
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after giving effect to such transaction, the Successor Company (A) would have a
Consolidated Net Worth equal or greater to the Consolidated Net Worth of the
Company immediately prior to such transaction and (B) would be able to Incur at
least an additional $1.00 of Indebtedness pursuant to paragraph (a) of
"-- Limitation on Indebtedness"; (iv) there has been delivered to the Transfer
Agent an Opinion of Counsel to the effect that holders of the Preferred Stock
will not recognize income, gain or loss for U.S. Federal income tax purposes as
a result of such consolidation, merger, conveyance, transfer or lease and will
be subject to U.S. Federal income tax on the same amount and in the same manner
and at the same times as would have been the case if such consolidation, merger,
conveyance, transfer or lease had not occurred; and (v) the Company shall have
delivered to the Transfer Agent an Officers' Certificate and an Opinion of
Counsel, each stating that such consolidation, merger or transfer comply with
the Certificate of Designation.
The Successor Company will succeed to, and be substituted for, and may
exercise every right and power of, the Company under the Certificate of
Designation, but, in the case of a lease of all or substantially all its assets,
the Company will not be released from the obligation to pay the liquidation
preference or dividends on the Preferred Stock.
Notwithstanding the foregoing clauses (ii) and (iii), any Restricted
Subsidiary of the Company may consolidate with, merge into or transfer all or
part of its properties and assets to the Company.
TRANSFER AGENT AND REGISTRAR
ChaseMellon Shareholder Services, L.L.C. is the transfer agent (the
"Transfer Agent") and registrar for the Preferred Stock.
CERTAIN DEFINITIONS
"Additional Assets" means (i) any property or assets (other than
Indebtedness and Capital Stock) in a Permitted Business; (ii) the Capital Stock
of a Person that becomes a Restricted Subsidiary as a result of the acquisition
of such Capital Stock by the Company or a Restricted Subsidiary of the Company;
(iii) Capital Stock constituting a minority interest in any Person that at such
time is a Restricted Subsidiary of the Company; or (iv) Permitted Investments of
the type and in the amounts described in clause (viii) of the definition
thereof; provided, however, that, in the case of clauses (ii) and (iii), such
Restricted Subsidiary is primarily engaged in a Permitted Business.
"Adjusted Consolidated Net Income" means, for any period, Consolidated Net
Income minus (plus) the net income (loss) of Interactive Channel, Inc. for such
period, plus an amount equal to the corporate overhead allocated to Interactive
Channel, Inc., on an after-tax basis, unless otherwise included in the net
income of Interactive Channel, Inc., for such period (as determined in good
faith by senior management of the Company), plus an amount equal to the
amortization of intangible assets relating to the Acquisitions.
"Adjusted Net Assets" of a Subsidiary Guarantor at any date shall mean the
lesser of the amount by which (x) the fair value of the property of such
Subsidiary Guarantor exceeds the total amount of liabilities, including, without
limitation, the probable liability of such Subsidiary Guarantor with respect to
its contingent liabilities (after giving effect to all other fixed and
contingent liabilities incurred or assumed on such date), but excluding
liabilities under the Subsidiary Guarantee, of such Subsidiary Guarantor at such
date and (y) the present fair salable value of the assets of such Subsidiary
Guarantor at such date exceeds the amount that will be required to pay the
probable liability of such Subsidiary Guarantor on its debts (after giving
effect to all other fixed and contingent liabilities Incurred or assumed on such
date and after giving effect to any collection from any Subsidiary by such
Subsidiary Guarantor in respect of the obligations of such Subsidiary under the
Subsidiary Guarantee), excluding debt in respect of the Subsidiary Guarantee, as
they become absolute and matured.
"Affiliate" of any specified person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of
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such Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"Asset Disposition" means any sale, lease, transfer, issuance or other
disposition (or series of related sales, leases, transfers, issuances or
dispositions that are part of a common plan) of shares of Capital Stock of (or
any other equity interests in) a Restricted Subsidiary (other than directors'
qualifying shares) or of any other property or other assets (each referred to
for the purposes of this definition as a "disposition") by the Company or any of
its Restricted Subsidiaries (including any disposition by means of a merger,
consolidation or similar transaction) other than (i) a disposition by a
Restricted Subsidiary to the Company or by the Company or a Restricted
Subsidiary to a Wholly-Owned Subsidiary, (ii) a disposition of inventory in the
ordinary course of business and for which adequate reserves have been
established in accordance with GAAP, (iii) a disposition of obsolete or worn out
equipment or equipment that is no longer useful in the conduct of the business
of the Company and its Restricted Subsidiaries and that is disposed of in each
case in the ordinary course of business, (iv) dispositions of property for net
proceeds which, when taken collectively with the net proceeds of any other such
dispositions under this clause (iv) that were consummated since the beginning of
the calendar year in which such disposition is consummated, do not exceed $1
million, and (v) transactions permitted under "Certain Covenants -- Merger and
Consolidation" above. Notwithstanding anything to the contrary contained above,
a Restricted Payment made in compliance with the "Limitation on Restricted
Payments" covenant shall not constitute an Asset Disposition except for purposes
of determinations of the Consolidated Coverage Ratio.
"Attributable Indebtedness" in respect of a Sale/Leaseback Transaction
means, as at the time of determination, the present value (discounted at the
interest rate borne by the Notes, compounded annually) of the total obligations
of the lessee for rental payments during the remaining term of the lease
included in such Sale/Leaseback Transaction (including any period for which such
lease has been extended).
"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum
of the product of the numbers of years (rounded upwards to the nearest month)
from the date of determination to the dates of each successive scheduled
principal payment of such Indebtedness or redemption or similar payment with
respect to Preferred Stock multiplied by the amount of such payment by (ii) the
sum of all such payments.
"Bank Indebtedness" means loans made by banks, trust companies and other
institutions principally engaged in the business of lending money to businesses
to the Company or a Restricted Subsidiary under a credit facility, loan
agreement or similar agreement.
"Capitalized Lease Obligations" means an obligation that is required to be
classified and accounted for as a capitalized lease for financial reporting
purposes in accordance with GAAP, and the amount of Indebtedness represented by
such obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP, and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date such lease may be terminated without penalty.
"Capital Stock" of any Person means any and all shares, interests, rights
to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) equity of such Person, including any Preferred
Stock, but excluding any debt securities convertible into such equity.
"Cash Equivalents" means (i) United States dollars, (ii) securities issued
or directly and fully Guaranteed or insured by the United States government or
any agency or instrumentality thereof, (iii) certificates of deposit, time
deposits and eurodollar time deposits with maturities of one year or less from
the date of acquisition, bankers' acceptances with maturities not exceeding one
year and overnight bank deposits, in each case with any commercial bank having
capital and surplus in excess of $500 million, (iv) repurchase obligations for
underlying securities of the types described in clauses (ii) and (iii) entered
into with any financial institution meeting the qualifications specified in
clause (iii) above, (v) commercial paper rated A-1 or the equivalent thereof by
Moody's or S&P and in each case maturing within one year after the date of
acquisition, (vi) investment funds investing 95% of their assets in securities
of the types described in clauses (i)-(v) above, (vii) readily marketable direct
obligations issued by any state of the United States of
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America or any political subdivision thereof having one of the two highest
rating categories obtainable form either Moody's or S&P and (viii) Indebtedness
or Preferred Stock issued by Persons with a rating of "A" or higher from S&P or
"A2" or higher from Moody's.
"Change of Control" means (i) any sale, lease, exchange or other transfer
(in one transaction or a series of related transactions) of all or substantially
all of the assets of the Company and its Subsidiaries; or (ii) a majority of the
Board of Directors of the Company or of any direct or indirect holding company
thereof shall consist of Persons who are not Continuing Directors of the
Company; or (iii) the acquisition by any Person or group of related Persons for
purposes of Section 13(d) of the Exchange Act, of the power, directly or
indirectly, to vote or direct the voting of securities having more than 50% of
the ordinary voting power for the election of directors of the Company or of any
direct or indirect holding company thereof.
"Common Stock" of any Person means Capital Stock of such Person that does
not rank prior, as to the payment of dividends or as to the distribution of
assets upon any voluntary or involuntary liquidation, dissolution or winding up
of such Person, to shares of Capital Stock of any other class of such Person.
"Consolidated Cash Flow" for any period means the Consolidated Net Income
for such period, plus the following to the extent deducted in calculating such
Consolidated Net Income: (i) income tax expense, (ii) Consolidated Interest
Expense, (iii) depreciation expense, (iv) amortization expense, (v) exchange or
translation losses on foreign currencies, and (vi) all other non-cash items
reducing Consolidated Net Income (excluding any noncash item to the extent it
represents an accrual of or reserve for cash disbursements for any subsequent
period prior to the Stated Maturity of the Notes) and less, to the extent added
in calculating Consolidated Net Income, (x) exchange or translation gains on
foreign currencies and (y) non-cash items (excluding such non-cash items to the
extent they represent an accrual for cash receipts reasonably expected to be
received prior to the Stated Maturity of the Notes), in each case for such
period. Notwithstanding the foregoing, the income tax expense, depreciation
expense and amortization expense of a Subsidiary of the Company shall be
included in Consolidated Cash Flow only to the extent (and in the same
proportion) that the net income of such Subsidiary was included in calculating
Consolidated Net Income.
"Consolidated Coverage Ratio" as of any date of determination means the
ratio of (i) the aggregate amount of Consolidated Cash Flow for the period of
the most recent four consecutive fiscal quarters ending prior to the date of
such determination and as to which financial statements are available to (ii)
Consolidated Interest Expense for such four fiscal quarters; provided, however,
that (1) if the Company or any of its Restricted Subsidiaries has Incurred any
Indebtedness since the beginning of such period and through the date of
determination of the Consolidated Coverage Ratio that remains outstanding or if
the transaction giving rise to the need to calculate Consolidated Coverage Ratio
is an Incurrence of Indebtedness, or both, Consolidated Cash Flow and
Consolidated Interest Expense for such period shall be calculated after giving
effect on a pro forma basis to (A) such Indebtedness as if such Indebtedness had
been Incurred on the first day of such period (provided that if such
Indebtedness is Incurred under a revolving credit facility (or similar
arrangement or under any predecessor revolving credit or similar arrangement)
only that portion of such Indebtedness that constitutes the one year projected
average balance of such Indebtedness (as determined in good faith by the Board
of Directors of the Company) shall be deemed outstanding for purposes of this
calculation), and (B) the discharge of any other Indebtedness repaid,
repurchased, defeased or otherwise discharged with the proceeds of such new
Indebtedness as if such discharge had occurred on the first day of such period,
(2) if since the beginning of such period any Indebtedness of the Company or any
of its Restricted Subsidiaries has been repaid, repurchased, defeased or
otherwise discharged (other than Indebtedness under a revolving credit or
similar arrangement unless such revolving credit Indebtedness has been
permanently repaid and the underlying commitment terminated and has not been
replaced), Consolidated Interest Expense for such period shall be calculated
after giving pro forma effect thereto as if such Indebtedness had been repaid,
repurchased, defeased or otherwise discharged on the first day of such period,
(3) if since the beginning of such period the Company or any of its Restricted
Subsidiaries shall have made any Asset Disposition or if the transaction giving
rise to the need to calculate the Consolidated Coverage Ratio is an Asset
Disposition, Consolidated Cash Flow for such period shall be reduced by an
amount equal to the Consolidated Cash Flow (if positive) attributable to the
assets which are the subject of such Asset Disposition for such period or
increased by an amount equal to the Consolidated Cash Flow (if negative)
attributable thereto for such
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period, and Consolidated Interest Expense for such period shall be (i) reduced
by an amount equal to the Consolidated Interest Expense attributable to any
Indebtedness of the Company or any of its Restricted Subsidiaries repaid,
repurchased, defeased or otherwise discharged with respect to the Company and
its continuing Restricted Subsidiaries in connection with such Asset Disposition
for such period (or, if the Capital Stock of any Restricted Subsidiary of the
Company is sold, the Consolidated Interest Expense for such period directly
attributable to the Indebtedness of such Restricted Subsidiary to the extent the
Company and its continuing Restricted Subsidiaries are no longer liable for such
Indebtedness after such sale) and (ii) increased by interest income attributable
to the assets which are the subject of such Asset Disposition for such period,
(4) if since the beginning of such period the Company or any of its Restricted
Subsidiaries (by merger or otherwise) shall have made an Investment in any
Restricted Subsidiary of the Company (or any Person which becomes a Restricted
Subsidiary of the Company as a result thereof) or an acquisition of assets
occurring in connection with a transaction causing a calculation to be made
hereunder which constitutes all or substantially all of an operating unit of a
business, Consolidated Cash Flow and Consolidated Interest Expense for such
period shall be calculated after giving pro forma effect thereto (including the
incurrence of any Indebtedness) as if such Investment or acquisition occurred on
the first day of such period and (5) if since the beginning of such period any
Person (that subsequently became a Restricted Subsidiary of the Company or was
merged with or into the Company or any Restricted Subsidiary of the Company
since the beginning of such period) shall have made any Asset Disposition,
Investment or acquisition of assets that would have required an adjustment
pursuant to clause (3) or (4) above if made by the Company or a Restricted
Subsidiary of the Company during such period, Consolidated Cash Flow and
Consolidated Interest Expense for such period shall be calculated after giving
pro forma effect thereto as if such Asset Disposition, Investment or acquisition
occurred on the first day of such period. For purposes of this definition,
whenever pro forma effect is to be given to an acquisition of assets, the amount
of income or earnings relating thereto and the amount of Consolidated Interest
Expense associated with any Indebtedness Incurred in connection therewith, the
pro forma calculations shall be determined in good faith by a responsible
financial or accounting officer of the Company. If any Indebtedness bears a
floating rate of interest and is being given pro forma effect, the interest
expense on such Indebtedness shall be calculated as if the rate in effect on the
date of determination had been the applicable rate for the entire period (taking
into account any Interest Rate Agreement applicable to such Indebtedness if such
Interest Rate Agreement has a remaining term in excess of 12 months).
"Consolidated Interest Expense" means, for any period, the total interest
expense of the Company and its Restricted Subsidiaries determined in accordance
with GAAP, plus, to the extent not included in such interest expense (i)
interest expense attributable to Capitalized Lease Obligations, (ii)
amortization of debt discount, (iii) capitalized interest, (iv) non-cash
interest expense, (v) commissions, discounts and other fees and charges owed
with respect to letters of credit and bankers' acceptance financing, (vi)
interest actually paid by the Company or any such Restricted Subsidiary under
any Guarantee of Indebtedness or other obligation of any other Person, (vii) net
payments (whether positive or negative) pursuant to Interest Rate Agreements,
(viii) the cash contributions to any employee stock ownership plan or similar
trust to the extent such contributions are used by such plan or trust to pay
interest or fees to any Person (other than the Company) in connection with
Indebtedness Incurred by such plan or trust and (ix) cash and Disqualified Stock
dividends in respect of all Preferred Stock of Subsidiaries and Disqualified
Stock of the Company held by Persons other than the Company or a Wholly-Owned
Subsidiary and less (a) to the extent included in such interest expense, the
amortization of capitalized debt issuance costs and (b) interest income.
Notwithstanding the foregoing, the Consolidated Interest Expense with respect to
any Restricted Subsidiary of the Company, that was not a Wholly-Owned
Subsidiary, shall be included only to the extent (and in the same proportion)
that the net income of such Restricted Subsidiary was included in calculating
Consolidated Net Income.
"Consolidated Net Income" means, for any period, the consolidated net
income (loss) of the Company and its consolidated Subsidiaries determined in
accordance with GAAP; provided, however, that there shall not be included in
such Consolidated Net Income: (i) any net income (loss) of any Person acquired
by the Company or any of its Restricted Subsidiaries in a pooling of interests
transaction for any period prior to the date of such acquisition, (ii) any net
income of any Restricted Subsidiary of the Company if such Restricted Subsidiary
is subject to restrictions, directly or indirectly, on the payment of dividends
or the making of
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distributions by such Restricted Subsidiary, directly or indirectly, to the
Company (other than restrictions in effect on the Issue Date with respect to a
Restricted Subsidiary of the Company and other than restrictions that are
created or exist in compliance with the "Limitation on Restrictions on
Distributions from Restricted Subsidiaries" covenant), (iii) any gain or loss
realized upon the sale or other disposition of any assets of the Company or its
consolidated Restricted Subsidiaries (including pursuant to any Sale/Leaseback
Transaction) which are not sold or otherwise disposed of in the ordinary course
of business and any gain or loss realized upon the sale or other disposition of
any Capital Stock of any Person, (iv) any extraordinary gain or loss, (v) the
cumulative effect of a change in accounting principles, (vi) the net income of
any Person, other than a Restricted Subsidiary, except to the extent of the
lesser of (A) cash dividends or distributions actually paid to the Company or
any of its Restricted Subsidiaries by such Person and (B) the net income of such
Person (but in no event less than zero), and the net loss of such Person (other
than an Unrestricted Subsidiary) shall be included only to the extent of the
aggregate Investment of the Company or any of its Restricted Subsidiaries in
such Person and (vii) any non-cash expenses attributable to grants or exercises
of employee stock options. Notwithstanding the foregoing, for the purpose of the
covenant described under "Certain Covenants--Limitation on Restricted Payments"
only, there shall be excluded from Consolidated Net Income any dividends,
repayments of loans or advances or other transfers of assets from Unrestricted
Subsidiaries to the Company or a Restricted Subsidiary to the extent such
dividends, repayments or transfers increase the amount of Restricted Payments
permitted under such covenant pursuant to clause (a) (3) (D) thereof.
"Consolidated Net Worth" means the total of the amounts shown on the
balance sheet of the Company and its consolidated Restricted Subsidiaries,
determined on a consolidated basis in accordance with GAAP, as of the end of the
most recent fiscal quarter of the Company ending prior to the taking of any
action for the purpose of which the determination is being made and for which
financial statements are available (but in no event ending more than 135 days
prior to the taking of such action), as (i) the par or stated value of all
outstanding Capital Stock of the Company plus (ii) paid in capital or capital
surplus relating to such Capital Stock plus (iii) any retained earnings or
earned surplus less (A) any accumulated deficit and (B) any amounts attributable
to Disqualified Stock.
"Continuing Director" of any Person means, as of the date of determination,
any Person who (i) was a member of the Board of Directors of such Person on the
date of the Indenture or (ii) was nominated for election or elected to the Board
of Directors of such Person with the affirmative vote of a majority of the
Continuing Directors of such Person who were members of such Board of Directors
at the time of such nomination or election.
"Currency Agreement" means in respect of a Person any foreign exchange
contract, currency swap agreement or other similar agreement as to which such
Person is a party or a beneficiary.
"Disqualified Stock" means any Capital Stock which, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event (other than an event which
would constitute a Change of Control), (i) matures (excluding any maturity as
the result of an optional redemption by the issuer thereof) or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable
at the option of the holder thereof, in whole or in part, on or prior to the
Stated Maturity of the Notes, or (ii) is convertible into or exchangeable
(unless at the sole option of the issuer thereof) for (a) debt securities or (b)
any Capital Stock referred to in (i) above, in each case at any time prior to
the Stated Maturity of the Notes.
"Equity Offering" means an offering for cash by the Company of its common
stock, or options, warrants or rights with respect to its common stock.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, or
any successor statute or statutes thereto.
"Existing Indebtedness" means Indebtedness of the Company or its Restricted
Subsidiaries in existence on the Issue Date, plus interest accrued thereon,
after application of the net proceeds of the sale of the Notes and Units as
described in this Prospectus.
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"fair market value" means, with respect to any asset or property, the price
which could be negotiated in an arm's-length, free market transaction, for cash,
between a willing seller and a willing and able buyer, neither of whom is under
undue pressure or compulsion to complete the transaction. Fair market value
shall be determined by the Board of Directors of the Company acting reasonably
and in good faith and shall be evidenced by a Board Resolution of the Board of
Directors of the Company delivered to the Trustee.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the date of the Indenture, including those set
forth in the opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession. All ratios and computations based on GAAP contained in
the Indenture shall be computed in conformity with GAAP.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any other Person and any
obligation, direct or indirect, contingent or otherwise, of such Person (i) to
purchase or pay (or advance or supply funds for the purchase or payment of) such
Indebtedness of such other Person (whether arising by virtue of partnership
arrangements, or by agreement to keep-well, to purchase assets, goods,
securities or services, to take-or-pay, or to maintain financial statement
conditions or otherwise) or (ii) entered into for purposes of assuring in any
other manner the obligee of such Indebtedness of the payment thereof or to
protect such obligee against loss in respect thereof (in whole or in part);
provided, however, that the term "Guarantee" shall not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning.
"Guarantor Senior Indebtedness" means, with respect to a Subsidiary
Guarantor, whether outstanding on the Issue Date or thereafter issued, all
Guarantees by such Subsidiary Guarantor of Senior Indebtedness of the Company
and all other Indebtedness of such Subsidiary Guarantor, including interest and
fees thereon, unless, in the instrument creating or evidencing the same or
pursuant to which the same is outstanding, it is provided that the obligations
of such Subsidiary Guarantor in respect of such Indebtedness are not superior in
right of payment to the obligations of such Subsidiary Guarantor under the
Subsidiary Guaranty; provided, however, that Guarantor Senior Indebtedness shall
not include (1) any obligations of such Subsidiary Guarantor to the Company or
any other Subsidiary of the Company, (2) any liability for Federal, state, local
or other taxes owed or owing by such Subsidiary Guarantor, (3) any accounts
payable or other liability to trade creditors arising in the ordinary course of
business (including Guarantees thereof or instruments evidencing such
liabilities) or (4) any Indebtedness, Guarantee or obligation of such Subsidiary
Guarantor that is expressly subordinate or junior in right of payment to any
other Indebtedness, Guarantee or obligation of such Subsidiary Guarantor,
including any Guarantor Senior Subordinated Indebtedness and Guarantor
Subordinated Obligations of such Subsidiary Guarantor.
"Guarantor Subordinated Obligation" means, with respect to a Subsidiary
Guarantor, any Indebtedness of such Subsidiary Guarantor (whether outstanding on
the Issue Date or thereafter incurred) which is subordinate or junior in right
of payment to the obligations of such Subsidiary Guarantor under the Subsidiary
Guarantee pursuant to a written agreement.
"Incur" means issue, assume, guarantee, incur or otherwise become liable
for; provided, however, that any indebtedness or Capital Stock of a Person
existing at the time such person becomes a Restricted Subsidiary (whether by
merger, consolidation, acquisition or otherwise) shall be deemed to be incurred
by such Restricted Subsidiary at the time it becomes a Restricted Subsidiary.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication), (i) the principal of and premium (if any)
in respect of indebtedness of such Person for borrowed money, (ii) the principal
of and premium (if any) in respect of obligations of such Person evidenced by
bonds, debentures, notes or other similar instruments, (iii) all obligations of
such Person in respect of letters of credit or other similar instruments
(including reimbursement obligations with respect thereto) (other than
obligations with respect to letters of credit securing obligations (other than
obligations described in clauses (i), (ii) and (v) ) entered into in the
ordinary course of business of such Person to the extent that such letters
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of credit are not drawn upon or, if and to the extent drawn upon, such drawing
is reimbursed no later than the third business day following receipt by such
Person of a demand for reimbursement following payment on the letter of credit),
(iv) all obligations of such Person to pay the deferred and unpaid purchase
price of property or services (except trade payables and accrued expenses
Incurred in the ordinary course of business), which purchase price is due more
than six months after the date of placing such property in service or taking
delivery and title thereto or the completion of such services, (v) all
Capitalized Lease Obligations and all Attributable Indebtedness of such Person,
(vi) all Indebtedness of other Persons secured by a Lien on any asset of such
Person, whether or not such Indebtedness is assumed by such Person, (vii) all
Indebtedness of other Persons to the extent Guaranteed by such Person, (viii)
the amount of all obligations of such Person with respect to the redemption,
repayment or other repurchase of any Disqualified Stock or, with respect to any
Restricted Subsidiary of the Company, any Preferred Stock of such Restricted
Subsidiary to the extent such obligation arises on or before the Stated Maturity
of the Notes (but excluding, in each case, accrued dividends) with the amount of
Indebtedness represented by such Disqualified Stock or Preferred Stock, as the
case may be, being equal to the greater of its voluntary or involuntary
liquidation preference and its maximum fixed repurchase price; provided that,
for purposes hereof the "maximum fixed repurchase price" of any Disqualified
Stock or Preferred Stock, as the case may be, which does not have a fixed
repurchase price shall be calculated in accordance with the terms of such
Disqualified Stock or Preferred Stock, as the case may be, as if such
Disqualified Stock or Preferred Stock, as the case may be, were purchased on any
date on which Indebtedness shall be required to be determined pursuant to the
Indenture, and if such price is based on the fair market value of such
Disqualified Stock or Preferred Stock, as the case may be, such fair market
value shall be determined in good faith by the Board of Directors of the Company
and (ix) to the extent not otherwise included in this definition, obligations
under Currency Agreements and Interest Rate Agreements. Unless specifically set
forth above, the amount of Indebtedness of any Person at any date shall be the
outstanding principal amount of all unconditional obligations as described
above, as such amount would be reflected on a balance sheet prepared in
accordance with GAAP, and the maximum liability of such Person, upon the
occurrence of the contingency giving rise to the obligation, of any contingent
obligations described above at such date.
"Indenture" means the Indenture dated October 30, 1997 between the Company,
the Subsidiary Guarantors and the Trustee under which the Outstanding Notes
were, and the Exchange Notes will be, issued.
"Interest Escrow Account" means the account funded with $22.6 million of
the net proceeds of the Offering, representing funds sufficient to pay the first
four interest payments on the Notes.
"Interest Rate Agreement" means with respect to any Person any interest
rate protection agreement, interest rate future agreement, interest rate option
agreement, interest rate swap agreement, interest rate cap agreement, interest
rate collar agreement, interest rate hedge agreement or other similar agreement
or arrangement as to which such Person is party or a beneficiary.
"Investment" in any Person means any direct or indirect advance, loan
(other than advances to customers in the ordinary course of business that are
recorded as accounts payable on the balance sheet of such Person) or other
extension of credit (including by way of Guarantee or similar arrangement, but
excluding any debt or extension of credit represented by a bank deposit other
than a time deposit) or capital contribution to (by means of any transfer of
cash or other property to others or any payment for property or services for the
account or use of others), or any purchase or acquisition of Capital Stock,
Indebtedness or other similar instruments issued by such Person; provided that
any Investment in the interactive television business shall be made by any
Person, directly or indirectly, through Interactive Channel, Inc., Interactive
Channel Technologies Inc. and any of their Wholly-Owned Subsidiaries. For
purposes of the "Limitation on Restricted Payments" covenant, (i) "Investment"
shall include the portion (proportionate to the Company's equity interest in a
Restricted Subsidiary to be designated as an Unrestricted Subsidiary) of the
fair market value of the net assets of such Restricted Subsidiary of the Company
at the time that such Restricted Subsidiary is designated an Unrestricted
Subsidiary; provided, however, that upon a redesignation of such Subsidiary as a
Restricted Subsidiary, the Company shall be deemed to continue to have a
permanent "Investment" in an Unrestricted Subsidiary in an amount (if positive)
equal to (x) the Company's "Investment" in such Subsidiary at the time of such
redesignation less (y) the portion (proportionate to the
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Company's equity interest in such Subsidiary) of the fair market value of the
net assets of such Subsidiary at the time that such Subsidiary is so
redesignated a Restricted Subsidiary; and (ii) any property transferred to or
from an Unrestricted Subsidiary shall be valued at its fair market value at the
time of such transfer, in each case as determined in good faith by the Board of
Directors and evidenced by a resolution of such Board of Directors certified in
an Officers' Certificate to the Trustee.
"Issue Date" means the date on which the Outstanding Preferred Stock and
Outstanding Notes were originally issued.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Moody's" means Moody's Investors Service, Inc.
"Net Available Cash" from an Asset Disposition means cash payments received
(including any cash payments received by way of deferred payment of principal
pursuant to a note or installment receivable or otherwise, but only as and when
received, but excluding any other consideration received in the form of
assumption by the acquiring Person of Indebtedness or other obligations relating
to the properties or assets subject to such Asset Disposition) therefrom in each
case net of (i) all legal, title and recording tax expenses, commissions and
other fees and expenses incurred, and all Federal, state, foreign and local
taxes required to be paid or accrued as a liability under GAAP, as a consequence
of such Asset Disposition, (ii) all payments made on any Indebtedness which is
secured by any assets subject to such Asset Disposition, in accordance with the
terms of any Lien upon such assets, or which must by its terms, or in order to
obtain a necessary consent to such Asset Disposition or by applicable law, be
repaid out of the proceeds from such Asset Disposition, (iii) all distributions
and other payments required to be made to any Person owning a beneficial
interest in assets subject to sale or minority interest holders in Subsidiaries
or joint ventures as a result of such Asset Disposition, (iv) the deduction of
appropriate amounts to be provided by the seller as a reserve, in accordance
with GAAP, against any liabilities associated with the assets disposed of in
such Asset Disposition, provided however, that upon any reduction in such
reserves (other than to the extent resulting from payments of the respective
reserved liabilities), Net Available Cash shall be increased by the amount of
such reduction to reserves, and retained by the Company or any Restricted
Subsidiary of the Company after such Asset Disposition and (v) any portion of
the purchase price from an Asset Disposition placed in escrow (whether as a
reserve for adjustment of the purchase price, for satisfaction of indemnities in
respect of such Asset Disposition or otherwise in connection with such Asset
Disposition) provided, however, that upon the termination of such escrow, Net
Available Cash shall be increased by any portion of funds therein released to
the Company or any Restricted Subsidiary.
"Net Cash Proceeds," with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually Incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result of such issuance or sale.
"Non-Recourse Debt" means Indebtedness (i) as to which neither the Company
nor any Restricted Subsidiary (a) provides any guarantee or credit support of
any kind (including any undertaking, guarantee, indemnity, agreement or
instrument that would constitute Indebtedness) or (b) is directly or indirectly
liable (as a guarantor, general partner or otherwise) and (ii) no default with
respect to which (including any rights that the holders thereof may have to take
enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any other Indebtedness of the
Company or any Restricted Subsidiary to declare a default under such other
Indebtedness or cause the payment thereof to be accelerated or payable prior to
its Stated Maturity.
"Officer" means the Chairman of the Board, the Chief Executive Officer, the
Chief Operating Officer, the President, the Chief Financial Officer, or any
Vice-President, the Treasurer or the Secretary of the Company.
"Officer's Certificate" shall mean a certificate signed by two Officers of
the Company, at least one of whom shall be the principal executive, financial or
accounting officer of the Company.
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"Permitted Business" means any business which is the same as or related,
ancillary or complementary to any of the businesses of the Company and its
Restricted Subsidiaries on the date of the Indenture, as reasonably determined
by the Company's Board of Directors; provided, that, an entity which is not an
operating entity and whose primary business is to hold or maintain intellectual
property or licenses shall not qualify as a "Permitted Business."
"Permitted Investment" means an Investment by the Company or any of its
Restricted Subsidiaries in (i) a Wholly-Owned Subsidiary of the Company (other
than Interactive Channel Technologies, Inc., 997758 Ontario, Inc., Cableshare
(U.S.) Limited, Cableshare B.V., Cable Share International Inc. and 1229501
Ontario, Inc.); provided, however, that (A) the primary business of such
Wholly-Owned Subsidiary is a Permitted Business and (B) in the case of
Investments by the Company or any of its Restricted Subsidiaries in Interactive
Channel, Inc., in an amount not to exceed the amount set forth in clause (b) of
the "Limitation on Restricted Payments" covenant; (ii) another Person if as a
result of such Investment such other Person becomes a Wholly-Owned Subsidiary of
the Company or is merged or consolidated with or into, or transfers or conveys
all or substantially all its assets to, the Company or a Wholly-Owned Subsidiary
of the Company; provided, however, that in each case such Person's primary
business is a Permitted Business; (iii) Temporary Cash Investments; (iv)
receivables owing to the Company or any of its Restricted Subsidiaries, created
or acquired in the ordinary course of business and payable or dischargeable in
accordance with customary trade terms; (v) payroll, travel and similar advances
to cover matters that are expected at the time of such advances ultimately to be
treated as expenses for accounting purposes and that are made in the ordinary
course of business; (vi) loans and advances to employees made in the ordinary
course of business consistent with past practices of the Company or such
Restricted Subsidiary in an aggregate amount outstanding at any one time not to
exceed $250,000; (vii) loans or advances to senior management of the Company
which loans or advances are fully secured on the date of such loans or advances
by shares of Common Stock of the Company owned by such senior management in an
aggregate amount outstanding not to exceed $750,000; (viii) stock, obligations
or securities received in settlement of debts created in the ordinary course of
business and owing to the Company or any of its Restricted Subsidiaries or in
satisfaction of judgments or claims; (ix) a Person engaged in a Permitted
Business or a loan or advance to the Company the proceeds of which are used
solely to make an investment in a Person engaged in a Permitted Business or a
Guarantee by the Company of Indebtedness of any Person in which such Investment
has been made provided, however, that no Permitted Investments may be made
pursuant to this clause (viii) to the extent the amount thereof would, when
taken together with all other Permitted Investments made pursuant to this clause
(ix), exceed $3 million in the aggregate (plus, to the extent not previously
reinvested, any return of capital realized on Permitted Investments made
pursuant to this clause (ix), or any release or other cancellation of any
Guarantee constituting such Permitted Investment); (x) Persons to the extent
such Investment is received by the Company or any Restricted Subsidiary as
consideration for asset dispositions effected in compliance with the covenant
described under "Limitations on Sales of Assets and Subsidiary Stock"; (xi)
prepayments and other credits to suppliers made in the ordinary course of
business consistent with the past practices of the Company and its Restricted
Subsidiaries; and (xii) Investments in connection with pledges, deposits,
payments or performance bonds made or given in the ordinary course of business
in connection with or to secure statutory, regulatory or similar obligations,
including obligations under health, safety or environmental obligations.
"Permitted Liens" means: (i) Liens imposed by law, such as carriers',
warehousemen's and mechanics' Liens, in each case for sums not yet due from the
Company or any Restricted Subsidiary or being contested in good faith by
appropriate proceedings by the Company or any Restricted Subsidiary, as the case
may be, or other Liens arising out of judgments or awards against the Company or
any Restricted Subsidiary with respect to which the Company or such Restricted
Subsidiary, as the case may be, will then be prosecuting an appeal or other
proceedings for review; (ii) Liens for property taxes or other taxes,
assessments or governmental charges of the Company or any Restricted Subsidiary
not yet due or payable or subject to penalties for nonpayment or which are being
contested by the Company or such Restricted Subsidiary, as the case may be, in
good faith by appropriate proceedings; (iii) Liens in favor of issuers of
performance bonds and surety bonds issued pursuant to clause (vii) under
"-- Certain Covenants -- Limitation on Indebtedness"; (iv) survey exceptions,
encumbrances, easements or, reservations of, or rights of others for, licenses,
rights-of-way, sewers, electric lines, telegraph and telephone lines and other
similar purposes or zoning or other restrictions as to the use of
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real property of the Company or any Restricted Subsidiary incidental to the
ordinary course of conduct of the business of the Company or such Restricted
Subsidiary or as to the ownership of properties of the Company or any Restricted
Subsidiary, which, in either case, were not incurred in connection with
Indebtedness and which do not in the aggregate materially adversely affect the
value of said properties or materially impair their use in the operation of the
business of the Company or any Restricted Subsidiary; (v) Liens outstanding
immediately after the Issue Date as set forth in a schedule to the Indenture;
(vi) Liens on property, assets or shares of stock of any Restricted Subsidiary
at the time such Restricted Subsidiary became a Subsidiary of the Company;
provided, however, that (A) if any such Lien has been Incurred in anticipation
of such transaction, such property, assets or shares of stock subject to such
Lien will have a fair market value at the date of the acquisition thereof not in
excess of the lesser of (1) the aggregate purchase price paid or owed by the
Company in connection with the acquisition of such Restricted Subsidiary and (2)
the fair market value of all property and assets of such Restricted Subsidiary
and (B) any such Lien will not extend to any other assets owned by the Company
or any Restricted Subsidiary; (vii) Liens on property or assets at the time the
Company or any Restricted Subsidiary acquired such assets, including any
acquisition by means of a merger or consolidation with or into the Company or
such Restricted Subsidiary; provided, however, that (A) if any such Lien is
Incurred in anticipation of such transaction, such property or assets subject to
such Lien will have a fair market value at the date of the acquisition thereof
not in excess of the lesser of (1) the aggregate purchase price paid or owed by
the Company or such Restricted Subsidiary in connection with the acquisition
thereof and of any other property and assets acquired simultaneously therewith
and (2) the fair market value of all such property and assets acquired by the
Company or such Restricted Subsidiary and (B) any such Lien will not extend to
any other property or assets owned by the Company or any Restricted Subsidiary;
(viii) Liens securing Indebtedness or other obligations of a Restricted
Subsidiary owing to the Company or a Wholly Owned Subsidiary; (ix) Liens to
secure any extension, renewal, refinancing, replacement or refunding (or
successive extensions, renewals, refinancings, replacements or refundings), in
whole or in part, of any Indebtedness secured by Liens referred to in any of
clauses (v), (vi) and (vii); provided, however, that any such Lien will be
limited to all or part of the same property or assets that secured the original
Lien (plus improvements on such property) and the aggregate principal amount of
Indebtedness that is secured by such Lien will not be increased to an amount
greater than the sum of (A) the outstanding principal amount, or, if greater,
the committed amount, of the Indebtedness described under clauses (v), (vi) and
(vii) at the time the original Lien became a Permitted Lien under the Indenture
and (B) an amount necessary to pay any premiums, fees and other expenses
Incurred by the Company in connection with such refinancing, refunding,
extension, renewal or replacement; (x) Liens on property or assets of the
Company securing Interest Rate Agreements and Currency Agreements so long as the
related Indebtedness is, and is permitted under "-- Certain
Covenants -- Limitation on Indebtedness", secured by a Lien on the same property
securing the relevant Interest Rate Agreement or Currency Agreement; (xi) Liens
on property or assets of the Company or any Restricted Subsidiary securing
Indebtedness (1) under purchase money obligation or Capital Lease Obligations
permitted under "-- Limitation on Indebtedness" or (2) under Sale/Leaseback
Transactions permitted under "-- Limitation on Sale/Leaseback Transactions";
provided, that (A) the amount of Indebtedness Incurred in any specific case does
not, at the time such Indebtedness is Incurred, exceed the lesser of the cost or
fair market value of the property or asset acquired or constructed in connection
with such purchase money obligation or Capital Lease Obligation or subject to
such Sale/Leaseback Transaction, as the case may be, (B) such Lien will attach
to such property or asset upon acquisition of such property or asset and or upon
commencement of such Sale/Leaseback Transaction, as the case may be, and (C) no
property or asset of the Company or any Restricted Subsidiary (other than the
property or asset acquired or contracted in connection with such purchase money
Obligation or Capital Lease obligation or subject to such Sale/Leaseback
Transaction, as the case may be) are subject to any Lien securing such
Indebtedness; (xii) Liens granted to the Trustee on the assets of the Company
securing the Company's obligations under the Indenture; (xiii) Liens granted to
the Trustee on the assets of the Subsidiary Guarantors securing the Subsidiary
Guarantors' Obligations under the Guarantees; and (xv) Liens on the Interest
Escrow Account securing the Company's obligations under the Indenture.
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"Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization, government or any agency or political subdivision hereof or any
other entity.
"Preferred Stock," as applied to the Capital Stock of any corporation,
means Capital Stock of any class or classes (however designated) which is
preferred as to the payment of dividends, or as to the distribution of assets
upon any voluntary or involuntary liquidation or dissolution of such
corporation, over shares of Capital Stock of any other class of such
corporation.
"Public Market" exists at any time with respect to the common stock of the
Company if (a) the common stock of the Company is then registered with the
Securities and Exchange Commission pursuant to Section 12(b) or 12(g) of the
Exchange Act and traded either on a national securities exchange or in the
National Association of Securities Dealers Automated Quotation System and (b) at
least 15% of the total issued and outstanding common stock of the Company, has
been distributed prior to such time by means of an effective registration
statement under the Securities Act.
"Refinancing Indebtedness" means Indebtedness that refunds, refinances,
replaces, renews, repays or extends (including pursuant to any defeasance or
discharge mechanism) (collectively, "refinances," and "refinanced" shall have a
correlative meaning) any Indebtedness existing on the date of the Indenture or
Incurred in compliance with the Indenture (including Indebtedness of the Company
that refinances Indebtedness of any Restricted Subsidiary and Indebtedness of
any Restricted Subsidiary that refinances Indebtedness of another Restricted
Subsidiary) including Indebtedness that refinances Refinancing Indebtedness;
provided, however, that (i) the Refinancing Indebtedness has a Stated Maturity
no earlier than the earlier of (A) the first anniversary of the Stated Maturity
of the Notes and (B) Stated Maturity of the Indebtedness being refinanced, (ii)
the Refinancing Indebtedness has an Average Life at the time such Refinancing
Indebtedness is Incurred that is equal to or greater than the lesser of (A) the
Average Life of the Notes and (B) the Average Life of the Indebtedness being
refinanced and (iii) the Refinancing Indebtedness is in an aggregate principal
amount (or if issued with original issue discount, an aggregate issue price)
that is equal to (or 101% of, in the case of a refinancing of the Notes in
connection with a Change of Control) or less than the sum of the aggregate
principal amount (or if issued with original issue discount, the accreted value)
then outstanding of the Indebtedness being refinanced.
"Restricted Subsidiary" means any Subsidiary of the Company other an
Unrestricted Subsidiary.
"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired whereby the Company or a Restricted Subsidiary
transfers such property to a Person and the Company or a Subsidiary leases it
from such Person.
"Secured Indebtedness" means any Indebtedness of a Subsidiary Guarantor
secured by a Lien.
"Senior Indebtedness" means, whether outstanding on the Issue Date or
thereafter issued, all Indebtedness of the Company, including interest and fees
thereon, unless, in the instrument creating or evidencing the same or pursuant
to which the same is outstanding, it is provided that the obligations in respect
of such Indebtedness are not superior in right of payment to the Notes;
provided, however, that Senior Indebtedness will not include (1) any obligation
of the Company to any Subsidiary, (2) any liability for Federal, state, foreign,
local or other taxes owed or owing by the Company, (3) any accounts payable or
other liability to trade creditors arising in the ordinary course of business
(including Guarantees thereof or instruments evidencing such liabilities), or
(4) any Indebtedness, Guarantee or obligation of the Company that is expressly
subordinate or junior in right of payment to any other Indebtedness, Guarantee
or obligation of the Company, including any Subordinated Obligations.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"Significant Subsidiary" of the Company within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
"S&P" means Standard and Poor's Ratings Group.
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"Stated Maturity" means, with respect to any security, the date specified
in such security as the fixed date on which the payment of principal of such
security is due and payable, including pursuant to any mandatory redemption
provision.
"Subordinated Obligation" means any Indebtedness of the Company (whether
outstanding on the Issue Date or thereafter Incurred) which is subordinate or
junior in right of payment to the Notes pursuant to a written agreement.
"Subsidiary" of any Person means any corporation, association, partnership
or other business entity of which more than 50% of the total voting power of
shares of Capital Stock or other interests (including partnership interests)
entitled (without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by (i) such Person, (ii) such Person and one
or more Subsidiaries of such Person or (iii) one or more Subsidiaries of such
Person. Unless otherwise specified herein, each reference to a Subsidiary shall
refer to a Subsidiary of the Company.
"Subsidiary Guarantee" means the Guarantee of the Notes by a Subsidiary
Guarantor.
"Subsidiary Guarantor" means each Subsidiary of the Company in existence on
the Issue Date and each Subsidiary (other than foreign subsidiaries and
Unrestricted Subsidiaries) created or acquired by the Company after the Issue
Date.
"Temporary Cash Investments" means any of the following: (i) any Investment
in direct obligations of the United States of America or any agency thereof or
obligations Guaranteed by the United States of America or any agency thereof,
(ii) Investments in time deposit accounts, certificates of deposit and money
market deposits maturing within 180 days of the date of acquisition thereof
issued by a bank or trust company which is organized under the laws of the
United States of America, any state thereof or any foreign country recognized by
the United States of America having capital surplus and undivided profits
aggregating in excess of $250 million (or the foreign currency equivalent
thereof) and whose long-term debt, or whose parent holding company's long-term
debt, is rated "A" (or such similar equivalent rating) or higher by at least one
nationally recognized statistical rating organization (as defined in Rule 436
under the Securities Act), (iii) repurchase obligations with a term of not more
than 30 days for underlying securities of the types described in clause (i)
above entered into with a bank meeting the qualifications described in clause
(ii) above, (iv) Investments in commercial paper, maturing not more than 180
days after the date of acquisition, issued by a corporation (other than an
Affiliate of the Company) organized and in existence under the laws of the
United States of America or any foreign country recognized by the United States
of America with a rating at the time as of which any investment therein is made
of "P-1" (or higher) according to Moody's or "A-1" (or higher) according to S&P,
(v) Investments in securities with maturities of six months or less from the
date of acquisition issued or fully guaranteed by any state, commonwealth or
territory of the United States of America, or by any political subdivision or
taxing authority thereof, and rated at least "A" by S&P or "A" by Moody's and
(vi) Investments in mutual funds whose investment guidelines restrict such
funds' investments to those satisfying the provisions of clauses (i) through (v)
above.
"Trustee" means U.S. Trust Company of Texas, N.A., as trustee under the
Indenture.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of
the Company (including any newly acquired or newly formed Subsidiary of the
Company) to be an Unrestricted Subsidiary unless such Subsidiary or any of its
Subsidiaries owns any Capital Stock or Indebtedness of, or owns or holds any
Lien on any property of, the Company or any Restricted Subsidiary of the Company
that is not a Subsidiary of the Subsidiary to be so designated provided,
however, that each Subsidiary to be so designated and each of its Subsidiaries
has not at the time of such designation, and does not thereafter create, Incur,
issue, assume, guarantee or otherwise becomes liable with respect to any
Indebtedness other than Non-Recourse Indebtedness and either (A) the Subsidiary
to be so designated has total consolidated assets of $10,000 or less or (B) if
such Subsidiary has consolidated assets greater than $10,000, then such
designation
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would be permitted under "Limitation on Restricted Payments." The Board of
Directors may designate any Unrestricted Subsidiary to be a Restricted
Subsidiary subject to the limitations contained in "Limitation on Designations
of Unrestricted Subsidiaries".
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable or redeemable at the issuer's option.
"Wholly-Owned Subsidiary" means a Restricted Subsidiary of the Company, at
least 99% of the Capital Stock of which (other than directors' qualifying
shares) is owned by the Company or another Wholly-Owned Subsidiary, and shall
include Interactive Channel Technologies Inc. notwithstanding the ownership by
Maureen E. Pocock of 1,535,821 Class Y Shares of 997758 Ontario Inc., which owns
1,623,409 Class A Shares and 843,818 Class B Shares of Interactive Channel
Technologies Inc.
DESCRIPTION OF THE OUTSTANDING PREFERRED STOCK
The terms of the Outstanding Preferred Stock are identical in all material
respects to the Exchange Preferred Stock, except that the Outstanding Preferred
Stock has not been registered under the Securities Act, is subject to certain
restrictions on transfer and is entitled to certain registration rights under
the Registration Agreement (which rights terminate upon the consummation of the
Exchange Offer, except under limited circumstances) (see "Description of the
Exchange Preferred Stock -- Registration Agreement"). In addition, the
Registration Rights Agreement provides that if (i) within 45 days of the Issue
Date (as defined herein) on a Shelf Request (as defined herein) neither an
exchange offer registration statement nor a resale shelf registration statement
has been filed, (ii) within 120 days of the Issue Date or a Shelf Request
neither an exchange offer registration statement has been declared effective nor
a resale shelf registration statement has been filed, (iii) within 180 days of
the Issue Date or a Shelf Request neither an exchange offer has been consummated
nor a resale shelf registration statement has been declared effective or (iv)
either the exchange offer registration statement or the resale shelf
registration statement has been declared effective and such registration
statement ceases to be effective or usable (subject to certain exceptions) in
connection with resales of Outstanding Preferred Stock during periods specified
in the Registration Agreement (each such event referred to in clauses (i)
through (iv), a "Registration Default"), dividends ("Additional Dividends") will
accrue on the Outstanding Preferred Stock (in addition to the stated dividends
on the Outstanding Preferred Stock) from and including the date on which any
such Registration Default shall occur to but excluding the date on which all
Registration Defaults have been cured. Additional Dividends will accrue at a
rate of 0.50% per annum during the 30-day period immediately following the
occurrence of any Registration Default and shall increase by 0.50% per annum
with respect to each subsequent 30-day period, but in no event shall such rate
exceed 2.0% per annum. The Exchange Preferred Stock is not entitled to any such
Additional Dividends (subject to certain limited exceptions). The Outstanding
Preferred Stock and the Exchange Preferred Stock will constitute a single series
of securities under the Certificate of Designation. See "Description of the
Exchange Preferred Stock."
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Outstanding Preferred Stock was originally sold by the Company on
October 30, 1997 to NatWest Capital Markets Limited ("NatWest") and Prudential
Securities Incorporated ("Prudential", and referred to with NatWest as the
"Initial Purchasers") as part of units sold pursuant to that certain Purchase
Agreement dated October 23, 1997 among the Company and the Initial Purchasers
(the "Purchase Agreement"). The Initial Purchasers subsequently resold the
Outstanding Preferred Stock to qualified institutional buyers pursuant to Rule
144A under the Securities Act, or institutional "accredited investors" (as
defined in Rule 501(a) (1), (2), (3) or (7) of Regulation D under the Securities
Act) or outside the United States in compliance with Regulation S under the
Securities Act. Pursuant to the Purchase Agreement, the Company
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entered into that certain Preferred Stock Registration Rights Agreement dated as
of October 30, 1997 (the "Registration Rights Agreement"), pursuant to which the
Company has agreed, for the benefit of the holders of the Outstanding Notes, at
the Company's cost, to use its best efforts to (i) file a registration statement
with the Commission within 45 days after the date of the original issue (the
"Issue Date") of the Outstanding Preferred Stock (such date of filing, the
"Filing Date") with respect to the Exchange Offer for the Outstanding Preferred
Stock, and (ii) cause the registration statement to be declared effective under
the Securities Act within 120 days after the Issue Date. Upon the registration
statement being declared effective, the Company will offer the Exchange
Preferred Stock in exchange for the Outstanding Preferred Stock. The Company
will keep the Exchange Offer open for no less than 30 business days (or longer
if required by applicable law) after the date on which notice of the Exchange
Offer is mailed to the holders of the Outstanding Preferred Stock.
For each share of Outstanding Preferred Stock properly tendered and
accepted pursuant to the Exchange Offer, the holder of such share of Outstanding
Preferred Stock will receive one share of Exchange Preferred Stock. Dividends on
the Exchange Preferred Stock will accrue or accumulate from the last date on
which dividends were paid on the Outstanding Preferred Stock tendered in
exchange therefor or, if no interest or dividends have been paid on the
Outstanding Preferred Stock, from the Issue Date.
Each holder of the Outstanding Preferred Stock who wishes to exchange the
Outstanding Preferred Stock for Exchange Preferred Stock in the Exchange Offer
will be required to represent in the Letter of Transmittal that (i) it is not an
affiliate of the Company, (ii) the Exchange Preferred Stock to be received by it
was acquired in the ordinary course of its business and (iii) at the time of
commencement of the Exchange Offer, it has no arrangement with any person to
participate in the distribution (within the meaning of the Securities Act) of
the Exchange Preferred Stock.
In the event that applicable interpretations of the staff of the Commission
do not permit the Company to effect the Exchange Offer, or if for any other
reason the Exchange Offer is not consummated within 180 days after the Issue
Date, or, under certain circumstances, if the Initial Purchasers or any holder
of Outstanding Preferred Stock (other than the Initial Purchasers) who is not
eligible to participate in the Exchange Offer shall so request (each a "Shelf
Request"), the Company will at its cost, (a) within 45 days of such Shelf
Request, file a shelf registration statement covering resales of the Outstanding
Preferred Stock (a "Shelf Registration Statement"), (b) use its best efforts to
cause such Shelf Registration Statement to be declared effective under the
Securities Act no later than 120 days following a Shelf Request and (c) use its
best efforts to keep effective such Shelf Registration Statement until the
earlier of two years after the Issue Date and such time as all of the applicable
Outstanding Preferred Stock have been sold thereunder. The Company will, in the
event of the filing of a Shelf Registration Statement, provide to each holder of
the Outstanding Preferred Stock copies of the prospectus which is a part of such
Shelf Registration Statement, notify each such holder when such Shelf
Registration Statement has become effective and take certain other actions as
are required to permit unrestricted resales of the Outstanding Preferred Stock.
A holder that sells its Outstanding Preferred Stock pursuant to a Shelf
Registration Statement generally will be required to be named as a selling
securityholder in the related prospectus and to deliver a prospectus to
purchasers, will be subject to certain of the civil liability provisions under
the Securities Act in connection with such sales and will be bound by the
provisions of the Registration Rights Agreement which are applicable to such
holder (including certain indemnification obligations).
If the Company fails to comply with the above provisions or if such Shelf
Registration Statement fails to become effective, then, as liquidated damages,
additional dividends (the "Additional Dividends") shall become payable with
respect to the Outstanding Preferred Stock as follows:
(i) if the registration statement for the Exchange Offer or the Shelf
Registration Statement is not filed within 45 days following the Issue
Date, the Additional Dividends shall accrue on the Outstanding Notes over
and above the stated interest percentage at a rate of 0.50% per annum for
the first 30 days commencing on the 46th day after the Issue Date, such
Additional Dividends increasing by an additional 0.50% per annum at the
beginning of each subsequent 30-day period;
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(ii) if the registration statement for the Exchange Offer or the Shelf
Registration Statement is not declared effective within 120 days following
the Filing Date, an Additional Dividends shall accrue on the Outstanding
Notes over and above the stated interest percentage at a rate of 0.50% per
annum for the first 30 days commencing on the 121st day after the Filing
Date, such Additional Dividends increasing by an additional 0.50% per annum
at the beginning of each subsequent 30-day period; or
(iii) if (A) the Company has not exchanged all Outstanding Preferred
Stock validly tendered in accordance with the terms of the Exchange Offer
on or prior to 180 days after the Filing Date or (B) the registration
statement for the Exchange Offer ceases to be effective at any time prior
to the time that the Exchange Offer is consummated or (C) if applicable,
the Shelf Registration Statement has been declared effective and such Shelf
Registration Statement ceases to be effective at any time prior to the
second anniversary of the Issue Date (unless all the Exchange Preferred
Stock have been sold thereunder or as otherwise provided herein), then the
Additional Dividends shall accrue on the Outstanding Preferred Stock over
and above the stated percentage of 0.50% per annum for the first 30 days
commencing on (x) the 181st day after the Filing Date with respect to the
Outstanding Preferred Stock validly tendered and not exchanged by the
Company, in the case of (A) above, or (y) the day of the registration
statement for the Exchange Offer ceases to be effective or usable for its
intended purpose in the case of (B) above, or (z) the day the Shelf
Registration Statement ceases to be effective in the case of (C) above, the
rate of such Additional Dividends increasing by an additional 0.50% per
annum at the beginning of each subsequent 30-day period; provided, however,
that the Additional Dividends payable on the Outstanding Preferred Stock
may not exceed in the aggregate 2.0% per annum; and provided further, that
(1) upon the filing of the registration statement for the Exchange Offer or
the Shelf Registration Statement (in the case of clause (i) above), (2)
upon the effectiveness of such registration statement for the Exchange
Offer or the Shelf Registration Statement (in the case of (ii) above), or
(3) upon the exchange of Exchange Preferred Stock for all Outstanding
Preferred Stock tendered (in the case of clause (iii) (A) above), or upon
the effectiveness of the registration statement which had ceased to remain
effective in the case of clause (iii) (B) above, or upon the effectiveness
of the Shelf Registration Statement which had ceased to remain effective
(in the case of clause (iii) (C) above), the Additional Dividends accruing
on the Outstanding Preferred Stock as a result of such clause (or the
relevant subclause thereof), as the case may be, shall cease to accrue.
Any Additional Dividends due pursuant to clauses (i), (ii) or (iii) above
will be payable and will be determined by multiplying the applicable rate of
such Additional Dividends by the liquidation preference of the Outstanding
Preferred Stock multiplied by a fraction, the numerator of which is the number
of days such Additional Dividends was applicable during such period (determined
on the basis of a 360-day year comprised of twelve 30-day months), and the
denominator of which is 360.
The summary herein of all material provisions of the Registration Rights
Agreement does not purport to be exhaustive and is subject to, and is qualified
in its entirety by, all the provisions of the Registration Rights Agreement, a
copy of which will be available upon request to the Company.
Following the consummation of the Exchange Offer, holders of the
Outstanding Preferred Stock who were eligible to participate in the Exchange
Offer but who did not tender their Outstanding Preferred Stock will not have any
further exchange or registration rights and such Unregistered Securities will
continue to be subject to certain restrictions on transfer. Accordingly, the
liquidity of the market for such Outstanding Preferred Stock could be adversely
affected.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all
Outstanding Preferred Stock validly tendered and not withdrawn prior to 5:00
p.m., New York City time, on the Expiration Date. The Company will issue one
share of Exchange Preferred Stock in exchange for each share of Outstanding
Preferred Stock accepted in the Exchange Offer. Holders may tender some or all
of their Outstanding Preferred Stock pursuant to the Exchange Offer.
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The form and terms of the Exchange Preferred Stock are the same as the form
and terms of the Outstanding Preferred Stock except that the Exchange Preferred
Stock has been registered under the Securities Act and hence will not bear
legends restricting the transfer thereof. The Exchange Preferred Stock will
evidence the same debt as the Outstanding Preferred Stock and will be governed
by the Certificate of Designation.
As of the date of this Prospectus 800,000 shares of Outstanding Preferred
Stock are outstanding. The Company has fixed the close of business ,
1998 as the record date for the Exchange Offer for purposes of determining the
person to whom this Prospectus and the Letter of Transmittal will be mailed
initially.
Holders of the Outstanding Preferred Stock do not have any appraisal or
dissenters' rights under the General Corporation Law of Delaware or the
Certificate of Designation in connection with the Exchange Offer. The Company
intends to conduct the Exchange Offer in accordance with the applicable
requirements of the Exchange Act and the rules and regulations of the Commission
thereunder.
The Company shall be deemed to have accepted validly tendered shares of
Outstanding Preferred Stock when, as and if the Company has given oral or
written notice thereof to the Exchange Agent. The Exchange Agent will act as
agent for the tendering holders for the purpose of receiving the Outstanding
Preferred Stock from the Company.
If any tendered shares of Outstanding Preferred Stock are not accepted for
exchange because of an invalid tender, the occurrence of certain other events
set forth herein or otherwise, the certificates for any such unaccepted
Outstanding Preferred Stock will be returned, without expense, to the tendering
holder thereof as promptly as practicable after the Expiration Date.
Holders who tender Outstanding Preferred Stock in the Exchange Offer will
not be required to pay brokerage commissions or fees or, subject to the
instructions of the Letter of Transmittal, transfer taxes with respect to the
exchange of Outstanding Preferred Stock pursuant to the Exchange Offer. The
Company will pay all charges and expenses, other than the transfer taxes in
certain circumstances, in connection with the Exchange Offer. See "-- Fees and
Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
, 1998, unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice and will mail to the registered
holders an announcement thereof, each prior to 9:00 a.m., New York City time, on
the next business day after the previously scheduled expiration date.
The Company reserves the right, (i) to delay accepting any Outstanding
Preferred Stock, to extend the Exchange Offer or to terminate the Exchange Offer
if any of the conditions set forth below under "-- Conditions" shall not have
been satisfied, by giving oral or written notice of such delay, extension or
termination to the Exchange Agent or (ii) to amend the terms of the Exchange
Offer in any manner. Any such delay in acceptance, extension, termination or
amendment will be followed as promptly as practicable by oral or written notice
thereof to the registered holders.
PROCEDURES FOR TENDERING
The tender of Outstanding Preferred Stock pursuant to any of the procedures
set forth in this Prospectus and in the Letter of Transmittal will constitute a
binding agreement between the Tendering Holder and the Company in accordance
with the terms and subject to the conditions set forth herein and in the Letter
of Transmittal. The tender of Outstanding Preferred Stock will constitute an
agreement to deliver good and marketable title to all tendered Outstanding
Preferred Stock prior to the Expiration Date free and clear of all liens,
charges, claims, encumbrances, interests and restrictions of any kind.
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EXCEPT AS PROVIDED IN "-- GUARANTEED DELIVERY PROCEDURES," UNLESS THE
OUTSTANDING PREFERRED STOCK BEING TENDERED IS DEPOSITED BY THE HOLDER WITH THE
EXCHANGE AGENT PRIOR TO THE EXPIRATION DATE (ACCOMPANIED BY A PROPERLY COMPLETED
AND DULY EXECUTED LETTER OF TRANSMITTAL), THE COMPANY MAY, AT ITS OPTION, REJECT
SUCH TENDER. ISSUANCE OF OUTSTANDING PREFERRED STOCK WILL BE MADE ONLY AGAINST
DEPOSIT OF TENDERED OUTSTANDING PREFERRED STOCK AND DELIVERY OF ALL OTHER
REQUIRED DOCUMENTS. NOTWITHSTANDING THE FOREGOING, DTC PARTICIPANTS TENDERING
THROUGH ATOP WILL BE DEEMED TO HAVE MADE VALID DELIVERY WHERE THE EXCHANGE AGENT
RECEIVES AN AGENT'S MESSAGE (DEFINED BELOW) PRIOR TO THE EXPIRATION DATE.
Accordingly, to properly tender Outstanding Preferred Stock, the following
procedures must be followed:
Outstanding Preferred Stock held through DTC. Each Beneficial Owner holding
Outstanding Preferred Stock through a DTC Participant must instruct such DTC
Participant to cause its Outstanding Preferred Stock to be tendered in
accordance with the procedures set forth in this Prospectus.
Pursuant to an authorization given by DTC to the DTC Participants, each DTC
Participant holding Outstanding Preferred Stock through DTC must (i)
electronically transmit its acceptance through ATOP, and DTC will then edit and
verify the acceptance, execute a book-entry delivery to the Exchange Agent's
account at DTC and send an Agent's Message to the Exchange Agent for its
acceptance, or (ii) comply with the guaranteed delivery procedures set forth
below and in the Notice of Guaranteed Delivery. See "--Guaranteed Delivery
Procedures."
The Exchange Agent will (promptly after the date of this Prospectus)
establish accounts at DTC for purposes of the Exchange Offer with respect to
Outstanding Preferred Stock held through DTC, and any financial institution that
is a DTC Participant may make book-entry delivery of interests in Outstanding
Preferred Stock into the Exchange Agent's account through ATOP. However,
although delivery of interests in the Outstanding Preferred Stock may be
effected through book-entry transfer into the Exchange Agent's account through
ATOP, an Agent's Message in connection with such book-entry transfer, and any
other required documents, must be, in any case, transmitted to and received by
the Exchange Agent at its address set forth under "-- Exchange Agent," or the
guaranteed delivery procedures set forth below must be complied with, in each
case, prior to the Expiration Date. Delivery of documents to DTC does not
constitute delivery to the Exchange Agent. The confirmation of a book-entry
transfer into the Exchange Agent's account at DTC as described above is referred
to herein as a "Book-Entry Confirmation."
The term "Agent's Message" means a message transmitted by DTC to, and
received by, the Exchange Agent and forming a part of the Book-Entry
Confirmation, which states that DTC has received an express acknowledgment from
each DTC Participant tendering through ATOP that such DTC Participants have
received a Letter of Transmittal and agree to be bound by the terms of the
Letter of Transmittal and that the Company may enforce such agreement against
such DTC Participants.
Cede & Co., as the Holder of the global certificates representing the
Outstanding Preferred Stock (a "Global Security"), will tender a portion of each
Global Security equal to the aggregate principal amount due at the stated
maturity or number of shares for which instructions to tender are given by DTC
Participants.
Outstanding Preferred Stock held by Holders. Each Holder must (i) complete
and sign and mail or deliver the accompanying Letter of Transmittal, and any
other documents required by the Letter of Transmittal, together with
certificate(s) representing all tendered Outstanding Preferred Stock, to the
Exchange Agent at its address set forth under "-- Exchange Agent," or (ii)
comply with the guaranteed delivery procedures set forth below and in the Notice
of Guaranteed Delivery. See "-- Guaranteed Delivery Procedures."
All signatures on a Letter of Transmittal must be guaranteed by any member
firm of a registered national securities exchange or of the National Association
of Securities Dealers, Inc., a commercial bank or trust company having an office
or correspondent in the United States or an "eligible guarantor" institution
within the meaning of Rule 17Ad-15 under the Exchange Act (each an "Eligible
Institution"); provided, however,
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that signatures on a Letter of Transmittal need not be guaranteed if such
Outstanding Notes are tendered for the account of an Eligible Institution
including (as such terms are defined in Rule 17Ad-15): (i) a bank; (ii) a
broker, dealer, municipal securities dealer, municipal securities broker,
government securities dealer or government securities broker; (iii) a credit
union; (iv) a national securities exchange, registered securities association or
clearing agency; or (v) a savings institution that is a participant in a
Securities Transfer Association recognized program.
If a Letter of Transmittal or any Outstanding Preferred Stock is signed by
a trustee, executor, administrator, guardian, attorney-in-fact, agent, officer
of a corporation or other person acting in a fiduciary or representative
capacity, such person must so indicate when signing, and proper evidence
satisfactory to the Company of the authority of such person so to act must be
submitted.
Holders should indicate in the applicable box in the Letter of Transmittal
the name and address to which substitute certificates evidencing Outstanding
Preferred Stock for amounts not tendered are to be issued or sent, if different
from the name and address of the person signing the Letter of Transmittal. In
the case of issuance in a different name, the employer identification or social
security number of the person named must also be indicated. If no instructions
are given, such Outstanding Preferred Stock not tendered, as the case may be,
will be returned to the person signing the Letter of Transmittal.
By tendering, each Holder and each DTC Participant will make to the Company
the representations set forth in the third paragraph under the heading
"-- Purpose and Effect of the Exchange Offer."
No alternative, conditional, irregular or contingent tenders will be
accepted (unless waived). By executing a Letter of Transmittal or transmitting
an acceptance through ATOP, as the case may be, each Tendering Holder waives any
right to receive any notice of the acceptance for purchase of its Unregistered
Securities.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of tendered Outstanding Preferred Stock will be resolved
by the Company, whose determination will be final and binding. The Company
reserves the absolute right to reject any or all tenders that are not in proper
form or the acceptance of which may, in the opinion of counsel for the Company,
be unlawful. The Company also reserves the absolute right to waive any condition
to the Exchange Offer and any irregularities or conditions of tender as to
particular Outstanding Preferred Stock. The Company's interpretation of the
terms and conditions of the Exchange Offer (including the instructions in the
Letter of Transmittal) will be final and binding. Unless waived, any
irregularities in connection with tenders must be cured within such time as the
Company shall determine. The Company and the Exchange Agent shall not be under
any duty to give notification of defects in such tenders and shall not incur
liabilities for failure to give such notification. Tenders of Outstanding
Preferred Stock will not be deemed to have been made until such irregularities
have been cured or waived. Any Outstanding Preferred Stock received by the
Exchange Agent that are not properly tendered and as to which the irregularities
have not been cured or waived will be returned by the Exchange Agent to the
tendering Holder, unless otherwise provided in the Letter of Transmittal, as
soon as practicable following the Expiration Date.
LETTERS OF TRANSMITTAL AND OUTSTANDING PREFERRED STOCK MUST BE SENT ONLY TO
THE EXCHANGE AGENT. DO NOT SEND LETTERS OF TRANSMITTAL OR OUTSTANDING PREFERRED
STOCK TO THE COMPANY OR DTC.
The method of delivery of Outstanding Preferred Stock and Letters of
Transmittal, any required signature guaranties and all other required documents,
including delivery through DTC and any acceptance through ATOP, is at the
election and risk of the persons tendering and delivering acceptances or Letters
of Transmittal and, except as otherwise provided in the applicable Letter of
Transmittal, delivery will be deemed made only when actually received by the
Exchange Agent. If delivery is by mail, it is suggested that the Holder use
properly insured, registered mail with return receipt requested, and that the
mailing be made sufficiently in advance of the Expiration Date to permit
delivery to the Exchange Agent prior to the Expiration Date.
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GUARANTEED DELIVERY PROCEDURES
Outstanding Preferred Stock held through DTC. DTC Participants holding
Outstanding Preferred Stock through DTC who wish to cause their Outstanding
Preferred Stock to be tendered, but who cannot transmit their acceptances
through ATOP prior to the Expiration Date, may cause a tender to be effected if:
(a) guaranteed delivery is made by or through an Eligible Institution;
(b) prior to 5:00 p.m., New York City time on the Expiration Date, the
Exchange Agent receives from such Eligible Institution a properly completed
and duly executed Notice of Guaranteed Delivery (by mail, hand delivery,
facsimile transmission or overnight courier) substantially in the form
provided by the Company herewith; and
(c) Book-Entry Confirmation and an Agent's Message in connection
therewith (as described above) are received by the Exchange Agent within
three NYSE trading days after the date of the execution of the Notice of
Guaranteed Delivery.
Outstanding Preferred Stock Held by Holders. Holders who wish to tender
their Outstanding Preferred Stock and (i) whose are not immediately available,
(ii) who cannot deliver their Outstanding Preferred Stock, the Letter of
Transmittal or any other required documents to the Exchange Agent or (iii) who
cannot complete the procedures for book-entry transfer, prior to the Expiration
Date, may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to 5:00 p.m., New York City time on the Expiration Date, the
Exchange Agent receives from such Eligible Institution a properly completed
and duly executed Notice of Guaranteed Delivery (by facsimile transmission,
mail or hand delivery) setting forth the name and address of the holder,
the certificate number(s) of such Outstanding Preferred Stock and the
number of shares of Outstanding Preferred Stock tendered, stating that the
tender is being made thereby and guaranteeing that, within three Nasdaq
National Market trading days after the Expiration Date, the Letter of
Transmittal (or facsimile thereof) together with the certificate(s)
representing the Outstanding Preferred Stock (or a confirmation of
book-entry transfer of such Outstanding Preferred Stock into the Exchange
Agent's account at the Book-Entry Transfer Facility), and any other
documents required by the Letter of Transmittal will be deposited by the
Eligible Institution with the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as the certificate(s) representing all tendered
Outstanding Preferred Stock in proper form for transfer (or a confirmation
or book-entry transfer of such Outstanding Preferred Stock into the
Exchange Agent's account at the Book-Entry Transfer Facility), and all
other documents required by the Letter of Transmittal are received by the
Exchange Agent upon three Nasdaq National Market trading days after the
Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Outstanding Preferred Stock according
to the guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Outstanding Preferred Stock
may be withdrawn at any time prior to 5:00 p.m., New York City time, on the
Expiration Date.
Outstanding Preferred Stock held through DTC. DTC Participants holding
Outstanding Preferred Stock who have transmitted their acceptances through ATOP
may, prior to 5:00 p.m., New York City time, on the Expiration Date, withdraw
the instruction given thereby by delivering to the Exchange Agent, at its
address set forth under "-- Exchange Agent," a written, telegraphic or facsimile
notice of withdrawal of such instruction. Such notice of withdrawal must contain
the name and number of the DTC Participant, the number of shares of the
Outstanding Preferred Stock to which such withdrawal related and the signature
of the DTC Participant. Withdrawal of such an instruction will be effective upon
receipt of such written notice of withdrawal by the Exchange Agent.
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Outstanding Preferred Stock held by Holders. Holders may withdraw a tender
of Outstanding Preferred Stock in the Exchange Offer, by a telegram, telex,
letter or facsimile transmission notice of withdrawal received by the Exchange
Agent at its address set forth herein prior to 5:00 p.m., New York City time, on
the Expiration Date. Any such notice of withdrawal must (i) specify the name of
the person having deposited the Outstanding Preferred Stock to be withdrawn (the
"Depositor"), (ii) identify the Outstanding Preferred Stock to be withdrawn
(including the certificate number(s) and number of shares of such Outstanding
Preferred Stock, or, in the case of Outstanding Preferred Stock transferred by
book-entry transfer, the name and number of the account at the Book-Entry
Transfer Facility to be credited), (iii) be signed by the holder in the same
manner as the original signature on the Letter of Transmittal by which such
Outstanding Preferred Stock was tendered (including any required signature
guarantees) or be accompanied by documents of transfer sufficient to have the
Trustee with respect to the Outstanding Preferred Stock register the transfer of
such Outstanding Preferred Stock into the name of the person withdrawing the
tender and (iv) specify the name in which any such Outstanding Preferred Stock
is to be registered, if different from that of the Depositor. All questions as
to the validity, form and eligibility (including time of receipt) of such
notices will be determined by the Company, whose determination shall be final
and binding on all parties. Any Outstanding Preferred Stock so withdrawn will be
deemed not to have been validly tendered for purposes of the Exchange Offer and
no Exchange Preferred Stock will be issued with respect thereto unless the
Outstanding Preferred Stock so withdrawn is validly retendered. Any Outstanding
Preferred Stock which has been tendered but which is not accepted for exchange
will be returned to the holder thereof without cost to such holder as soon as
practicable after withdrawal, rejection of tender or termination of the Exchange
Offer. Properly withdrawn Outstanding Preferred Stock may be retendered by
following one of the procedures described above under "-- Procedures for
Tendering" at any time prior to the Expiration Date.
All signatures on a notice of withdrawal must be guaranteed by an Eligible
Institution; provided, however, that signatures on the notice of withdrawal need
not be guaranteed if the Outstanding Preferred Stock being withdrawn are held
for the account of an Eligible Institution.
A withdrawal of an instruction or a withdrawal of a tender must be executed
by a DTC Participant or a Holder, as the case may be, in the same manner as the
person's name appears on its transmission through ATOP or Letter of Transmittal,
as the case may be, to which such withdrawal relates. If a notice of withdrawal
is signed by a trustee, partner, executor, administrator, guardian,
attorney-in-fact, agent, officer of a corporation or other person acting in a
fiduciary or representative capacity, such person must so indicate when signing
and must submit with the revocation appropriate evidence of authority to execute
the notice of withdrawal. A DTC Participant or a Holder may withdraw an
instruction or a tender, as the case may be, only if such withdrawal complies
with the provisions of this Prospectus.
A withdrawal of a tender of Outstanding Preferred Stock by a DTC
Participant or a Holder, as the case may be, may be rescinded only by a new
transmission of an acceptance through ATOP or execution and delivery of a new
Letter of Transmittal, as the case may be, in accordance with the procedures
described herein.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or exchange securities for, any Outstanding
Preferred Stock, and may terminate or amend the Exchange Offer as provided
herein before the acceptance of such Outstanding Preferred Stock, if:
(a) any action or proceeding is instituted or threatened in any court
or by or before any governmental agency with respect to the Exchange Offer
which, in the judgment of the Company upon written advice of counsel, could
reasonably be expected to materially impair the ability of the Company to
proceed with the Exchange Offer or any material adverse development has
occurred in any existing action or proceeding with respect to the Company
or any of the subsidiaries; or
(b) any law, statute, rule, regulation or interpretation by the staff
of the Commission is proposed, adopted or enacted, which, in the judgment
of the company and based on written advice of counsel, could
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reasonably be expected to materially impair the ability of the Company to
proceed with the Exchange Offer or materially impair the contemplated
benefits of the Exchange Offer to the Company; or
(c) any governmental approval has not been obtained, which approval
the Company shall, in its discretion and based on written advice of
counsel, deem necessary for the consummation of the Exchange Offer as
contemplated hereby.
If any of the conditions are not satisfied, the Company may (i) refuse to
accept any Outstanding Preferred Stock and return all tendered shares of
Outstanding Preferred Stock to the tendering holders, (ii) extend the Exchange
Offer and retain all shares of Outstanding Preferred Stock tendered prior to the
expiration of the Exchange Offer, subject, however, to the rights of holders to
withdraw such shares of Outstanding Preferred Stock (see "-- Withdrawal of
Tenders") or (iii) waive such unsatisfied conditions with respect to the
Exchange Offer and accept all properly tendered shares of Preferred Stock which
have not been withdrawn.
EXCHANGE AGENT
ChaseMellon Shareholder Services, LLC has been appointed as Exchange Agent
for the Exchange Offer. Questions and requests for assistance, requests for
additional copies of this Prospectus or of the Letter of Transmittal and
requests for Notice of Guaranteed Delivery should be directed to the Exchange
Agent addressed as follows:
2323 Bryan Street
Suite 2300
Dallas, Texas 75201-2656
Delivery to an address other than as set forth above, or transmission of
instructions via a facsimile number other than the one set forth above, will not
constitute a valid delivery.
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telecopy, telephone or in person by officers and
regular employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers, or others
soliciting acceptances of the Exchange Offer. The Company however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company. Such expenses include fees and expenses of the Exchange
Agent, accounting and legal fees and printing costs, among others.
ACCOUNTING TREATMENT
The Exchange Preferred Stock will be recorded at the same carrying value as
the Outstanding Preferred Stock, as reflected in the Company's accounting
records on the date of exchange. Accordingly, no gain or loss for accounting
purposes will be recognized by the Company. The expenses of the Exchange Offer
will be expended over the time of the Exchange Preferred Stock.
CONSEQUENCES OF FAILURE TO EXCHANGE
The Outstanding Preferred Stock that is not exchanged for Exchange
Preferred Stock pursuant to the Exchange Offer will remain a restricted
security. Accordingly, such Outstanding Preferred Stock may be resold only (i)
to the Company (upon redemption thereof or otherwise), (ii) so long as the
Outstanding Preferred Stock are eligible for resale pursuant to Rule 144A, to a
person inside the United States whom the seller reasonably believes is a
qualified institutional buyer within the meaning of Rule 144A under the
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Securities Act in a transaction meeting the requirements of Rule 144A, in
accordance with Rule 144 under the Securities Act, or pursuant to another
exemption from the registration requirements of the Securities Act (and based
upon an opinion of counsel reasonably acceptable to the Company), (iii) outside
the United States to a foreign person in a transaction meeting the requirements
of Rule 904 under the Securities Act, or (iv) pursuant to an effective
registration statement under the Securities Act, in each case in accordance with
any applicable securities laws of any state of the United States.
RESALE OF THE EXCHANGE PREFERRED STOCK
With respect to resales of Exchange Preferred Stock, based on
interpretations by the staff of the Commission set forth in no-action letters
issued to third parties, the Company believes that a holder or other person who
receives Exchange Preferred Stock in the ordinary course of business, whether or
not such person is the holder (other than (i) a broker-dealer who purchases such
Exchange Preferred Stock from the Company to resell pursuant to Rule 144A or any
other available exemption under the Securities Act or (ii) a person that is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act) who receives Exchange Preferred Stock in exchange for Outstanding Preferred
Stock, and who is not participating, does not intend to participate, and has no
arrangement or understanding with person to participate, in the distribution of
the Exchange Preferred Stock, will be allowed to resell the Exchange Preferred
Stock to the public without further registration under the Securities Act and
without delivering to the purchasers of the Exchange Preferred Stock a
prospectus that satisfies the requirements of Section 10 of the Securities Act.
However, if any holder acquires Exchange Preferred Stock in the Exchange Offer
for the purpose of distributing or participating in a distribution of the
Exchange Preferred Stock, such holder cannot rely on the position of the staff
of the Commission enunciated in such no-action letters or any similar
interpretive letters, and must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any resale
transaction, unless an exemption from registration is otherwise available.
Further, each Participating Broker-Dealer that receives Exchange Preferred Stock
for its own account in exchange for Exchange Preferred Stock, where such
Securities were acquired by such Participating Broker-Dealer as a result of
market-making activities or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of such Exchange
Preferred Stock.
As contemplated by these no-action letters and the Registration Rights
Agreement, each holder accepting the Exchange Offer is required to represent to
the Company in the Letter of Transmittal that (i) the Exchange Preferred Stock
is to be acquired by the holder or the person receiving such Exchange Preferred
Stock, whether or not such person is the holder, in the ordinary course of
business, (ii) the holder or any such other person (other than a broker-dealer
referred to in the next sentence) is not engaging and does not intend to engage,
in the distribution of the Exchange Preferred Stock, (iii) the holder or any
such other person has no arrangement or understanding with any person to
participate in the distribution of the Exchange Preferred Stock, (iv) neither
the holder nor any such other person is an "affiliate" of the Company within the
meaning of Rule 405 under the Securities Act, and (v) the holder or any such
other person acknowledges that if such holder or other person participates in
the Exchange Offer for the purpose of distributing the Exchange Preferred Stock
it must comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale of the Exchange Preferred Stock and
cannot rely on those no-action letters. As indicated above, each Participating
Broker-Dealer that receives Exchange Preferred Stock for its own account in
exchange for Outstanding Preferred Stock must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Preferred Stock. For a
description of the procedures for such resales by Participating Broker-Dealers,
see "Plan of Distribution."
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CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of the material U.S. Federal income
tax considerations applicable to a holder that exchanges Outstanding Preferred
Stock for Exchange Preferred Stock pursuant to the Exchange Offer, but does not
purport to be a complete analysis of all the potential tax considerations
relating thereto. This summary is based upon current provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), final, temporary, and proposed
regulations of the Treasury Department, administrative rulings and
pronouncements of the Internal Revenue Service (the "IRS") and judicial
decisions currently in effect, all of which are subject to different
interpretations and to change, possibly with retroactive effect. The discussion
does not deal with all aspects of U.S. Federal income taxation that may be
relevant to particular investors in light of their personal investment
circumstances (for example, to persons holding Outstanding Preferred Stock or
Exchange Preferred Stock as part of a "conversion" transaction or as a part of a
"hedge" or "hedging" transaction, "integrated" transaction, or as a position in
a "straddle" for U.S. Federal income tax purposes), nor does it discuss U.S.
Federal income tax considerations applicable to certain types of investors
subject to special treatment under the U.S. Federal income tax laws (for
example, insurance companies, tax-exempt organizations, financial institutions,
traders or dealers in securities or currencies or persons that have a
"functional currency" other than the U.S. dollar, and taxpayers subject to the
alternative minimum tax). In addition, the discussion does not consider the
effect of any foreign, state, local, gift, estate or other tax laws that may be
applicable to a particular investor. The Company has not sought any ruling from
the IRS with respect to the statements made and the conclusions reached in the
following summary, and there can be no assurance that the IRS will agree with
such statements and conclusions. The discussion assumes that investors hold
Outstanding Preferred Stock, and will hold Exchange Preferred Stock, as capital
assets within the meaning of Section 1221 of the Code.
EACH INVESTOR CONSIDERING THE EXCHANGE OF OUTSTANDING PREFERRED STOCK FOR
EXCHANGE PREFERRED STOCK PURSUANT TO THE PREFERRED STOCK EXCHANGE OFFER SHOULD
CONSULT ITS TAX ADVISOR REGARDING THE PARTICULAR TAX CONSEQUENCES OF
PARTICIPATING IN THE EXCHANGE OFFER AND OWNING AND DISPOSING OF THE EXCHANGE
PREFERRED STOCK AND THE EFFECT THAT ITS PARTICULAR CIRCUMSTANCES MAY HAVE ON
SUCH CONSEQUENCES, INCLUDING THE APPLICABILITY AND EFFECT OF STATE, LOCAL, GIFT,
ESTATE, AND FOREIGN TAX LAWS.
U.S. HOLDERS
The following discussion is limited to the U.S. Federal income tax
consequences relevant to a holder of Outstanding Preferred Stock and Exchange
Preferred Stock that is (i) a citizen or resident (as defined in Section
7701(b)(1) of the Code) of the United States or any state thereof, (ii) a
corporation or partnership created or organized under the laws of the United
States or any political subdivision thereof (including the District of Columbia)
(including any other partnership treated as a United States person under any
applicable U.S. Treasury regulations, but excluding a partnership that meets the
definition contained in this clause (ii) but is not treated as a United States
person under any such U.S. Treasury regulations), (iii) an estate or trust
described in Section 7701(a)(30) of the Code, or (iv) a person whose worldwide
income or gain is otherwise subject to U.S. Federal income taxation on a net
income basis (a "U.S. Holder").
Exchange Offer. The exchange of Outstanding Preferred Stock for Exchange
Preferred Stock should not constitute a taxable exchange. Nevertheless, if an
exchange were deemed to occur and it were determined that the value of the
Exchange Preferred Stock exceeded the value of the Outstanding Preferred Stock
at the time of the Exchange Offer, it is possible that a holder would have
income to the extent of such excess.
A holder should have the same adjusted basis and holding period in the
Exchange Preferred Stock as it had in the Outstanding Preferred Stock
immediately before the Exchange Offer.
If the Company pays additional cash distributions with respect to the
Outstanding Preferred Stock as a result of its failure to comply with certain
obligations under the Exchange and Registration Rights Agreement, such
distributions should be treated in the same manner as distributions described
below under "Distributions in General."
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The Exchange Preferred Stock received in the Exchange Offer might be
treated as Section 306 Stock if the Company were to have current or accumulated
earnings and profits in the taxable year in which the Exchange Offer occurs.
Generally, a holder of Section 306 Stock may have adverse tax consequences upon
the sale, redemption, or other taxable disposition of such stock. Such adverse
consequences include treatment of amounts received upon such disposition as
ordinary income, rather than capital gain. As stated above, the Company does not
currently have, and does not expect to have prior to late 2000, any current or
accumulated earnings and profits. Therefore, it is anticipated that the Exchange
Preferred Stock will not constitute Section 306 Stock.
Distributions in General. Distributions with respect to the Outstanding
Preferred Stock or Exchange Preferred Stock will be treated as dividends
(taxable as ordinary income) to the extent of the current and accumulated
earnings and profits of the Company. To the extent that the amount of a
distribution with respect to the Outstanding Preferred Stock or Exchange
Preferred Stock exceeds the current and accumulated earnings and profits of the
Company, it will be treated first as a tax-free return of capital to the extent
of the U.S. Holder's basis in such stock, and thereafter as capital gain from
the sale or exchange of such stock. Such gain generally will be capital gain and
will be taxed at a reduced rate for a U.S. Holder who is not a corporation and
who holds the Outstanding Preferred Stock or Exchange Preferred Stock for more
than one year and at a further reduced rate for a U.S. Holder who is not a
corporation and who holds the Outstanding Preferred Stock or Exchange Preferred
Stock for more than eighteen months. The Company does not currently have, and
does not expect to have prior to late 2000, any current or accumulated earnings
and profits.
A U.S. Holder that is a corporation otherwise entitled to the
dividends-received deduction as provided in Section 243 of the Code will be
entitled to that deduction (generally at a 70% rate) with respect to amounts
treated as dividends on the Outstanding Preferred Stock or Exchange Preferred
Stock, but will not be entitled to that deduction with respect to amounts
treated as a return of capital or capital gain. In addition, the
dividend-received deduction is subject to certain limitations and the benefit of
such deduction may be reduced by the corporate alternative minimum tax.
Corporate U.S. Holders should consult their own tax advisors regarding the
availability of, and limitations on, the dividends-received deduction.
In determining entitlement to the dividends-received deduction, corporate
U.S. Holders should also consider the provisions of Sections 246(c), 246A and
1059 of the Code and Treasury regulations promulgated under, and IRS rulings and
administrative pronouncements relating to, such Code provisions. Section 246(c)
of the Code disallows the dividends received deduction in its entirety if the
stock with respect to which the dividend is paid is not held for a minimum
holding period or if the taxpayer is obligated to make a dividend substitute or
corresponding payment with respect to a position in substantially similar or
related property (but only to the extent of such payment). Code Section
246(c)(4) provides that a holder may not count toward this minimum holding
period any period in which the holder (i) has, among other things, an option to
sell, (ii) is under a contractual obligation to sell, (iii) has made (and not
closed) a short sale of substantially identical stock or securities, or (iv) has
diminished its risk of loss by holding one or more other positions with respect
to substantially similar or related property. Section 246A of the Code contains
the "debt-financed portfolio stock" rules, under which the dividends-received
deduction could be reduced to the extent that a holder incurs indebtedness
directly attributable to its investment in the Outstanding Preferred Stock or
Exchange Preferred Stock. Under certain circumstances, Section 1059 of the Code
(i) reduces the tax basis of stock by a portion of any "extraordinary dividends"
that are eligible for the dividends-received deduction and (ii) to the extent
that the basis reduction would otherwise reduce the tax basis of the stock below
zero, requires immediate gain recognition.
Preferred Stock Distributions on the Outstanding Preferred Stock or
Exchange Preferred Stock. If the Company pays a distribution on the Outstanding
Preferred Stock or Exchange Preferred Stock in the form of additional shares of
Outstanding Preferred Stock or Exchange Preferred Stock ("Additional Preferred
Shares," each, individually, an "Additional Preferred Share"), such distribution
will be taxable for U.S. Federal income tax purposes in the same manner as
distributions described above under "Distributions in General." The amount of
such distribution will equal the fair market value on the distribution date of
the Additional Preferred Shares distributed to a holder on that date. A holder's
tax basis in an Additional
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Preferred Share will equal the fair market value of such shares on the
distribution date, and such holder's holding period for such share will begin on
the day after the distribution date.
Excess Redemption Price. Under Section 305 of the Code and the Treasury
regulations authorized thereunder, if the redemption price of preferred stock
exceeds its issue price (i.e., its fair market value at its date of original
issue) by more than a de minimis amount, then under certain circumstances, such
excess may be treated as a constructive distribution that will be treated in the
same manner as distributions described above under "Distributions in General." A
holder of such preferred stock is required to treat such excess as a
constructive distribution received by the holder over the life of the preferred
stock under a constant yield method using principles similar to the accrual of
original issue discount ("OID") under the OID provisions of the Code.
The Company determined the issue price of the Outstanding Preferred Stock
(other than an Additional Preferred Share) by allocating the offering price of
each Unit between the Outstanding Preferred Stock and associated Warrants
comprising such Unit based upon their relative fair market values. Based on the
Company's allocation of the initial offering price of the Units between the
Outstanding Preferred Stock and the Warrants, the issue price of the Outstanding
Preferred Stock was $18.089 per share. That allocation by the Company will be
binding on each holder, unless the holder explicitly discloses (on a statement
attached to the holder's timely filed U.S. Federal income tax return for the
year that includes the acquisition date of the Unit) that its allocation of the
Unit's offering price between the Outstanding Preferred Stock and the Warrants
is different from the Company's allocation. The Company's allocation, however,
is not binding on the IRS, and therefore, there can be no assurance that the IRS
will respect such allocation. A holder should have the same issue price in the
Exchange Preferred Stock as it had in the Outstanding Preferred Stock.
Based on the foregoing determination of the issue price, the mandatory
redemption price of the Outstanding Preferred Stock or Exchange Preferred Stock
(other than an Additional Preferred Share) exceeds such stock's issue price by
more than a de minimis amount. Accordingly, holders will be required to treat
such excess as a constructive distribution over the term of the Outstanding
Preferred Stock or Exchange Preferred Stock (as described above), which
distribution would be treated in the same manner as distributions described
above under "Distributions in General."
The issue price of an Additional Preferred Share will be the fair market
value of such share on the date of distribution. If the redemption price (i.e.,
liquidation preference) of an Additional Preferred Share exceeds the issue price
of such share by more than a de minimis amount, then a holder thereof would be
required to treat such excess as a constructive distribution over the term of
the Additional Preferred Share (as described above), which distribution would be
treated in the same manner as distributions described above under "Distributions
in General." Because Additional Preferred Shares may be issued at different
times prior to November 1, 2002, it is possible that a holder would own
Additional Preferred Shares with different issue prices. Consequently, if the
Company had current or accumulated earnings and profits in such a case, a holder
would be treated as having received constructive dividends on its Additional
Preferred Shares in differing amounts depending on the issue price of each
Additional Preferred Share and the Company's current and accumulated earnings
and profits, and those shares would not be fungible due to their differing U.S.
Federal income tax characteristics.
Sale, Redemption or other Taxable Disposition. Upon a sale or other taxable
disposition of Outstanding Preferred Stock or Exchange Preferred Stock (other
than a redemption), a holder generally will recognize capital gain or loss for
U.S. Federal income tax purposes (except to the extent of cash payments received
on the disposition that are attributable to declared but unpaid dividends, which
will be treated in the same manner as distributions described above under
"Distributions in General") in an amount equal to the difference between (i) the
sum of the amount of cash and the fair market value of any property received
upon such sale or other taxable disposition and (ii) the holder's adjusted tax
basis in the stock being disposed of. Such capital gain will be taxed at a
reduced rate for a U.S. Holder who is not a corporation and who holds the
Outstanding Preferred Stock or Exchange Preferred Stock for more than one year
and at a further reduced rate for a U.S. Holder who is not a corporation and who
holds the Outstanding Preferred Stock or Exchange Preferred Stock for more than
eighteen months.
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A holder's initial tax basis in the Outstanding Preferred Stock (other than
an Additional Preferred Share) will equal the portion of the purchase price
allocated to the Outstanding Preferred Stock, as described above under "Excess
Redemption Price." A holder's initial tax basis in an Additional Preferred Share
will equal the fair market value of such share on the distribution date.
Thereafter, the initial tax basis of the Outstanding Preferred Stock or an
Additional Preferred Share (as well as the holder's basis in Exchange Preferred
Stock) will be (i) increased by the amount (if any) of any constructive
distributions the holder is treated as having received pursuant to the rules
described above under "Excess Redemption Price," and (ii) decreased by the
portion of any distribution (actual or constructive) that is treated as a
tax-free recovery of basis as described above under "Distributions In General."
Gain or loss recognized by a holder on a redemption of the Outstanding
Preferred Stock or Exchange Preferred Stock, as the case may be, would qualify
for the treatment described above, if after taking into account stock that is
actually or constructively owned under the constructive ownership rules of Code
Section 318 by such holder, either (i) the holder's interest in the stock of the
Company is completely terminated as a result of the redemption under Section
302(b)(3) of the Code; (ii) the redemption is "substantially disproportionate"
with respect to the holder under Section 302(b)(2) of the Code; or (iii) the
redemption is "not essentially equivalent to a dividend" under Section 302(b)(1)
of the Code. Under Section 318 of the Code, a person generally will be treated
as the owner of stock of the Company owned by certain related parties or certain
entities in which the person owns an interest and of stock that a holder could
acquire through the exercise of an option. For this purpose, an option would
include a Warrant. Thus, a holder of Warrants will be treated as constructively
owning Common Stock that such holder would receive upon exercising its Warrants.
Whether a redemption is "not essentially equivalent to a dividend" depends on
each holder's facts and circumstances, but in any event, requires a "meaningful
reduction" in such holder's interest in the Company. A holder of the Outstanding
Preferred Stock or Exchange Preferred Stock who sells some or all of the stock
of the Company owned by it may be able to take such sales into account, if
necessary, to satisfy one of the foregoing conditions, but such a holder should
consult its own tax advisor.
If none of the above conditions is satisfied, the entire amount of the cash
received on a redemption will be treated as a distribution, which will be
treated in the same manner as distributions described above under "Distributions
in General." In such case, the holder's basis in the redeemed Outstanding
Preferred Stock or Exchange Preferred Stock, as the case may be, would be
transferred to the holder's remaining shares of the Company stock (if any). If
the holder does not retain any shares of the Company stock, such basis may be
entirely lost.
If none of the above conditions is satisfied as a result of the option
attribution rules under Section 318, recent amendments to Section 1059 would
cause the basis reduction rules of that Section to apply without regard to
holding period, and only to the basis in the stock actually redeemed.
Consequently, gain will be recognized immediately in the amount, if any, that
the non-taxed portion of the dividend exceeds the basis in the stock actually
redeemed.
NON-U.S. HOLDERS
The following discussion is limited to the U.S. Federal income tax
consequences relevant to a holder of Outstanding Preferred Stock and Exchange
Preferred Stock received therefor who is not a U.S. Holder (a "Non-U.S.
Holder").
Dividends on Outstanding Preferred Stock or Exchange Preferred
Stock. Generally, dividends received by a Non-U.S. Holder with respect to
Outstanding Preferred Stock or Exchange Preferred Stock will be subject to U.S.
withholding tax at a rate of 30%, which rate may be subject to reduction by an
applicable income tax treaty and compliance with certain requirements to
document entitlement to the benefits of such treaty. If the dividends are
effectively connected with the conduct of a United States trade or business or
are attributable to a permanent establishment in the United States, they would
be taxed at the graduated rates that are applicable to United States citizens,
resident aliens, and domestic corporations and would not be subject to U.S.
withholding tax if the Non-U.S. Holder gives an appropriate statement to the
withholding
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agent in advance of the dividend payment. A Non-U.S. Holder that is a
corporation may be subject to an additional branch profits tax on effectively
connected dividends.
Sale of Outstanding Preferred Stock or Exchange Preferred Stock. A Non-U.S.
Holder generally will not be subject to U.S. Federal income tax on gain
recognized, if any, upon the sale or exchange of Outstanding Preferred Stock or
Exchange Preferred Stock unless (i) the gain is effectively connected with the
conduct of a trade or business within the United States by the Non-U.S. Holder,
(ii) in the case of a Non-U.S. Holder who is a nonresident alien individual and
holds the Outstanding Preferred Stock or Exchange Preferred Stock as a capital
asset, such Non-U.S. Holder is present in the United States for 183 or more days
in the taxable year and certain other circumstances are present, or (iii) the
Non-U.S. Holder is subject to tax pursuant to the provisions of the Code
applicable to certain United States expatriates.
Further, upon a disposition of a United States real property interest
("USRPI"), the transferor may be subject to U.S. Federal income tax on gain
recognized and the transferee may be required to withhold a portion of the
purchase price as a prepayment of the transferor's income tax liability. The
Company believes that it is not, and is not expected to become, a "United States
real property holding corporation" as such term is defined in Section 897(c) of
the Code and that none of the Outstanding Preferred Stock or Exchange Preferred
Stock will be a USRPI.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Information reporting and backup withholding may apply to certain
noncorporate holders with respect to (i) payments by the Company of dividends on
the Outstanding Preferred Stock or Exchange Preferred Stock, or (ii) proceeds of
a sale of Outstanding Preferred Stock or Exchange Preferred Stock. Such payments
generally will be subject to backup withholding at a rate of 31% unless the
payee of such payments supplies the payor or its agent with a taxpayer
identification number, certified under penalties of perjury, and certain other
information, or otherwise establishes, in the manner prescribed by law, an
exemption from backup withholding. In addition, if Outstanding Preferred Stock
or Exchange Preferred Stock are sold to (or through) a "broker," the broker may
be required to withhold 31% of the entire sales price, unless either (i) the
broker determines that the seller is a corporation or other exempt recipient or
(ii) the seller provides, in the required manner, certain identifying
information. Such a sale must also be reported by the broker to the IRS, unless
the broker determines that the seller is an exempt recipient. The term "broker"
as defined by Treasury regulations includes all persons who, in the ordinary
course of their business, stand ready to effect sales made by others.
Any amount withheld under such backup withholding rules from a payment to a
holder will be allowed as a credit against the holder's U.S. Federal income tax,
provided that the holder furnishes the required information to the IRS. In
addition, certain penalties may be imposed by the IRS on a holder who is
required to supply information but does not do so in the proper manner.
THE FOREGOING SUMMARY IS INCLUDED HEREIN FOR GENERAL INFORMATION ONLY.
ACCORDINGLY, EACH PARTICIPANT IN THE EXCHANGE OFFER SHOULD CONSULT WITH ITS OWN
TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES TO SUCH PARTICIPANT OF
PARTICIPATING IN THE EXCHANGE OFFER AND OWNING AND DISPOSING OF THE EXCHANGE
PREFERRED STOCK, INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL AND
FOREIGN INCOME AND OTHER TAX LAWS.
PLAN OF DISTRIBUTION
Based on interpretations of the staff of the Division of Corporation
Finance of the SEC set forth in no-action letters issued to third parties, the
Company believes that, except as described below, Exchange Preferred Stock
issued pursuant to the Exchange Offer may be offered for resale, resold and
otherwise transferred by the respective holders thereof without further
compliance with the registration and prospectus delivery requirements of the
Securities Act, provided that (i) such Exchange Preferred Stock is acquired in
the ordinary course of such holder's business and (ii) such holder is not
participating, and has no arrangement or understanding with any person to
participate, in a distribution of the Exchange Preferred Stock. A holder of
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Outstanding Preferred Stock that is an "affiliate" of the Company within the
meaning of Rule 405 under the Securities Act or that is a broker-dealer that
purchased Outstanding Preferred Stock from the Company to resell pursuant to an
exemption from registration under the Securities Act (a) cannot rely on such
interpretations by the staff of the Division of Corporation Finance of the SEC,
(b) will not be permitted or entitled to tender such Outstanding Preferred Stock
in the Exchange Offer and (c) must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any sale or other
transfer of such Outstanding Preferred Stock unless such sale or transfer is
made pursuant to an exemption from such requirements. In addition, any holder
who tenders Outstanding Preferred Stock in the Exchange Offer with the intention
or for the purpose of participating in a distribution of the Exchange Preferred
Stock cannot rely on such interpretations by the staff of the Division of
Corporation Finance of the SEC and must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with the
secondary resale transaction. Unless an exemption from registration is otherwise
available, any such resale transaction should be covered by an effective
registration statement containing selling security holders information required
by Item 507 of Regulation S-K under the Securities Act. To date, the staff of
the Division of Corporation Finance of the SEC has taken the position that a
broker-dealer that has acquired securities in exchange for securities that were
acquired by such broker-dealer as a result of market-making activities or other
trading activities may fulfill the prospectus delivery requirements with the
prospectus contained in an exchange offer registration statement.
Each holder of Outstanding Preferred Stock who wishes to exchange its
Outstanding Preferred Stock for Exchange Preferred Stock in the Exchange Offer
will be required to make certain representations to the Company set forth in
"The Exchange Offer -- Purpose and Effect of the Exchange Offer."
Each broker-dealer that receives Exchange Preferred Stock for its own
account pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus meeting the requirements of the Securities Act in connection with any
resale of such Exchange Preferred Stock. This Prospectus may be used by a
broker-dealer in connection with resales of Exchange Preferred Stock received in
exchange for Outstanding Preferred Stock where such Exchange Preferred Stock was
acquired as a result of market-making activities or other trading activities.
Subject to certain provisions set forth in the Registration Agreement, the
Company has agreed that, for a period of up to 180 days after the consummation
of the Exchange Offer, it will make this Prospectus available to any
broker-dealer for use in connection with any such resale. See "Risk
Factors -- Lack of Public Market" and "The Exchange Offer -- Resale of Exchange
Preferred Stock."
The Company will not receive any proceeds from any sale of Exchange
Preferred Stock by broker-dealers. Exchange Preferred Stock received by
broker-dealers for their own account pursuant to the Exchange Offer may be sold
from time to time in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the Exchange
Preferred Stock or a combination of such methods of resale, at market prices
prevailing at the time of resale, at prices related to such prevailing market
prices or negotiated prices. Any such resale may be made directly to purchasers
or to or through brokers or dealers who may receive compensation in the form of
commissions or concessions from any such broker-dealer and/or the purchasers of
any such Exchange Preferred Stock. Any broker-dealer that resells Exchange
Preferred Stock that was received by it for its own account pursuant to the
Exchange Offer and any broker or dealer that participates in a distribution of
such Exchange Preferred Stock may be deemed to be an "underwriter" within the
meaning of the Securities Act and any profit from any such resale of Exchange
Preferred Stock and any commissions or concessions received by any such person
may be deemed to be underwriting compensation under the Securities Act. The
Letter of Transmittal states that by acknowledging that it will deliver and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act.
Subject to certain provisions set forth in the Registration Agreement, for
a period of 180 days after the date the Exchange Offer is consummated, the
Company will promptly send additional copies of this Prospectus and any
amendment or supplement to this Prospectus to any Participating Broker-Dealer
that requests such documents in the Letter of Transmittal. The Company has
agreed to pay the expenses incident to the Exchange Offer, other than any
discounts or commissions incurred upon the sale of the Exchange
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Preferred Stock. The Company will indemnify each Participating Broker-Dealer
selling Exchange Preferred Stock against certain liabilities, including
liabilities under the Securities Act.
LEGAL MATTERS
The validity of the Exchange Preferred Stock issued pursuant to the
Exchange Offer will be passed upon for the Company by Thompson & Knight, P.C.,
Dallas, Texas.
INDEPENDENT AUDITORS
The Consolidated Financial Statements of Source Media, Inc. at December 31,
1995 and 1996, and for each of the three years in the period ended December 31,
1996, appearing in this Prospectus and Registration Statement have been audited
by Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein.
The statements of assets, liabilities and divisional equity of the
Electronic Publishing Division of Brite Voice Systems, Inc. as of December 31,
1995 and 1996 and the related statements of revenues and expenses, changes in
divisional equity and cash flows for the years then ended included in this
Prospectus and Registration Statement have been audited by Arthur Andersen, LLP,
independent public accountants, as stated in their report which is included
herein.
The financial statements of Voice News Network, Inc. as of December 31,
1996 for the years then ended, included in this Prospectus and Registration
Statement, have been audited by Price Waterhouse LLP, independent accountants,
as stated in their report appearing herein.
AVAILABLE INFORMATION
Source is subject to the informational requirements of the Exchange Act and
in accordance therewith files report, proxy statements and other information
with the SEC. Reports, registration statements and other information concerning
the Company may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Regional Offices of the Commission at 7 World Trade
Center, New York, New York 10048 and Suite 1400, Northwestern Atrium Center, 500
West Madison Street, Chicago, Illinois 60611. Copies of such material can also
be obtained from the Public Reference Section of the SEC at 450 Fifth Street,
N.W., Washington, D.C. 20549 at prescribed rates. The Commission maintains a Web
site at http://www.sec.gov that contains reports, proxy and information
statements and other information regarding issuers, including Source, that file
electronically with the Commission.
In addition, the Company has agreed that, whether or not it is required to
do so by the rules and regulations of the Commission, for so long as any
Preferred Stock remains outstanding, it will furnish to the holders of the
Preferred Stock and, to the extent permitted by applicable law or regulation,
file with the Commission (i) all quarterly and annual financial information that
would be required to be contained in a filing with the Commission on Forms 10-Q
and 10-K if the Company were required to file such Forms, including for each a
"Management's Discussion and Analysis of Pro Forma and Historical Financial
Condition and Results of Operations" and, with respect to the annual information
only, a report thereof by the Company's independent certified public accountants
and (ii) all reports that would be required to be filed on Form 8-K if it were
required to file such reports. In addition, for so long as any of the Preferred
Stock remains outstanding, the Company has agreed to make available to any
prospective purchaser of the Preferred Stock or beneficial owner of the
Preferred Stock, in connection with any sale thereof, the information required
by Rule 144A(d)(4) under the Securities Act.
The Outstanding Notes are, and the Exchange Notes will be, fully and
unconditionally guaranteed, jointly and severally, on a senior secured basis, by
all of the Company's subsidiaries. The Company has not presented separate
financial statements for such subsidiary guarantors because such information is
not material to investors.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents and information heretofore filed with the
Commission by the Company are hereby incorporated by reference into this
Prospectus:
1. The Company's Annual Report on Form 10-K for the year ended
December 31, 1996;
2. The Company's Quarterly Report on Form 10-Q for the quarters ended
March 31, 1997, June 30, 1997 and September 30, 1997; and
3. The Company's Current Report on Form 8-K dated January 19, 1997.
4. The Company's Current Report on Form 8-K and Current Report on Form
8-K/A, both dated October 30, 1997.
All documents subsequently filed by the Company pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act prior to the termination of the Exchange
Offer shall be deemed to be incorporated by reference into this Prospectus and
to be a part hereof from the date of filing of such documents. Any statement
contained in a document incorporated or deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for purposes of this
Prospectus to the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
The Company will provide without charge to each person, including any
beneficial owner, to whom this Offering Memorandum is delivered, on the written
or oral request of any such person, a copy of any and all of the documents
incorporated by reference herein (other than exhibits to such documents which
are not specifically incorporated by reference in such documents). Written
requests for such copies should be directed to the Company, 5400 LBJ Freeway,
Suite 680, Dallas, Texas 75240, Attention: Maryann Walsh, General Counsel and
Secretary. Telephone requests may be directed to Maryann Walsh, General Counsel
and Secretary of the Company, at (972) 701-5400.
106
<PAGE> 110
GLOSSARY OF CERTAIN DEFINITIONS
The following is a glossary of certain defined terms appearing elsewhere in
this Offering Memorandum.
Advanced analog set-top boxes. Cable set-top boxes with capabilities that
exceed those of standard analog set-top boxes by offering additional features
such as addressability, electronic program guides and pay-per-view.
Ameritech. A Regional Bell Operating Company providing telephone services
and distributing Yellow Pages directories in Illinois, Indiana, Michigan, Ohio
and Wisconsin.
Analog set-tops. Cable set-top boxes with capabilities that are limited to
simple de-scrambling of cable transmissions and delivering the signal to the
television.
ASIC chip set. Application-specific integrated circuits developed to work
in conjunction with each other as a chip set.
Bell Atlantic. A Regional Bell Operating Company providing telephone
services and distributing Yellow Pages directories in Delaware, Maryland, New
Jersey, Pennsylvania, Virginia, West Virginia and the District of Columbia.
BellSouth. A Regional Bell Operating Company providing telephone services
and distributing Yellow Pages directories in Alabama, Florida, Georgia,
Kentucky, Louisiana, Mississippi, North Carolina, South Carolina and Tennessee.
Cablevision. Cablevision Systems Corporation, a cable operator.
Century. Century Communications Corporation, a cable operator.
CSS sub. Cable Super Sites subscriber.
CTAM. The marketing society for the cable and telecommunications industry.
DCT 1000. A digital set-top box currently manufactured and sold by
NextLevel.
Digital set-top boxes. Set-top boxes that receive cable transmissions from
the head-end in a digital format and translate them into an analog signal which
is sent to the television.
DMA. Designated Market Area.
Donnelley. Reuben H. Donnelley, Inc., a Yellow Pages sales, marketing and
publishing company.
EBITDA. Earnings before interest, taxes, depreciation and amortization.
FEM. Feature Expansion Module, a device inserted into an expansion slot in
NextLevel advanced analog set-top boxes in order to offer additional features.
Frame relay. A method of high speed data transmission over telephone lines.
GTE. An independent telephone company providing telephone services and
distributing Yellow Pages directories in Alabama, Connecticut, Florida, Hawaii,
Idaho, Illinois, Indiana, Kentucky Minnesota, Montana, North Carolina, Ohio,
Oklahoma, Oregon, Pennsylvania, South Carolina, Texas, Washington and Wisconsin.
Head-end. The central distribution point for a local cable operator
consisting of downlink equipment, modulators and transmission equipment.
Kbps. Kilobytes per second.
LSI Logic. LSI Logic Corporation, a developer and manufacturer of
integrated circuits (chips).
Marcus. Marcus Cable Corporation L.P., a cable operator.
Motherboard. A custom microchip which is integrated into the base design of
the set-top box chassis.
107
<PAGE> 111
NextLevel. The Broadband Network Group of NextLevel Systems, Inc. (formerly
General Instruments Corporation).
OPUS Research. A telecommunications research company based in San
Francisco, California which publishes Telemedia News & Views.
Overbuild cable companies. A cable company which installs an additional
cable television infrastructure, or "overbuilds", in a market with an existing
cable franchise.
Pacific Bell. A Regional Bell Operating Company providing telephone
services and distributing Yellow Pages directories in California and Nevada.
Paul Kagan Associates. Paul Kagan Associates, Inc., a media research
company.
Publishing Partner. A Yellow Pages or newspaper publisher participating
with the Company in offering voice information services.
Premium tier. A collection of cable channels packaged together and sold as
a single offering, or tier, to local cable subscribers.
SNET. Southern New England Telephone Inc., a Yellow Pages publisher.
Spyglass. Spyglass, Inc., a provider of software and services used to make
devices work over the Internet.
Still frame. A single image that contains a combination of text and
pictures which is formatted into a frame for transmission over cable television
systems.
UHF. Ultra high frequency, a method for delivering local broadcast
television for channels above the 12 allocated to the VHF spectrum.
US West. A Regional Bell Operating Company providing telephone services and
distributing Yellow Pages directories in Arizona, Colorado, Idaho, Iowa,
Minnesota, Montana, Nebraska, New Mexico, North Dakota, Oregon, South Dakota,
Washington, Wyoming and Utah.
Voice Information Services. A service utilizing a computer system to
provide access to audio-recorded information over the telephone.
WAN. Wide area network.
WINK. Wink Communications, a company which offers data and graphics
enhancement technology for television.
Web TV. Web TV Networks, Inc., a company offering hardware and services to
provide Internet access over televisions through phone lines.
108
<PAGE> 112
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
HISTORICAL CONSOLIDATED FINANCIAL STATEMENTS OF SOURCE
MEDIA, INC.
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets at December 31, 1995 and 1996,
and September 30, 1997 (Unaudited)........................ F-3
Consolidated Statement of Operations for the Years Ended
December 31, 1994, 1995 and 1996 and the Nine Months Ended
September 30, 1996 and 1997 (Unaudited)................... F-4
Consolidated Statements of Stockholders' Equity (Capital
Deficiency) for the Years Ended December 31, 1994, 1995
and 1996 and the Nine Months Ended September 30, 1997
(Unaudited)............................................... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1994, 1995 and 1996 and the Nine Months Ended
September 30, 1996 and 1997 (Unaudited)................... F-7
Notes to Consolidated Financial Statements.................. F-8
HISTORICAL FINANCIAL STATEMENTS OF ELECTRONIC PUBLISHING
DIVISION OF BRITE VOICE SYSTEMS, INC.
Report of Independent Public Accountants.................... F-22
Statements of Assets, Liabilities and Divisional Equity at
December 31, 1996 and 1995................................ F-23
Statements of Revenues and Expenses For the Years Ended
December 31, 1996 and 1995................................ F-24
Statements of Changes in Divisional Equity For the Years
Ended December 31, 1996 and 1995.......................... F-25
Statements of Cash Flows For the Years Ended December 31,
1996 and 1995............................................. F-26
Notes to Financial Statements............................... F-27
Statements of Assets, Liabilities and Divisional Equity at
December 31, 1996 and September 30, 1997 (Unaudited)...... F-30
Statements of Revenues and Expenses For the Nine Months
Ended September 30, 1997 and 1996 (Unaudited)............. F-31
Statements of Changes in Divisional Equity For the Year
Ended December 31, 1996 and the Nine Months Ended
September 30, 1997 (Unaudited)............................ F-32
Statements of Cash Flows For the Nine Months Ended September
30, 1997 and 1996
(Unaudited)............................................... F-33
Condensed Notes to Financial Statements..................... F-34
HISTORICAL FINANCIAL STATEMENTS OF VOICE NEWS NETWORK, INC.
Report of Independent Accountants........................... F-35
Balance Sheet at December 31, 1996.......................... F-36
Statement of Operations For the year ended December 29,
1996...................................................... F-37
Statement of Cash Flows For the year ended December 29,
1996...................................................... F-38
Statement of Owner's Equity For the year ended December 29,
1996...................................................... F-39
Notes to Financial Statements............................... F-40
Balance Sheet at September 29, 1997 (Unaudited)............. F-43
Statement of Operations For the nine months ended September
29, 1997 and September 28, 1996
(Unaudited)............................................... F-44
Statement of Cash Flows For the nine months ended September
29, 1997 and September 28, 1996
(Unaudited)............................................... F-45
Notes to Financial Statements............................... F-46
</TABLE>
F-1
<PAGE> 113
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Source Media, Inc.
We have audited the accompanying consolidated balance sheets of Source
Media, Inc. (the Company) as of December 31, 1995 and 1996, and the related
consolidated statements of operations, stockholders' equity (capital
deficiency), and cash flows for each of the three years in the period ended
December 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Source Media,
Inc., at December 31, 1995 and 1996, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Dallas, Texas
February 7, 1997, except for Note 5 and the last
paragraph of Note 6, for which the date is
April 9, 1997, and the first paragraph of Note 3,
for which the date is September 9, 1997.
F-2
<PAGE> 114
SOURCE MEDIA, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- SEPTEMBER 30,
1995 1996 1997
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 17,479,223 $ 4,302,943 $ 4,158,379
Restricted investments.................................... -- 611,182 --
Trade accounts receivable, less allowance for doubtful
accounts................................................ 1,076,239 956,078 1,156,771
Deferred expenses......................................... 889,393 729,819 1,039,464
Prepaid expenses and other current assets................. 892,234 1,167,201 892,563
------------ ------------ ------------
Total current assets................................ 20,337,089 7,767,223 7,247,177
Property and equipment:
Production equipment...................................... 2,421,816 3,951,502 4,084,751
Computer equipment........................................ 927,672 1,937,826 2,386,983
Other equipment........................................... 960,446 2,520,885 3,886,018
Furniture and fixtures.................................... 120,544 128,235 490,580
------------ ------------ ------------
4,430,478 8,538,448 10,848,332
Accumulated depreciation and amortization................... 2,670,017 3,576,999 5,138,338
------------ ------------ ------------
1,760,461 4,961,449 5,709,994
Intangible assets:
Patents................................................... 3,597,989 3,597,989 14,936,508
Goodwill.................................................. 3,010,137 3,010,137 3,010,137
Contract rights........................................... -- 1,121,000 1,121,000
------------ ------------ ------------
6,608,126 7,729,126 19,067,645
Accumulated amortization.................................... 4,510,434 5,541,770 8,310,843
------------ ------------ ------------
2,097,692 2,187,356 10,756,802
Other non-current assets.................................... -- 980,745 974,831
------------ ------------ ------------
Total assets........................................ $ 24,195,242 $ 15,896,773 $ 24,688,804
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
Current liabilities:
Trade accounts payable.................................... $ 1,296,516 $ 917,462 $ 813,924
Accrued payroll........................................... 258,734 420,926 440,760
Other accrued liabilities................................. 1,650,091 1,483,373 1,433,305
Amounts payable related to acquisitions................... -- 1,350,000 --
Unearned income........................................... 4,724,957 3,976,244 3,586,328
Current portion of capital lease obligations.............. 184,175 85,683 28,861
------------ ------------ ------------
Total current liabilities........................... 8,114,473 8,233,688 6,303,178
Long-term debt, net of discount............................. -- 4,612,021 19,470,151
Capital lease obligations................................... 35,039 22,706 25,913
Commitments and contingencies
Minority interests in consolidated subsidiaries............. 3,618,629 3,665,104 3,839,552
Note receivable and accrued interest from minority
stockholder, net of discount.............................. (610,175) (666,931) (709,436)
------------ ------------ ------------
3,008,454 2,998,173 3,130,116
Stockholders' equity (capital deficiency):
Common stock, $.001 par value
Issued shares -- 10,303,556, 10,327,041 and 11,874,578
shares as of December 31, 1995 and 1996 and September
30, 1997, respectively.................................. 10,304 10,327 11,875
Less treasury stock at cost -- 356,200, 381,351 and
381,351 shares as of December 31, 1995 and 1996 and
September 30, 1997, respectively........................ (3,515,563) (3,757,641) (3,757,641)
Capital in excess of par value............................ 59,955,392 60,815,785 75,152,939
Accumulated deficit....................................... (43,076,663) (56,931,832) (75,505,547)
Foreign currency translation.............................. (34,619) 3,737 (40,248)
Notes receivable and accrued interest from stockholders... (301,575) (110,191) (101,932)
------------ ------------ ------------
Total stockholders' equity (capital deficiency)..... 13,037,276 30,185 (4,240,554)
------------ ------------ ------------
Total liabilities and stockholders' equity (capital
deficiency)....................................... $ 24,195,242 $ 15,896,773 $ 24,688,804
============ ============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE> 115
SOURCE MEDIA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------ --------------------------
1994 1995 1996 1996 1997
------------ ------------ ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Monetary revenues........... $ 9,194,068 $ 9,341,720 $ 8,574,823 $ 6,405,778 $ 7,988,259
Nonmonetary revenues........ 21,748,976 15,944,656 9,944,082 8,041,541 4,927,961
------------ ------------ ------------ ----------- ------------
Total revenues......... 30,943,044 25,286,376 18,518,905 14,447,319 12,916,220
Monetary cost of sales...... 5,247,685 4,936,729 3,485,045 2,707,457 4,944,983
Nonmonetary cost of sales... 21,748,976 15,944,656 9,944,082 8,041,541 4,927,961
------------ ------------ ------------ ----------- ------------
Total cost of sales.... 26,996,661 20,881,385 13,429,127 10,748,998 9,872,944
Gross profit................ 3,946,383 4,404,991 5,089,778 3,698,321 3,043,276
Selling, general, and
administrative expenses... 8,987,438 7,951,837 11,747,155 8,081,441 13,803,350
Amortization of intangible
assets.................... 1,684,353 1,031,337 1,031,337 773,503 2,769,073
Research and development
expenses.................. 2,705,557 3,750,244 6,330,745 4,414,119 2,681,587
Write-down of intangible
assets.................... 1,900,000 -- -- -- --
------------ ------------ ------------ ----------- ------------
15,277,348 12,733,418 19,109,237 13,269,063 19,254,010
------------ ------------ ------------ ----------- ------------
Operating loss.............. (11,330,965) (8,328,427) (14,019,459) (9,570,742) (16,210,734)
Interest expense............ 417,587 354,333 614,037 360,617 2,661,647
Interest income............. (122,011) (217,284) (788,629) (661,931) (238,578)
Other (income) expense...... 1,463,571 (24,782) (36,173) (32,207) (51,119)
Minority interests in
earnings (losses) of
consolidated
subsidiaries.............. (232,891) (252,689) 46,475 (68,823) (8,970)
Charges related to financing
incentives................ -- 1,581,250 -- -- --
------------ ------------ ------------ ----------- ------------
Net loss.................... (12,857,221) (9,769,255) (13,855,169) (9,168,398) (18,573,714)
Preferred stock dividends... 1,621,240 832,651 -- -- --
------------ ------------ ------------ ----------- ------------
Net loss attributable to
common stockholders....... $(14,478,461) $(10,601,906) $(13,855,169) $(9,168,398) $(18,573,714)
------------ ------------ ------------ ----------- ------------
Net loss per common share... $ (3.22) $ (1.65) $ (1.39) $ (0.92) $ (1.64)
============ ============ ============ =========== ============
Weighted average common
shares outstanding........ 4,498,298 6,412,690 9,935,455 9,932,528 11,292,655
============ ============ ============ =========== ============
</TABLE>
See accompanying notes.
F-4
<PAGE> 116
SOURCE MEDIA, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
<TABLE>
<CAPTION>
NOTES
COMMON STOCK CAPITAL IN FOREIGN RECEIVABLE
--------------------- TREASURY EXCESS OF ACCUMULATED CURRENCY FROM
SHARES AMOUNT STOCK PAR VALUE DEFICIT TRANSLATION STOCKHOLDERS
---------- -------- ----------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993....... 4,509,922 $ 4,510 $ (10,000) $12,242,740 $(20,450,187) $ 63,012 $ (52,513)
Issuance of common stock upon
exercise of stock options........ 4,583 5 -- 3,460 -- -- --
Issuance of common stock to acquire
patents.......................... 6,324 6 -- 99,994 -- -- --
Issuance of warrants for services
provided......................... -- -- -- 456,250 -- -- --
Nonmonetary employee compensation
related to stock options......... -- -- -- 231,250 -- -- --
Dividend-in-kind ($0.20 per Series
A preferred share)............... -- -- -- (1,117,957) -- -- --
Dividend-in-kind ($0.21 per Series
B preferred share)............... -- -- -- (503,283) -- -- --
Accrued interest on note receivable
from stockholder................. -- -- -- -- -- -- (5,000)
Net loss........................... -- -- -- -- (12,857,221) -- --
Foreign currency translation....... -- -- -- -- -- (70,533) --
---------- -------- ----------- ----------- ------------ -------- ---------
BALANCE AT DECEMBER 31, 1994....... 4,520,829 4,521 (10,000) 11,412,454 (33,307,408) (7,521) (57,513)
Issuance of common stock upon
exercise of stock options........ 84,639 85 -- 254,685 -- -- (225,000)
Nonmonetary employee compensation
related to stock options......... -- -- -- 46,875 -- -- --
Dividend-in-kind ($0.10 per Series
A preferred share)............... -- -- -- (564,022) -- -- --
Dividend-in-kind ($0.13 per Series
B preferred share)............... -- -- -- (268,629) -- -- --
Issuance of warrant on
bridge financings................ -- -- -- 1,581,250 -- -- --
Conversion of notes payable to
common stock..................... 67,570 68 -- 329,932 -- -- --
Conversion of preferred stock to
common stock in the Merger....... 2,109,516 2,109 -- 17,553,869 -- -- --
Company common stock deemed issued
in the Merger.................... 1,184,440 1,184 -- 8,905,898 -- -- --
Redemption of Merger
dissenting shares................ -- -- (527,220) -- -- -- --
Merger expenses.................... -- -- -- (1,135,099) -- -- --
Cancellation of treasury stock in
the Merger....................... (13,438) (13) 10,000 (9,987) -- -- --
Accrued interest on notes
receivable from stockholders..... -- -- -- -- -- -- (19,062)
Issuance of common stock in
secondary offering............... 2,350,000 2,350 -- 21,848,166 -- -- --
Purchase of treasury stock......... -- -- (2,988,343) -- -- -- --
Net loss........................... -- -- -- -- (9,769,255) -- --
Foreign currency translation....... -- -- -- -- -- (27,098) --
---------- -------- ----------- ----------- ------------ -------- ---------
BALANCE AT DECEMBER 31, 1995....... 10,303,556 10,304 (3,515,563) 59,955,392 (43,076,663) (34,619) (301,575)
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY (CAPITAL
DEFICIENCY)
---------------
<S> <C>
BALANCE AT DECEMBER 31, 1993....... $ (8,202,438)
Issuance of common stock upon
exercise of stock options........ 3,465
Issuance of common stock to acquire
patents.......................... 100,000
Issuance of warrants for services
provided......................... 456,250
Nonmonetary employee compensation
related to stock options......... 231,250
Dividend-in-kind ($0.20 per Series
A preferred share)............... (1,117,957)
Dividend-in-kind ($0.21 per Series
B preferred share)............... (503,283)
Accrued interest on note receivable
from stockholder................. (5,000)
Net loss........................... (12,857,221)
Foreign currency translation....... (70,533)
------------
BALANCE AT DECEMBER 31, 1994....... (21,965,467)
Issuance of common stock upon
exercise of stock options........ 29,770
Nonmonetary employee compensation
related to stock options......... 46,875
Dividend-in-kind ($0.10 per Series
A preferred share)............... (564,022)
Dividend-in-kind ($0.13 per Series
B preferred share)............... (268,629)
Issuance of warrant on
bridge financings................ 1,581,250
Conversion of notes payable to
common stock..................... 330,000
Conversion of preferred stock to
common stock in the Merger....... 17,555,978
Company common stock deemed issued
in the Merger.................... 8,907,082
Redemption of Merger
dissenting shares................ (527,220)
Merger expenses.................... (1,135,099)
Cancellation of treasury stock in
the Merger....................... --
Accrued interest on notes
receivable from stockholders..... (19,062)
Issuance of common stock in
secondary offering............... 21,850,516
Purchase of treasury stock......... (2,988,343)
Net loss........................... (9,769,255)
Foreign currency translation....... (27,098)
------------
BALANCE AT DECEMBER 31, 1995....... 13,037,276
</TABLE>
F-5
<PAGE> 117
SOURCE MEDIA, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
(CONTINUED)
<TABLE>
<CAPTION>
NOTES
COMMON STOCK CAPITAL IN FOREIGN RECEIVABLE
--------------------- TREASURY EXCESS OF ACCUMULATED CURRENCY FROM
SHARES AMOUNT STOCK PAR VALUE DEFICIT TRANSLATION STOCKHOLDERS
---------- -------- ----------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock upon
exercise of stock options........ 23,485 23 -- 141,777 -- -- --
Issuance of warrant with First
Tranche Note..................... -- -- -- 745,830 -- -- --
Repayment of notes receivable and
accrued interest from stockholder
through surrender of common
stock............................ -- -- (242,078) -- -- -- 242,078
Other.............................. -- -- -- (27,214) -- -- (50,694)
Net loss........................... -- -- -- -- (13,855,169) -- --
Foreign currency translation....... -- -- -- -- -- 38,356 --
---------- -------- ----------- ----------- ------------ -------- ---------
BALANCE AS OF DECEMBER 31, 1996.... 10,327,041 $ 10,327 $(3,757,641) $60,815,785 $(56,931,832) $ 3,737 $(110,191)
========== ======== =========== =========== ============ ======== =========
Issuance of common stock upon
exercise of stock options........ 124,814 125 -- 551,308 -- -- --
Acquisition of remaining minority
interest in ICT.................. 1,389,723 1,390 -- 10,384,280 -- -- --
Issuance of warrants for services
provided......................... -- -- -- 279,571 -- -- --
Issuance of warrants with Aggregate
Tranche Notes.................... -- -- -- 2,823,090 -- -- --
Other.............................. 33,000 33 -- 299,030 -- -- 8,259
Net loss........................... -- -- -- -- (18,573,715) -- --
Foreign currency translation....... -- -- -- -- -- (43,985) --
---------- -------- ----------- ----------- ------------ -------- ---------
BALANCE AS OF SEPTEMBER 30, 1997
(UNAUDITED)...................... 11,874,578 $ 11,875 $(3,757,641) $75,152,939 $(75,505,547) $(40,248) $(101,932)
========== ======== =========== =========== ============ ======== =========
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY (CAPITAL
DEFICIENCY)
---------------
<S> <C>
Issuance of common stock upon
exercise of stock options........ 141,800
Issuance of warrant with First
Tranche Note..................... 745,830
Repayment of notes receivable and
accrued interest from stockholder
through surrender of common
stock............................ --
Other.............................. (77,908)
Net loss........................... (13,855,169)
Foreign currency translation....... 38,356
------------
BALANCE AS OF DECEMBER 31, 1996.... $ 30,185
============
Issuance of common stock upon
exercise of stock options........ 551,308
Acquisition of remaining minority
interest in ICT.................. 10,385,670
Issuance of warrants for services
provided......................... 279,571
Issuance of warrants with Aggregate
Tranche Notes.................... 2,823,090
Other.............................. 307,332
Net loss........................... (18,573,715)
Foreign currency translation....... (43,985)
------------
BALANCE AS OF SEPTEMBER 30, 1997
(UNAUDITED)...................... $ (4,240,554)
============
</TABLE>
See accompanying notes.
F-6
<PAGE> 118
SOURCE MEDIA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------- --------------------------
1994 1995 1996 1996 1997
------------ ----------- ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss...................................... $(12,857,221) $(9,769,255) $(13,855,169) $(9,168,398) $(18,573,714)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation................................ 732,049 801,339 906,982 645,323 1,561,339
Amortization of intangible assets........... 1,684,332 1,031,337 1,031,337 773,502 2,769,073
Non-cash interest expense................... -- -- 589,990 -- 2,630,392
Provision for losses on accounts
receivable................................ 32,353 108,123 82,269 86,983 32,712
Minority interests in net earnings
(losses).................................. (232,891) (252,689) 46,475 (68,823) (8,970)
Charges relating to financing incentives.... -- 1,581,250 -- -- 315,068
Write-down of intangible assets............. 1,900,000 -- -- -- --
Warrants issued for services provided....... 456,250 -- -- -- 279,571
Issuance of common stock in litigation
settlement................................ -- -- -- -- 299,063
Other, net.................................. 172,036 (28,903) (59,453) (157,152) (34,246)
Changes in operating assets and liabilities:
Trade accounts receivable................... 327,849 (198,983) 37,892 (59,353) (233,405)
Prepaid expenses and other current assets... 254,004 (193,754) (274,967) 146,733 274,638
Deferred expenses........................... (397,245) 159,168 159,574 121,226 (309,645)
Trade accounts payable...................... 568,058 (263,017) (379,054) (387,145) (103,538)
Accrued payroll............................. (313,149) 69,651 162,192 (45,685) 19,834
Other accrued liabilities................... 558,461 502,025 (339,781) (70,786) 122,995
Other accrued liabilities to related
parties................................... (268,685) (204,880) -- -- --
Unearned income............................. 1,030,799 (648,722) (748,713) (217,434) (389,916)
------------ ----------- ------------ ----------- ------------
Net cash used in operating activities......... (6,353,000) (7,307,310) (12,640,426) (8,401,009) (11,348,749)
INVESTING ACTIVITIES
Capital expenditures.......................... (412,438) (257,888) (2,678,970) (1,449,213) (1,675,544)
Acquisitions of equipment and contract
rights...................................... -- -- (1,200,000) -- (1,350,000)
ICT acquisition costs......................... -- -- (645,984) -- --
Restricted investments........................ -- -- (611,182) -- --
Other......................................... -- -- (47,998) -- --
------------ ----------- ------------ ----------- ------------
Net cash used in investing activities......... (412,438) (257,888) (5,184,134) (1,449,213) (3,025,544)
FINANCING ACTIVITIES
Net proceeds from issuance of debt and
warrant..................................... 1,000,000 3,050,000 4,606,163 4,606,109 13,922,625
Payments on debt.............................. (200,000) (4,050,000) -- -- --
Payments on capital lease obligations......... (164,800) (176,503) (110,825) (151,466) (76,773)
Proceeds from issuance of common stock upon
exercise of stock options................... 3,465 29,770 141,800 79,712 551,308
Proceeds from issuance of common stock in
secondary offering, net of fees and
expenses.................................... -- 21,850,516 -- -- --
Purchase of treasury stock.................... -- (2,988,343) -- -- --
Proceeds from issuance of preferred stock net
of fees and expenses........................ 5,054,787 -- -- -- --
Cash acquired in the Merger................... -- 8,891,389 -- --
Payment of fees and expenses associated
with Merger................................. -- (1,135,099) -- --
Redemption of Merger dissenter shares......... -- (527,220) -- -- --
Other......................................... -- -- (27,214) (30,043) (123,446)
------------ ----------- ------------ ----------- ------------
Net cash provided by financing activities..... 5,693,452 24,944,510 4,609,924 4,504,312 14,273,714
Effect of exchange rate changes on cash and
cash equivalents............................ (35,859) (27,099) 38,356 26,112 (43,985)
------------ ----------- ------------ ----------- ------------
Net increase (decrease) in cash and cash
equivalents................................. (1,107,845) 17,352,213 (13,176,280) (5,319,798) (144,564)
Cash and cash equivalents at beginning of
period...................................... 1,234,855 127,010 17,479,223 17,479,223 4,302,943
------------ ----------- ------------ ----------- ------------
Cash and cash equivalents at end of period.... $ 127,010 $17,479,223 $ 4,302,943 $12,159,425 $ 4,158,379
============ =========== ============ =========== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the period for:
Interest on long-term debt, notes payable,
and capital leases........................ $ 417,587 $ 354,333 $ 24,047 $ 35,617 $ 31,255
============ =========== ============ =========== ============
</TABLE>
See accompanying notes.
F-7
<PAGE> 119
SOURCE MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. COMPANY HISTORY AND DESCRIPTION
Source Media, Inc. (Source or the Company), through its wholly-owned
subsidiary IT Network, 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. The Interactive Channel offers over 60
interactive programs including on demand local and national news, sports and
weather, home shopping with 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.
IT Network was incorporated on July 19, 1988, as a Colorado corporation and
subsequently, on July 23, 1991, reincorporated in Texas. On June 23, 1995, IT
Network merged (the Merger) into a wholly-owned subsidiary of HB Communications
Acquisition Corp. (HBAC). Pursuant to the Merger agreement, IT Network's
outstanding common stock and preferred stock were converted into an aggregate
6,696,992 shares of the Company's common stock. In connection with the Merger,
HBAC changed its name to Source Media, Inc. Because the Merger resulted in IT
Network's stockholders having a majority ownership in Source, the Merger was
accounted for as an issuance of IT Network's shares in exchange for the net
assets of Source. In connection with the Merger, Source paid $527,000 to redeem
50,500 HBAC common shares held by dissenting stockholders and repaid $4,100,000
of IT Network debt and related accrued interest. For accounting and financial
reporting purposes, the Company has reflected in its consolidated financial
statements the assets, liabilities, and equity of IT Network at their historical
book values. Accordingly, the results of operations and financial position of
the Company, for periods and dates prior to the Merger, are the historical
results of operations and financial position of IT Network for such period and
dates.
The Company has authorized for issuance up to 1,000,000 shares of $.001 par
value preferred stock and 50,000,000 shares of $.001 par value common stock.
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company;
its wholly-owned subsidiary IT Network; and IT Network's majority-owned Canadian
subsidiaries, Interactive Channel Technologies Inc., a publicly traded company
(ICT), and 997758 Ontario Inc. (997758). All material intercompany amounts and
transactions have been eliminated. Certain amounts from prior years have been
reclassified to conform with the current year presentation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Minority Interests
Minority interests represent the minority stockholders' proportionate
shares of the equity of both ICT and 997758. At December 31, 1995 and 1996, the
Company owned approximately 51% of ICT's capital stock, representing
approximately 74% voting control. At December 31, 1995 and 1996, the Company
owned 100%
F-8
<PAGE> 120
SOURCE MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of the voting Class X shares of 997758, while an individual owned 100% of the
Class Y nonvoting shares of 997758, as more fully discussed in Note 6 -- Stock
Options, Warrants and Employee Stock Purchase Plan. In January 1997, the Company
completed an arrangement whereby it acquired the remaining shares of ICT, as
more fully discussed in Note 4 -- Acquisitions.
Cash and Cash Equivalents
The Company classifies all highly liquid investments with original
maturities of three months or less to be cash equivalents.
Restricted Investments
On December 12, 1996, the Company entered into a letter of credit which was
collateralized by a deposit of $611,182. This deposit matures on May 6, 1997 in
the amount of $624,000 and will be used to pay an overseas supplier for goods
expected to be shipped to the Company at that time.
Monetary Revenue Recognition
The Company earns monetary revenues through advertising sponsorships of its
IT Network telephone business. Monetary revenues are recognized on a
straight-line basis over the term of the respective contracts, beginning at the
time of the annual distribution of the applicable local Yellow Pages directory,
or at the applicable contract start date, if later, and continuing to the end of
the term of the respective contracts, which is typically from 3 to 12 months. As
the Company typically bills the sponsorship fees before the end of the
contracts, unearned income represents cumulative amounts billed under monetary
contracts in excess of cumulative revenues earned under the same contracts.
The Company has entered into agreements with certain Regional Bell
Operating Companies or their affiliates or other Yellow Pages publishers
(collectively, "Directory Publishers") whereby the Company agreed to share
certain revenues and the Directory Publisher agreed to bear certain costs. Under
the terms of certain of these agreements, the Company's sales force sells
certain advertising sponsorships for the Company's interactive telephone
programming. In these cases, the Company recognizes the full amount of revenues
received, pursuant to sponsorships sold by the Company's sales personnel, as
revenue on a straight-line basis and recognizes the Directory Publisher's costs
under such agreements as cost of sales. In other agreements, the Directory
Publisher's sales force sells such sponsorships. In these cases, the Company
recognizes as revenues only its share of the contract amount as these services
are provided.
Under its agreements with certain Directory Publishers, the Company pays
the Directory Publisher fees equal to a percentage of cash collected under
monetary contracts with advertisers, as discussed above. Such fees are paid to
the Directory Publisher prior to the end of the contracts with the advertisers,
while the related expenses are recognized on a straight-line basis over the
length of the advertising contracts. Accordingly, deferred expense represents
cumulative fees paid to the Directory Publishers, under revenue and cost-sharing
agreements, in excess of cumulative expenses recognized under the same
contracts.
To date, the majority of revenues generated by the Interactive Channel have
been associated with trials related to Interactive Channel technology. The
Company anticipates the majority of future Interactive Channel revenues will be
generated by subscribers and advertisers and recognized as revenues on a monthly
basis as the services are provided.
Nonmonetary Revenue Recognition
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 service in
F-9
<PAGE> 121
SOURCE MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
exchange for promotional messages provided in connection with the IT Network
telephone business and print advertisements in the Company's printed 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.
Nonmonetary revenues and cost of sales are recognized on a straightline
basis over the terms of the respective contracts. The Company was obligated to
provide future services and was entitled to receive future advertising and
information content of $9,430,099 and $3,507,507 at December 31, 1995 and 1996,
respectively.
Property and Equipment
Property and equipment are recorded at cost. Depreciation and amortization,
including the amortization of assets recorded under capital lease obligations
(which is included in depreciation expense), are computed by the straight-line
method over the estimated useful lives of the assets. Computer equipment is
depreciated over a three-year period. Production and other equipment are
depreciated over a five-year period. Furniture and fixtures are depreciated over
a seven-year period.
Intangible Assets
Goodwill and patents are related to the acquisition of the ICT interest in
1992 and are amortized using the straight-line method over an estimated useful
life of five years. Contract rights, which relate to the 1996 IT Network
telephone business acquisitions discussed in Note 4 -- Acquisitions, are
amortized over the minimum contract period of three years.
The Company continually reevaluates the propriety of the carrying value of
intangible assets, as well as the amortization periods, to determine whether
current events and circumstances warrant adjustment to the carrying value or
revisions to estimates of useful lives. To measure any potential impairment of
goodwill and patents, the Company periodically compares the carrying value of
its investment in ICT to its equity ownership percentage of the fair market
value of ICT. As a result of this periodic evaluation, effective December 31,
1994, the Company recorded a write-down of its patents and goodwill in the
amount of $1,900,000.
Advertising Costs
The Company expenses the costs of advertising as incurred. Advertising
expense was $1,315,286 for the year ended December 31, 1996. Advertising
expenses were not material for the years ended December 31, 1995 and 1994.
Translation of Foreign Currencies
The financial positions and results of operations of ICT and 997758 are
measured using local currency as the functional currency. Assets and liabilities
of these subsidiaries are translated at the exchange rate in effect at each
year-end. Statement of operations accounts are translated at the average rate of
exchange prevailing during the year. Translation adjustments arising from the
use of differing exchange rates from period to period are included in the
foreign currency translation account in stockholders' equity.
Computation of Net Loss Per Common Share
The computation of net loss per common share in each period is based on the
weighted average number of common shares outstanding for each period, after the
retroactive adjustment to reflect shares issued to the former IT Network common
stockholders as part of the Merger. Convertible securities and stock options are
F-10
<PAGE> 122
SOURCE MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
not included in the net loss per common share calculation for each period
because they are anti-dilutive. The common stock held by HBAC stockholders and
the common stock issued upon the conversion of the preferred stock of IT are
included in the computation from the date of the Merger.
Stock Options
The Company accounts for employee and director stock option grants in
accordance with Accounting Principles Board Opinion No. 25, Accounting For Stock
Issued to Employees (APB 25) and related Interpretations. Under APB 25, no
compensation expense is recognized for stock option grants to employees and
directors if the exercise price of the Company's stock option grants is at or
above the fair market value of the underlying stock on the date of grant.
Expenses Related to Discontinued Public Offering
Included in Other (Income) Expense for the year ended December 31, 1994 are
expenses of $1,479,000 associated with a discontinued public offering.
Unaudited Interim Information
The interim consolidated financial information as of September 30, 1997 and
for the periods ended September 30, 1996 and 1997, is unaudited. However, in the
opinion of management, these interim consolidated financial statements include
all adjustments, which are of a normal recurring nature, necessary for a fair
presentation of the financial position, results of operations, and cash flows
for the periods presented. Results of operations and cash flows for the nine
months ended September 30, 1997 are not necessarily indicative of the results
that may be expected for the entire year ending December 31, 1997.
3. COMMITMENTS AND CONTINGENCIES
On January 17, 1997, William T. Little, a stockholder and former director
of the Company, 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, IT Network and certain of its executive officers
and directors, alleging that he and various convertible noteholders converted
their notes into common stock of the Company based upon misrepresentations by
the Company 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 Network would engage in a public offering of its stock for approximately
$56 per share, which did not occur. The plaintiff further claims that the
Company also offered to issue to him, during the time he was serving as a
director of the Company, an unspecified number of shares of the common stock of
the Company in consideration for his release of any claims related to such
alleged misrepresentations and that the Company 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 as well as including counterclaims
against Mr. Little for breach of fiduciary duty during his tenure as a director
of the Company and seeking exemplary and punitive damages. On September 9, 1997,
the parties entered into a settlement agreement and release under which the
Company will provide registered stock of the Company to the plaintiff. The
expense of the settlement, which will be recorded in the third quarter of 1997,
will not have a material impact on the result of operations of the Company.
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, commenced a legal proceeding in
F-11
<PAGE> 123
SOURCE MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Ontario, Canada in the Ontario Court (General Division) against the Company and
certain executive officers of the Company and a director of ICT on the grounds
that the defendants took actions intended to depress the value of ICT to allow
the Company to acquire shares 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 the Company 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 common shares
of the Company 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. On October 21, 1996, the plaintiffs advised that they intended to move
to amend their statement of claim for punitive damages in the amounts of Cdn$1
million against the Company and an aggregate of Cdn$2 million against certain
officers of the Company. A date has not been set for the plaintiffs' motion to
amend the statement of claim. 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 the Company.
The Company is party to ordinary routine litigation and other claims
incidental to its business, none of which is expected to have a material adverse
effect on the Company's results of operations or financial position. The costs
of defending litigation and other claims are expensed as incurred.
4. ACQUISITIONS
In October 1996, the Company acquired certain audiotext servicing assets
from The Reuben H. Donnelly Corporation ("Donnelly") for an aggregate purchase
price of $750,000, of which $600,000 was paid in October 1996 and $150,000 is
due in June 1997. In connection therewith, the Company executed a services
agreement with a three year minimum term under which Donnelly is obligated to
pay the Company a minimum of $3.2 million over the term of the agreement and the
Company is assuming Donnelly's operating responsibilities for its audiotext
business. The Donnelly asset acquisition has been accounted for as the purchase
of equipment and contract rights and the purchase price allocated to the assets
acquired based on the estimated fair values at the date of acquisition.
In December 1996, the Company acquired certain audiotext servicing assets
from GTE Directories Corporation ("GTE") for an aggregate purchase price of
$1,800,000, of which $600,000 was paid in December 1996 and $600,000 is due in
both June and August 1997. In connection therewith, the Company executed both
sales agency and services agreements with a three year minimum term under which
the parties have agreed to share revenues and the Company is assuming GTE's
operating responsibilities for its audiotext business. Of the shared revenues
which the Company expects to generate pursuant to the sales agency agreement,
the Company has guaranteed GTE a minimum of approximately $3.7 million over the
term of the agreement. If the Company pays the minimum required amount to GTE in
each of the years under the sales agency agreement, then pursuant to the
services agreement, GTE has agreed to pay the Company a minimum of approximately
$2.8 million for services rendered over the term of the agreement. The GTE asset
acquisition has also been accounted for as the purchase of equipment and
contract rights and the purchase price allocated to the assets acquired based on
the estimated fair values at the date of acquisition.
In January 1997, the Company acquired all of the outstanding shares of ICT
held by minority interest shareholders in exchange for 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
F-12
<PAGE> 124
SOURCE MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 will be accounted for by the purchase method of
accounting. The purchase price will be allocated primarily to patents, which
will be amortized over a five year period.
5. LONG-TERM DEBT
On April 3, 1996, the Company issued a senior note (the First Tranche Note)
in the principal amount of $5.0 million and a warrant (the First Tranche
Warrant) which entitled the holder 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
amount 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 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 $15.0 million upon
the issuance of additional senior notes (the Second Tranche Notes) in the
principal amount of $15.0 million and warrants (the Second Tranche Warrants)
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 shares 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 interest
accrued 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 will be 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.
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 capital expenditures through the end of 1997.
However, 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.
F-13
<PAGE> 125
SOURCE MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. STOCK OPTIONS, WARRANTS AND EMPLOYEE STOCK PURCHASE PLAN
Stock Options
During 1995, the Company adopted the 1995 Performance Equity Plan (the
Equity Plan). The Equity Plan provides for the grant of options to purchase
shares of the Company's common stock to employees, officers, directors, and
consultants of the Company and its subsidiaries, including IT Network. Options
granted pursuant to the Equity Plan have a term of ten years from the date of
grant and vest over a five year period. The Equity Plan authorizes the granting
of awards (stock options, stock appreciation rights, restricted stock, deferred
stock, stock reload options, and/or other stock-based awards, as defined), the
exercise of which would allow up to an aggregate of 900,000 shares of the
Company's common stock to be acquired. As of December 31, 1996, there were
options outstanding under the Equity Plan to purchase 900,000 shares of Common
Stock at an average exercise price of $9.42 per share.
During 1989, the Company established a qualified incentive employee stock
option plan. Options granted in 1989 and 1990 have a term of ten years from the
date of grant and vest over a three year period. During 1991 and 1993, the
Company established additional qualified incentive employee stock option plans
whereby granted options have a term of ten years from the date of grant and vest
over a five year period. The Company does not intend to grant any additional
options under these plans and, accordingly, all remaining options available for
grant under such plans are assumed to be canceled.
Stock option activity under the employee stock option plans during the
years ended December 31, 1994, 1995, and 1996 was as follows:
<TABLE>
<CAPTION>
OPTIONS SHARES WEIGHTED
AVAILABLE UNDER AGGREGATE OPTION OR AVERAGE
EMPLOYEE STOCK OPTION ACTIVITY FOR GRANT OPTION PRICE EXERCISE PRICE EXERCISE PRICE
------------------------------ --------- --------- ----------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993.... 227,134 247,837 $ 3,205,147 $ 0.74-26.79 $12.93
Options authorized............ -- -- --
Options granted............... (70,816) 70,816 1,897,200 26.79 26.79
Options exercised............. -- (4,583) (3,465) 0.74-26.79 0.76
Options canceled.............. 45,324 (45,324) (679,675) 26.79 15.00
-------- --------- -----------
Balance at December 31, 1994.... 201,642 268,746 4,419,207 0.74-26.79 16.44
Options authorized............ 500,000 -- --
Options repriced.............. -- -- (2,449,709)
Options granted............... (220,586) 220,586 2,247,607 9.77-11.50 10.19
Options exercised............. -- (84,688) (261,353) 0.74-3.72 3.09
Options canceled.............. 56,035 (56,035) (684,034) 9.77-26.79 12.21
Options assumed canceled...... (178,092) -- --
-------- --------- -----------
Balance at December 31,1995..... 358,999 348,609 3,271,718 0.74-11.50 9.39
Options authorized............ 400,000 -- --
Options granted............... (775,224) 775,224 7,181,190 8.25-10.50 9.26
Options exercised............. -- (23,485) (141,796) 0.74-9.77 6.04
Options canceled -- 1995
Plan....................... 16,225 (16,225) (169,731) 8.25-11.12 10.46
Options canceled -- Other
plans...................... -- (22,379) (217,980) 3.72-9.77 9.74
-------- --------- -----------
Balance at December 31, 1996.... 0 1,061,744 $ 9,923,401 $0.74-$11.50 $ 9.35
======== ========= ===========
</TABLE>
In March 1995 the Board of Directors approved a reduction in the exercise
price of certain of the Company's outstanding employee stock options. In total,
145,783 options with exercise prices of $14.88 and $26.79 per share were revised
to an exercise price of $9.77 per share, which represented fair market value.
F-14
<PAGE> 126
SOURCE MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Certain additional information as of December 31, 1996, is being presented
based on a range of exercise prices as follows:
<TABLE>
<CAPTION>
$0.74-$3.72 $8.25-$11.50
----------- ------------
<S> <C> <C>
Number of shares outstanding................................ 17,016 1,044,728
Weighted average exercise price of shares outstanding....... $ 1.64 $ 9.47
Weighted average remaining contractual life................. 3.3 years 8.9 years
Number of shares exercisable................................ 17,016 196,398
Weighted average exercise price of shares exercisable....... $ 1.64 $ 10.19
</TABLE>
During 1995, the Company adopted the 1995 Nonqualified Stock Option Plan
for Non-Employee Directors (the Directors' Plan). The Directors' Plan provides
for the automatic annual grant to each non-employee director of the Company an
option to purchase 3,000 shares of Common Stock. Options granted under the
Directors' Plan have an exercise price equal to the fair market value of the
Common Stock on the date of grant and are exercisable at any time from the date
of grant until the fifth anniversary thereof. The Directors' Plan provides for
the grant of options to purchase up to 90,000 shares of Common Stock. During
1995, options to purchase a total of 12,000 shares at a price of $10.89 per
share were granted from the Directors' Plan. During 1996, options to purchase a
total of 18,000 shares at a price of $10.43 per share were issued from the
Directors' Plan. As of December 31, 1996, there were options outstanding under
the Directors' Plan to purchase 30,000 shares of Common Stock at an average
exercise price of $10.61 per share.
The Company has adopted the pro forma disclosure provisions of the
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (FAS 123). As required by FAS 123, pro forma information regarding
net loss and loss per share has been determined as if the Company had accounted
for employee stock options granted subsequent to December 31, 1994 under the
fair value method provided for under FAS 123. The fair value for the stock
options granted to officers and key employees of the Company after January 1,
1995 was estimated at the date of the grant using the Black-Scholes option
pricing model with the following weighted-average assumptions:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Risk-free interest rate..................................... 6.55% 6.39%
Expected dividend yield..................................... 0.00% 0.00%
Expected volatility......................................... 30% 30%
Expected lives.............................................. 4.0 years 4.0 years
</TABLE>
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
The weighted-average fair value of stock options granted during the years
ended December 31, 1995 and 1996 was $2.85 and $2.34, respectively. For purposes
of the pro forma disclosures, the estimated fair value of
F-15
<PAGE> 127
SOURCE MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
stock options granted during 1995 and 1996 has been amortized to expense over
the vesting period. The Company's pro forma information is as follows (in
thousands, except for loss per common share information):
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C> <C>
Net loss attributable to common stockholders................ As reported $10,602 $13,855
Pro forma $10,912 $14,411
Net loss per common share................................... As reported $ 1.65 $ 1.39
Pro forma $ 1.70 $ 1.45
</TABLE>
Because FAS 123 is applicable only to options and stock-based awards
granted subsequent to December 31, 1994, its pro forma effect will not be fully
reflected until 1999.
Warrants
The Company has issued warrants for the purchase of shares of its common
stock from time to time in connection with various financing transactions and
for advisory and consulting services provided to the Company. As of December 31,
1996, warrants for the purchase of common stock of the Company were outstanding
as follows:
<TABLE>
<CAPTION>
SHARES ISSUABLE
UPON EXERCISE EXERCISE PRICE EXPIRATION DATE
- --------------- -------------- ---------------
<C> <C> <S>
1,903,302 $10.60 -- 11.00 June 1998
1,034,687 7.44 May 2000
500,000(1) 10.21 March 2001
476,500(2) 11.00 June 2000
252,676 10.50 December 1998
83,085 10.79 February 2001
10,079 18.60 February 1998
---------
4,260,329(3)
=========
</TABLE>
- ---------------
(1) First Tranche Warrants. See Note 5 -- Long-Term Debt.
(2) 451,500 of which are redeemable by the Company at a purchase price of $0.01
per warrant upon 20 days notice at any time in the event the sales price of
the Company's common stock is at least $20.00 per share for 20 consecutive
trading days.
(3) The majority of the warrants provide for registration rights.
During the year ended December 31, 1995, the Company incurred charges
related to financing incentives of $1,581,250 as a result of the issuance of
certain of the above warrants in connection with interim financings. During the
year ended December 31, 1994, the Company recorded approximately $456,000 in
selling, general and administrative expenses upon the issuance of warrants for
certain advisory and consulting services provided to the Company.
997758 Class Y Stock Put Rights
On September 24, 1992, the Company's subsidiary, 997758, entered into an
agreement with an individual to issue shares of 997758's nonvoting Class Y
shares in exchange for Class A Subordinate Voting Shares and Class B Multiple
Voting Shares of ICT owned by such individual. The individual has the right at
any time through February 14, 2000, to exchange any or all of the Class Y shares
of 997758 for up to an aggregate of 206,376 shares of the Company's common
stock. Each exercise of the exchange rights shall include at least Cdn $150,000
in value of Class Y shares of 997758 being exchanged for the Company's common
stock.
F-16
<PAGE> 128
SOURCE MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Shares Reserved for Future Issuance
As of December 31, 1996, 5,618,449 common shares were reserved for future
issuance, as follows:
<TABLE>
<CAPTION>
NUMBER OF
SECURITY RESERVED SHARES
-------- ---------------
<S> <C>
Stock Warrants.............................................. 4,260,329
Employee and director stock options......................... 1,151,744
997758 Class Y Stock put rights............................. 206,376
---------
5,618,449
=========
</TABLE>
Employee Stock Purchase Plan
During July 1996, the Board of Directors of the Company adopted the
Employee Stock Purchase Plan (the Plan), subject to approval by the Company's
stockholders at the 1997 annual meeting. Under the Plan, eligible employees may
purchase shares of the Company's common stock at a discount through voluntary
monthly payroll deductions, beginning in September 1996. In connection with the
Plan, the Company has set aside 100,000 shares of common stock held in treasury.
Anti-Dilution Provisions
Certain of the stock warrants contain anti-dilution provisions whereby the
exercise price and the number of shares exercisable pursuant to the warrants may
be adjusted from time to time upon the occurrence of certain events. In
connection with such provisions, warrants to purchase 1,034,687 shares of the
Company's common stock at a purchase price of $7.44 per share were adjusted to
provide for the purchase of the same number of shares at a purchase price of
$6.00 per share, and warrants to purchase 28,302 shares of the Company's common
stock at a purchase price of $10.60 per share were adjusted to provide for the
purchase of 68,498 shares at a purchase price of $4.38 per share upon the
issuance of common stock in connection with the ICT acquisition discussed in
Note 4 -- Acquisitions and the amendment to the First Tranche Warrant and
issuance of the Second Tranche Warrants discussed in Note 5 -- Long-Term Debt.
7. NOTES RECEIVABLE FROM STOCKHOLDERS
On May 20, 1993, the Company loaned $750,000 to the individual holding
Class Y shares of 997758, which note is secured by the individual's holdings in
997758 and bears interest at a rate per annum of 2%, payable quarterly. The
unpaid principal and interest become due on May 20, 2000. The Company recorded a
discount of $292,000 to reflect the difference between the actual interest rate
and a reasonable market rate (10%) and increased goodwill accordingly. The note
and accrued interest, net of the unamortized discount of $178,866 and $137,152
as of December 31, 1995 and 1996, respectively, are reflected as a reduction of
minority interests in the accompanying consolidated balance sheet.
On June 30, 1993, the Company loaned $50,000 to an officer, director, and
stockholder. This loan bears interest at the rate of 10% per annum, with the
principal amount and accrued interest due and payable on May 31, 1997. Payment
of the note is secured by a pledge of 6,719 shares of common stock. Amounts
outstanding, including accrued interest, are included in stockholders' equity
(capital deficiency) in the accompanying consolidated balance sheets.
In May 1995, the Company loaned $225,000 to an officer and stockholder.
Such loan bore interest at the rate of 10% per annum, with principal and accrued
interest due May 31, 1997. In February 1996, the officer and stockholder repaid
the note and all accrued interest through a surrender of common stock with a
fair market value equal to the outstanding note and accrued interest as of the
date of repayment.
F-17
<PAGE> 129
SOURCE MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. LEASES
The Company leases office space and various office equipment under
operating leases. Rent expense was $522,093, $508,349, and $485,221 for the
years ended December 31, 1994, 1995, and 1996, respectively. The Company has
non-cancelable operating lease commitments of $610,809 and $235,699 in the years
ending December 31, 1997 and 1998, respectively.
The Company leases certain production equipment under capital leases having
effective interest rates ranging from 3.7% to 21%, with lease terms that expire
through 1998. Assets recorded under capital leases, which are included in
property and equipment, were $454,198 and $502,071 at December 31, 1995 and
1996, respectively. Accumulated amortization related to these assets was
$197,561 and $297,404 at December 31, 1995 and 1996, respectively.
9. INCOME TAXES
For the years ended December 31, 1994, 1995 and 1996, the Company had no
provision or benefit for income taxes because the deferred benefit from the
operating losses was offset by an increase in the valuation allowance of $2.9
million, $3.2 million and $5.6 million, respectively. Significant components of
the Company's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Deferred tax liabilities:
Tax over book depreciation.............................. $ (92,502) $ (220,134)
Other................................................... (302,394) (204,589)
------------ ------------
Total deferred tax liabilities.......................... (394,896) (424,723)
Deferred tax assets:
Net operating loss carryforwards...................... 12,386,189 18,191,157
Investment tax credits................................ 3,431,000 3,304,758
Unearned income....................................... 1,555,418 1,471,210
Accrued compensation.................................. 342,160 432,362
Accrued expenses...................................... 53,754 56,540
Other................................................. 37,729 26,886
------------ ------------
Total deferred tax assets............................... 17,806,250 23,482,913
Valuation allowance for deferred tax assets............. (17,411,354) (23,058,190)
------------ ------------
Net of valuation allowance............................ 394,896 424,723
------------ ------------
Net deferred tax asset.................................. $ -- $ --
============ ============
</TABLE>
At December 31, 1996, the Company had net operating loss carryforwards of
approximately $42.2 million for United States income tax purposes, that expire
in 2003 through 2011, which may be used to reduce future United States taxable
income. The Tax Reform Act of 1986 imposes limitations on the use of net
operating loss carryforwards if certain stock ownership changes occur. As a
result of the Merger, an ownership change occurred that will cause the Company's
utilization of pre-Merger net operating losses to be limited to approximately
$3.5 million in a given year.
At December 31, 1996, ICT had net operating loss carryforwards for Canadian
income tax purposes of approximately Cdn $9.3 million, expiring in 1997 through
2003, which may be used to reduce future Canadian taxable income of ICT. ICT
also has available at December 31, 1996 investment tax credits totaling Cdn $4.5
million, expiring in 1997 through 2003.
F-18
<PAGE> 130
SOURCE MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1996, ICT had net operating loss carryforwards for Ontario
Provincial income tax purposes of approximately Cdn $9.8 million, expiring in
1998 through 2003, which may be used to reduce future Ontario taxable income of
ICT.
10. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
The Company performs ongoing credit evaluations of its customers and does
not require collateral. Overall, concentrations of credit risk with respect to
receivables, except for the customers discussed below, are limited because of
the large number of customers in the Company's customer base, the relatively
small dollar amount of individual customer balances and their dispersion across
many different industries and geographic areas. The Company maintains an
allowance for doubtful accounts, which was $110,199 and $62,504 as of December
31, 1995 and 1996, respectively, to reserve for potential credit losses, which
have historically been within management's expectations.
During the years ended December 31, 1995 and 1996, the Company generated
approximately $1,898,000 and $1,466,000 in monetary revenues, or 20% and 17%,
respectively, of total monetary revenues for 1995 and 1996, and approximately
$5,975,000 and $3,179,000 in nonmonetary revenues, or 37% and 32%, respectively,
of total nonmonetary revenues for 1995 and 1996, through contracts with
advertisers and media sponsors related to sponsorships of the Company's printed
menu of audiotext topics distributed in the yellow pages of Ameritech
Advertising Services (Ameritech). Subsequent to year end, Ameritech and the
Company agreed to enter into a definitive agreement pursuant to which the
Company will be the exclusive audiotext sales and service provider in up to 38
Ameritech Yellow Pages directories for a three year period commencing in January
1998.
During 1995 and 1996, the Company also generated approximately $1,084,000
and $213,000 in monetary revenues, or 12% and 2%, respectively, of total
monetary revenues for 1995 and 1996, through sales of services called Consumer
Tips to Ameritech.
As of December 31, 1995 and 1996, balances due from Ameritech represented
24% and 30% of the Company's accounts receivable, respectively. Additionally, as
of December 31, 1996, The Reuben H. Donnelly Corporation accounted for 38% of
accounts receivable pursuant to its service agreement with the Company,
effective in October 1996. All such receivables have since been collected. No
other customer represented more than 10% of the Company's accounts receivable or
accounted for greater than 10% of monetary revenues as of December 31, 1996, or
for either of the two years then ended.
11. SEGMENT REPORTING
For financial reporting purposes, the Company operates in two business
segments:
On-demand telephone services -- The Company's IT Network telephone
business provides advertiser-sponsored interactive programming via the
telephone in markets throughout the United States.
On-demand television services -- The Company's on-demand television
product, the Interactive Channel, is designed to provide a broad range of
interactive programming via the television.
Corporate assets consist primarily of cash and cash equivalents and
deferred debt issuance costs.
F-19
<PAGE> 131
SOURCE MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following are operating results and certain other information by
business segment:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
-------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net revenues:
On-demand telephone............................... $ 30,093 $25,283 $ 17,487
On-demand television.............................. 850 3 1,032
-------- ------- --------
$ 30,943 $25,286 $ 18,519
======== ======= ========
Operating loss:
On-demand telephone............................... $ (2,633) $ (756) $ (301)
On-demand television.............................. (6,659) (5,819) (10,311)
Corporate expenses................................ (2,039) (1,753) (3,407)
-------- ------- --------
$(11,331) $(8,328) $(14,019)
======== ======= ========
Identifiable assets:
On-demand telephone............................... $ 4,363 $ 4,120 $ 6,482
On-demand television.............................. 3,729 2,596 4,166
Corporate assets.................................. 127 17,479 5,249
-------- ------- --------
$ 8,219 $24,195 $ 15,897
======== ======= ========
Depreciation and amortization:
On-demand telephone............................... $ 470 $ 458 $ 361
On-demand television.............................. 1,946 1,374 1,577
-------- ------- --------
$ 2,416 $ 1,833 $ 1,938
======== ======= ========
Capital expenditures:
On-demand telephone............................... $ 195 $ 17 $ 591
On-demand television.............................. 217 241 2,088
-------- ------- --------
$ 412 $ 258 $ 2,679
======== ======= ========
</TABLE>
F-20
<PAGE> 132
SOURCE MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Foreign net revenues, operating loss, and identifiable assets of all
consolidated foreign subsidiaries located outside the United States and its
territories, and possessions as of and for the years ended December 31, 1994,
1995, and 1996, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
-------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net revenues:
United States..................................... $ 30,098 $25,286 $ 17,806
Canada............................................ 845 -- 713
Transfers between geographic areas................ 665 2,423 3,945
Adjustments and eliminations...................... (665) (2,423) (3,945)
-------- ------- --------
$ 30,943 $25,286 $ 18,519
======== ======= ========
Operating income (loss):
United States..................................... $ (6,955) $(7,069) $(12,659)
Canada............................................ (2,940) (508) 128
Adjustments and eliminations...................... (1,436) (751) (1,488)
-------- ------- --------
$(11,331) $(8,328) $(14,019)
======== ======= ========
Identifiable assets:
United States..................................... $ 5,150 $21,402 $ 15,029
Canada............................................ 3,069 2,793 868
-------- ------- --------
$ 8,219 $24,195 $ 15,897
======== ======= ========
</TABLE>
F-21
<PAGE> 133
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors
Brite Voice Systems, Inc.:
We have audited the accompanying statements of assets, liabilities and
divisional equity of the Electronic Publishing Division of Brite Voice Systems,
Inc. (the Division -- Note 2), as of December 31, 1996 and 1995, and the related
statements of revenues and expenses, changes in divisional equity, and cash
flows for the years then ended. These statements are the responsibility of the
Division's management. Our responsibility is to express an opinion on these
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the statements referred to above present fairly, in all
material respects, the assets and liabilities of the Electronic Publishing
Division of Brite Voice Systems, Inc., as of December 31, 1996 and 1995, and its
revenues and expenses, changes in divisional equity and cash flows for the years
then ended in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
------------------------------------
Kansas City, Missouri,
September 10, 1997
F-22
<PAGE> 134
ELECTRONIC PUBLISHING DIVISION OF
BRITE VOICE SYSTEMS, INC.
STATEMENTS OF ASSETS, LIABILITIES AND DIVISIONAL EQUITY
DECEMBER 31, 1996 AND 1995
ASSETS
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
CURRENT ASSETS:
Accounts receivable, less allowance for doubtful accounts
of $214,671 and $164,263 for 1996 and 1995............. $ 3,085,364 $2,522,993
Prepaid expenses and other................................ -- 3,700
----------- ----------
Total current assets.............................. 3,085,364 2,526,693
PROPERTY AND EQUIPMENT:
Furniture and equipment................................... 1,427,482 1,338,202
Less-Accumulated depreciation............................. (1,053,584) (768,316)
----------- ----------
Total property and equipment...................... 373,898 569,886
GOODWILL.................................................... 338,291 --
----------- ----------
Total assets...................................... $ 3,797,553 $3,096,579
=========== ==========
LIABILITIES AND DIVISIONAL EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 317,502 $ 77,497
Accrued salaries and wages................................ 89,959 72,186
Deferred revenue.......................................... 12,001 46,360
Customer deposits......................................... 24,830 26,150
----------- ----------
Total current liabilities......................... 444,292 222,193
----------- ----------
COMMITMENTS AND CONTINGENCIES
DIVISIONAL EQUITY........................................... 3,353,261 2,874,386
----------- ----------
Total liabilities and divisional equity........... $ 3,797,553 $3,096,579
=========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE> 135
ELECTRONIC PUBLISHING DIVISION OF
BRITE VOICE SYSTEMS, INC.
STATEMENTS OF REVENUES AND EXPENSES
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
NET REVENUES................................................ $9,412,006 $7,273,221
COSTS AND EXPENSES:
Costs of sales/services................................... 4,685,011 3,148,626
Sales and marketing....................................... 250,638 396,635
General and administrative................................ 163,750 141,385
Allocation of general overhead............................ 1,377,614 1,084,161
---------- ----------
6,477,013 4,770,807
---------- ----------
REVENUES IN EXCESS OF EXPENSES.............................. $2,934,993 $2,502,414
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE> 136
ELECTRONIC PUBLISHING DIVISION OF
BRITE VOICE SYSTEMS, INC.
STATEMENTS OF CHANGES IN DIVISIONAL EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
BALANCE, beginning of year.................................. $ 2,874,386 $ 2,487,948
Revenues in excess of expenses............................ 2,934,993 2,502,414
Cash transfers to parent, net............................. (2,456,118) (2,115,976)
----------- -----------
BALANCE, end of year........................................ $ 3,353,261 $ 2,874,386
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE> 137
ELECTRONIC PUBLISHING DIVISION OF
BRITE VOICE SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Revenues in excess of expenses............................ $2,934,993 $2,502,414
Items not requiring cash --
Depreciation and amortization.......................... 306,794 295,629
Loss on disposal of fixed assets....................... 4 491
Changes in --
Accounts receivable.................................... (562,371) (492,831)
Accounts payable and accrued expenses.................. 257,778 47,376
Other current assets and liabilities................... (31,979) (40,540)
---------- ----------
Net cash provided by operating activities......... 2,905,219 2,312,539
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................ (110,810) (196,563)
Increase in other assets.................................. (338,291) --
---------- ----------
Net cash used in investing activities............. (449,101) (196,563)
---------- ----------
NET CASH TRANSFERS TO PARENT................................ $2,456,118 $2,115,976
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE> 138
ELECTRONIC PUBLISHING DIVISION OF
BRITE VOICE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
1. SALE OF THE BUSINESS:
Brite Voice Systems, Inc., has entered into an agreement in principle to
sell the net assets of its Electronic Publishing Division to Source Media, Inc.
(SMI), for approximately $35,000,000, subject to post-closing adjustments, as
agreed. Closing of the transaction is contingent on many factors including,
among other things, the success of SMI obtaining funds to close the transaction
and any waiting periods imposed by the Hart Scott Rodino Antitrust Improvements
Act of 1976.
2. ORGANIZATION:
Basis of Presentation
The accompanying financial statements include the accounts of certain
products sold and delivered by the Electronic Publishing Division (the Division)
of Brite Voice Systems, Inc. (the Parent), the Parent company of the Division.
These financial statements reflect the assets, liabilities, revenues and
expenses related to: (i) the management of audiotex systems installed on the
premises of newspaper and yellow pages publishers, including daily programming
changes and the production of monthly reports reflecting system usage, messages
played and advertisements heard; (ii) the creation and transmission by satellite
of a wide variety of general information suitable for dissemination in any
location for access by telephone callers through audiotex systems owned or
operated by newspaper and yellow pages publishers, broadcasters and network
operators; (iii) the creation and provision to yellow pages publishers over the
Internet of a variety of information; (iv) the sale of advertising sponsorships
to various categories of audiotex information made available through yellow
pages publishers' audiotex systems, including creation of printed material
designed for inclusion in the publishers' directories, and (v) advertiser
management services provided on behalf of yellow pages publishers whereby
advertising entities are contacted from an outbound call center for periodic
updating of their audiotex sponsorships and advertisements.
These financial statements reflect the revenues and expenses of the
Division, including direct and indirect expenses of the Division that are paid
by the Parent and charged directly to the Division. Allocation of the general
overhead from the Parent includes charges for marketing, general corporate
management, accounting and payroll services, legal services and certain
communication functions. In addition, the taxable income of the Division is
included in the consolidated tax return of the Parent. No income tax expense or
related current or deferred tax assets or liabilities have been allocated to the
Division by the Parent as the division is not an income tax reporting entity nor
does it have a tax sharing agreement with the Parent.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets which
range from three to ten years.
Goodwill
Goodwill of $338,291 at December 31, 1996 (none at December 31, 1995),
represents the cost in excess of net tangible assets acquired in a business
combination accounted for as a purchase, and is being amortized over five years.
(See Note 4.)
F-27
<PAGE> 139
ELECTRONIC PUBLISHING DIVISION OF
BRITE VOICE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Divisional Equity
The Parent utilizes a centralized cash management system for certain of its
operations, including the Division. Cash distributed to or advanced from the
Parent has been reflected as a decrease or increase in divisional equity in the
accompanying statements.
Revenue Recognition
Revenues are generally recognized when the services are provided. Billings
in advance of the service being provided are recorded as deferred revenues in
the accompanying financial statements.
Credit Risk
The Division extends unsecured credit to customers throughout the United
States and Canada and in certain foreign countries.
4. ACQUISITIONS:
On December 13, 1996, the Parent issued 15,000 shares of its common stock
and paid $195,000 in cash for certain assets of Harrison & Associates, L.L.C.
The terms of the Asset Purchase Agreement provide for additional consideration
of up to 55,000 shares of the Parent's common stock provided certain operating
results are achieved. The contingent consideration has not been recorded as of
December 31, 1996, as there is no assurance that the operating results will be
achieved.
Had the acquisition occurred on January 1 of 1996 and 1995, revenues and
division net income would not differ materially from the amounts included in the
accompanying statements of revenue and expenses.
In the event that the transaction contemplated with SMI is consummated, the
Parent will be required to issue the remainder of the shares reserved for
issuance under the Asset Purchase Agreement.
5. EMPLOYEE BENEFITS:
The Parent sponsors various benefit programs which cover substantially all
of its employees, including those of the Division. Benefits under these programs
include medical, dental, vision and pharmaceutical coverage, life and accidental
death and dismemberment insurance, vacation and sick pay programs, and a 401(k)
plan, under which the Parent contributes a percentage of employee contributions
at rates determined by the Board of Directors of the Parent.
Expenses related to these programs are allocated to all of the Parent's
operations, including the Division, based on a percentage of base salary. The
Division recorded expenses of $422,803 and $331,283 for the years ended December
31, 1996 and 1995, respectively, relating to these programs.
Management of the Parent believes that the expenses charged to the Division
are not materially different from the costs that would have been incurred had
the Division borne such expenses on a direct basis.
6. COMMITMENTS AND CONTINGENCIES:
The Parent leases office space under noncancellable agreements expiring at
various times in future years. The Division is not a party to any of these
agreements, but is allocated expenses based on the costs incurred by the Parent
for rent, utilities, maintenance, property taxes and insurance. The Division was
allocated $350,238 and $267,996 for the years ended December 31, 1996 and 1995,
respectively. The facilities allocation is based on the number of employees
employed by the Division, and the management of the Parent believes that the
F-28
<PAGE> 140
ELECTRONIC PUBLISHING DIVISION OF
BRITE VOICE SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
expenses charged to the Division are not materially different from the costs
that would have been incurred had the Division borne such expenses on a direct
basis.
The Division is subject to claims and litigation from time to time arising
in the normal operation of its business. Management believes that the ultimate
resolution of any pending claim will not be material to the results of
operations or the financial position of the Division.
7. SIGNIFICANT CUSTOMERS:
For the years ended December 31, 1996 and 1995, one customer and its
affiliates accounted for revenues of $2,624,161 and $1,528,775, respectively.
F-29
<PAGE> 141
ELECTRONIC PUBLISHING DIVISION OF
BRITE VOICE SYSTEMS, INC.
STATEMENTS OF ASSETS, LIABILITIES AND DIVISIONAL EQUITY
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
CURRENT ASSETS:
Accounts receivable, less allowance for doubtful accounts
of $271,289 and $214,671 for 1997 and 1996,
respectively........................................... $ 3,225,572 $ 3,085,364
Prepaid expenses and other................................ 9,800 --
----------- -----------
Total current assets.............................. 3,235,372 3,085,364
PROPERTY AND EQUIPMENT:
Furniture and equipment................................... 1,410,817 1,427,482
Less- Accumulated depreciation............................ (1,169,846) (1,053,584)
----------- -----------
Total property and equipment 240,971 373,898
GOODWILL 285,836 338,291
----------- -----------
Total Assets...................................... $ 3,762,179 $ 3,797,553
=========== ===========
LIABILITIES AND DIVISIONAL EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 394,304 $ 317,502
Accrued salaries and wages................................ 151,202 89,959
Deferred revenue.......................................... 80,038 12,001
Customer deposits......................................... 23,430 24,830
----------- -----------
Total current liabilities......................... 648,974 444,292
----------- -----------
COMMITMENT AND CONTINGENCIES
DIVISIONAL EQUITY 3,113,205 3,353,261
----------- -----------
Total liabilities and divisional equity........... $ 3,762,179 $ 3,797,553
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE> 142
ELECTRONIC PUBLISHING DIVISION OF
BRITE VOICE SYSTEMS, INC.
STATEMENTS OF REVENUES AND EXPENSES
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
NET REVENUES................................................ $9,804,254 $7,022,786
COSTS AND EXPENSES
Costs of sales/services................................... 4,818,421 3,412,268
Sales and marketing....................................... 1,109,967 159,625
General and administrative................................ 105,251 122,813
Allocation of general overhead............................ 1,471,768 1,033,210
---------- ----------
7,505,407 4,727,916
---------- ----------
REVENUES IN EXCESS OF EXPENSES.............................. $2,298,847 $2,294,870
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE> 143
ELECTRONIC PUBLISHING DIVISION OF
BRITE VOICE SYSTEMS, INC.
STATEMENTS OF CHANGES IN DIVISIONAL EQUITY
(UNAUDITED)
<TABLE>
<S> <C>
BALANCE, December 31, 1995.................................. $ 2,874,386
Revenues in excess of expenses............................ 2,934,993
Cash transfers to parent, net............................. (2,456,118)
-----------
BALANCE, December 31, 1996.................................. 3,353,261
Revenues in excess of expenses............................ 2,298,847
Cash transfers to parent, net............................. (2,538,903)
-----------
BALANCE, September 30, 1997................................. $ 3,113,205
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE> 144
ELECTRONIC PUBLISHING DIVISION OF
BRITE VOICE SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Revenues in excess of expenses............................ $2,298,847 $2,294,870
Items not requiring cash-
Depreciation and amortization.......................... 225,347 235,057
Loss on disposal of fixed assets....................... 13,704 --
Changes in-
Accounts receivable.................................... (140,208) (497,492)
Accounts payable and accrued expenses.................. 138,045 122,291
Other current assets and liabilities................... 56,837 (43,480)
---------- ----------
Net cash provided by operating activities......... 2,592,572 2,111,246
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................ (53,669) (104,807)
---------- ----------
Net cash used in investing activities............. (53,669) (104,807)
---------- ----------
NET CASH TRANSFERS TO PARENT................................ $2,538,903 $2,006,439
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-33
<PAGE> 145
ELECTRONIC PUBLISHING DIVISION OF
BRITE VOICE SYSTEMS, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
In the opinion of management, the accompanying unaudited financial
statements contain all adjustments necessary to present fairly the statements of
assets, liabilities and divisional equity as of September 30, 1997, and the
statements of revenues and expenses, changes in divisional equity, and cash
flows for the nine months ended September 30, 1997 and 1996. Such adjustments
made to the financial statements are of a normal, recurring nature. Although
management believes that the disclosures are adequate to make the information
presented not misleading, certain information and footnote disclosures,
including significant accounting policies, normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission (the "SEC"). These financial statements
should be read in conjunction with the audited financial statements of
Electronic Publishing Division of Brite Voice Systems, Inc. for the year ended
December 31, 1996. The revenues and expenses for the nine months ended September
30, 1997 are not necessarily indicative of the results to be expected for the
full year.
On October 30, 1997, Brite Voice Systems, Inc. completed the sale of its
Electronic Publishing Division to Source Media, Inc. (SMI), for approximately
$35,550,000.
F-34
<PAGE> 146
REPORT OF INDEPENDENT ACCOUNTANTS
October 1, 1997
To the Board of Directors and
Shareholders of Tribune Company
In our opinion, the accompanying balance sheet and the related statement of
operations, of cash flows and of owner's equity present fairly, in all material
respects, the financial position of Voice News Network, Inc. at December 29,
1996, and the results of its operations and its cash flows for the year then
ended, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
/s/ PRICE WATERHOUSE LLP
- ------------------------------------
Price Waterhouse LLP
Chicago, Illinois
F-35
<PAGE> 147
VOICE NEWS NETWORK, INC.
(WHOLLY OWNED BY TRIBUNE COMPANY)
BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
DECEMBER 29,
1996
------------
<S> <C>
Current assets:
Accounts receivable (net of allowance for doubtful
accounts of $33,704)................................... $299,117
Deferred income taxes..................................... 25,737
Other current assets...................................... 16,897
--------
Total current assets.............................. 341,751
--------
Properties:
Leasehold improvements.................................... 57,319
Furniture and equipment................................... 732,160
Construction in progress.................................. 160,769
--------
950,248
Accumulated depreciation.................................... (386,167)
--------
Net properties.................................... 564,081
--------
Total assets...................................... $905,832
========
LIABILITIES AND OWNER'S EQUITY
Current liabilities:
Accounts payable.......................................... $ 81,613
Accrued compensation...................................... 61,999
Subscriber deposits....................................... 16,025
--------
Total current liabilities......................... 159,637
Deferred income taxes....................................... 59,748
Commitments and contingencies (Note 5)......................
--------
Total liabilities................................. 219,385
--------
Owner's equity............................................ 686,447
--------
Total liabilities and owner's equity.............. $905,832
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-36
<PAGE> 148
VOICE NEWS NETWORK, INC.
(WHOLLY OWNED BY TRIBUNE COMPANY)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED
DECEMBER 29,
1996
------------
<S> <C>
Operating revenues.......................................... $2,424,875
Operating expenses:
Cost of sales............................................. 1,592,334
General and administrative................................ 271,613
----------
Total operating expenses.......................... 1,863,947
----------
Operating income............................................ 560,928
Provision for income taxes.................................. 222,969
----------
Net income.................................................. $ 337,959
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-37
<PAGE> 149
VOICE NEWS NETWORK, INC.
(WHOLLY OWNED BY TRIBUNE COMPANY)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED
DECEMBER 29,
1996
------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 337,959
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation........................................... 148,228
Deferred income taxes.................................. (10,381)
Changes in assets and liabilities:
Accounts receivable, net............................. (103,640)
Other current assets................................. (5,567)
Accounts payable..................................... 12,068
Accrued compensation................................. 21,094
Other liabilities.................................... 3,888
---------
Net cash provided by operating activities................. 403,649
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (205,717)
---------
Net cash used for investing activities.................... (205,717)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net distribution to owner................................. (197,932)
---------
Net cash used for financing activities.................... (197,932)
---------
Net increase in cash and cash equivalents................... --
Cash and cash equivalents, beginning of period.............. --
---------
Cash and cash equivalents, end of period.................... $ --
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-38
<PAGE> 150
VOICE NEWS NETWORK, INC.
(WHOLLY OWNED BY TRIBUNE COMPANY)
STATEMENT OF OWNER'S EQUITY
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED
DECEMBER 29,
1996
------------
<S> <C>
Owner's equity at January 1, 1996........................... $ 546,420
Net income.................................................. 337,959
Net cash distributions to owner............................. (197,932)
---------
Owner's equity at December 29, 1996......................... $ 686,447
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-39
<PAGE> 151
VOICE NEWS NETWORK, INC.
(WHOLLY OWNED BY TRIBUNE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 29, 1996
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
Voice News Network (VNN or the Company) is owned and operated by Tribune
Media Services, a wholly owned subsidiary of Tribune Company (Tribune).
VNN produces and distributes, via satellite or telephone line transmission,
daily audiotex programs containing news, entertainment and consumer information
to its subscribers, primarily newspaper and other media companies. VNN's
subscribers generally sell and attach voice advertisements at the beginning and
end of the audiotex messages and provide customers access to these programs
through local phone service. Audiotex programs are provided to subscribers based
primarily on annual service agreements.
Certain corporate general and administrative expenses of Tribune have been
allocated to the Company (Notes 3 and 4) on various bases which, in the opinion
of management, are reasonable. However, such expenses are not necessarily
indicative of, and it is not practicable for management to estimate, the nature
and level of expenses which might have been incurred had the Company operated as
a stand-alone company.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Revenue is recognized on a straight line basis over each subscriber's
service agreement term.
Properties
Properties (including transmission equipment, office and studio equipment
and leasehold improvements) are stated at cost. Depreciation is computed using
the straight-line method over the properties' estimated useful lives, which
range from three to ten years. Expenditures for maintenance and repairs are
charged to expense as incurred.
Income Taxes
The Company's operations are included in Tribune's consolidated United
States federal and state income tax returns. Based on Tribune's tax-sharing
policy, the Company computes taxes as if it were filing separate tax returns.
Income taxes are provided based on the liability method of accounting pursuant
to Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." The liability method measures the expected tax impact of future taxable
income or deductions resulting from differences in the tax and financial
reporting bases of assets and liabilities reflected in the balance sheet and the
expected tax impact of carryforwards for tax purposes.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of management's estimates.
Actual results could differ from those estimates.
Statement of Cash Flows
Information related to cash paid for taxes has been omitted since these
costs are charged to the Company by Tribune.
Fiscal Year
The Company's fiscal year ends on the last Sunday in December. The 1996
fiscal year included 52 weeks.
F-40
<PAGE> 152
VOICE NEWS NETWORK, INC.
(WHOLLY OWNED BY TRIBUNE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 -- RELATED PARTY TRANSACTIONS
VNN is dependent on Tribune for financing. The Company participates in
Tribune's centralized cash management program with respect to accounts
receivable, accounts payable, payroll and employee benefits. All disbursements
and receipts related to the cash management program are recorded as owner
contributions/distributions in the accompanying financial statements. Interest
is not recorded on these balances.
Tribune also provides the Company with certain information systems,
insurance and administrative services. Charges for these services are based on
allocations of Tribune's actual direct and indirect costs using varying
allocation bases as appropriate (e.g., payroll, headcount, etc.) designed to
estimate the actual cost incurred by Tribune to render these services to the
Company. This allocation process is consistent with the methodology used by
Tribune to allocate the cost of similar services provided to its other business
units. The allocated costs of these services are included in the accompanying
statement of operations and totaled $82,792 in 1996.
Tribune Media Services leases certain office space from Tribune Properties,
Inc., a wholly owned subsidiary of Tribune. Tribune Media Services allocates a
portion of the lease expense to VNN. The 1996 expense related to allocated
office lease expense included in the statement of operations is $57,959.
Certain Tribune subsidiaries are VNN subscribers. Revenues from these
related parties totaled $61,827 in 1996.
Treasury, legal and tax services provided by Tribune are not allocated to
the Company because these costs are not significant.
NOTE 4 -- EMPLOYEE BENEFIT PLANS
VNN participates in several Tribune-sponsored benefit plans, including an
employee stock ownership plan with annual allocations based on payroll, an
employee share purchase plan and a qualified savings incentive plan. The savings
incentive plan provides for uniform employer contributions to eligible employees
of $.25 for each $1.00 contributed by participants up to 4 percent of the
participants' compensation. VNN also participates in certain Tribune-sponsored
medical and life insurance plans and certain VNN employees are participants in
various Tribune incentive and deferred compensation plans. The total 1996
expense related to these employee benefits included in the statement of
operations is $90,393.
NOTE 5 -- COMMITMENTS AND CONTINGENCIES
The Company has entered into a contract with a satellite uplink provider
through November, 1998. Future commitments under this non-cancelable contract
are $30,000 and $27,500 in 1997 and 1998, respectively.
The Company is involved in litigation from time to time incidental to the
conduct of its business; however, the Company is not currently a party to any
lawsuit or proceeding which, in the opinion of management, is likely to have a
material adverse effect on the financial position or results of operations of
the Company.
NOTE 6 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the current assets and liabilities approximate fair
value because of the short maturity of these instruments.
F-41
<PAGE> 153
VOICE NEWS NETWORK, INC.
(WHOLLY OWNED BY TRIBUNE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7 -- INCOME TAXES
The provision for income taxes (all currently payable) for the year ended
December 29, 1996 was $208,261. The provision for income taxes approximates
39.8% of pre-tax income and is higher than Tribune's federal statutory tax rate
of 35% due to state income taxes. Significant components of VNN's net deferred
tax liability as of December 26, 1996 are as follows:
<TABLE>
<S> <C>
Accounts receivable................................ $13,396
Accrued employee compensation...................... 12,341
-------
Deferred tax assets.............................. 25,737
Net properties..................................... 59,748
-------
Deferred tax liabilities......................... 59,748
-------
Net deferred tax liability....................... $34,011
=======
</TABLE>
NOTE 8 -- SUBSEQUENT EVENT -- PROPOSED SALE OF VNN
On October 1, 1997, the Company entered into an agreement with Source
Media, Inc. (Source) whereby Source will acquire VNN for approximately $9
million.
F-42
<PAGE> 154
VOICE NEWS NETWORK, INC.
(WHOLLY OWNED BY TRIBUNE COMPANY)
BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 29,
1997
-------------
(UNAUDITED)
<S> <C>
Current assets:
Accounts receivable (net of allowance for doubtful
accounts of $42,705)................................... $ 389,348
Deferred income taxes..................................... 26,704
Other current assets...................................... 12,579
---------
Total current assets.............................. 428,631
---------
Properties:
Leasehold improvements.................................... 57,319
Furniture and equipment................................... 852,289
Construction in progress.................................. 83,146
---------
992,754
Accumulated depreciation.................................. (502,287)
---------
Net properties.................................... 490,467
---------
Total assets...................................... $ 919,098
=========
LIABILITIES AND OWNER'S EQUITY
Current liabilities:
Accounts payable.......................................... $ 42,458
Accrued compensation...................................... 37,971
Subscriber deposits....................................... 10,635
---------
Total current liabilities......................... 91,064
Deferred income taxes..................................... 57,771
Commitments and contingencies............................. --
---------
Total liabilities................................. 148,835
---------
Owner's equity............................................ 770,263
---------
Total liabilities and owner's equity.............. $ 919,098
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-43
<PAGE> 155
VOICE NEWS NETWORK, INC.
(WHOLLY OWNED BY TRIBUNE COMPANY)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE NINE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 29, 1997 SEPTEMBER 28, 1996
------------------ ------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Operating revenues......................................... $1,922,912 $1,771,737
Operating expenses:
Cost of sales............................................ 1,131,336 1,197,814
General and administrative............................... 214,932 173,914
---------- ----------
Total operating expenses......................... 1,346,268 1,371,728
---------- ----------
Operating income........................................... 576,644 400,009
Provision for income taxes................................. 230,658 160,004
---------- ----------
Net income................................................. $ 345,986 $ 240,005
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-44
<PAGE> 156
VOICE NEWS NETWORK, INC.
(WHOLLY OWNED BY TRIBUNE COMPANY)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE NINE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 29, 1997 SEPTEMBER 28, 1996
(UNAUDITED) (UNAUDITED)
------------------ ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................... $ 345,986 $ 240,005
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation.......................................... 122,699 101,524
Deferred income taxes................................. (2,944) (5,320)
Changes in assets and liabilities:
Accounts receivable, net............................ (90,231) (112,515)
Other current assets................................ 4,318 (15,691)
Accounts payable.................................... (39,155) 4,963
Accrued compensation................................ (24,028) (3,167)
Other liabilities................................... (5,390) 3,917
--------- ---------
Net cash provided by operating activities................ 311,255 213,716
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures..................................... (49,085) (123,661)
--------- ---------
Net cash used for investing activities................... (49,085) (123,661)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net distribution to owner................................ (262,170) (90,055)
--------- ---------
Net cash used for financing activities................... (262,170) (90,055)
--------- ---------
Net increase in cash and cash equivalents.................. -- --
Cash and cash equivalents, beginning of period............. -- --
--------- ---------
Cash and cash equivalents, end of period................... $ -- $ --
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-45
<PAGE> 157
VOICE NEWS NETWORK, INC.
(WHOLLY OWNED BY TRIBUNE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION
Voice News Network, Inc. (VNN or the Company) is owned and operated by
Tribune Media Services, a wholly owned subsidiary of Tribune Company (Tribune).
VNN produces and distributes, via satellite or telephone line transmission,
daily audiotex programs containing news, entertainment and consumer information
to its subscribers, primarily newspaper and other media companies. VNN's
subscribers generally sell and attach voice advertisements at the beginning and
end of the audiotex messages and provide customers access to these programs
through local phone service. Audiotex programs are provided to subscribers based
primarily on annual service agreements.
Certain corporate general and administrative expenses of Tribune have been
allocated to the Company on various bases which, in the opinion of management,
are reasonable. However, such expenses are not necessarily indicative of, and it
is not practicable for management to estimate, the nature and level of expenses
which might have been incurred had the Company operated as a stand-alone
company.
NOTE 2 -- BASIS OF PRESENTATION
Unaudited interim financial period -- The accompanying financial
information as of September 29, 1997 and September 28, 1996 and for the nine
months ended September 29, 1997 and September 28, 1996 is unaudited. The interim
financial statements have been prepared on the same basis as the annual
financial statements. In the opinion of management, such interim financial
information reflects adjustments consisting only of normal and recurring
adjustments necessary for a fair presentation of such financial information. The
unaudited results of operations for the interim periods ended September 29, 1997
and September 28, 1996 are not necessarily indicative of the results of
operations to be expected for any other period or for the full year.
NOTE 3 -- SUBSEQUENT EVENT -- SALE OF VNN
On October 30, 1997, Source Media, Inc. acquired VNN for approximately $9
million.
F-46
<PAGE> 158
======================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 1
Risk Factors.......................... 18
Use of Proceeds....................... 24
Capitalization........................ 24
Unaudited Pro Forma Condensed
Consolidated Financial Statements... 25
Selected Consolidated Financial
Data................................ 32
Forward-Looking Statements............ 34
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 34
Business.............................. 41
Management............................ 58
Certain Transactions.................. 60
Principal Stockholders................ 61
Shares Eligible For Future Sale....... 62
Description of Capital Stock.......... 63
Description of Exchange Preferred
Stock............................... 67
Description of Outstanding Preferred
Stock............................... 89
Exchange Offer........................ 89
Certain U.S. Federal Income Tax
Consequences........................ 99
Plan of Distribution.................. 103
Legal Matters......................... 105
Independent Auditors.................. 105
Available Information................. 105
Incorporation of Certain Documents by
Reference........................... 106
Glossary of Certain Definitions....... 107
Index to Financial Statements......... F-1
</TABLE>
======================================================
======================================================
$20,000,000
EXCHANGE OFFER
[SOURCE MEDIA LOGO]
SOURCE MEDIA, INC.
$20,000,000 13 1/2% SENIOR
PIK PREFERRED STOCK
----------------------------
PROSPECTUS
----------------------------
, 1997
======================================================
<PAGE> 159
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
In accordance with Section 102(b)(7) of the Delaware General Corporation
Law ("DGCL"), the Company's Certificate of Incorporation includes a provision
that eliminates, to the fullest extent permitted by law, the personal liability
of members of its Board of Directors to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a director. Such provision does
not eliminate or limit the liability of a director (1) for any breach of a
director's duty of loyalty to the Company or its stockholders, (2) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of a law, (3) for paying an unlawful dividend or approving an illegal
stock purchase or redemption (as provided in Section 174 of the DGCL) or (4) for
any transaction from which the director derived an improper personal benefit.
Section 145 of the DGCL permits a corporation to indemnify any director or
officer of the corporation against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
in connection with any action, suit or proceeding brought by reason of the fact
that such person is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, if such person acted in good faith and in a
manner that he reasonably believed to be in or not opposed to the best interests
of the corporation and, with respect to any criminal action or proceeding, if he
had no reasonable cause to believe his conduct was unlawful. In a derivative
action (i.e., one brought by or in the right of the corporation),
indemnification may be made for expenses actually and reasonably incurred by any
officer or director in connection with the defense or settlement of such an
action or suit if such person acted in good faith and in a manner that he
reasonably believed to be in or not opposed to the best interests of the
corporation, except that no indemnification may be made in respect of any claim,
issue or matter as to which such person shall have been adjudged to be liable to
the corporation unless and only to the extent that the court in which such
action or suit was brought shall determine that such person is fairly and
reasonably entitled to indemnity for such expenses despite such adjudication of
liability.
The DGCL also permits a corporation to purchase and maintain insurance on
behalf of any person who is or was a director or officer against any liability
asserted against him and incurred by him in such capacity, or arising out of his
status as such, whether or not the corporation has the power to indemnify him
against that liability under Section 145 of the DGCL.
Certain provisions of the Company's Certificate of Incorporation and Bylaws
generally provide for the indemnification of and advancement of litigation
expenses to the Company's directors and officers and such other persons
designated by the Board of Directors of the Company as entitled to the benefits
of indemnification against all liabilities, losses and expenses incurred in
connection with any claim, action, suit or proceeding in which any of them
become involved by reason of their service rendered to the Company or, at its
request, to another entity; provided, however, that no such right to
indemnification shall exist with respect to an action brought by an indemnitee
against the Company unless certain conditions set forth in such provisions are
satisfied. The provisions of the Company's Certificate of Incorporation and
Bylaws are not exclusive of any other indemnification rights to which an
indemnitee may be entitled, whether by contract or otherwise. The Company may
also purchase liability insurance on behalf of its directors and officers,
whether or not it would have the obligation or power to indemnity any of them
under the terms of its Certificate of Incorporation.
In addition, each of the control persons, officers and directors of each of
the Subsidiary Guarantors is generally provided indemnification to the fullest
extent allowed by the law of such Subsidiary Guarantor's respective jurisdiction
of organization.
II-1
<PAGE> 160
ITEM 21(A). EXHIBITS
The information required by this Item 21(a) is set forth in the Index to
Exhibits accompanying this Registration Statement and is incorporated herein by
reference.
ITEM 22. UNDERTAKINGS
The undersigned Co-Registrants hereby undertake that, for purposes of
determining any liability under the Securities Act, each filing of an annual
report pursuant to section 13(a) or section 15(d) of the Exchange Act that is
incorporated by reference in the Registration Statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Co-Registrants pursuant to the provisions described under Item 20 above, or
otherwise, the Co-Registrants have been advised that in the opinion of the SEC
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. If a claim for indemnification against such
liabilities (other than the payment by the Co-Registrants of expenses incurred
or paid by a director, officer or controlling person of the Co-Registrants in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Co-Registrants will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The undersigned Co-Registrants hereby undertake to respond to requests for
information that is incorporated by reference into the Prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in the documents
filed subsequent to the effective date of the Registration Statement when it
became effective.
The undersigned Co-Registrants undertake to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
II-2
<PAGE> 161
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf of the
undersigned, thereunto duly authorized, in Dallas, Texas, on the 10th day of
December, 1997.
SOURCE MEDIA, INC.
BY: /s/ TIMOTHY P. PETERS
----------------------------------------
TIMOTHY P. PETERS
Chairman of the Board
and Chief Executive Officer
SOURCE MEDIA, INC.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ TIMOTHY P. PETERS Chief Executive Officer December 10, 1997
- ----------------------------------------------------- and Chairman of the
Timothy P. Peters Board (principal
executive officer)
/s/ W. SCOTT BEDFORD Chief Financial Officer December 10, 1997
- ----------------------------------------------------- and Treasurer
W. Scott Bedford (principal financial
and accounting
officer)
* President and Director December 10, 1997
- -----------------------------------------------------
John J. Reed
* Director December 10, 1997
- -----------------------------------------------------
David L. Kuykendall
* Director December 10, 1997
- -----------------------------------------------------
Michael J. Marocco
* Director December 10, 1997
- -----------------------------------------------------
James L. Greenwald
* Director December 10, 1997
- -----------------------------------------------------
Robert H. Alter
* Director December 10, 1997
- -----------------------------------------------------
Robert J. Cresci
* Director December 10, 1997
- -----------------------------------------------------
Barry Rubenstein
*By: /s/ W. SCOTT BEDFORD
------------------------------------------------
W. Scott Bedford
attorney-in-fact
</TABLE>
II-3
<PAGE> 162
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.1 -- Restated Certificate of Incorporation, as amended (filed
as Exhibit 3.1 to the Company's Registration Statement on
Form S-1, as amended (No. 33-97564), and incorporated
herein by reference).
3.2 -- Bylaws (filed as Exhibit 3.2 to HBAC's Registration
Statement on Form S-1, as amended (No. 33-62606), and
incorporated herein by reference).
4.1 -- Form of Common Stock Certificate (filed as Exhibit 4.1 to
the Company's Registration Statement on Form S-1 (No.
33-97564), and incorporated herein by reference).
4.2 -- Certificate of Designation for Senior PIK Preferred Stock
(filed as Exhibit 4.2 to the Company's current report on
Form 8-K dated October 30, 1997, and incorporated herein
by reference).
4.3 -- Indenture dated as of October 30, 1997 between Source
Media, Inc. and U.S. Trust Company of Texas, N.A. (filed
as Exhibit 4.1 to the Company's current report on Form
8-K dated October 30, 1997, and incorporated herein by
reference).
4.4 -- Warrant Agreement dated as of October 30, 1997 between
Source Media, Inc. and ChaseMellon Shareholder Services
(filed as Exhibit 4.3 to the Company's current report on
Form 8-K dated October 30, 1997, and incorporated herein
by reference).
5.1+ -- Opinion of Thompson & Knight, P.C.
10.1 -- Master Agreement between IT Network, Inc. and Pacific
Bell Directory, dated December 16, 1992, as amended
(filed as Exhibit 10.18 to HBAC's Registration Statement
on Form S-4 (No. 33-90482), and incorporated herein by
reference).
10.2 -- Master AudioText Agreement between IT Network, Inc. and
BellSouth, dated May 1, 1993 (filed as Exhibit 10.22 to
HBAC's Registration Statement on Form S-4 (No. 33-90482),
and incorporated herein by reference).
10.3 -- Sales Agency Agreement by and between US West Marketing
Resources Group, Inc. and IT Network, Inc., dated July 6,
1995 (filed as Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1995,
and incorporated herein by reference).
10.4 -- Development and Licensing Agreement dated as of April 1,
1995 between IT Network, Inc., Source Media, Inc., ICT
Inc., Cable Share International Inc., ICT (U.S.) Limited
and ICT B.V. (filed as Exhibit 10.22 to the Company's
Annual Report on Form 10-K for the Year Ended December
31, 1995, and incorporated herein by reference).
10.5 -- Interactive Television License Agreement between IT
Network, Inc., ICT (U.S.) Limited and ICT Inc., dated
June 11, 1992 (filed as Exhibit 10.40 to HBAC's
Registration Statement on Form S-4 (No. 33-90482), and
incorporated herein by reference).
10.6 -- Interactive Channel Distribution Agreement dated November
16, 1995 between IT Network, Inc. and Cablevision Systems
Corporation (filed as Exhibit 99.2 to the Company's
Current Report on Form 8-K filed January 30, 1996, and as
amended on March 19, 1996, and incorporated herein by
reference).
</TABLE>
<PAGE> 163
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.7 -- Interactive Cable Agreement between IT Network, Inc. and
Sammons Communications, Inc., dated June 4, 1993 (filed
as Exhibit 10.53 to HBAC's Registration Statement on Form
S-4 (No. 33-90482), and incorporated herein by
reference).
10.8 -- Contribution Agreement between National Research Council
Canada and ICT Inc. (filed as Exhibit 10.54 to HBAC's
Registration Statement on Form S-4 (No. 33-90482), and
incorporated herein by reference).
10.9 -- Letter of Understanding between IT Network, Inc. and
Pacific Bell Directory dated August 25, 1994 (filed as
Exhibit 10.55 to HBAC's Registration Statement on Form
S-4 (No. 33-90482), and incorporated herein by
reference).
10.10 -- Stock Purchase Warrant dated April 13, 1996 between
Northstar Advantage High Total Return Fund and the
Company (filed as Exhibit 10.3 to the Company's Quarterly
Report on Form 10-Q for the Quarter Ended March 31, 1996,
and incorporated herein by reference).
10.11 -- Sales Agency Agreement dated May 20, 1996 between The
Reuben H. Donnelley Corporation and IT Network, Inc.
(filed as Exhibit 10.1 to the Company's Quarterly Report
on Form 10-Q for the Quarter Ended June 30, 1996, and
incorporated herein by reference).
10.12 -- License Agreement dated June 6, 1996 between WinStar New
Media Co., Inc. and the Company (filed as Exhibit 10.2 to
the Company's Quarterly Report on Form 10-Q for the
Quarter Ended June 30, 1996, and incorporated herein by
reference).
10.13 -- Charter Affiliation Agreement between Century
Communications Corporation and the Company (filed as
Exhibit 10.1 to the Company's Current Report on Form 8-K
filed April 23, 1996, and incorporated herein by
reference).
10.14 -- Services Agreement dated October 21, 1996 between The
Reuben H. Donnelley Corporation and IT Network, Inc.
(filed as Exhibit 10.1 to the Company's Quarterly Report
on Form 10-Q for the Quarter Ended September 30, 1996,
and incorporated herein by reference).
10.15 -- Arrangement Agreement dated November 13, 1996 between the
Company and ICT. (filed as Exhibit 10.18 to the Company's
Registration Statement on Form S-1 (No. 33-16883),
subsequently withdrawn, and incorporated herein by
reference).
10.16 -- Form of Plan of Arrangement. (filed as Exhibit 10.19 to
the Company's Registration Statement on Form S-1 (No.
33-16883), subsequently withdrawn, and incorporated
herein by reference).
10.17 -- Stock Purchase Warrant dated as of April 9, 1996 between
the Company and Northstar (filed as Exhibit 10.29 to the
Company's Annual Report on Form 10-K for the Year Ended
December 31, 1996, and incorporated herein by reference).
10.18 -- Amended and Restated Stock Purchase Warrant dated as of
April 9, 1997 between the Company and Northstar (filed as
Exhibit 10.30 to the Company's Annual Report on Form 10-K
for the Year Ended December 31, 1996, and incorporated
herein by reference).
10.19 -- Stock Purchase Warrant dated as of April 9, 1997 between
the Company and Zeneca (filed as Exhibit 10.31 to the
Company's Annual Report on Form 10-K for the Year Ended
December 31, 1996, and incorporated herein by reference).
</TABLE>
<PAGE> 164
<TABLE>
<C> <S>
10.20 -- Stock Purchase Warrant dated as of April 9, 1997 between the Company and Delaware
(filed as Exhibit 10.32 to the Company's Annual Report on Form 10-K for the Year Ended
December 31, 1996, and incorporated herein by reference).
10.21 -- Stock Purchase Warrant dated as of April 9, 1997 between the Company and ICI (filed as
Exhibit 10.33 to the Company's Annual Report on Form 10-K for the Year Ended December
31, 1996, and incorporated herein by reference).
10.22 -- Stock Purchase Warrant dated as of April 9, 1997 between the Company and McConnell
(filed as Exhibit 10.34 to the Company's Annual Report on Form 10-K for the Year Ended
December 31, 1996, and incorporated herein by reference).
10.23 -- Amended and Restated Registration Rights Agreement dated as of April 9, 1997 among the
Company and Northstar, Zeneca, McConnell, ICI and Delaware (filed as Exhibit 10.35 to
the Company's Annual Report on Form 10-K for the Year Ended December 31, 1996, and
incorporated herein by reference).
10.24 -- Asset Purchase Agreement dated September 23, 1997 between IT Network, Inc. and Brite
Voice Systems, Inc. (filed as Exhibit 2.1 to the Company's current report on Form 8-K
dated October 30, 1997, and incorporated herein by reference).
10.25 -- Amendment dated October 7, 1997 between IT Network, Inc. and Brite Voice Systems, Inc.
to Asset Purchase Agreement dated September 23, 1997 between IT Network, Inc. and Brite
Voice Systems, Inc. (filed as Exhibit 2.2 to the Company's current report on Form 8-K
dated October 30, 1997, as amended, and incorporated herein by reference).
10.26 -- Asset Purchase Agreement dated September 30, 1997 between Source Media, Inc. and IT
Network, Inc. and Voice News Network, Inc. (filed as Exhibit 2.3 to the Company's
current report on Form 8-K dated October 30, 1997, and incorporated herein by
reference).
10.28 -- Preferred Stock Registration Rights Agreement dated as of October 30, 1997 between
Source Media, Inc. and Natwest Capital Markets Limited and Prudential Securities
Incorporated. (filed as Exhibit 10.2 to the Company's current report on Form 8-K dated
October 30, 1997, and incorporated herein by reference).
10.29 -- Exchange and Registration Rights Agreement for Senior Secured Notes dated as of October
30, 1997 between Source Media, Inc. and certain of its subsidiaries and Natwest Capital
Markets Limited and Prudential Securities Incorporated (filed as Exhibit 10.1 to the
Company's current report on Form 8-K dated October 30, 1997, and incorporated herein by
reference).
23.1* -- Consent of Ernst & Young LLP.
23.2* -- Consent of Arthur Andersen LLP.
23.3* -- Consent of Price Waterhouse LLP.
23.4+ -- Consent of Thompson & Knight, P.C. (included as part of Exhibit 5.1).
24.1* -- Power of Attorney.
27+ -- Financial Data Schedule.
</TABLE>
- ---------------
+ To be filed by amendment.
* Filed herewith.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our report dated February 7, 1997 (except for Note
5 and the last paragraph of Note 6, for which the date is April 9, 1997, and the
first paragraph of Note 3, for which the date is September 9, 1997), in the
Registration Statement (Form S-4) and related Prospectus of Source Media, Inc.
for the registration of its 13 1/2% Senior PIK Preferred Stock, filed with the
Securities and Exchange Commission.
/s/ ERNST & YOUNG LLP
Dallas, Texas
December 8, 1997
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report and to all references to our firm included in or made a part of Source
Media Inc.'s Form S-4 to register its 13 1/2% Senior PIK Preferred Stock.
ARTHUR ANDERSEN LLP
December 10, 1997,
Kansas City, Missouri
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of the
Statement on Form S-4 of Source Media, Inc. of our report dated October 1, 1997
relating to the financial statements of Voice News Network, Inc., which appears
in such Prospectus.
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
Chicago, Illinois
December 9, 1997
<PAGE> 1
EXHIBIT 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned directors and officers
of Source Media, Inc., a Delaware corporation, which is filing a Registration
Statement on Form S-4 with the Securities and Exchange Commission, Washington,
D.C. 20549 under the provisions of the Securities Act of 1933, as amended (the
"Securities Act"), hereby constitute and appoint Timothy P. Peters, W. Scott
Bedford and Maryann Walsh, and each of them, the individual's true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for the person and in his or her name, place and stead, in any
and all capacities, to sign such Registration Statement and any or all
amendments, including post-effective amendments, to the Registration Statement,
including a Prospectus or an amended Prospectus therein and any registration
statement for the same offering that is to be effective upon filing pursuant to
Rule 462(b) under the Securities Act, and all other documents in connection
therewith to be filed with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact as agents or any of them, or their substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ TIMOTHY P. PETERS Chief Executive Officer and December 8, 1997
- ----------------------------------------------------- Chairman of the Board
Timothy P. Peters (principal executive
officer)
/s/ W. SCOTT BEDFORD Chief Financial Officer and December 8, 1997
- ----------------------------------------------------- Treasurer (principal
W. Scott Bedford financial and accounting
officer)
/s/ JOHN J. REED President and Director December 8, 1997
- -----------------------------------------------------
John J. Reed
/s/ DAVID L. KUYKENDALL Director December 8, 1997
- -----------------------------------------------------
David L. Kuykendall
/s/ MICHAEL J. MAROCCO Director December 8, 1997
- -----------------------------------------------------
Michael J. Marocco
/s/ JAMES L. GREENWALD Director December 8, 1997
- -----------------------------------------------------
James L. Greenwald
/s/ ROBERT H. ALTER Director December 8, 1997
- -----------------------------------------------------
Robert H. Alter
/s/ ROBERT J. CRESCI Director December 8, 1997
- -----------------------------------------------------
Robert J. Cresci
/s/ BARRY RUBENSTEIN Director December 8, 1997
- -----------------------------------------------------
Barry Rubenstein
</TABLE>
