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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 names of Co-Registrants as specified in their charters)
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DELAWARE 13-3700438
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
File No. 333- File No. 333- File No. 333-
SMI HOLDINGS, INC. INTERACTIVE CHANNEL TECHNOLOGIES IT NETWORK, INC.
(Exact name of Co-Registrant INC. (Exact name of Co-Registrant
as specified in its charter) (Exact name of Co-Registrant as specified in its charter)
as specified in its charter)
TEXAS ONTARIO DELAWARE
(State or other jurisdiction of (State or other jurisdiction of (State or other jurisdiction of
incorporation or organization) incorporation or organization) incorporation or organization)
84-1091089 74-213067 75-2730723
(I.R.S. Employer Identification (I.R.S. Employer Identification (I.R.S. Employer Identification
No.) No.) No.)
File No. 333- File No. 333- File No. 333-
997758 ONTARIO INC. 1229501 ONTARIO INC. CABLE SHARE INTERNATIONAL INC.
(Exact name of Co-Registrant (Exact name of Co-Registrant (Exact name of Co-Registrant
as specified in its charter) as specified in its charter) as specified in its charter)
ONTARIO ONTARIO BARBADOS
(State or other jurisdiction of (State or other jurisdiction of (State or other jurisdiction of
incorporation or organization) incorporation or organization) incorporation or organization)
APPLIED FOR APPLIED FOR APPLIED FOR
(I.R.S. Employer Identification (I.R.S. Employer Identification (I.R.S. Employer Identification
No.) No.) No.)
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File No. 333-
INTERACTIVE CHANNEL, INC.
(Exact name of Co-Registrant
as specified in its charter)
DELAWARE
(State or other jurisdiction of
incorporation or organization)
75-2730724
(I.R.S. Employer Identification
No.)
File No. 333-
CABLESHARE (U.S.) LIMITED
(Exact name of Co-Registrant
as specified in its charter)
ILLINOIS
(State or other jurisdiction of
incorporation or organization)
36-3534795
(I.R.S. Employer 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(1) REGISTERED PER NOTE OFFERING PRICE REGISTRATION FEE
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12% Senior Secured Notes due 2004................. $100,000,000 100% $100,000,000 $29,500.00
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Guarantees of 12% Senior Secured Notes due 2004... (2) (2) (2) (2)
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(1) The issuer of the Notes registered hereby is Source Media, Inc. The
guarantees registered hereby are made by SMI Holdings, Inc., Interactive
Channel Technologies Inc., IT Network, Inc., Interactive Channel, Inc.,
997758 Ontario Inc., 1229501 Ontario Inc., Cable Share International Inc.
and Cableshare (U.S.) Limited.
(2) No additional consideration will be received for the guarantees of the Notes
registered hereby.
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 12% SENIOR SECURED NOTES DUE 2004 THAT HAVE BEEN
REGISTERED
UNDER THE SECURITIES ACT OF 1933 FOR ANY AND ALL OF ITS OUTSTANDING
12% SENIOR SECURED NOTES DUE 2004
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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 12% Senior Secured Notes due 2004 (the "Exchange Notes") for a
like aggregate principal amount of its outstanding 12% Senior Secured Notes due
2004 (the "Outstanding Notes"), of which an aggregate principal amount of
$100,000,000 is outstanding as of the date hereof. The form and the terms of the
Exchange Notes will be the same in all material respects as the form and terms
of each of the Outstanding Notes, except that (i) the Exchange Notes 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 Notes will not be entitled to certain rights of holders
of Outstanding Notes under the Exchange and Registration Rights Agreement dated
October 30, 1997 (the "Registration Rights Agreement"). See "The Exchange
Offer -- Purpose and Effect of the Exchange Offer." The Exchange Notes will be
initially issued as a single, permanent global certificate. See "Description of
Exchange Notes."
The Outstanding Notes were 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 Notes are 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 Notes 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 Notes 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 Notes are 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 Notes. 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 Notes 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 Notes. The Letter of Transmittal
state 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 Notes received in
exchange for Outstanding Notes where such Outstanding Notes were 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 NOTES.
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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 Notes whose Outstanding Notes are not tendered and
accepted in the Exchange Offer will continue to hold such Outstanding Notes and
will be entitled to all the rights and preferences and will be subject to the
limitations applicable thereto under the indenture governing the Outstanding
Notes and the Exchange Notes. Following consummation of the Exchange Offer, the
holders of Outstanding Notes 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 Notes held by them. The Exchange Notes will evidence the
same debt as the Outstanding Notes and will be entitled to the benefits of the
indenture (the "Indenture"), dated October 30, 1997, governing the Outstanding
Notes and the Exchange Notes. The Outstanding Notes and the Exchange Notes are
sometimes referred to herein collectively as the "Notes."
The Notes will bear interest at the rate of 12% per annum, payable
semi-annually on May 1 and November 1, commencing May 1, 1998. The Notes will
mature on November 1, 2004. Except as described below, the Company may not
redeem the Notes prior to November 1, 2001. On or after such date, the Company
may redeem the Notes, in whole or in part, at any time, at the redemption prices
set forth herein, together with accrued and unpaid interest, if any, to the date
of redemption. In addition, at any time and from time to time on or prior to
November 1, 2000, the Company may, subject to certain requirements, redeem up to
35% of the aggregate principal amount of the Notes with the cash proceeds of one
or more public Equity Offerings (as defined) at a redemption price equal to
112.0% of the principal amount to be redeemed, together with accrued and unpaid
interest, if any, to the date of redemption, provided, that at least $65.0
million of the aggregate principal amount of the Notes remain outstanding
immediately after each such redemption. The Notes will not be subject to any
sinking fund requirement. Upon the occurrence of a Change of Control (as
defined), the Company will be required to make an offer to repurchase the Notes
at a price equal to 101% of the principal amount thereof, together with accrued
and unpaid interest, if any, to the date of repurchase. There can be no
assurance that the Company will have funds available to repurchase the Notes
upon the occurrence of a Change of Control. See "Description of Exchange
Notes -- 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 Indenture does not contain any provisions that
afford holders of the Notes protection in the event of a highly leveraged or
other transaction that may adversely affect such holders. See "Description of
Exchange Notes" and "Risk Factors -- Substantial Leverage; Ability to Service
Debt" and "-- Change of Control."
The Outstanding Notes are and the Exchange Notes will be senior obligations
of the Company and will be secured by substantially all of the assets of the
Company. The Outstanding Notes rank and the Exchange Notes will rank pari passu
in right of payment with all existing and future Senior Indebtedness (as
defined) of the Company and will rank senior to all existing and future
Subordinated Obligations (as defined) of the Company. The Outstanding Notes are,
and the Exchange Notes will be, unconditionally guaranteed (the "Guarantees") by
each of the Company's subsidiaries (the "Subsidiary Guarantors"). The Guarantees
are and will be senior obligations of the Subsidiary Guarantors and are and will
be secured by substantially all of the assets of each Subsidiary Guarantor. The
Guarantees rank and will rank pari passu in right of payment with all existing
and future Senior Indebtedness of the Subsidiary Guarantors and rank and will
rank senior in right of payment to all Subordinated Obligations of the
Subsidiary Guarantors. The Outstanding Notes have been designated for trading on
the PORTAL Market.
The Exchange Offer is not conditioned on any minimum aggregate principal
amount of Outstanding Notes being tendered for exchange. The Company will accept
for exchange any and all validly tendered Outstanding Notes 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 Notes 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.
The Outstanding Notes constitute securities for which there is no
established trading market. Any Outstanding Notes not tendered and accepted in
the Exchange Offer will remain outstanding. The Company does not currently
intend to list the Exchange Notes on any securities exchange. To the extent that
any Outstanding Notes are tendered and accepted in the Exchange Offer, a
holder's ability to sell untendered Outstanding Notes could be adversely
affected. No assurances can be given as to the liquidity of the trading market
for either the Outstanding Notes or the Exchange Notes.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OUTSTANDING NOTES 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 Outstanding Notes and Units consisting of the
Company's 13 1/2% Senior PIK 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.
5
<PAGE> 9
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.
6
<PAGE> 10
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 Notes.......... The Outstanding Notes were 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 Notes 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 Notes 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......... $100,000,000 aggregate principal amount of 12%
Senior Secured Notes due 2004 (the "Exchange
Notes").
The Exchange Offer......... The Company is offering to exchange $1,000
principal amount of Exchange Notes for each $1,000
principal amount of Outstanding Notes that are
properly tendered and accepted. The Company will
issue Exchange Notes on or promptly after the
Expiration Date. As of the date hereof, there is
$100,000,000 aggregate principal amount of
Outstanding Notes outstanding. The terms of the
Exchange Notes are identical in all material
respects to the terms of the Outstanding Notes for
which they may be exchanged pursuant to the
Exchange Offer, except that the Exchange Notes are
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 aggregate principal amount of Outstanding
Notes 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 Notes issued pursuant to the Exchange
Offer in exchange for Outstanding Notes may be
offered for resale, resold and otherwise
transferred by holders thereof (other than (i) a
broker-dealer who purchases such Exchange Notes
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
Notes are 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 Notes.
However, the Company has not sought a no-action
letter with respect to the Exchange Offer and there
can be no assurance that the staff of the
Commission would make a similar determination with
respect to the
9
<PAGE> 13
Exchange Offer. Each holder of Exchange Notes,
other than a broker-dealer, must represent that
such conditions have been met. In addition, each
broker-dealer that receives Exchange Notes 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 Notes.
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 Notes received in exchange
for Outstanding Notes where such Outstanding Notes
were acquired by such broker-dealer as a result of
market-making activities or other trading
activities. Pursuant to the Registration Rights
Agreements, 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
Notes 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".
Accrued Interest on the
Exchange Notes........... Each Exchange Note will bear interest from the most
recent date to which interest has been paid on the
Outstanding Notes or, if no interest has been paid
on such Outstanding Notes, 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 Notes 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 Expiration Date upon the occurrence of
any such condition. The Exchange Offer is not
conditioned on any minimum aggregate principal
10
<PAGE> 14
amount of Outstanding Notes being tendered for
exchange. See "The Exchange Offer -- Conditions."
Consequences of Failure to
Exchange................. Any Outstanding Notes not tendered pursuant to the
Exchange Offer will remain outstanding and continue
to accrue interest or accumulate dividends. Such
Outstanding Notes 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 Notes 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 Notes for Exchange
Notes 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 of Exchange Notes
will continue to be required to include interest on
such Exchange Notes in gross income in accordance
with their method of accounting for U.S. Federal
income tax purposes. Holders should review the
information set forth under "Certain U.S. Federal
Income Tax Consequences" for a discussion of
certain U.S. Federal income consequences relating
to the Outstanding Notes and the Exchange Notes
prior to tendering the Outstanding Notes 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 NOTES
Tendering Outstanding
Notes...................... Each beneficial owner owning interests in
Outstanding Notes ("Beneficial Owner") through a
DTC Participant (as defined) must instruct such DTC
Participant to cause Outstanding Notes 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
Notes held by DTC."
Each participant (a "DTC Participant") in the
Depository Trust Company ("DTC") holding
Outstanding Notes 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 Notes held through DTC"
and "-- Guaranteed Delivery
Procedures -- Outstanding Notes held through DTC."
11
<PAGE> 15
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 Notes, 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
Notes 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 Notes acquired
directly from the Company for its own account,
(iii) the Exchange Notes acquired pursuant to the
Exchange Offer are 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 Notes. See
"The Exchange Offer -- Procedures for Tendering."
Guaranteed Delivery
Procedures............... DTC Participants holding Outstanding Notes through
DTC who wish to cause their Outstanding Notes 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 Notes but (i) whose Outstanding
Notes are not immediately available and will not be
available for tendering prior to the Expiration
Date, or (ii) who cannot deliver their Outstanding
Notes, 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 Notes 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............. U.S. Trust Company of Texas, N.A. 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 Notes (including holders who are not
permitted to participate in the Exchange Offer or
who may not freely resell Exchange Notes 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 Notes by such holders. See "Exchange
Offer -- Purpose and Effect of the Exchange Offer."
12
<PAGE> 16
THE EXCHANGE NOTES
Securities Offered......... $100,000,000 aggregate principal amount of 12%
Senior Secured Notes due 2004 that have been
registered under the Securities Act. The form and
terms of the Exchange Notes are identical in all
material respects to the terms of the Outstanding
Notes for which they may be exchanged pursuant to
the Exchange Offer, except for certain transfer
restrictions and registration rights relating to
the Outstanding Notes and except for certain
provisions providing for an increase in the
interest rate on the Outstanding Notes under
circumstances relating to the Exchange Offer. See
"Description of the Exchange Notes."
Maturity Date.............. November 1, 2004.
Interest Payment Dates..... May 1 and November 1 of each year, commencing on
May 1, 1998.
Optional Redemption........ Except as described below and under "Change of
Control", the Company may not redeem the Notes
prior to November 1, 2001. On or after such date,
the Company may redeem the Notes, in whole or in
part, at any time at the redemption prices set
forth herein, together with accrued and unpaid
interest, if any, to the date of redemption. In
addition, at any time and from time to time on or
prior to November 1, 2000, the Company may, subject
to certain requirements, redeem up to 35% of the
aggregate principal amount of the Notes with the
cash proceeds received from one or more Equity
Offerings at a redemption price equal to 112% of
the principal amount to be redeemed, together with
accrued and unpaid interest, if any, to the date of
redemption, provided that at least $65 million of
the aggregate principal amount of the Notes remain
outstanding immediately after each such redemption.
Change of Control.......... Upon the occurrence of a Change of Control, the
Company will be required to make an offer to
repurchase the Notes at a price equal to 101% of
the principal amount thereof, together with accrued
and unpaid interest, if any, to the date of
repurchase.
Ranking.................... The Outstanding Notes are, and the Exchange Notes
will be, senior secured obligations of the Company
and will rank pari passu in right of payment with
all existing and future Senior Indebtedness of the
Company (including the Outstanding Notes) and will
rank senior in right of payment to all existing and
future Subordinated Obligations of the Company.
Escrow and Disbursement
Agreement................ 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. Until
disbursed in accordance with the Escrow and
Disbursement Agreement (as defined), the Interest
Escrow Account is designed to secure a portion of
the Company's obligations under the Notes. Funds
will be disbursed from the Interest Escrow Account
only to pay interest on the Notes and, upon certain
repurchases or redemptions of the Notes, to pay
principal of and premium, if any, thereon. Pending
such disbursement, all funds contained in the
Interest Escrow Account will be invested in Cash
Equivalents (as defined).
13
<PAGE> 17
Security................... The collateral securing the Outstanding Notes
consists, and the collateral securing the Exchange
Notes will consist, of substantially all the assets
of the Company, all the capital stock of the
Subsidiary Guarantors and the Interest Escrow
Account. The collateral securing the Guarantees
will consist of substantially all of the assets of
the Subsidiary Guarantors.
Guarantees................. The Outstanding Notes are, and the Exchange Notes
will be, unconditionally guaranteed, jointly and
severally, by each of the Subsidiary Guarantors.
The Guarantees will be senior obligations of the
Subsidiary Guarantors and will be secured by
substantially all of the assets of the Subsidiary
Guarantors. The Guarantees will rank pari passu in
right of payment with all existing and future
Senior Indebtedness of the Subsidiary Guarantors
and will rank senior in right of payment to all
existing and future Subordinated Obligations of the
Subsidiary Guarantors. The Guarantees may be
released upon the occurrence of certain events.
The guarantee executed by IT Network 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.
Restrictive Covenants...... The indenture under which the Outstanding Notes
were, and the Exchange Notes will be, issued (the
"Indenture") contains certain covenants that, among
other things, limit (i) the incurrence of
additional indebtedness by the Company and its
subsidiaries, (ii) the payment of dividends on, and
redemption of, capital stock of the Company and the
redemption of certain subordinated obligations of
the Company, (iii) investments, including
investments over a certain amount in Interactive
Channel by the Company or any Restricted
Subsidiary, (iv) sales of assets and subsidiary
stock, (v) transactions with affiliates and (vi)
consolidations, mergers and transfers of all or
substantially all of the assets of the Company. The
Indenture also prohibits certain distributions from
subsidiaries. However, all the limitations and
prohibitions are subject to a number of important
qualifications and exceptions.
Exchange Offer and Absence
of a Public Market for the
Notes.................... The Exchange Notes will generally be freely
transferable (subject to the restrictions discussed
elsewhere herein) but will be new securities for
which there will not initially be a market. The
Outstanding Notes have been designated for trading
in the PORTAL market. The Company does not intend
to apply for a listing of the Exchange Notes, on
any securities exchange or on any automated dealer
quotation system. See "Notes Plan of Distribution."
For more complete information regarding the Notes, see "Description of Exchange
Notes" and "Description of Outstanding Notes".
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<PAGE> 18
RISK FACTORS
Prospective acquirors of the Exchange Notes 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 Notes.
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 Indenture 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 Notes involves a high degree of risk.
Prospective purchasers of the Exchange Notes 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.
INSUFFICIENT COLLATERAL
The proceeds of any sale of the Collateral following an event of default
under the Indenture would most likely not be sufficient to repay the Notes in
full. Although the Collateral consists of substantially all the assets of the
Company, most of the Company's assets consist of goodwill, other intangibles and
accounts receivable. The tangible assets comprising the Collateral, which, as of
September 30, 1997, had a book value of approximately $5.7 million, will consist
primarily of production, computer and other equipment. If a bankruptcy
proceeding were to be commenced by or against the Company and the bankruptcy
court were to conclude that the Notes were inadequately secured, the holders of
the Notes would have only an unsecured deficiency claim to the extent of such
inadequacy and would not be entitled to post-petition interest. Any deficiency
claim (whether or not in a bankruptcy proceeding involving the Company) of the
holders of the Notes would rank pari passu with any deficiency claims of all
other general unsecured creditors. In addition,
18
<PAGE> 22
the ability of the holders of the Notes to effect a sale of the Collateral may
be subject to certain bankruptcy limitations in the event of a bankruptcy
proceeding involving the Company.
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.
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. See "Description of Exchange 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.
CONSEQUENCES OF A FAILURE TO EXCHANGE
The Outstanding Notes have 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 Trustee (as defined) in certain cases to require the
delivery of opinions of counsel, certifications and other information prior to
any such transfer. Outstanding Notes 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
19
<PAGE> 23
Outstanding Notes that remain outstanding will not be entitled to any rights to
have such Outstanding Notes 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 Notes that remain outstanding after consummation of the Exchange
Offer only if such Outstanding Notes are 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 Notes are tendered and
accepted in the Exchange Offer, the market for untendered Outstanding Notes is
likely to diminish; accordingly, holders who do not tender their Outstanding
Notes may encounter difficulties in selling such notes following the Exchange
Offer. The Exchange Notes and any Outstanding Notes that remain outstanding
after consummation of the Exchange Offer will constitute a single series of debt
securities under the Indenture and, accordingly, will vote together as a single
class for purposes of determining whether holders of the requisite percentage in
outstanding principal amount of the Notes have taken certain actions or
exercised certain rights under the Indenture.
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 or results of
operations.
20
<PAGE> 24
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 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
21
<PAGE> 25
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 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.
FRAUDULENT CONVEYANCE; LIMITATION ON SUBSIDIARY GUARANTORS
Various fraudulent conveyance laws enacted for the protection of creditors
may apply to the Subsidiary Guarantors' issuance of the Guarantees. To the
extent that a court were to find that (x) a Guarantee was incurred by a
Subsidiary Guarantor with intent to hinder, delay or defraud any present or
future creditor or the Subsidiary Guarantor contemplated insolvency with a
design to prefer one or more creditors to the exclusion in whole or in part of
others or (y) a Subsidiary Guarantor did not receive fair consideration or
reasonably equivalent value for issuing its Guarantee and such Subsidiary
Guarantor (i) was insolvent, (ii) was rendered insolvent by reason of the
issuance of such Guarantee, (iii) was engaged or about to engage in a business
or transaction for which the remaining assets of such Subsidiary Guarantor
constituted unreasonably small
22
<PAGE> 26
capital to carry on its business or (iv) intended to incur, or believed that it
would incur, debts beyond its ability to pay such debts as they matured, the
court could avoid or subordinate such Guarantee in favor of the Subsidiary
Guarantor's creditors. Among other things, a legal challenge of a Guarantee on
fraudulent conveyance grounds may focus on the benefits, if any, realized by the
Subsidiary Guarantor as a result of the issuance by the Company of the Notes.
The Indenture contains a savings clause, which generally will limit the
obligations of each Subsidiary Guarantor under its Guarantee to the maximum
amount as will, after giving effect to all of the liabilities of such Subsidiary
Guarantor, result in such obligations not constituting a fraudulent conveyance.
To the extent a Guarantee of any Subsidiary Guarantor was avoided as a
fraudulent conveyance or held unenforceable for any other reason, holders of the
Notes would cease to have any claim against such Subsidiary Guarantor and would
be creditors solely of the Company and any Subsidiary Guarantor whose Guarantee
was not avoided or held unenforceable. In such event, the claims of the holders
of the Notes against the issuer of an invalid Guarantee would be subject to the
prior payment of all liabilities of such Subsidiary Guarantor. There can be no
assurance that, after providing for all prior claims, there would be sufficient
assets to satisfy the claims of the holders of the Notes relating to any avoided
portions of any of the Guarantees.
The measure of insolvency for purposes of the foregoing considerations will
vary depending upon the law applied in any such proceeding. Generally, however,
a Subsidiary Guarantor may be considered insolvent if the sum of its debts,
including contingent liabilities, was greater than the fair marketable value of
all of its assets at a fair valuation or if the present fair marketable value of
its assets was less than the amount that would be required to pay its probable
liability on its existing debts, including contingent liabilities, as they
become absolute and mature. In addition, each foreign Subsidiary Guarantor is
limited by applicable local law as to the amount that it can guarantee.
Based upon financial and other information, the Company and the Subsidiary
Guarantors believe that the Guarantees are being incurred for proper purposes
and in good faith and that the Company and each Subsidiary Guarantor is solvent
and will continue to be solvent after issuing its Guarantee, will have
sufficient capital for carrying on its business after such issuance and will be
able to pay its debts as they mature. There can be no assurance, however, that a
court passing on such standards would agree with the Company.
LACK OF PUBLIC MARKET
The Outstanding Notes were issued to, and the Company believes are
currently owned by, a relatively small number of beneficial owners. The
Outstanding Notes have 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 Notes. See "-- Consequences of a Failure to Exchange."
Although the Exchange Notes 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 Notes are traded after their initial
issuance, they may trade at a discount from their 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 Notes 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 Notes. The liquidity of, and trading market for, the Notes 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 Notes for its own account in
exchange for Outstanding Notes, where such Outstanding Notes were 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 Notes. 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
23
<PAGE> 27
right to require that Participating Broker-Dealers suspend the resale of
Exchange Notes pursuant to this Prospectus. Notwithstanding that the Company may
cause the resale of Exchange Notes pursuant to this Prospectus to be suspended,
the Company has 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
Notes."
EXCHANGE OFFER ELIGIBILITY AND PROCEDURES
Any holder of the Outstanding Notes who is an "affiliate" of the Company
within the meaning of Rule 405 under the Securities Act or any broker-dealer who
purchased Outstanding Notes 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 Notes 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 Notes unless
such sale or transfer is made pursuant to an exemption from such requirements.
See "The Exchange Offer -- Resale of Exchange Notes."
Each holder of Outstanding Notes who wishes to exchange its Outstanding
Notes for Exchange Notes 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 Notes in exchange for the Outstanding Notes
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
Notes desiring to tender such Outstanding Notes in exchange for Exchange Notes
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 Notes for exchange. See "The Exchange Offer -- Procedures for
Tendering."
24
<PAGE> 28
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 sale of the outstanding Notes, representing funds
sufficient to pay the first four interest payments on the outstanding 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.
25
<PAGE> 29
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.
26
<PAGE> 30
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
27
<PAGE> 31
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
28
<PAGE> 32
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
29
<PAGE> 33
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.
30
<PAGE> 34
(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
31
<PAGE> 35
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.
32
<PAGE> 36
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>
33
<PAGE> 37
<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 (4,241) (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 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.
34
<PAGE> 38
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.
35
<PAGE> 39
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.
36
<PAGE> 40
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
37
<PAGE> 41
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
38
<PAGE> 42
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
39
<PAGE> 43
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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<PAGE> 44
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.
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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<PAGE> 45
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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<PAGE> 46
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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<PAGE> 47
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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<PAGE> 48
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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<PAGE> 49
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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<PAGE> 53
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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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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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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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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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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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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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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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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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
William S. 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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<PAGE> 67
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 issued
by the Company in the Offering, the material terms of which are described below.
Liquidation Preference. The liquidation preference of the Preferred Stock
is $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.
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<PAGE> 68
Dividends. The Preferred Stock is entitled to dividends at a rate equal to
13 1/2% per annum of the liquidation preference per share, payable quarterly
beginning February 1, 1998. The Company, at its option, may pay dividends on any
dividend payment date occurring on or before November 1, 2002 either in cash or
by the issuance of additional Preferred Stock with a liquidation preference
equal to the amount of such dividends; thereafter, dividends will be paid in
cash. The Indenture limits the amount of cash dividends that may be paid on the
preferred stock of the Company, including the Preferred Stock.
Dividend Payment Dates. Dividends are payable on February 1, May 1, August
1 and November 1 of each year.
Voting. The Preferred Stock is non-voting, except as otherwise required by
law and except in certain circumstances, 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 Preferred Stock, with respect to dividend rights and rights on
liquidation, winding-up and dissolution of the Company, ranks senior to all
classes of common stock and to all other classes of preferred stock of the
Company subject to certain exceptions.
Change of Control. Upon the occurrence of a change of control, the Company
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 contains certain
restrictive provisions that are substantially identical to those contained in
the Indenture and that, among other things, limit (i) the incurrence of
additional indebtedness by the Company and its subsidiaries, (ii) the issuance
of preferred stock of the Company's subsidiaries, (iii) payment of dividends on,
and redemption of, capital stock of the Company and the redemption of certain
subordinated obligations of the Company, (iv) investments, including investments
over a certain amount in Interactive Channel by the Company or any restricted
subsidiary, (v) transactions with affiliates and (vi) consolidations, mergers
and transfers of all or substantially all of the assets of the Company.
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.
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.
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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 purchase.
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.
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
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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 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.
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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 NOTES
GENERAL
The Outstanding Notes were, and the Exchange Notes are to be, issued under
an Indenture, dated as of October 30, 1997 (the "Indenture"), between the
Company and U.S. Trust Company of Texas, N.A., as Trustee (the "Trustee"), a
copy of which is available upon request to the Company. The Exchange Notes and
the Outstanding Notes will constitute a single series of debt securities under
the Indenture. The following is a summary of certain provisions of the Indenture
and the Notes and does not purport to be complete and is subject to, and is
qualified in its entirety by reference to, all the provisions of the Indenture
(including the definitions of certain terms therein and those terms made a part
thereof by the Trust Indenture Act of 1939, as amended) and the Notes.
Principal of, premium, if any, and interest on the Notes will be payable,
and the Notes may be exchanged or transferred, at the office or agency of the
Company in the Borough of Manhattan, The City of New York (which initially shall
be the corporate trust office of the Trustee in New York, New York), except
that, at the option of the Company, payment of interest may be made by check
mailed to the address of the holders as such address appears in the Note
Register. Initially, the Trustee will act as Paying Agent and Registrar for the
Notes. The Notes may be presented for registration of transfer and exchange at
the offices of the Registrar, which initially will be the Trustee's corporate
trust office. The Company may change any Paying Agent and Registrar without
notice to holders of the Notes.
For each Outstanding Note accepted for exchange, the holder of such
Outstanding Note will receive an Exchange Note having a principal amount equal
to that of the surrendered Outstanding Note.
The Notes will be issued only in fully registered form, without coupons, in
denominations of $1,000 and any integral multiple of $1,000. No service charge
will be made for any registration of transfer or exchange of Notes, but the
Company may require payment of a sum sufficient to cover any transfer tax or
other similar governmental charge payable in connection therewith.
TERMS OF NOTES
The Notes will be senior secured obligations of the Company, limited to
$100 million aggregate principal amount, and will mature on November 1, 2004.
Each Note will bear interest at the rate of 12% per annum from the date of
issuance, or from the most recent date to which interest has been paid or
provided for, and will be payable semiannually on May 1 and November 1 of each
year (each an "Interest Payment Date"), commencing on May 1, 1998, to holders of
record at the close of business on the April 15th or October 15th immediately
preceding the Interest Payment Date. Interest will be computed on the basis of a
360-day year comprised of twelve 30-day months.
DISBURSEMENT OF FUNDS -- INTEREST ESCROW ACCOUNT
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, in an interest escrow account (the "Interest Escrow
Account") held by the Escrow Agent for the benefit of the Trustee under the
Indenture in accordance with the Escrow and Disbursement Agreement. The Company
has entered into the Escrow and Disbursement Agreement, which provides, among
other things, that funds may be disbursed from the Interest Escrow Account only
to pay interest on the Notes (or, if a portion of the Notes has been retired by
the Company, funds representing the interest payment on the retired Notes may be
paid to the Company) and, upon certain repurchases or redemptions thereof, to
pay principal of and premium, if any, thereon. Pending such disbursement, the
Company will cause all funds contained in the Interest Escrow Account to be
invested in Cash Equivalents. Interest earned on these Cash Equivalents will be
added to the Interest Escrow Account.
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SECURITY
The Outstanding Notes are, and the Exchange Notes will be, secured by a
first priority security interest in: (i) substantially all of the assets of the
Company, including all of the Capital Stock of each Subsidiary Guarantor and
(ii) pending disbursement pursuant to the Escrow and Disbursement Agreement, the
Interest Escrow Account. The Guarantees are secured by substantially all of the
assets of each Subsidiary Guarantor.
MANDATORY REDEMPTION
The Company will not be required to make mandatory redemptions or sinking
fund payments prior to the maturity of the Notes.
REDEMPTION
Optional Redemption. Except as set forth below, the Notes will not be
redeemable at the option of the Company prior to November 1, 2001. On and after
such date, the Notes will be redeemable, at the Company's option, in whole or in
part, at any time upon not less than 30 nor more than 60 days' prior notice
mailed by first-class mail to each holder's registered address, at the following
redemption prices (expressed in percentages of principal amount), if redeemed
during the 12-month period commencing on November 1 of the years set forth
below, plus accrued and unpaid interest to the redemption date (subject to the
right of holders of record on the relevant record date to receive interest due
on the relevant Interest Payment Date):
<TABLE>
<CAPTION>
REDEMPTION
PERIOD PRICE
------ ----------
<S> <C>
2001........................................................ 106.00%
2002........................................................ 103.00%
2003 and thereafter......................................... 100.00%
</TABLE>
Optional Redemption Upon Equity Offering. In addition, at any time prior to
November 1, 2000, the Company may, at its option, redeem up to 35% of the Notes,
with net cash proceeds of one or more Equity Offerings by the Company so long as
there is a Public Market at the time of such redemption, at a redemption price
equal to 112% of the principal amount thereof, plus accrued and unpaid interest
thereon, if any, to the date of redemption; provided, however, that after any
such redemption the aggregate principal amount of the Notes outstanding must
equal at least $65 million. In order to effect the foregoing redemption with the
proceeds of any Equity Offering, the Company shall make such redemption not more
than 90 days after the consummation of any such Equity Offering.
Selection. In the case of any partial redemption, selection of the Notes
for redemption will be made by the Trustee on a pro rata basis, by lot or by
such other method as the Trustee in its sole discretion shall deem to be fair
and appropriate; provided, however, that if a partial redemption is made with
proceeds of an Equity Offering, selection of the Notes or portion thereof for
redemption shall be made by the Trustee only on a pro rata basis, unless such
method is otherwise prohibited. Notes may be redeemed in part in multiples of
$1,000 principal amount only. Notice of redemption will be sent, by first class
mail, postage prepaid, at least 45 days (unless a shorter period is acceptable
to the Trustee) prior to the date fixed for redemption to each holder whose
Notes are to be redeemed at the last address for such holder then shown on the
Note Register. If any Note is to be redeemed in part only, the notice of
redemption that relates to such Note shall state the portion of the principal
amount thereof to be redeemed. A new Note in principal amount equal to the
unredeemed portion thereof will be issued in the name of the holder thereof upon
cancellation of the original Note. On and after any redemption date, interest
will cease to accrue on the Notes or part thereof called for redemption as long
as the Company has deposited with the Paying Agent funds in satisfaction of the
redemption price pursuant to the Indenture.
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RANKING
The Outstanding Notes are, and the Exchange Notes will be, senior secured
obligations of the Company and will rank pari passu in right of payment with all
existing and future Senior Indebtedness of the Company and will rank senior in
right of payment to all existing and future Subordinated Obligations of the
Company.
SUBSIDIARY GUARANTEES
Each Subsidiary Guarantor unconditionally guarantees, jointly and
severally, to each holder and the Trustee, the full and prompt payment of
principal of and interest on the Notes, and of all other obligations of the
Company under the Indenture. The Guarantees are senior secured obligations of
each Subsidiary Guarantor and will rank pari passu in right of payment with all
existing and future Guarantor Senior Indebtedness of each Subsidiary Guarantor
and will rank senior in right of payment to all future and existing Guarantor
Subordinated Obligations of each Guarantor.
The obligations of each Subsidiary Guarantor are limited to the maximum
amount as will, after giving effect to all other contingent and fixed
liabilities of such Subsidiary Guarantor and after giving effect to any
collections from or payments made by or on behalf of any other Subsidiary
Guarantor in respect of the obligations of such other Subsidiary Guarantor under
its Subsidiary Guarantee or pursuant to its contribution obligations under the
Indenture, result in the obligations of such Subsidiary Guarantor under the
Subsidiary Guarantee not constituting a fraudulent conveyance or fraudulent
transfer under federal or state law. In addition, the obligations of each
foreign Subsidiary Guarantor are limited to the maximum amount permitted under
applicable law. Each Subsidiary Guarantor that makes a payment or distribution
under a Subsidiary Guarantee shall be entitled to contribution from each other
Subsidiary Guarantor in a pro rata amount based on the Adjusted Net Assets of
each Subsidiary Guarantor.
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.
Each Subsidiary Guarantor may consolidate with or merge into or sell its
assets to the Company or another Subsidiary Guarantor without limitation,
provided that, a Subsidiary Guarantor engaged in the interactive television
business may not merge with or consolidate into a Subsidiary Guarantor engaged
in the voice information services business and vice versa. Each Subsidiary
Guarantor may consolidate with or merge into or sell all or substantially all
its assets to a corporation, partnership or trust other than the Company or
another Subsidiary Guarantor (whether or not affiliated with the Subsidiary
Guarantor). Upon the sale or disposition of a Subsidiary Guarantor (or all or
substantially all of its assets) to a Person (whether or not an Affiliate of the
Subsidiary Guarantor) which is not a Subsidiary of the Company, which sale or
disposition is otherwise in compliance with the Indenture (including the
covenant described under "-- Certain Covenants -- Limitation on Sales of Assets
and Subsidiary Stock"), such Subsidiary Guarantor shall be deemed released from
all its obligations under the Indenture and its Subsidiary Guarantee and such
Subsidiary Guarantee shall terminate; provided, however, that any such
termination shall occur only to the extent that all of its guarantees of, and
under all of its pledges of assets or other security interests which secure, any
other Indebtedness of the Company shall also terminate upon such release, sale
or transfer.
Subsequent to the Issue Date, separate financial information for the
Subsidiary Guarantors will not be provided except to the extent required by
Regulation S-X under the Securities Act.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder will have the right
to require the Company to repurchase all or any part of such holder's Notes at a
purchase price in cash equal to 101% of the principal amount thereof plus
accrued and unpaid interest, if any, to the date of purchase (subject to the
right of holders of record on the relevant record date to receive interest due
on the relevant Interest Payment Date).
Within 30 days following any Change of Control, unless the Company has
mailed a redemption notice with respect to all the outstanding Notes in
connection with such Change of Control, the Company shall mail
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a notice to each holder with a copy to the Trustee stating: (1) that a Change of
Control has occurred and that such holder has the right to require the Company
to purchase such holder's Notes at a purchase price in cash equal to 101% of the
principal amount thereof plus accrued and unpaid interest, if any, to the date
of purchase (subject to the right of holders of record on a record date to
receive interest on the relevant Interest Payment Date), (2) the repurchase date
(which shall be no earlier than 30 days nor later than 60 days from the date
such notice is mailed); and (3) the procedures determined by the Company,
consistent with the Indenture, that a holder must follow in order to have its
Notes purchased.
The Company will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of Notes pursuant to this covenant. To the
extent that the provisions of any securities laws or regulations conflict with
provisions of the Indenture, the Company will comply with the applicable
securities laws and regulations and shall not be deemed to have breached its
obligations described in the Indenture by virtue thereof.
The definition of "Change of Control" includes, among other transactions, a
disposition of all or substantially all of the property and assets of the
Company and its Subsidiaries. With respect to the disposition of property or
assets, the phrase "all or substantially all" as used in the Indenture varies
according to the facts and circumstances of the subject transaction, has no
clearly established meaning under New York law (which is the choice of law under
the Indenture) and is subject to judicial interpretation. Accordingly, in
certain circumstances there may be a degree of uncertainty in ascertaining
whether a particular transaction would involve a disposition of "all or
substantially all" of the property or assets of a Person, and therefore it may
be unclear as to whether a Change of Control has occurred and whether the
Company is required to make an offer to repurchase the Notes as described above.
Future Senior Indebtedness of the Company and its Subsidiaries may contain
prohibitions of certain events that would constitute a Change of Control or
require such Senior Indebtedness to be repurchased upon a Change of Control.
Moreover, the exercise by the holders of their right to require the Company to
repurchase the Notes could cause a default under such Senior Indebtedness, even
if the Change of Control itself does not, due to the financial effect of such
repurchase of the Company. Finally, the Company's ability to pay cash to the
holders upon a repurchase may be limited by the Company's then existing
financial resources. There can be no assurance that sufficient funds will be
available when necessary to make any required repurchases.
The existence of a holder's right to require the Company to repurchase such
holder's Notes upon the occurrence of a Change of Control may deter a third
party from seeking to acquire the Company in a transaction that would constitute
a Change of Control.
CERTAIN COVENANTS
The Indenture 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 (i) no Default or
Event of Default shall have occurred and be continuing at the time of such
Incurrence or would occur as a consequence of such Incurrence and (ii) on the
date thereof the Consolidated Coverage Ratio would be greater than 2.0:1.
(b) Notwithstanding the foregoing paragraph (a), the Company and its
Restricted Subsidiaries may Incur the following Indebtedness:
(i) Indebtedness of the Company or any Restricted Subsidiary under
Bank Indebtedness and under standby letters of credit or reimbursement
obligations with respect thereto issued in the ordinary course of business
and consistent with industry 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;
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(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;
(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 credit, surety bonds or performance bonds
securing any obligations of the Company or any of its Restricted
Subsidiaries pursuant to such agreements, in each case Incurred in
connection with the disposition of any business assets or Restricted
Subsidiary of the Company (other than Guarantees of Indebtedness or other
obligations Incurred by any Person acquiring all or any portion of such
business assets or Restricted Subsidiary of the Company for the purpose of
financing such acquisition) in a principal amount not to exceed the gross
proceeds actually
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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 Indenture (so long as the Company or such
Subsidiary Guarantor, as the case may be, could have Incurred such
Indebtedness directly without violation of the Indenture) and (B)
Guarantees by a Restricted Subsidiary of Senior Indebtedness Incurred by
the Company without violation of the Indenture (so long as such Restricted
Subsidiary could have Incurred such Indebtedness directly without violation
of the Indenture);
(ix) Indebtedness arising from the honoring by a bank or other
financial institution of a check, draft or similar instrument issued by the
Company or its Restricted Subsidiaries drawn against insufficient funds in
the ordinary course of business in an amount not to exceed $250,000 at any
time, provided that such Indebtedness is extinguished within two business
days of its incurrence; and
(x) Indebtedness (other than Indebtedness described in clauses
(i)-(ix)) in a principal amount which, when taken together with the
principal amount of all other Indebtedness Incurred pursuant to this clause
(x) and then outstanding, will not exceed $4 million (it being understood
that any Indebtedness Incurred under this clause (x) shall cease to be
deemed Incurred or outstanding for purposes of this clause (x) (but shall
be deemed to be Incurred for purposes of paragraph (a)) from and after the
first date on which the Company or its Restricted Subsidiaries could have
Incurred such Indebtedness under the foregoing paragraph (a) without
reliance upon this clause (x)).
(c) Neither the Company nor any Restricted Subsidiary shall Incur any
Indebtedness under paragraph (b) above if the proceeds thereof are used,
directly or indirectly, to refinance any Subordinated Obligations of the Company
unless such Indebtedness shall be subordinated to the Notes to at least the same
extent as such Subordinated Obligations. No Restricted Subsidiary shall Incur
any Indebtedness under paragraph (b) above if the proceeds thereof are used,
directly or indirectly, to refinance any Guarantor Subordinated Obligation of
such Subsidiary Guarantor unless such Indebtedness shall be subordinated to the
obligations of such Subsidiary Guarantor under the Subsidiary Guaranty to at
least the same extent as such Guarantor Subordinated Obligation.
(d) The Company will not permit any Unrestricted Subsidiary to Incur any
Indebtedness other than Non-Recourse Debt.
Limitation on Restricted Payments
(a) The Company shall not, and shall not permit any of its Restricted
Subsidiaries, directly or indirectly, to (i) declare or pay any dividend or make
any distribution on or in respect of its Capital Stock (including any payment in
connection with any merger or consolidation involving the Company or any of its
Restricted Subsidiaries) except (A) dividends or distributions payable in its
Capital Stock (other than Disqualified Stock) or in options, warrants or other
rights to purchase such Capital Stock, and (B) dividends or distributions
payable to the Company or any of its Restricted Subsidiaries by any of its
Subsidiaries (and if the Subsidiary paying the dividend or making the
distribution is not a Wholly-Owned Subsidiary, to its other holders of Capital
Stock on a pro rata basis), (ii) purchase, redeem, retire or otherwise acquire
for value any Capital Stock of the Company held by Persons other than a
Wholly-Owned Subsidiary of the Company or any Capital Stock of a Restricted
Subsidiary of the Company held by any Affiliate of the Company, other than a
Wholly-Owned Subsidiary (in either case, other than in exchange for its Capital
Stock (other than Disqualified Stock)), (iii) purchase, repurchase, redeem,
defease or otherwise acquire or retire for value, prior to scheduled maturity,
scheduled repayment or scheduled sinking fund payment, any Subordinated
Obligations (other than the purchase, repurchase or other acquisition of
Subordinated Obligations purchased in anticipation of satisfying a sinking fund
obligation, principal installment or final maturity, in each case due within one
year of the date of purchase, repurchase or acquisition) or (iv) make any
Investment (other than a Permitted Investment) in any Person (any such dividend,
distribution, purchase, redemption, repurchase,
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defeasance, other acquisition, retirement or Investment as described in
preceding clauses (i) through (iv) being referred to as a "Restricted Payment"),
if at the time the Company or such Restricted Subsidiary makes such Restricted
Payment:
(1) a Default shall have occurred and be continuing (or would result
therefrom); or
(2) the Company is not able to Incur an additional $1.00 of
Indebtedness pursuant to paragraph (a) under "-- Limitation on
Indebtedness"; or
(3) the aggregate amount of such Restricted Payment and all other
Restricted Payments declared or made subsequent to the Issue Date would
exceed the sum of (A) 50% of the Consolidated Net Income accrued during the
period (treated as one accounting period) from the first day of the fiscal
quarter beginning on or after the Issue Date to the end of the most recent
fiscal quarter ending prior to the date of such Restricted Payment as to
which financial results are available (but in no event ending more than 135
days prior to the date of such Restricted Payment) (or, in case such
Consolidated Net Income shall be a deficit, minus 100% of such deficit);
(B) the aggregate net proceeds received by the Company from the issue or
sale of its Capital Stock (other than Disqualified Stock) or other capital
contributions subsequent to the Issue Date (other than net proceeds
received from an issuance or sale of such Capital Stock to (x) a Subsidiary
of the Company, (y) an employee stock ownership plan or similar trust 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 Issue Date of any Indebtedness of the Company
convertible or exchangeable for Capital Stock of the Company (less the
amount of any cash, or other property, distributed by the Company upon such
conversion or exchange); and (D) the amount equal to the net reduction in
Investments (other than Permitted Investments) made after the Issue Date by
the Company or any of its Restricted Subsidiaries in any Person resulting
from (i) repurchases or redemptions of such Investments by such Person,
proceeds realized upon the sale of such Investment to an unaffiliated
purchaser, repayments of loans or advances or other transfers of assets by
such Person to the Company or any Restricted Subsidiary of the Company or
(ii) the redesignation of Unrestricted Subsidiaries as Restricted
Subsidiaries (valued in each case as provided in the definition of
"Investment") not to exceed, in the case of any Unrestricted Subsidiary,
the amount of Investments previously included in the calculation of the
amount of Restricted Payments; provided, however, that no amount shall be
included under this clause (D) to the extent it is already included in
Consolidated Net Income.
(b) Notwithstanding the foregoing, the Company shall not, and shall not
permit any of its Restricted Subsidiaries, to make Investments in Interactive
Channel, Inc. or Interactive Channel Technologies, Inc., if at the time of such
Investment:
(1) a Default shall have occurred and be continuing (or would result
therefrom); or
(2) the aggregate amount of such Investment and all other Investments
in Interactive Channel, Inc. made subsequent to the Issue Date would exceed
the sum of (A) $34.0 million; (B) 50% of the Adjusted Consolidated Net
Income accrued during the period (treated as one accounting period) from
the first day of the fiscal quarter beginning on or after the Issue Date to
the end of the most recent fiscal quarter ending prior to the date of such
Investment as to which financial results are available (but in no event
ending more than 135 days prior to the date of such Restricted Payment)
(or, in case such Adjusted Consolidated Net Income shall be a deficit,
minus 100% of such deficit); and (C) the aggregate net proceeds received by
the Company from the issue or sale of its Capital Stock (other than
Disqualified Stock) or other capital contributions subsequent to the Issue
Date as calculated in accordance with paragraph (a)(3)(B) above.
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(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
"Limitation on Indebtedness" covenant; provided, however, that such purchase or
redemption shall be excluded in the calculation of the amount of Restricted
Payments; (iii) any purchase or redemption of Subordinated Obligations from Net
Available Cash to the extent permitted under "-- Limitation on Sales of Assets
and Subsidiary Stock" below; provided, however, that such purchase or redemption
shall be excluded in the calculation of the amount of Restricted Payments; and
(iv) dividends paid within 60 days after the date of declaration if at such date
of declaration such dividend would have complied with this provision; provided,
however, that such dividend shall be included in the calculation of the amount
of Restricted Payments, provided, however, that in each case, that no Default or
Event of Default shall have occurred or be continuing at the time of such
payment or as a result thereof.
(d) For purposes of determining compliance with the foregoing covenant,
Restricted Payments may be made with cash or non-cash assets, provided that any
Restricted Payment made other than in cash shall be valued at the fair market
value (determined, subject to the additional requirements of the immediately
succeeding proviso, 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 Indenture shall be
issued by an independent investment banking firm of national standing.
(e) Not later than the date of making any Restricted Payment, the Company
shall deliver to the Trustee an Officer's Certificate stating that such
Restricted Payment complies with the Indenture and setting forth in reasonable
detail the basis upon which the required calculations were computed, which
calculations may be based upon the Company's latest available quarterly
financial statements and a copy of any required investment banker's opinion.
Limitation on Liens
The Indenture provides that the Company will not, and will not permit any
Restricted Subsidiary to, directly or indirectly, create, incur, assume or
suffer to exist any Liens, except for Permitted Liens.
Limitation on Restrictions on Distributions from Restricted Subsidiaries
The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, create or permit to exist or become effective any consensual
encumbrance or restriction on the ability of any such Restricted Subsidiary to
(i) pay dividends or make any other distributions on its Capital Stock or pay
any Indebtedness or other obligation owed to the Company, (ii) make any loans or
advances to the Company or (iii) transfer any of its property or assets to the
Company, except: (a) any encumbrance or restriction pursuant to an agreement in
effect at or entered into on the Issue Date; (b) any encumbrance or restriction
with respect to such a Restricted Subsidiary pursuant to an agreement relating
to any Indebtedness issued by such Restricted Subsidiary on or prior to the date
on which such Restricted Subsidiary was acquired by the Company and outstanding
on such date (other than Indebtedness Incurred in anticipation of, or to provide
all or any portion of the funds or credit support utilized to consummate, the
transaction or series of related transactions pursuant to which such Restricted
Subsidiary became a Restricted Subsidiary of the Company or was acquired by the
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Company); (c) any encumbrance or restriction with respect to such a Restricted
Subsidiary pursuant to an agreement evidencing Indebtedness Incurred without
violation of the Indenture or effecting a refinancing of Indebtedness issued
pursuant to an agreement referred to in clauses (a) or (b) or this clause (c) or
contained in any amendment to an agreement referred to in clauses (a) or (b) or
this clause (c); provided, however, that the encumbrances and restrictions with
respect to such Restricted Subsidiary contained in any of such agreement,
refinancing agreement or amendment, taken as a whole, are no less favorable to
the holders of the Notes in any material respect, as determined in good faith by
the Board of Directors of the Company, than encumbrances and restrictions with
respect to such Restricted Subsidiary contained in agreements in effect at, or
entered into on, the Issue Date; (d) in the case of clause (iii), any
encumbrance or restriction (A) that restricts in a customary manner the
subletting, assignment or transfer of any property or asset that is a lease,
license, conveyance or contract or similar property or asset, (B) by virtue of
any transfer of, agreement to transfer, option or right with respect to, or Lien
on, any property or assets of the Company or any Restricted Subsidiary not
otherwise prohibited by the Indenture, (C) that is included in a licensing
agreement to the extent such restrictions limit the transfer of the property
subject to such licensing agreement or (D) arising or agreed to in the ordinary
course of business and that does not, individually or in the aggregate, detract
from the value of property or assets of the Company or any of its Subsidiaries
in any manner material to the Company or any such Restricted Subsidiary; (e) in
the case of clause (iii) above, restrictions contained in security agreements,
mortgages or similar documents securing Indebtedness of a Restricted Subsidiary
to the extent such restrictions restrict the transfer of the property subject to
such security agreements; (f) in the case of clause (iii) above, any instrument
governing or evidencing Indebtedness of a Person acquired by the Company or any
Restricted Subsidiary of the Company at the time of such acquisition, which
encumbrance or restriction is not applicable to any Person, or the properties or
assets of any Person, other than the Person so acquired; provided, however, that
such Indebtedness is not Incurred in connection with or in contemplation of such
acquisition; (g) any restriction with respect to such a Restricted Subsidiary
imposed pursuant to an agreement entered into for the sale or disposition of all
or substantially all of the Capital Stock or assets of such Restricted
Subsidiary pending the closing of such sale or disposition; and (h) encumbrances
or restrictions arising or existing by reason of applicable law.
Limitation on Sales of Assets and Subsidiary Stock
(a) The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, make any Asset Disposition unless (i) the Company or such
Restricted Subsidiary receives consideration at the time of such Asset
Disposition at least equal to the fair market value (as determined in good faith
by senior management of the Company or, if the fair market value of such assets
exceeds $500,000, by the Company's Board of Directors) (including as to the
value of all non-cash consideration), of the shares and assets subject to such
Asset Disposition, (ii) at least 80% of the consideration thereof received by
the Company or such Restricted Subsidiary is in the form of cash or Cash
Equivalents and (iii) an amount equal to 100% of the Net Available Cash from
such Asset Disposition is applied by the Company (or such Restricted Subsidiary,
as the case may be): (A) first, to the extent the Company or any Restricted
Subsidiary elects (or is required by the terms of any Senior Indebtedness), (x)
to prepay, repay or purchase Senior Indebtedness or (y) to the investment in or
acquisition of Additional Assets within 180 days from the later of the date of
such Asset Disposition or the receipt of such Net Available Cash; (B) second,
within 180 days from the receipt of such Net Available Cash, to the extent of
the balance of such Net Available Cash after application in accordance with
clause (A), to make an offer to purchase Notes at 100% of their principal amount
plus accrued and unpaid interest, if any, thereon; (C) third, within 180 days
after the later of the application of Net Available Cash in accordance with
clauses (A) and (B) and the date that is one year from the receipt of such Net
Available Cash, to the extent of the balance of such Net Available Cash after
application in accordance with clauses (A) and (B), to prepay, repay or
repurchase Indebtedness (other than Preferred Stock) of a Wholly-Owned
Subsidiary (in each case other than Indebtedness owned to the Company); and (D)
fourth, to the extent of the balance of such Net Available Cash after
application in accordance with clauses (A), (B) and (C), to (w) the investment
in or acquisition of Additional Assets, (x) the making of Temporary Cash
Investments, (y) the prepayment, repayment or purchase of Indebtedness of the
Company (other than Indebtedness owing to any Subsidiary of the Company) or
Indebtedness of any Subsidiary (other than Indebtedness owed to the
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Company or any of its Subsidiaries) or (z) any other purpose otherwise permitted
under the Indenture, in each case within the later of 45 days after the
application of Net Available Cash in accordance with clauses (A), (B) and (C) or
the date that is one year from the receipt of such Net Available Cash; provided,
however, that, in connection with any prepayment, repayment or purchase of
Indebtedness pursuant to clause (A), (B), (C) or (D) above, the Company or such
Restricted Subsidiary shall retire such Indebtedness and shall cause the related
loan commitment (if any) to be permanently reduced in an amount equal to the
principal amount so prepaid, repaid or purchased. Notwithstanding the foregoing
provisions, the Company and its Restricted Subsidiaries shall not be required to
apply any Net Available Cash in accordance herewith except to the extent that
the aggregate Net Available Cash from all Asset Dispositions which are not
applied in accordance with this covenant at any time exceed $5 million. The
Company shall not be required to make an offer for Notes pursuant to this
covenant if the Net Available Cash available therefor (after application of the
proceeds as provided in clause (A)) is less than $5 million for any particular
Asset Disposition (which lesser amounts shall be carried forward for purposes of
determining whether an offer is required with respect to the Net Available Cash
from any subsequent Asset Disposition).
For the purposes of this covenant, the following will be deemed to be cash:
(x) the assumption by the transferee of Senior Indebtedness of the Company or
Senior Indebtedness of any Restricted Subsidiary and the release of the Company
or such Restricted Subsidiary from all liability on such Senior Indebtedness in
connection with such Asset Disposition (in which case the Company shall, without
further action, be deemed to have applied such assumed Indebtedness in
accordance with clause (A) of the preceding paragraph) and (y) securities
received by the Company or any Restricted Subsidiary of the Company from the
transferee that are promptly (and in any event within 60 days) converted by the
Company or such Restricted Subsidiary into cash.
(b) In the event of an Asset Disposition that requires the purchase of
Notes pursuant to clause (a)(iii)(B), the Company will be required to purchase
Notes tendered pursuant to an offer by the Company for the Notes at a purchase
price of 101% of their principal amount plus accrued and unpaid interest, if
any, to the purchase date in accordance with the procedures (including prorating
in the event of oversubscription) set forth in the Indenture. If the aggregate
purchase price of the Notes tendered pursuant to the offer is less than the Net
Available Cash allotted to the purchase of the Notes, the Company will apply the
remaining Net Available Cash in accordance with clauses (a)(iii)(C) or (D)
above.
(c) The Company will comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
or regulations in connection with the repurchase of Notes pursuant to the
Indenture. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this covenant, the Company will comply
with the applicable securities laws and regulations and will not be deemed to
have breached its obligations under the Indenture by virtue thereof.
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.
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(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 fully secured on the date of such
loans or advances by shares of Common Stock of the Company owned by such senior
management, in an aggregate amount outstanding not to exceed $750,000, (v)
indemnification agreements with, and the payment of fees and indemnities to,
directors, officers and employees of the Company and its Restricted
Subsidiaries, in each case in the ordinary course of business, (vi) transactions
pursuant to agreements in existence on the Issue Date which are (x) described in
the Offering Memorandum relating 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, (vii) any employment,
non-competition or confidentiality agreements entered into by the Company or any
of its Restricted Subsidiaries with its employees in the ordinary course of
business, and (viii) the issuance of Capital Stock of the Company (other than
Disqualified Stock).
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
Indenture.
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 Indenture Incur Indebtedness secured by a
Permitted Lien on such property or assets in an amount equal to the Attributable
Indebtedness with respect to such Sale/Leaseback Transaction, (ii) the Net Cash
Proceeds from such Sale/Leaseback Transaction are at least equal to the fair
market value of the property or assets subject to such Sale/Leaseback
Transaction (such fair market value determined, in the event such property or
assets have a fair market value in excess of $500,000, no more than 30 days
prior to the effective date of such Sale/Leaseback Transaction, by the Board of
Directors of the Company as evidenced by a resolution of such Board of
Directors), (iii) the Net Cash Proceeds of such Sale/Leaseback Transaction are
applied in accordance with the provisions described under "-- Limitation on
Sales of Assets and Subsidiary Stock," and (iv) 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
Notes, 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
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Exchange Act, the Company will nevertheless deliver such Exchange Act
information to the holders of the Notes 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 Channel Technologies, Inc. and any of their Wholly-Owned
Subsidiaries.
Taxes
The Company will, and will cause its Restricted Subsidiaries to, pay and
discharge when due and payable all taxes, levies, imposts, duties or other
governmental charges ("Taxes") imposed on it or on its income or profits or on
any of its properties except such Taxes which are being contested in good faith
in appropriate proceedings and for which adequate reserves have been established
with GAAP.
Limitation on Designations of Unrestricted Subsidiaries
The Company may designate any Subsidiary of the Company (other than a
Subsidiary of the Company which owns Capital Stock of a Restricted Subsidiary)
as an "Unrestricted Subsidiary" under the Indenture (a "Designation") only if:
(a) no Default shall have occurred and be continuing at the time of or
after giving effect to such Designation; and
(b) the Company would be permitted under the Indenture to make an
Investment at the time of Designation (assuming the effectiveness of such
Designation) in an amount (the "Designation Amount") equal to the sum of
(i) fair market value of the Capital Stock of such Subsidiary owned by the
Company and the Restricted Subsidiaries on such date and (ii) the aggregate
amount of other Investments of the Company and the Restricted Subsidiaries
in such Subsidiary on such date; and
(c) the Company would be permitted to Incur $1.00 of additional
Indebtedness (other than Permitted Indebtedness) pursuant to the covenant
described under "-- Limitation on Indebtedness" at the time of Designation
(assuming the effectiveness of such Designation).
In the event of any such Designation, the Company shall be deemed to have
made an Investment constituting a Restricted Payment pursuant to the covenant
described under "-- Limitation on Restricted Payments" for all purposes of the
Indenture in the Designation Amount. The Indenture will further provide that the
Company shall not, and shall not permit any Restricted Subsidiary to, at any
time (x) provide direct or indirect credit support for or a guarantee of any
Indebtedness of any Unrestricted Subsidiary (including of any undertaking,
agreement or instrument evidencing such Indebtedness), (y) be directly or
indirectly liable for any Indebtedness of any Unrestricted Subsidiary or (z) be
directly or indirectly liable for any Indebtedness which provides that the
holder thereof may (upon notice, lapse of time or both) declare a default
thereon or cause the payment thereof to be accelerated or payable prior to its
final scheduled maturity upon the occurrence of a default with respect to any
Indebtedness of any Unrestricted Subsidiary (including any right to take
enforcement action against such Unrestricted Subsidiary), except, in the case of
clause (x) or (y), to the extent permitted under the covenant described under
"-- Limitation on Restricted Payments."
The Indenture further provides that the Company may revoke any Designation
of a Subsidiary as an Unrestricted Subsidiary (a "Revocation"), whereupon such
Subsidiary shall then constitute a Restricted Subsidiary, if:
(a) no Default shall have occurred and be continuing at the time of
and after giving effect to such Revocation; and
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(b) all Liens and Indebtedness of such Unrestricted Subsidiary
outstanding immediately following such Revocation would, if incurred at
such time, have been permitted to be incurred for all purposes of the
Indenture.
All Designations and Revocations must be evidenced by Board Resolutions of
the Company delivered to the Trustee certifying compliance with the foregoing
provisions.
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, by supplemental indenture, executed and
delivered to the Trustee, in form satisfactory to the Trustee, all the
obligations of the Company under the Notes and the Indenture; (ii) immediately
after giving effect to such transaction (and treating any Indebtedness that
becomes an obligation of the Successor Company or any Subsidiary of the
Successor Company as a result of such transaction as having been incurred by the
Successor Company or such Restricted Subsidiary at the time of such
transaction), no Default or Event of Default shall have occurred and be
continuing; (iii) immediately after giving effect to such transaction, the
Successor Company (A) would have a Consolidated Net Worth equal to or greater
than the Consolidated Net Worth of the Company immediately prior to such
transaction and (B) would be able to Incur at least an additional $1.00 of
Indebtedness pursuant to paragraph (a) of "-- Limitation on Indebtedness"; (iv)
there has been delivered to the Trustee an Opinion of Counsel to the effect that
holders of the Notes will not recognize income, gain or loss for U.S. Federal
income tax purposes as a result of such consolidation, merger, conveyance,
transfer or lease and will be subject to U.S. Federal income tax on the same
amount and in the same manner and at the same times as would have been the case
if such consolidation, merger, conveyance, transfer or lease had not occurred;
and (v) the Company shall have delivered to the Trustee an Officers' Certificate
and an Opinion of Counsel, each stating that such consolidation, merger or
transfer and such supplemental indenture (if any) comply with the Indenture.
The Successor Company will succeed to, and be substituted for, and may
exercise every right and power of, the Company under the Indenture, but, in the
case of a lease of all or substantially all its assets, the Company will not be
released from the obligation to pay the principal of and interest on the Notes.
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.
EVENTS OF DEFAULT
Each of the following constitutes an Event of Default under the Indenture:
(i) a default in any payment of interest on any Note when due, continued for 30
days, (ii) a default in the payment of principal of any Note when due at its
Stated Maturity, upon optional redemption, upon required repurchase, upon
declaration or otherwise, (iii) the failure by the Company to comply with its
obligations under the "Merger and Consolidation" covenant described under
"Certain Covenants" above, (iv) the failure by the Company to comply for 30 days
after notice with any of its obligations under the covenants described under
"Change of Control" above or under covenants described under "Certain Covenants"
above (in each case, other than a failure to purchase Notes which shall
constitute an Event of Default under clause (ii) above), other than "Merger and
Consolidation," (v) the failure by the Company or any Subsidiary Guarantor to
comply for 60 days after notice with its other agreements contained in the
Indenture, (vi) Indebtedness of the Company or any Restricted Subsidiary is not
paid within any applicable grace period after final maturity or is accelerated
by the holders thereof because of a default and the total amount of such
Indebtedness unpaid or accelerated exceeds $3 million and such default shall not
have been cured or such acceleration rescinded after a 10-day period, (vii)
certain events of bankruptcy, insolvency or reorganization of the Company or a
Significant Subsidiary (the "bankruptcy provisions"), (viii) any judgment or
decree for the payment of money in excess
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of $3 million (to the extent not covered by insurance) is rendered against the
Company or a Significant Subsidiary and such judgment or decree shall remain
undischarged or unstayed for a period of 60 days after such judgment becomes
final and non-appealable (the "judgment default provision") or (ix) any
Subsidiary Guarantee by a Significant Subsidiary ceases to be in full force and
effect (except as contemplated by the terms of the Indenture) or any Subsidiary
Guarantor that is a Significant Subsidiary denies or disaffirms its obligations
under the Indenture or its Subsidiary Guarantee and such Default continues for
10 days. However, a default under clause (iv) or (v) will not constitute an
Event of Default until the Trustee or the holders of 25% in principal amount of
the outstanding Notes notify the Company of the default and the Company does not
cure such default within the time specified in clause (iv) or (v) after receipt
of such notice.
If an Event of Default occurs and is continuing, the Trustee or the holders
of at least 25% in principal amount of the outstanding Notes by notice to the
Company may declare the principal of and accrued and unpaid interest, if any, on
all the Notes to be due and payable. Upon such a declaration, such principal and
accrued and unpaid interest shall be due and payable immediately. If an Event of
Default relating to certain events of bankruptcy, insolvency or reorganization
of the Company occurs, the principal of and accrued and unpaid interest on all
the Notes will become and be immediately due and payable without any declaration
or other act on the part of the Trustee or any holders. Under certain
circumstances, the holders of a majority in principal amount of the outstanding
Notes may rescind any such acceleration with respect to the Notes and its
consequences.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, if an Event of Default occurs and is continuing, the Trustee will be
under no obligation to exercise any of the rights or powers under the Indenture
at the request or direction of any of the holders unless such holders have
offered to the Trustee reasonable indemnity or security against any loss,
liability or expense. Except to enforce the right to receive payment of
principal, premium (if any) or interest when due, no holder may pursue any
remedy with respect to the Indenture or the Notes unless (i) such holder has
previously given the Trustee notice that an Event of Default is continuing, (ii)
holders of at least 25% in principal amount of the outstanding Notes have
requested the Trustee to pursue the remedy, (iii) such holders have offered the
Trustee reasonable security or indemnity against any loss, liability or expense,
(iv) the Trustee has not complied with such request within 60 days after the
receipt of the request and the offer of security or indemnity and (v) the
holders of a majority in principal amount of the outstanding Notes have not
given the Trustee a direction that, in the opinion of the Trustee, is
inconsistent with such request within such 60-day period. Subject to certain
restrictions, the holders of a majority in principal amount of the outstanding
Notes are given the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or of exercising any trust or
power conferred on the Trustee. The Trustee, however, may refuse to follow any
direction that conflicts with law or the Indenture or that the Trustee
determines is unduly prejudicial to the rights of any other holder or that would
involve the Trustee in personal liability. Prior to taking any action under the
Indenture, the Trustee shall be entitled to indemnification satisfactory to it
in its sole discretion against all losses and expenses caused by taking or not
taking such action.
The Indenture provides that if a Default occurs and is continuing and is
known to the Trustee, the Trustee must mail to each holder notice of the Default
within 90 days after it occurs. Except in the case of a Default in the payment
of principal of, premium (if any) or interest on any Note, the Trustee may
withhold notice if and so long as its board of directors, a committee of its
board of directors or a committee of its Trust officers in good faith determines
that withholding notice is in the interests of the holders of the Notes. In
addition, the Company is required to deliver to the Trustee, within 90 days
after the end of each fiscal year, a certificate indicating whether the signers
thereof know of any Default that occurred during the previous year. The Company
also is required to deliver to the Trustee, within 30 days after the occurrence
thereof, written notice of any events which would constitute certain Defaults.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Indenture may be amended with the
consent of the holders of a majority in principal amount of the Notes then
outstanding and any past default or compliance with any provisions may be waived
with the consent of the holders of a majority in principal amount of the Notes
then
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outstanding. However, without the consent of each holder of an outstanding Note
affected, no amendment may, among other things, (i) reduce the amount of Notes
whose holders must consent to an amendment, (ii) reduce the stated rate of or
extend the stated time for payment of interest on any Note, (iii) reduce the
principal of or extend the Stated Maturity of any Note, (iv) reduce the premium
payable upon the redemption or repurchase of any Note or change the time at
which any Note may be redeemed as described under "Optional Redemption" above,
(v) make any Note payable in money other than that stated in the Note, (vi)
impair the right of any holder to receive payment of principal of and interest
on such holder's Notes on or after the due dates therefor or to institute suit
for the enforcement of any payment on or with respect to such holder's Notes or
(vii) make any change in the amendment provisions which require each holder's
consent or in the waiver provisions.
Without the consent of any holder, the Company and the Trustee may amend
the Indenture to cure any ambiguity, omission, defect or inconsistency, to
provide for the assumption by a successor corporation, partnership, trust or
limited liability company of the obligations of the Company under the Indenture
(provided, however, that prior to such assumption there has been delivered to
the Trustee an Opinion of Counsel to the effect that holders of the Notes will
not recognize income, gain or loss for U.S. Federal income tax purposes as a
result of such assumption 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 assumption had not occurred), to provide for uncertificated Notes
in addition to or in place of certificated Notes (provided that the
uncertificated Notes are issued in registered form for purposes of Section
163(f) of the Code, or in a manner such that the uncertificated Notes are
described in Section 163(f)(2)(B) of the Code), to add further Guarantees with
respect to the Notes, to secure the Notes with additional collateral, to add to
the covenants of the Company for the benefit of the holders or to surrender any
right or power conferred upon the Company, to make any change that does not
adversely affect the rights of any holder or to comply with any requirement of
the Commission in connection with the qualification of the Indenture under the
Trust Indenture Act.
The consent of the holders is not necessary under the Indenture to approve
the particular form of any proposed amendment. It is sufficient if such consent
approves the substance of the proposed amendment.
After an amendment under the Indenture becomes effective, the Company is
required to mail to the holders a notice briefly describing such amendment.
However, the failure to give such notice to all the holders or any defect
therein, will not impair or affect the validity of the amendment.
DEFEASANCE
The Company at any time may terminate all its obligations under the Notes
and the Indenture ("legal defeasance"), except for certain obligations,
including those respecting the defeasance trust and obligations to register the
transfer or exchange of the Notes, to replace mutilated, destroyed, lost or
stolen Notes and to maintain a registrar and paying agent in respect of the
Notes. The Company at any time may terminate its obligations under covenants
described under "Certain Covenants" (other than "Merger and Consolidation"), the
operation of the cross acceleration provision, the bankruptcy provisions with
respect to Significant Subsidiaries, the judgment default provision and the
Subsidiary Guaranty provision described under "Events of Default" above and the
limitations contained in clauses (iii) and (iv) under "Certain
Covenants -- Merger and Consolidation" above ("covenant defeasance").
The Company may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If the Company exercises its
legal defeasance option, payment of the Notes may not be accelerated because of
an Event of Default with respect thereto. If the Company exercises its covenant
defeasance option, payment of the Notes may not be accelerated because of an
Event of Default specified in clause (iv), (vi), (vii) (with respect only to
Significant Subsidiaries), (viii) or (ix) under "Events of Default" above or
because of the failure of the Company to comply with clause (iii) or (iv) under
"Certain Covenants -- Merger and Consolidation" above.
In order to exercise either defeasance option, the Company must irrevocably
deposit in trust (the "defeasance trust") with the Trustee money or U.S.
Government Obligations for the payment of principal, premium (if any) and
interest on the Notes to redemption or maturity, as the case may be, and must
comply
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with certain other conditions, including delivery to the Trustee of an Opinion
of Counsel to the effect that holders of the Notes will not recognize income,
gain or loss for U.S. Federal income tax purposes as a result of such deposit
and defeasance 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
deposit and defeasance had not occurred (and, in the case of legal defeasance
only, such Opinion of Counsel must be based on a ruling of the Internal Revenue
Service or other change in applicable U.S. Federal income tax law).
TRANSFER AND EXCHANGE
Upon any transfer of a Note, the Registrar may require a holder of Notes,
among other things, to furnish appropriate endorsements and transfer documents,
and to pay any taxes and fees required by law or permitted by the Indenture. The
Registrar is not required to transfer or exchange any Notes selected for
redemption nor is the Registrar required to transfer or exchange any Notes for a
period of 15 days before a selection of Notes to be redeemed. The registered
holder of a Note may be treated as the owner of it for all purposes.
CONCERNING THE TRUSTEE
U.S. Trust Company of Texas, N.A. is the Trustee under the Indenture and
has been appointed by the Company as Registrar and Paying Agent with regard to
the Notes.
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim a security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest (as defined in
the Indenture) it must eliminate such conflict or resign.
The holders of a majority in aggregate principal amount of the then
outstanding Notes issued under the Indenture will have the right to direct the
time, method and place of conducting any proceeding for exercising any remedy
available to the Trustee. The Indenture provides that in case an Event of
Default shall occur (which shall not be cured) the Trustee will be required, in
the exercise of its power, to use the degree of care of a prudent man in the
conduct of his own affairs. Subject to such provisions, the Trustee will be
under no obligation to exercise any of its rights or powers under the Indenture
at the request of any of the holders of the Notes issued thereunder unless they
shall have offered to the Trustee security and indemnity satisfactory to it.
GOVERNING LAW
The Indenture provides that it and the Notes will be governed by, and
construed in accordance with, the laws of the State of New York without giving
effect to applicable principles of conflicts of law to the extent that the
application of the law of another jurisdiction would be required thereby.
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,
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including, without limitation, the probable liability of such Subsidiary
Guarantor with respect to its contingent liabilities (after giving effect to all
other fixed and contingent liabilities incurred or assumed on such date), but
excluding liabilities under the Subsidiary Guarantee, of such Subsidiary
Guarantor at such date and (y) the present fair salable value of the assets of
such Subsidiary Guarantor at such date exceeds the amount that will be required
to pay the probable liability of such Subsidiary Guarantor on its debts (after
giving effect to all other fixed and contingent liabilities Incurred or assumed
on such date and after giving effect to any collection from any Subsidiary by
such Subsidiary Guarantor in respect of the obligations of such Subsidiary under
the Subsidiary Guarantee), excluding debt in respect of the Subsidiary
Guarantee, as they become absolute and matured.
"Affiliate" of any specified person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing.
"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.
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"Capital Stock" of any Person means any and all shares, interests, rights
to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) equity of such Person, including any Preferred
Stock, but excluding any debt securities convertible into such equity.
"Cash Equivalents" means (i) United States dollars, (ii) securities issued
or directly and fully Guaranteed or insured by the United States government or
any agency or instrumentality thereof, (iii) certificates of deposit, time
deposits and eurodollar time deposits with maturities of one year or less from
the date of acquisition, bankers' acceptances with maturities not exceeding one
year and overnight bank deposits, in each case with any commercial bank having
capital and surplus in excess of $500 million, (iv) repurchase obligations for
underlying securities of the types described in clauses (ii) and (iii) entered
into with any financial institution meeting the qualifications specified in
clause (iii) above, (v) commercial paper rated A-1 or the equivalent thereof by
Moody's or S&P and in each case maturing within one year after the date of
acquisition, (vi) investment funds investing 95% of their assets in securities
of the types described in clauses (i)-(v) above, (vii) readily marketable direct
obligations issued by any state of the United States of America or any political
subdivision thereof having one of the two highest rating categories obtainable
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
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Board of Directors of the Company) shall be deemed outstanding for purposes of
this calculation), and (B) the discharge of any other Indebtedness repaid,
repurchased, defeased or otherwise discharged with the proceeds of such new
Indebtedness as if such discharge had occurred on the first day of such period,
(2) if since the beginning of such period any Indebtedness of the Company or any
of its Restricted Subsidiaries has been repaid, repurchased, defeased or
otherwise discharged (other than Indebtedness under a revolving credit or
similar arrangement unless such revolving credit Indebtedness has been
permanently repaid and the underlying commitment terminated and has not been
replaced), Consolidated Interest Expense for such period shall be calculated
after giving pro forma effect thereto as if such Indebtedness had been repaid,
repurchased, defeased or otherwise discharged on the first day of such period,
(3) if since the beginning of such period the Company or any of its Restricted
Subsidiaries shall have made any Asset Disposition or if the transaction giving
rise to the need to calculate the Consolidated Coverage Ratio is an Asset
Disposition, Consolidated Cash Flow for such period shall be reduced by an
amount equal to the Consolidated Cash Flow (if positive) attributable to the
assets which are the subject of such Asset Disposition for such period or
increased by an amount equal to the Consolidated Cash Flow (if negative)
attributable thereto for such period, and Consolidated Interest Expense for such
period shall be (i) reduced by an amount equal to the Consolidated Interest
Expense attributable to any Indebtedness of the Company or any of its Restricted
Subsidiaries repaid, repurchased, defeased or otherwise discharged with respect
to the Company and its continuing Restricted Subsidiaries in connection with
such Asset Disposition for such period (or, if the Capital Stock of any
Restricted Subsidiary of the Company is sold, the Consolidated Interest Expense
for such period directly attributable to the Indebtedness of such Restricted
Subsidiary to the extent the Company and its continuing Restricted Subsidiaries
are no longer liable for such Indebtedness after such sale) and (ii) increased
by interest income attributable to the assets which are the subject of such
Asset Disposition for such period, (4) if since the beginning of such period the
Company or any of its Restricted Subsidiaries (by merger or otherwise) shall
have made an Investment in any Restricted Subsidiary of the Company (or any
Person which becomes a Restricted Subsidiary of the Company as a result thereof)
or an acquisition of assets occurring in connection with a transaction causing a
calculation to be made hereunder which constitutes all or substantially all of
an operating unit of a business, Consolidated Cash Flow and Consolidated
Interest Expense for such period shall be calculated after giving pro forma
effect thereto (including the incurrence of any Indebtedness) as if such
Investment or acquisition occurred on the first day of such period and (5) if
since the beginning of such period any Person (that subsequently became a
Restricted Subsidiary of the Company or was merged with or into the Company or
any Restricted Subsidiary of the Company since the beginning of such period)
shall have made any Asset Disposition, Investment or acquisition of assets that
would have required an adjustment pursuant to clause (3) or (4) above if made by
the Company or a Restricted Subsidiary of the Company during such period,
Consolidated Cash Flow and Consolidated Interest Expense for such period shall
be calculated after giving pro forma effect thereto 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
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contributions are used by such plan or trust to pay interest or fees to any
Person (other than the Company) in connection with Indebtedness Incurred by such
plan or trust and (ix) cash and Disqualified Stock dividends in respect of all
Preferred Stock of Subsidiaries and Disqualified Stock of the Company held by
Persons other than the Company or a Wholly-Owned Subsidiary and less (a) to the
extent included in such interest expense, the amortization of capitalized debt
issuance costs and (b) interest income. Notwithstanding the foregoing, the
Consolidated Interest Expense with respect to any Restricted Subsidiary of the
Company, that was not a Wholly-Owned Subsidiary, shall be included only to the
extent (and in the same proportion) that the net income of such Restricted
Subsidiary was included in calculating Consolidated Net Income.
"Consolidated Net Income" means, for any period, the consolidated net
income (loss) of the Company and its consolidated Subsidiaries determined in
accordance with GAAP; provided, however, that there shall not be included in
such Consolidated Net Income: (i) any net income (loss) of any Person acquired
by the Company or any of its Restricted Subsidiaries in a pooling of interests
transaction for any period prior to the date of such acquisition, (ii) any net
income of any Restricted Subsidiary of the Company if such Restricted Subsidiary
is subject to restrictions, directly or indirectly, on the payment of dividends
or the making of distributions by such Restricted Subsidiary, directly or
indirectly, to the Company (other than restrictions in effect on the Issue Date
with respect 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.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
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"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.
"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
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of such Subsidiary Guarantor, including any Guarantor Senior Subordinated
Indebtedness and Guarantor Subordinated Obligations of such Subsidiary
Guarantor.
"Guarantor Subordinated Obligation" means, with respect to a Subsidiary
Guarantor, any Indebtedness of such Subsidiary Guarantor (whether outstanding on
the Issue Date or thereafter incurred) which is subordinate or junior in right
of payment to the obligations of such Subsidiary Guarantor under the Subsidiary
Guarantee pursuant to a written agreement.
"Incur" means issue, assume, guarantee, incur or otherwise become liable
for; provided, however, that any indebtedness or Capital Stock of a Person
existing at the time such person becomes a Restricted Subsidiary (whether by
merger, consolidation, acquisition or otherwise) shall be deemed to be incurred
by such Restricted Subsidiary at the time it becomes a Restricted Subsidiary.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication), (i) the principal of and premium (if any)
in respect of indebtedness of such Person for borrowed money, (ii) the principal
of and premium (if any) in respect of obligations of such Person evidenced by
bonds, debentures, notes or other similar instruments, (iii) all obligations of
such Person in respect of letters of credit or other similar instruments
(including reimbursement obligations with respect thereto) (other than
obligations with respect to letters of credit securing obligations (other than
obligations described in clauses (i), (ii) and (v) ) entered into in the
ordinary course of business of such Person to the extent that such letters of
credit are not drawn upon or, if and to the extent drawn upon, such drawing is
reimbursed no later than the third business day following receipt by such Person
of a demand for reimbursement following payment on the letter of credit), (iv)
all obligations of such Person to pay the deferred and unpaid purchase price of
property or services (except trade payables and accrued expenses Incurred in the
ordinary course of business), which purchase price is due more than six months
after the date of placing such property in service or taking delivery and title
thereto or the completion of such services, (v) all Capitalized Lease
Obligations and all Attributable Indebtedness of such Person, (vi) all
Indebtedness of other Persons secured by a Lien on any asset of such Person,
whether or not such Indebtedness is assumed by such Person, (vii) all
Indebtedness of other Persons to the extent Guaranteed by such Person, (viii)
the 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.
"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
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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 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 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.
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"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.
"Note Register" means the register of names and addresses of the holders of
the Notes maintained by the Registrar.
"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.
"Opinion of Counsel" means a written opinion, in form and substance
acceptable to the Trustee, from legal counsel who is acceptable to the Trustee.
"Paying Agent" means U.S. Trust Company of Texas, N.A., as paying agent
under the Indenture, or any successor thereto appointed pursuant to the
Indenture.
"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
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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 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
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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.
"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.
"Registrar" means U.S. Trust Company of Texas, N.A., as registrar under the
Indenture, or any successor thereto appointed pursuant to the Indenture.
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"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.
"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
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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.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of
the Company (including any newly acquired or newly formed Subsidiary of the
Company) to be an Unrestricted Subsidiary unless such Subsidiary or any of its
Subsidiaries owns any Capital Stock or Indebtedness of, or owns or holds any
Lien on any property of, the Company or any Restricted Subsidiary of the Company
that is not a Subsidiary of the Subsidiary to be so designated provided,
however, that each Subsidiary to be so designated and each of its Subsidiaries
has not at the time of such designation, and does not thereafter create, Incur,
issue, assume, guarantee or otherwise becomes liable with respect to any
Indebtedness other than Non-Recourse Indebtedness and either (A) the Subsidiary
to be so designated has total consolidated assets of $10,000 or less or (B) if
such Subsidiary has consolidated assets greater than $10,000, then such
designation would be permitted under "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.
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DESCRIPTION OF THE OUTSTANDING NOTES
The terms of the Outstanding Notes are identical in all material respects
to the Exchange Notes, except that the Outstanding Notes have not been
registered under the Securities Act, are subject to certain restrictions on
transfer and are 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
Notes -- Registration Agreement"). In addition, the Registration Rights
Agreement provides that if (i) within 45 days of the Issue Date (as defined
herein) or 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 Notes during periods specified in the Registration Agreement
(each such event referred to in clauses (i) through (iv), a "Registration
Default"), interest ("Additional Interest") will accrue on the Outstanding Notes
(in addition to the stated interest on the Outstanding Notes) 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 Interest
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 Notes are not entitled to any such
Additional Interest (subject to certain limited exceptions). The Outstanding
Notes and the Exchange Notes will constitute a single series of debt securities
under the Indenture. See "Description of the Exchange Notes."
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Outstanding Notes were 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") pursuant to that certain Purchase Agreement dated October 23, 1997
among the Company and the Initial Purchasers (the "Purchase Agreement"). The
Initial Purchasers and NatWest subsequently resold the Outstanding Notes 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 entered into that certain Exchange and 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 Notes (such
date of filing, the "Filing Date") with respect to the Exchange Offer for the
Outstanding Notes, 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 Notes in exchange for the Outstanding Notes. 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 Notes.
For each Outstanding Note properly tendered and accepted pursuant to the
Exchange Offer, the holder of such Outstanding Note will receive an Exchange
Note having a principal amount equal to that of the Outstanding Note tendered.
Interest on each Exchange Note will accrue from the last respective interest
date on which interest was paid on the Outstanding Note tendered in exchange
therefor or, if no interest has been paid on such Outstanding Note, from the
Issue Date.
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Each holder of the Outstanding Notes who wishes to exchange the Outstanding
Notes for Exchange Notes in the Exchange Offer will be required to represent in
the Letter of Transmittal that (i) it is not an affiliate of the Company or the
Subsidiary Guarantors, (ii) the Exchange Notes to be received by it were
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 Notes.
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 Notes (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 Notes (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 Notes
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 Notes
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 Notes. A holder that sells its Outstanding Notes
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 Exchange and Registration Rights Agreement which
are applicable to such holder (including certain indemnification obligations).
If the Company or the Subsidiary Guarantors fail to comply with the above
provisions or if such Shelf Registration Statement fails to become effective,
then, as liquidated damages, additional interest (the "Additional Interest")
shall become payable with respect to the Outstanding Notes 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 Interest 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 Interest increasing by an additional 0.50% per annum at the
beginning of each subsequent 30-day period;
(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, the Additional Interest 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 Interest 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 Notes
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 Outstanding Notes have
been sold thereunder or as otherwise provided herein), then the Additional
Interest shall accrue on the Outstanding Notes over and above the stated
interest 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 Notes 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 Interest increasing by an
additional 0.50% per annum at the beginning of each subsequent 30-day
period; provided, however, that
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the Additional Interest payable on the Outstanding Notes 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 Notes for all Outstanding Notes 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 Interest accruing on the Outstanding Notes as a
result of such clause (or the relevant subclause thereof) shall cease to
accrue.
Any Additional Interest due pursuant to clauses (i), (ii) or (iii) above
will be payable in cash, on the same original interest payment dates as interest
on the Outstanding Notes. The aggregate Additional Interest will be determined
by multiplying the applicable rate of such Additional Interest by the principal
amount of the Outstanding Notes multiplied by a fraction, the numerator of which
is the number of days such Additional Interest 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 Notes who were eligible to participate in the Exchange Offer but who
did not tender their Outstanding Notes will not have any further exchange or
registration rights and such Outstanding Notes will continue to be subject to
certain restrictions on transfer. Accordingly, the liquidity of the market for
such Outstanding Notes 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 Notes validly tendered and not withdrawn prior to 5:00 p.m., New
York City time, on the Expiration Date. The Company will issue $1,000 principal
amount of Exchange Notes in exchange for each $1,000 principal amount of
Outstanding Notes accepted in the Exchange Offer. Holders may tender some or all
of their Outstanding Notes pursuant to the Exchange Offer. However, Outstanding
Notes may be tendered only in integral multiples of $1,000.
The form and terms of the Exchange Notes are the same as the form and terms
of the Outstanding Notes except that the Exchange Notes have been registered
under the Securities Act and hence will not bear legends restricting the
transfer thereof. The Exchange Notes will evidence the same debt as the
Outstanding Notes and will be entitled to the benefits of the Indenture.
As of the date of this Prospectus $100,000,000 aggregate principal amount
of Outstanding Notes 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 Notes do not have any appraisal or dissenters'
rights under the General Corporation Law of Delaware or the Indenture 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 Outstanding
Notes 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 Notes from the Company.
If any tendered Outstanding Notes 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
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Outstanding Notes will be returned, without expense, to the tendering holder
thereof as promptly as practicable after the Expiration Date.
Holders who tender Outstanding Notes 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 Notes 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
Notes, 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 Notes 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 Notes will constitute an agreement to
deliver good and marketable title to all tendered Outstanding Notes prior to the
Expiration Date free and clear of all liens, charges, claims, encumbrances,
interests and restrictions of any kind.
EXCEPT AS PROVIDED IN "-- GUARANTEED DELIVERY PROCEDURES," UNLESS THE
OUTSTANDING NOTES BEING TENDERED ARE 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 NOTES WILL BE MADE ONLY AGAINST DEPOSIT OF
TENDERED OUTSTANDING NOTES 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 Notes, the following procedures
must be followed:
Outstanding Notes held through DTC. Each Beneficial Owner holding
Outstanding Notes through a DTC Participant must instruct such DTC Participant
to cause its Outstanding Notes 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 Notes 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
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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 Notes held through DTC, and any financial institution that is a DTC
Participant may make book-entry delivery of interests in Outstanding Notes into
the Exchange Agent's account through ATOP. However, although delivery of
interests in the Outstanding Notes 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 Notes (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 Notes 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 Notes, 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, 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 Note 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
Notes 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 Notes 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."
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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 Notes 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 Notes. 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 Notes will not be deemed to have been
made until such irregularities have been cured or waived. Any Outstanding Notes
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 NOTES MUST BE SENT ONLY TO THE
EXCHANGE AGENT. DO NOT SEND LETTERS OF TRANSMITTAL OR OUTSTANDING NOTES TO THE
COMPANY OR DTC.
The method of delivery of Outstanding Notes 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.
GUARANTEED DELIVERY PROCEDURES
Outstanding Notes held through DTC. DTC Participants holding Outstanding
Notes through DTC who wish to cause their Outstanding Notes 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 Notes Held by Holders. Holders who wish to tender their
Outstanding Notes and (i) whose are not immediately available, (ii) who cannot
deliver their Outstanding Notes, 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
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(by facsimile transmission, mail or hand delivery) setting forth the name
and address of the holder, the certificate number(s) of such Outstanding
Notes and the principal amount of Outstanding Notes 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 Notes (or a confirmation of book-entry
transfer of such Outstanding Notes 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 Notes in proper form for transfer (or a confirmation or
book-entry transfer of such Outstanding Notes 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 Notes according to the
guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Outstanding Notes may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration
Date.
Outstanding Notes held through DTC. DTC Participants holding Outstanding
Notes 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 principal amount due at the stated maturity date of the
Outstanding Notes 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.
Outstanding Notes held by Holders. Holders may withdraw a tender of
Outstanding Notes 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 Notes to be withdrawn (the "Depositor"),
(ii) identify the Outstanding Notes to be withdrawn (including the certificate
number(s) and principal amount due at the stated maturity of such Outstanding
Notes, or, in the case of Outstanding Notes 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 Notes were
tendered (including any required signature guarantees) or be accompanied by
documents of transfer sufficient to have the Trustee with respect to the
Outstanding Notes register the transfer of such Outstanding Notes into the name
of the person withdrawing the tender and (iv) specify the name in which any such
Outstanding Notes are 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 Notes so withdrawn
will be deemed not to have been validly tendered for purposes of the Exchange
Offer and no Exchange Notes will be issued with respect thereto unless the
Outstanding Notes so withdrawn are validly retendered. Any Outstanding Notes
which have been tendered but which are 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 Notes may be retendered by following one
of the procedures described above under "-- Procedures for Tendering" at any
time prior to the Expiration Date.
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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 Notes 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 Notes 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
Notes, and may terminate or amend the Exchange Offer as provided herein before
the acceptance of such Outstanding Notes, 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 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 Notes and return all tendered Outstanding Notes to the
tendering holders, (ii) extend the Exchange Offer and retain all Outstanding
Notes tendered prior to the expiration of the Exchange Offer, subject, however,
to the rights of holders to withdraw such Outstanding Notes (see "-- Withdrawal
of Tenders") or (iii) waive such unsatisfied conditions with respect to the
Exchange Offer and accept all properly tendered Outstanding Notes which have not
been withdrawn.
EXCHANGE AGENT
U.S. Trust Company of Texas, N.A. 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:
2001 Ross Avenue
Suite 2700
Dallas, Texas 75201
Attention: Corporate Trust
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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 and Trustee, accounting and legal fees and printing costs, among others.
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the same carrying value as the
Outstanding Notes, 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 Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
The Outstanding Notes that are not exchanged for Exchange Notes pursuant to
the Exchange Offer will remain restricted securities. Accordingly, such
Outstanding Notes may be resold only (i) to the Company (upon redemption thereof
or otherwise), (ii) so long as the Outstanding Notes 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 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 NOTES
With respect to resales of Exchange Notes, 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 Notes
in the ordinary course of business, whether or not such person is the holder
(other than (i) a broker-dealer who purchases such Exchange Notes 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 Notes in
exchange for Outstanding Notes, 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 Notes, will be allowed to resell the
Exchange Notes to the public without further registration under the Securities
Act and without delivering to the purchasers of the Exchange Notes a prospectus
that satisfies the requirements of Section 10 of the Securities Act. However, if
any holder acquires Exchange Notes in the Exchange Offer for the purpose of
distributing or participating in a distribution of the Exchange Notes, 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,
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each Participating Broker-Dealer that receives Exchange Notes for its own
account in exchange for Exchange Notes, 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 Notes.
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 Notes are to be
acquired by the holder or the person receiving such Exchange Notes, 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 Notes, (iii) the holder or any such other person
has no arrangement or understanding with any person to participate in the
distribution of the Exchange Notes, (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 Notes it must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale of the Exchange Notes and cannot rely on those no-action letters. As
indicated above, each Participating Broker-Dealer that receives Exchange Notes
for its own account in exchange for Outstanding Notes must acknowledge that it
will deliver a prospectus in connection with any resale of such Exchange Notes.
For a description of the procedures for such resales by Participating
Broker-Dealers, see "Plan of Distribution."
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
U.S. FEDERAL INCOME TAX CONSEQUENCES OF PARTICIPATING IN THE EXCHANGE OFFER AND
OWNING AND DISPOSING OF OUTSTANDING NOTES OR EXCHANGE NOTES
The following is a general discussion of the material U.S. Federal income
tax considerations applicable to a holder that exchanges Outstanding Notes for
Exchange Notes 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 Notes or Exchange Notes 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 Notes and will hold Exchange Notes as capital assets within the
meaning of Section 1221 of the Code.
EACH INVESTOR CONSIDERING THE EXCHANGE OF OUTSTANDING NOTES FOR EXCHANGE
NOTES PURSUANT TO THE 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 NOTES, 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.
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U.S. HOLDERS
The following discussion is limited to the U.S. Federal income tax
consequences relevant to a holder of Outstanding Notes and Exchange Notes 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").
Outstanding Notes and Exchange Notes
The Exchange Offer. The exchange of Outstanding Notes for Exchange Notes
pursuant to the Exchange Offer should not constitute a significant modification
of the terms of the Outstanding Notes and, accordingly, such exchange should not
be treated as a taxable event for U.S. Federal income tax purposes. Therefore,
such exchange should have no U.S. Federal income tax consequences to U.S.
Holders of Outstanding Notes, and each U.S. Holder of Exchange Notes will
continue to be required to include interest on the Exchange Notes in its gross
income in accordance with its method of accounting for U.S. Federal income tax
purposes.
Payment of Interest and Additional Interest. Interest on an Outstanding
Note or Exchange Note generally will be includable in the income of a U.S.
Holder as ordinary income at the time such interest is received or accrued, in
accordance with such U.S. Holder's method of accounting for U.S. Federal income
tax purposes. The Outstanding Notes were treated by the Company as issued
without original issue discount ("OID") within the meaning of the Code.
Additional Interest will accrue on the Outstanding Notes upon the occurrence of
certain events described under "The Exchange Offer -- Purpose and Effect of the
Exchange Offer." Because the Company determined that, when the Outstanding Notes
were issued, there was only a remote possibility that such events would occur,
the Company determined that Additional Interest should not be taken into account
in concluding that the Outstanding Notes were issued without OID.
AMORTIZABLE BOND PREMIUM
Generally, the excess of a U.S. Holder's tax basis in an Outstanding Note
or Exchange Note over the amount payable at maturity is bond premium that the
U.S. Holder may elect to amortize under Section 171 of the Code on a yield to
maturity basis over the period from the U.S. Holder's acquisition date to the
maturity date of the Outstanding Note or Exchange Note. The amortizable bond
premium is treated as an offset to interest income on the Outstanding Note or
Exchange Note for United States Federal income tax purposes. A U.S. Holder who
elects to amortize bond premium must reduce its tax basis in the Outstanding
Note or Exchange Note by the deductions allowable for amortizable bond premium.
An election to amortize bond premium is revocable only with the consent of the
IRS and applies to all obligations owned or acquired by the U.S. Holder on or
after the first day of the taxable year to which the election applies.
An Outstanding Note or Exchange Note may be called or submitted for
redemption at a premium prior to maturity. See "Description of Exchange
Notes -- Redemption -- Optional Redemption." An earlier call date is treated as
the maturity date of the Outstanding Note or Exchange Note and the amount of
bond premium is determined by treating the amount payable on such call date as
the amount payable at maturity, if such a calculation produces a smaller bond
premium than the method described in the preceding paragraph. If a U.S. Holder
is required to amortize and deduct the bond premium by reference to a certain
call date, the Outstanding Note or Exchange Note will be treated as maturing on
that date for the amount then payable. If the Outstanding Note or Exchange Note
is not redeemed on that call date, the Outstanding Note or Exchange Note will be
treated as reissued on that date for the amount of the call price on that date.
If an Outstanding Note or Exchange Note purchased at a premium is redeemed prior
to its maturity, a U.S. Holder who has elected to deduct the bond premium may be
permitted to deduct any remaining unamortized bond premium as an ordinary loss
in the taxable year of the redemption.
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MARKET DISCOUNT
The resale of Outstanding Notes or Exchange Notes may be affected by the
market discount provisions of the Code. A U.S. Holder has market discount if an
Outstanding Note or Exchange Note is purchased (other than at original issue) at
an amount below the stated redemption price at maturity of the Outstanding Note
or Exchange Note. A de minimis amount of market discount is ignored. A U.S.
Holder of an Outstanding Note or Exchange Note with market discount must either
elect to include market discount in income as it accrues or treat a portion of
the gain recognized on the disposition or retirement of the Outstanding Note or
Exchange Note as ordinary income. The amount of gain treated as ordinary income
would equal the lesser of (i) the gain recognized (or the appreciation, in the
case of a nontaxable transaction such as a gift) or (ii) the portion of the
market discount that accrued on a ratable basis (or, if elected, on a constant
interest rate basis) while the Outstanding Note or Exchange Note was held by the
U.S. Holder.
A U.S. Holder who acquires an Outstanding Note or Exchange Note at a market
discount also may be required to defer a portion of any interest expense that
otherwise may be deductible on any indebtedness incurred or maintained to
purchase or carry such Outstanding Note or Exchange Note until the U.S. Holder
disposes of the Outstanding Note or Exchange Note in a taxable transaction.
Moreover, to the extent of any accrued market discount on such Outstanding Note
or Exchange Note, any partial principal payment with respect to an Outstanding
Note or Exchange Note will be includible as ordinary income upon receipt, as
will the fair market value of the Outstanding Note or Exchange Note on certain
otherwise non-taxable transfers (such as gifts).
A U.S. Holder of Outstanding Notes or Exchange Notes acquired at a market
discount may elect for United States Federal income tax purposes to include
market discount in gross income as the discount accrues, either on a
straight-line basis or on a constant interest rate basis. This current inclusion
election, once made, applies to all market discount obligations acquired by the
U.S. Holder on or after the first day of the first taxable year to which the
election applies, and may not be revoked without the consent of the IRS. If a
U.S. Holder of Outstanding Notes or Exchange Notes makes such an election, the
foregoing rules with respect to the recognition of ordinary income on sales and
other dispositions of such debt instruments and on any partial principal payment
with respect to the Outstanding Notes or Exchange Notes, and the deferral of
interest deductions on indebtedness incurred or maintained to purchase or carry
such debt instruments, would not apply.
Sale, Exchange or Redemption of the Outstanding Notes or Exchange
Notes. Subject to the discussion of the Exchange Offer above, upon the sale,
exchange or redemption of an Outstanding Note or Exchange Note, a U.S. Holder
generally will recognize capital gain or loss equal to the difference between
(i) the amount of cash proceeds and the fair market value of any property
received on the sale, exchange or redemption (except to the extent such amount
is attributable to accrued interest income or market discount not previously
included in income which is taxable as ordinary income) and (ii) such U.S.
Holder's adjusted tax basis in the Outstanding Note or Exchange Note. A U.S.
Holder's adjusted tax basis in an Outstanding Note or Exchange Note generally
will equal the cost of the Outstanding Note or Exchange Note to such U.S. Holder
increased by the amount of interest income on the Outstanding Note or Exchange
Note previously taken into income by the U.S. Holder but not yet received by the
U.S. Holder and by the amount of any market discount previously taken into
income by the U.S. Holder and reduced by the amount of any bond premium
amortized by the U.S. Holder with respect to the Outstanding Notes or Exchange
Notes and by any principal payments on an Outstanding Note or Exchange Note.
Gain or loss realized by a U.S. Holder on the sale, exchange, redemption or
other disposition of an Outstanding Note or Exchange Note generally will be
capital gain or loss. Such capital gain will be taxed at a reduced rate for a
U.S. Holder who is not a corporation and who holds an Outstanding Note or
Exchange Note for greater than one year and at a further reduced rate for a U.S.
Holder who is not a corporation and who holds an Outstanding Note or Exchange
Note for more than eighteen months (subject to the market discount rules
discussed above).
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NON-U.S. HOLDERS
The following discussion is limited to the U.S. Federal income tax
consequences relevant to a holder of Outstanding Notes and Exchange Notes who is
not a U.S. Holder (a "Non-U.S. Holder").
Interest on Outstanding Notes or Exchange Notes. Payments of interest on
the Outstanding Notes or the Exchange Notes by the Company or any agent of the
Company to any Non-U.S. Holder will not be subject to U.S. Federal withholding
tax, provided that such interest income is not effectively connected with the
conduct of a United States trade or business of the Non-U.S. Holder and provided
that (i) the Non-U.S. Holder does not actually or constructively own 10% or more
of the total combined voting power of all classes of stock of the Company
entitled to vote; (ii) the Non-U.S. Holder is not a controlled foreign
corporation that is related to the Company through stock ownership; (iii) either
(A) the beneficial owner of the Outstanding Notes or the Exchange Notes
certifies (by submitting to the Company or its agent a Form W-8 (or a suitable
substitute form)) in compliance with applicable laws and regulations to the
Company or its agent, under penalties of perjury, that it is not a "United
States person" as defined in the Code and provides its name and address or (B) a
securities clearing organization, bank or other financial institution that holds
customers' securities in the ordinary course of its trade or business (a
"financial institution"), holds the Outstanding Notes or the Exchange Notes on
behalf of the beneficial owner and provides a statement to the Company or its
agent in which it certifies that a Form W-8 (or a suitable substitute form) has
been received from the beneficial owner by it or by a financial institution
between it and the beneficial owner and furnishes the payor with a copy thereof;
and (iv) the Non-U.S. Holder is not a bank which acquired the Outstanding Notes
or the Exchange Notes in consideration for an extension of credit made pursuant
to a loan agreement entered into in the ordinary course of business. Recently
promulgated Treasury regulations that will be effective January 1, 1999 (the
"1999 Regulations"), provide alternative methods for establishing exemptions
from withholding on payments to foreign persons. Under the 1999 Regulations, the
furnishing of the names of the beneficial owners of Outstanding Notes or
Exchange Notes and a copy of such beneficial owner's Form W-8 by a financial
institution with respect to beneficial owners, described in clause (iii)(B)
above, will not be required where the financial institution is a "qualified
intermediary" which has entered into a withholding agreement with the IRS
pursuant to such regulations. A Non-U.S. Holder that is not exempt from tax
under these rules will be subject to U.S. Federal income tax withholding at a
rate of 30% unless the interest is effectively connected with the conduct of a
United States trade or business, in which case the interest will be subject to
the U.S. Federal income tax on net income that applies to United States persons
generally. Non-U.S. Holders should consult applicable income tax treaties, which
may provide different rules, subject to compliance with certain requirements, to
document entitlement to treaty benefits.
Prior to the effective date of the 1999 Regulations, payments of interest
to a Non-U.S. Holder that is a foreign partnership are subject to the rules
described in the prior paragraph. The 1999 regulations will require, in the case
of Outstanding Notes or Exchange Notes held by a foreign partnership, that the
certification described in clause (iii) of the preceding paragraph be provided
by the partners rather than by the foreign partnership unless the foreign
partnership has taken on withholding tax responsibility as a "qualified
intermediary" (as discussed above). A look-through rule will apply in the case
of tiered partnerships.
Except to the extent that an applicable treaty otherwise provides, a
Non-U.S. Holder generally will be taxed in the same manner as a U.S. Holder with
respect to interest if the interest income is effectively connected with the
conduct of a United States trade or business of the Non-U.S. Holder. Effectively
connected interest received by a corporate Non-U.S. Holder may also, under
certain circumstances, be subject to an additional "branch profits tax" at a 30%
rate (or, if applicable, a lower treaty rate). Even though such effectively
connected interest is subject to income tax, and may be subject to the branch
profits tax, it is not subject to withholding tax if the Non-U.S. Holder
delivers to the payor a withholding certificate stating that the income is
effectively connected with a U.S. trade or business.
Sale of Outstanding Notes or Exchange Notes. 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 Notes or Exchange Notes 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
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individual and holds the Outstanding Notes or Exchange Notes 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.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Information reporting and backup withholding may apply to certain
noncorporate holders with respect to (i) principal and interest payments on an
Outstanding Note or Exchange Note or (ii) proceeds of a sale of an Outstanding
Note or Exchange Note. 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.
The 1999 Regulations would modify certain of the rules discussed above
generally with respect to payments on the Outstanding Notes and Exchange Notes
made after December 31, 1998. In particular, in the case of payments to foreign
partnerships (other than payments to foreign partnerships that qualify as
"withholding foreign partnerships" within the meaning of such Treasury
regulations and payments to foreign partnerships that are effectively connected
with the conduct of a trade or business in the United States), the partners of
such partnership will be required to provide the certification discussed above
in order to provide an exemption from backup withholding tax and information
reporting requirements.
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
NOTES, INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL AND FOREIGN INCOME
AND OTHER TAX LAWS.
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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 Notes 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 Notes are 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 Notes. A holder of Outstanding Notes 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 Notes 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
Notes 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 Notes unless such sale or transfer is
made pursuant to an exemption from such requirements. In addition, any holder
who tenders Outstanding Notes in the Exchange Offer with the intention or for
the purpose of participating in a distribution of the Exchange Notes 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 Notes who wishes to exchange its Outstanding
Notes for Exchange Notes 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 Notes 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 Notes. This Prospectus may be used by a broker-dealer in
connection with resales of Exchange Notes received in exchange for Outstanding
Notes where such Outstanding Notes were 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 Notes."
The Company will not receive any proceeds from any sale of Exchange Notes
by broker-dealers. Exchange Notes 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 Notes 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 Notes. Any
broker-dealer that resells Exchange Notes that were 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 Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit from any
such resale of Exchange Notes 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.
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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 Notes. The
Company will indemnify each Participating Broker-Dealer selling Exchange Notes
against certain liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
The validity of the Exchange Notes 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 Notes
remain outstanding, it will furnish to the holders of the Notes 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 Notes remain outstanding, the
Company has agreed to make available to any prospective purchaser of the Notes
or beneficial owner of the Notes, in connection with any sale thereof, the
information required by Rule 144A(d)(4) under the Securities Act.
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The Outstanding Notes are, and the Exchange Notes will be, fully and
unconditionally guaranteed, jointly and severally, on a senior secured basis, by
the Subsidiary Guarantors. The Company has not presented separate financial
statements for the Subsidiary Guarantors because such information is not
material to investors.
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.
113
<PAGE> 117
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.
114
<PAGE> 118
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.
115
<PAGE> 119
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> 120
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> 121
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> 122
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> 123
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> 124
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 -- 551,183 -- -- --
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.............................. 307,322
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> 125
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> 126
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> 127
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> 128
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> 129
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> 130
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> 131
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> 132
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> 133
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> 134
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> 135
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> 136
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> 137
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> 138
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> 139
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> 140
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> 141
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> 142
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> 143
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> 144
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> 145
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> 146
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> 147
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> 148
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> 149
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> 150
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> 151
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> 152
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> 153
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> 154
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> 155
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> 156
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> 157
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> 158
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> 159
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> 160
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> 161
VOICE NEWS NETWORK, INC.
(WHOLLY OWNED BY TRIBUNE COMPANY)
BALANCE SHEET
<TABLE>
<CAPTION>
ASSETS
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> 162
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> 163
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> 164
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> 165
======================================================
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....................... 25
Capitalization........................ 25
Unaudited Pro Forma Condensed
Consolidated Financial Statements... 26
Selected Consolidated Financial
Data................................ 33
Forward-Looking Statements............ 35
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 35
Business.............................. 42
Management............................ 59
Certain Transactions.................. 61
Principal Stockholders................ 62
Shares Eligible For Future Sale....... 63
Description of Capital Stock.......... 64
Description of Exchange Notes......... 69
Description of the Outstanding
Notes............................... 97
The Exchange Offer.................... 97
Certain U.S. Federal Income Tax
Consequences........................ 106
Plan of Distribution.................. 111
Legal Matters......................... 112
Independent Auditors.................. 112
Available Information................. 112
Incorporation of Certain Documents by
Reference........................... 113
Glossary of Certain Definitions....... 114
Index to Financial Statements......... F-1
</TABLE>
======================================================
======================================================
$100,000,000
EXCHANGE OFFER
[SOURCE MEDIA LOGO]
SOURCE MEDIA, INC.
$100,000,000 12% SENIOR SECURED NOTES DUE 2004
----------------------------
PROSPECTUS
----------------------------
, 1997
======================================================
<PAGE> 166
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> 167
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> 168
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, each of the
registrants has duly caused this Registration Statement to be signed on its
behalf by 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
SMI HOLDINGS, INC.
By: /s/ TIMOTHY P. PETERS
----------------------------------
Timothy P. Peters
Chairman of the Board and Chief
Executive Officer
INTERACTIVE CHANNEL TECHNOLOGIES
INC.
By: /s/ TIMOTHY P. PETERS
----------------------------------
Timothy P. Peters
President
IT NETWORK, INC.
By: /s/ DANIEL D. MAITLAND
----------------------------------
Daniel D. Maitland
President
INTERACTIVE CHANNEL, INC.
By: /s/ W. THOMAS OLIVER
----------------------------------
W. Thomas Oliver
President
II-3
<PAGE> 169
997758 ONTARIO INC.
By: /s/ TIMOTHY P. PETERS
--------------------------------
Timothy P. Peters
President
1229501 ONTARIO INC.
By: /s/ TIMOTHY P. PETERS
----------------------------------
Timothy P. Peters
President
CABLESHARE INTERNATIONAL INC.
By: /s/ MARYANN WALSH
----------------------------------
Maryann Walsh
Director and Secretary
CABLESHARE (U.S.) LIMITED
By: /s/ TIMOTHY P. PETERS
----------------------------------
Timothy P. Peters
President
II-4
<PAGE> 170
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 Operating Officer, December 10, 1997
- ----------------------------------------------------- Chief Financial
W. Scott Bedford Officer and Treasurer
(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-5
<PAGE> 171
SMI HOLDINGS, 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 Operating Officer, December 10, 1997
- ----------------------------------------------------- Chief Financial
W. Scott Bedford Officer and Treasurer
(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-6
<PAGE> 172
INTERACTIVE CHANNEL TECHNOLOGIES INC.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned directors and officers
of Interactive Channel Technologies Inc., an Ontario, Canada 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.
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 President and Director (principal December 10, 1997
- ----------------------------------------------------- executive officer)
Timothy P. Peters
/s/ W. SCOTT BEDFORD (principal financial and December 10, 1997
- ----------------------------------------------------- accounting officer)
W. Scott Bedford
</TABLE>
II-7
<PAGE> 173
IT NETWORK, INC.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned directors and officers
of IT Network, 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.
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/ DANIEL D. MAITLAND President (principal executive December 10, 1997
- ----------------------------------------------------- officer)
Daniel D. Maitland
/s/ W. SCOTT BEDFORD Chief Operating Officer, Chief December 10, 1997
- ----------------------------------------------------- Financial Officer and Treasurer
W. Scott Bedford (principal financial and
accounting officer)
/s/ TIMOTHY P. PETERS Chairman of the Board December 10, 1997
- -----------------------------------------------------
Timothy P. Peters
/s/ MARYANN WALSH Director December 10, 1997
- -----------------------------------------------------
Maryann Walsh
</TABLE>
II-8
<PAGE> 174
INTERACTIVE CHANNEL, INC.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned directors and officers
of Interactive Channel, 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.
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/ W. THOMAS OLIVER President (principal December 10, 1997
- ----------------------------------------------------- executive officer)
W. Thomas Oliver
/s/ W. SCOTT BEDFORD Chief Operating Officer, December 10, 1997
- ----------------------------------------------------- Chief Financial Officer
W. Scott Bedford and Treasurer (principal
financial and accounting
officer)
/s/ TIMOTHY P. PETERS Chairman of the Board December 10, 1997
- -----------------------------------------------------
Timothy P. Peters
/s/ MARYANN WALSH Director December 10, 1997
- -----------------------------------------------------
Maryann Walsh
</TABLE>
II-9
<PAGE> 175
997758 ONTARIO INC.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned directors and officers
of 997758 Ontario Inc., an Ontario, Canada 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.
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 President and Director December 10>,
- ----------------------------------------------------- (principal executive 1997
Timothy P. Peters officer)
/s/ W. SCOTT BEDFORD (principal financial and December 10, 1997
- ----------------------------------------------------- accounting officer)
W. Scott Bedford
/s/ TERRY POCOCK Director December 10, 1997
- -----------------------------------------------------
Terry Pocock
</TABLE>
II-10
<PAGE> 176
1229501 ONTARIO INC.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned directors and officers
of 1229501 Ontario Inc., an Ontario, Canada 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.
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 President and Director December 10, 1997
- ----------------------------------------------------- (principal executive
Timothy P. Peters officer)
/s/ W. SCOTT BEDFORD (principal financial and December 10, 1997
- ----------------------------------------------------- accounting officer)
W. Scott Bedford
/s/ TERRY POCOCK Director December 10, 1997
- -----------------------------------------------------
Terry Pocock
</TABLE>
II-11
<PAGE> 177
CABLE SHARE INTERNATIONAL INC.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned directors and officers
of Cable Share International Inc., a Barbados 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.
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/ MARYANN WALSH Secretary and Director December 10, 1997
- ----------------------------------------------------- (principal executive
Maryann Walsh officer)
/s/ W. SCOTT BEDFORD (principal financial and December 10, 1997
- ----------------------------------------------------- accounting officer)
W. Scott Bedford
/s/ TERRY POCOCK Director December 10, 1997
- -----------------------------------------------------
Terry Pocock
</TABLE>
II-12
<PAGE> 178
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> 179
<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> 180
<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).
10.27 -- 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).
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).
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 I of Exhibit 5.1).
24.1* -- Powers of Attorney.
25* -- Statement of eligibility of Trustee.
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 12% Senior Secured Notes due 2004, 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 12% Senior Secured Notes due 2004.
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
Registration 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 10, 1997
- ----------------------------------------------------- Chairman of the Board
Timothy P. Peters (principal executive
officer)
/s/ W. SCOTT BEDFORD Chief Financial Officer and December 10, 1997
- ----------------------------------------------------- Treasurer (principal
W. Scott Bedford financial and accounting
officer)
/s/ JOHN J. REED President and Director December 10, 1997
- -----------------------------------------------------
John J. Reed
/s/ DAVID L. KUYKENDALL Director December 10, 1997
- -----------------------------------------------------
David L. Kuykendall
/s/ MICHAEL J. MAROCCO Director December 10, 1997
- -----------------------------------------------------
Michael J. Marocco
/s/ JAMES L. GREENWALD Director December 10, 1997
- -----------------------------------------------------
James L. Greenwald
/s/ ROBERT H. ALTER Director December 10, 1997
- -----------------------------------------------------
Robert H. Alter
/s/ ROBERT J. CRESCI Director December 10, 1997
- -----------------------------------------------------
Robert J. Cresci
/s/ BARRY RUBENSTEIN Director December 10, 1997
- -----------------------------------------------------
Barry Rubenstein
</TABLE>
<PAGE> 2
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned directors and officers
of SMI Holdings, Inc., a Texas 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 10, 1997
- ----------------------------------------------------- Chairman of the Board
Timothy P. Peters (principal executive
officer)
/s/ W. SCOTT BEDFORD Chief Financial Officer and December 10, 1997
- ----------------------------------------------------- Treasurer (principal
W. Scott Bedford financial and accounting
officer)
/s/ JOHN J. REED President and Director December 10, 1997
- -----------------------------------------------------
John J. Reed
/s/ DAVID L. KUYKENDALL Director December 10, 1997
- -----------------------------------------------------
David L. Kuykendall
/s/ MICHAEL J. MAROCCO Director December 10, 1997
- -----------------------------------------------------
Michael J. Marocco
/s/ JAMES L. GREENWALD Director December 10, 1997
- -----------------------------------------------------
James L. Greenwald
/s/ ROBERT H. ALTER Director December 10, 1997
- -----------------------------------------------------
Robert H. Alter
/s/ ROBERT J. CRESCI Director December 10, 1997
- -----------------------------------------------------
Robert J. Cresci
/s/ BARRY RUBENSTEIN Director December 10, 1997
- -----------------------------------------------------
Barry Rubenstein
</TABLE>
<PAGE> 1
EXHIBIT 25
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM T-1
STATEMENT OF ELIGIBILITY AND QUALIFICATION UNDER THE TRUST
INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS
TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A
TRUSTEE PURSUANT TO SECTION 305(b)(2)_________
---------------
U.S. TRUST COMPANY OF TEXAS, N.A.
(Exact name of trustee as specified in its charter)
75-2353745
(State of incorporation (I.R.S. employer
if not a national bank) identification No.)
2001 Ross Ave, Suite 2700 75201
Dallas, Texas (Zip Code)
(Address of trustee's
principal executive offices)
Compliance Officer
U.S. Trust Company of Texas, N.A.
2001 Ross Ave, Suite 2700
Dallas, Texas 75201
(214) 754-1200
(Name, address and telephone number of agent for service)
---------------
Source Media, Inc.
(Exact name of obligor as specified in its charter)
Delaware 13-3700438
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)
5400 LBJ Freeway, Suite 680
Dallas, Texas 75240
(Address of principal executive offices) (Zip Code)
---------------
12% Senior Secured Notes Due 2004, Series A
(Title of indenture securities)
- --------------------------------------------------------------------------------
<PAGE> 2
GENERAL
1. General Information.
Furnish the following information as to the Trustee:
(a) Name and address of each examining or supervising authority to
which it is subject.
Federal Reserve Bank of Dallas (11th District),
Dallas, Texas (Board of Governors of the
Federal Reserve System)
Federal Deposit Insurance Corporation, Dallas, Texas
The Office of the Comptroller of the Currency,
Dallas, Texas
(b) Whether it is authorized to exercise corporate trust powers.
The Trustee is authorized to exercise corporate trust powers.
2. Affiliations with Obligor and Underwriters.
If the obligor or any underwriter for the obligor is an affiliate of
the Trustee, describe each such affiliation.
None.
3. Voting Securities of the Trustee.
Furnish the following information as to each class of voting
securities of the Trustee:
As of December 9, 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Col A. Col B.
- --------------------------------------------------------------------------------
Title of Class Amount Outstanding
- --------------------------------------------------------------------------------
<S> <C>
Capital Stock - par value $100 per share 5,000 shares
- --------------------------------------------------------------------------------
</TABLE>
4. Trusteeships under Other Indentures.
Not Applicable
5. Interlocking Directorates and Similar Relationships with the Obligor
or Underwriters.
Not Applicable
<PAGE> 3
6. Voting Securities of the Trustee Owned by the Obligor or its
Officials.
Not Applicable
7. Voting Securities of the Trustee Owned by Underwriters or their
Officials.
Not Applicable
8. Securities of the Obligor Owned or Held by the Trustee.
Not Applicable
9. Securities of Underwriters Owned or Held by the Trustee.
Not Applicable
10. Ownership or Holdings by the Trustee of Voting Securities of Certain
Affiliates or Security Holders of the Obligor.
Not Applicable
11. Ownership or Holdings by the Trustee of any Securities of a Person
Owning 50 Percent or More of the Voting Securities of the Obligor.
Not Applicable
12. Indebtedness of the Obligor to the Trustee.
Not Applicable
13. Defaults by the Obligor.
Not Applicable
14. Affiliations with the Underwriters.
Not Applicable
15. Foreign Trustee.
Not Applicable
16. List of Exhibits.
T-1.1 - A copy of the Articles of Association of U.S. Trust Company
of Texas, N.A.. incorporated herein by reference to Exhibit
T-1.1 filed with Form T-1 Statement, Registration No.
22-21897.
<PAGE> 4
16. (con't.)
T-1.2 - A copy of the certificate of authority of the Trustee to
commence business; incorporated herein by reference to
Exhibit T-1.2 filed with Form T-1 Statement, Registration
No. 22-21897.
T-1.3 - A copy of the authorization of the Trustee to exercise
corporate trust powers; incorporated herein by reference to
Exhibit T-1.3 filed with Form T-1 Statement, Registration
No. 22-21897.
T-1.4 - A copy of the By-laws of the U.S. Trust Company of Texas,
N.A.. as amended to date; incorporated herein by reference
to Exhibit T-1.4 filed with Form T-1 Statement,
Registration No. 22-21897.
T-1.6 - The consent of the Trustee required by Section 321(b) of
the Trust Indenture Act of 1939.
T-1.7 - A copy of the latest report of condition of the Trustee
published pursuant to law or the requirements of its
supervising or examining authority.
NOTE
As of December 9, 1997, the Trustee had 5,000 shares of Capital Stock
outstanding, all of which are owned by U.S. T.L.P.O. Corp. As of December 9,
1997, U.S. T.L.P.O. Corp. had 35 shares of Capital Stock outstanding, all of
which are owned by U.S. Trust Corporation. U.S. Trust Corporation had
outstanding 9,301,074 shares of $5 par value Common Stock as of December 9,
1997.
The term "Trustee" in Items 2, 5, 6, 7, 8, 9, 10 and 11 refers to each of U.S.
Trust Company of Texas, N.A., U.S. T.L.P.O. Corp. and U.S. Trust Corporation.
In as much as this Form T-1 is filed prior to the ascertainment by the Trustee
of all the facts on which to base responsive answers to Items 2, 5, 6, 7, 9, 10
and 11, the answers to said Items are based upon incomplete information. Items
2, 5, 6, 7, 9, 10 and 11 may, however, be considered correct unless amended by
an amendment to this Form T-1.
In answering any items in this Statement of Eligibility and Qualification which
relates to matters peculiarly within the knowledge of the obligors or their
directors or officers, or an underwriter for the obligors, the Trustee has
relied upon information furnished to it by the obligors and will rely on
information to be furnished by the obligors or such underwriter, and the
Trustee disclaims responsibility for the accuracy or completeness of such
information.
--------------------
<PAGE> 5
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939 the Trustee,
U.S Trust Company of Texas, N.A., a national banking association organized
under the laws of the United States of America, has duly caused this statement
of eligibility and qualification to be signed on its behalf by the undersigned,
thereunto duly authorized, all in the City of Dallas, and State of Texas on the
9th day of December, 1997.
U.S. Trust Company
of Texas, N.A., Trustee
By: /s/ BILL BARBER
----------------------------
William Barber
Vice President
<PAGE> 6
Exhibit T-1.6
CONSENT OF TRUSTEE
Pursuant to the requirements of Section 321(b) of the Trust Indenture Act of
1939 as amended in connection with the proposed issue of Source Media, Inc.,
12% Senior Secured Notes Due 2004, Series A, we hereby consent that reports of
examination by Federal, State, Territorial or District authorities may be
furnished by such authorities to the Securities and Exchange Commission upon
request therefore.
U.S. Trust Company of Texas, N.A.
By: /s/ BILL BARBER
---------------------------
William Barber
Vice President
<PAGE> 7
Federal Financial Institutions Examination Council
Board of Governors of the Federal Reserve System
OMB Number: 7100-0036
Federal Deposit Insurance Corporation
OMB Number: 3064-0052
Office of the Comptroller of the Currency
OMB Number: 1557-0081
Expires March 31, 2000
- --------------------------------------------------------------------------------
(LOGO)
Please Refer to Page i,
(1)
Table of Contents, for
the required disclosure
of estimated burden
- --------------------------------------------------------------------------------
CONSOLIDATED REPORTS OF CONDITION AND INCOME FOR A BANK WITH DOMESTIC OFFICES
ONLY AND TOTAL ASSETS OF LESS THAN $100 MILLION - - FFIEC 034
REPORT AT THE CLOSE OF BUSINESS September 30,1997
This report is required by law: 12 U.S.C. Section 324 (State member banks); 12
U.S. c. Section 1817 (State nonmember banks); and 12 U.S. C. Section 161
(National banks).
(970331)
--------
(RCRI 9999)
This report form is to be filed by banks with domestic offices only. Banks
with branches and consolidated subsidiaries in U.S. territories and
possessions, Edge or Agreement subsidiaries, foreign branches, consolidated
foreign subsidiaries, or International Banking Facilities must file FFIEC 031.
- --------------------------------------------------------------------------------
NOTE: The Reports of Condition and Income must be signed by an authorized
officer and the Report of Condition must be attested to by not less than two
directors (trustees) for State nonmember banks and three directors for State
member and National Banks.
I, Alfred B. Childs, SVP & Cashier
-----------------------------------
Name and Title of Officer Authorized to Sign Report
of the named bank do hereby declare that these Reports of Condition and Income
(including the supporting schedules) have been prepared in conformance with the
instructions issued by the appropriate Federal regulatory authority and are
true to the best of my knowledge and belief.
/s/ Alfred B. Childs
- ----------------------------
Signature of Officer Authorized to Sign Report
10/15/97
- -----------------------
Date of Signature
The Reports of Condition and Income are to be prepared in accordance with
Federal regulatory authority instructions. NOTE: these instructions may in
some cases differ from generally accepted accounting principles.
We, the undersigned directors (trustees), attest to the correctness of this
Report of Condition (including the supporting schedules) and declare that it
has been examined by us and to the best of our knowledge and belief has been
prepared in conformance with the instructions issued by the appropriate Federal
regulatory authority and is true and correct.
/s/ Stuart M. Pearman
- -------------------------
Director (Trustee)
/s/ J.T. Moore
- -------------------
Director (Trustee)
/s/ Peter J. Denker
- -----------------------
Director (Trustee)
- --------------------------------------------------------------------------------
FOR BANKS SUBMITTING HARD COPY REPORT FORMS:
STATE MEMBER BANKS: Return the original and one copy to the appropriate
Federal Reserve District Bank.
STATE NONMEMBER BANKS: Return the original only in the special return address
envelope provided. If express mail is used in lieu of the special return
address envelope, return the original only to the FDIC, c/o Quality Data
Systems, 2127 Espey Court, Suite 204, Crofton, MD 21114.
NATIONAL BANKS: Return the original only in the special return address
envelope provided. If express mail is used in lieu of the special return
address envelope, return the original only to the FDIC, c/o Quality Data
Systems, 2127 Espey Court, Suite 204, Crofton, MD 21114.
- --------------------------------------------------------------------------------
FDIC Certificate Number ____________
(RCRI 9050)
09-30-97
Banks should affix the address label in this space.
U. S. Trust Company of Texas, National Association
- --------------------------------------------------
Legal Title of Bank (TEXT 9010)
2001 Ross Avenue, Suite 2700
- ----------------------------
City (TEXT 9130)
Dallas, TX 75201
- ------------------------------------------------------------------------------
State Abbrev. (TEXT 9200) ZIP Code (TEXT 9220)
Board of Governors of the Federal Reserve System, Federal Deposit Insurance
Corporation, Office of the Comptroller of the Currency
<PAGE> 8
<TABLE>
<S> <C> <C> <C> <C> <C>
U.S. TRUST COMPANY OF TEXAS, N.A. Call Date: 09/30/97 State #: 6797 FFIEC 034
2100 ROSS AVENUE, SUITE 2700 Vendor ID: D Cert #: 33217 Page RC-2
DALLAS, TX 75201 Transit #: 11101765
9
CONSOLIDATED REPORT OF CONDITION FOR INSURED COMMERCIAL
AND STATE-CHARTERED SAVINGS BANKS FOR JUNE 30,1997
All schedules are to be reported in thousands of dollars. Unless otherwise indicated,
report the amount outstanding as of the last business day of the quarter.
SCHEDULE RC - BALANCE SHEET
C100
Dollar Amounts in Thousands
- -------------------------------------------------------------------------------------------------------------------------
ASSETS
1. Cash and balances due from depository institutions: RCON
----
a. Noninterest-bearing balances and currency and coin (1,2) 0081 882 1.a
---------------- ------ -------
b. Interest bearing balances (3) 0071 916 1.b
------------------------------------------- ------ -------
2. Securities:
a. Held-to-maturity securities (from Schedule RC-B, column A) 1754 0 2.a
-------------- ------ -------
b. Available-for-sale securities (from Schedule RC-B, column D) 1773 128,787 2.b
------------ ------ -------
3. Federal funds sold (4) and securities purchased under agreements to resell: 1350 6,000 3
4. Loans and lease financing receivables: RCON
----
a. Loans and leases, net of unearned income (from Schedule RC-C) 2122 12,545 4.a
-----------
b. LESS: Allowance for loan and lease losses 3123 200 4.b
-----------------------------
c. LESS: Allocated transfer risk reserve 3128 0 4.c
----------------------------------
d. Loans and leases, net of unearned income, allowance, and reserve RCON
----
(item 4.a minus 4.b and 4.c) 2125 12,345 4.d
------------------------------------------- ------ -------
5. Trading assets 3545 0 5.
-------------------------------------------------------------- ------ -------
6. Premises and fixed assets (including capitalized leases) 2145 694 6.
-------------------- ------ -------
7. Other real estate owned (from Schedule RC-M) 2150 0 7.
-------------------------------- ------ -------
8. Investments in unconsolidated subsidiaries and associated companies
(from Schedule RC-M) 2130 0 8.
-------------------------------------------------------- ------ -------
9. Customers' liability to this bank on acceptances outstanding 2155 0 9.
---------------- ------ -------
10. Intangible assets (from Schedule RC-M) 2143 0 10.
-------------------------------------- ------ -------
11. Other assets (from Schedule RC-F) 2160 2,070 11.
------------------------------------------- ------ -------
12. a. Total assets (sum of items 1 through 11) 2170 151,694 12.a
-------------------------------- ------ -------
b. Losses deferred pursuant to U.S.C. 1823(j) 0306 0 12.b
-------------------------------- ------ -------
c. Total assets and losses deferred pursuant to 12 U.S.C. 1823(j)
(sum of items 12.a and 12.b) 0307 151,694 12.c
--------------------------------------- ------ -------
(1) Includes cash items in process of collection and unposed debits.
(2) The amount reported in this item must be greater than or equal to the sum of Schedule RC-M, items 3.a and 3.b.
(3) Includes time certificates of deposit not held for trading.
(4) Report 'term federal funds sold' in Schedule RC, item 4.a, 'Loans and leases, net of unearned income,' and in Schedule
RC-C, part 1.
(5) Report securities purchased under agreements to resell that involve the receipt of immediately available funds and
mature in one business day or roll over under a continuing contract in Schedule RC, item 3.a, 'Federal funds sold.'
</TABLE>
<PAGE> 9
<TABLE>
<S> <C> <C>
U.S. TRUST COMPANY OF TEXAS, N.A. Call Date: 06/30/97 State #: 6797 FFIEC 034
2100 ROSS AVENUE, SUITE 2700 Vendor ID: D Cert #: 33217 Page RC-2
DALLAS, TX 75201 Transit #: 11101765
10
SCHEDULE RC - CONTINUED
Dollar Amounts in Thousands
- ----------------------------------------------------------------------------------------------------------------
LIABILITIES
13. Deposits:
a. In domestic offices (sum of totals of RCON
----
columns A and C from Schedule RC-E) RCON 2200 116,013 13.a
------------------------------------ ----
(1) Noninterest-bearing (1) 6631 8,660 13.a.1
-------------------------------------------
(2) Interest-bearing 6636 107,353
-------------------------------------------------
b. In foreign offices, Edge and Agreement subsidiaries, and IBFs
(1) Noninterest-bearing
---------------------------------------------
(2) Interest-bearing
-------------------------------------------------
14. Federal funds purchased(2) and securities sold under agreements to RCON 0 14
repurchase: ----
2800
15. a. Demand notes issued to the U.S. Treasury 2840 0 15.a
------------------------------- ------ -------
b. Trading liabilities 3548 0 15.b
----------------------------------------------------- ------ -------
16. Other borrowed money:
A. WITH A REMAINING MATURITY OF ONE YEAR OR LESS 2332 7,000 16.a
--------------------------- ------ -------
B. WITH A REMAINING MATURITY OF MORE THAN ONE YEAR THROUGH THREE YEARS A547 1,000 16.b
----- ------ -------
C. WITH A REMAINING MATURITY OF MORE THAN THREE YEARS A548 3,000 16.c
----------------------- ------ ------
17. Not applicable
18. Bank's liability on acceptances executed and outstanding 2920 0 18.
-------------------- ------ -------
19. Subordinated notes and debentures 3200 0 19.
------------------------------------------- ------ -------
20. Other liabilities (from Schedule RC-G) 2930 1,990 20.
-------------------------------------- ------ -------
21. Total liabilities (sum of items 13 through 20) 2948 129,003 21.
------------------------------ ------ -------
22. Not applicable
EQUITY CAPITAL
RCON 7,000 23.
----
23. Perpetual preferred stock and related surplus 3838
------------------------------- ------ -------
24. Common stock 3230 500 24.
---------------------------------------------------------------- ------ ------
25. Surplus (exclude all surplus related to preferred stock) 3839 8,384 25.
-------------------- ------ ------
26. a. Undivided profits and capital reserves 3632 6,512 26.a
---------------------------------- ------ ------
b. Net unrealized holding gains (losses) on available-for-sale
securities 8434 295 26.b
------------------------------------------------------------- ------ ------
27. Cumulative foreign currency translation adjustments
-------------------------
28. a. Total equity capital (sum of items 23 through 27) 3210 22,691 28.a
----------------------- ------ ------
b. Losses deferred pursuant to 12 U.S.C. 1823(j) 0306 0 28.b
--------------------------- ------ ------
c. Total equity capital and losses deferred pursuant to 12 U.S.C. 1823(j)
(sum of items 28.a and 28.b) 3559 22,691 28.c
------------------------------------------ ------ ------
29. Total liabilities, limited-life preferred stock, equity capital,
and losses deferred pursuant to 12 U.S.C. 1823(j) (sum of items
21, 22, and 28.c) 2257 151,694 29.
---------------------------------------------------------- ------ ------
MEMORANDUM
TO BE REPORTED ONLY WITH THE MARCH REPORT OF CONDITION.
1. Indicate in the box at the right the number of the statement below that best describes the most
comprehensive level of auditing work performed for the bank by independent external auditors as RCON
of any date during 1995 ----
----------------------------------------------------------------------- 6724 N/A M.1
1 = Independent audit of the bank conducted in accordance 4 = Directors' examination of the bank performed by other
with generally accepted auditing standards by certified external auditors (may be required by state chartering
public accounting firm which submits a report on the bank authority)
2 = Independent audit of the bank's parent holding company 5 = Review of the bank's financial statements by external
conducted in accordance with generally accepted auditing auditors
standards by a certified public accounting firm which 6 = Compilation of the bank's financial statements by
submits a report on the consolidated holding company (but external auditors
not on the bank separately) 7 = Other audit procedures (excluding tax preparation
3 = Directors' examination of the bank conducted in accordance work)
with generally accepted auditing standards by a certified 8 = No external audit work
public accounting firm (may be required by state chartering
authority)
</TABLE>
(1) Includes total demand deposits and noninterest-bearing time and savings
deposits.
(2) Report "term federal funds purchased" in Schedule RC, item 16, 'Other
borrowed money.'
(3) Report securities sold under agreements to repurchase that involve the
receipt of immediately available funds and mature in one business day or
roll over under a continuing contract in Schedule RC, item 14.a, 'Federal
funds purchased.'
<PAGE> 10
COMPTROLLER OF THE CURRENCY
- ------------------- --------------------
TREASURY DEPARTMENT [TREASURY DEPARTMENT LOGO] OF THE UNITED STATES
- ------------------- --------------------
WASHINGTON, D.C.
Whereas, satisfactory evidence has been presented to the Comptroller of
the Currency that U.S. Trust Company of Texas, National Association located in
Rowlett, State of Texas has complied with all provisions of the statutes of the
United States required to be complied with before being authorized to commence
the business of banking as a National Banking Association;
Now, therefore, I hereby certify that the above-named association is
authorized to commence the business of banking as a National Banking
Association.
In testimony whereof, witness my signature and seal of
office this 7th day of December 1990
Charter No. 18782 /s/ [ILLEGIBLE]
Comptroller of the Currency
<PAGE> 11
Exhibit T-1.3
[Comptroller of the Currency Logo]
TRUST PERMIT
- --------------------------------------------------------------------------------
Comptroller of the Currency
Administrator of National Banks
- --------------------------------------------------------------------------------
Southwestern District
1600 Lincoln Plaza
500 N. Akard
Dallas, Texas 75201-3394
WHEREAS, - U.S. Trust Company of Texas, National Association, located in Dallas,
Texas, being a national banking association, organized under the statutes of the
United States, has made application for authority to act as fiduciary;
AND WHEREAS, applicable provision of the statutes of the United States authorize
the grant of such authority;
NOW THEREFORE, I certify that the said association is authorized to act in all
fiduciary capacities permitted by such statutes.
IN TESTIMONY WHEREOF, witness my
signature and seal of the Office
this Sixth day of August, 1991.
/s/ EDWARD M. GRAVES
--------------------------------
Edward M. Graves
Director for Analysis
CHARTER NUMBER 18782
[Comptroller of the Currency Seal]
<PAGE> 12
Exhibit A
Articles of Association
of
U.S. Trust Company of Texas, National Association
For the purpose of organizing an association to perform any lawful activities
of national banks, the undersigned to enter into the following articles of
association:
FIRST: The title of this association shall be U.S. Trust Company of Texas,
National Association.
SECOND: The main office of the association shall be in Dallas, County of
Dallas, State of Texas. The general business of the association shall be
conducted at its main office and its branches.
THIRD: The board of directors of this association shall consist of not less
than five nor more than twenty-five persons, the exact number to be fixed and
determined from time to time by resolution of a majority of the full board of
directors or by resolution of a majority of the shareholders at any annual or
special meeting thereof. Each director shall own common or preferred stock of
the association with an aggregate par value of not less than $1,000, or common
or preferred stock of a bank holding company owning the association with an
aggregate par, fair market or equity value of not less than $1,000, as of
either (i) the date of purchase, (ii) the date the person became a director or
(iii) the date of that person's most recent election to the board of directors,
whichever is greater. Any combination of common or preferred stock of the
association or such holding company may be used.
Any vacancy in the board of directors may be filled by action of a majority of
the remaining directors may not increase the number of directors between
meetings of shareholders to a number which: (1) exceeds by more than two the
number of directors last elected by shareholders where the number was 15 or
less; and (2) exceeds by more than four the number of directors last elected by
shareholders where the number was 16 or more, but in no event shall the number
of directors exceed 25.
Terms of directors, including directors selected to fill vacancies, shall
expire at the next regular meeting of shareholders at which directors are
elected, unless the directors resign or are removed from office.
Despite the expiration of a director's term, the director shall continue to
serve until his or her successor is elected and qualifies or until there is a
decrease in the number of directors and his or her position is eliminated.
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Honorary or advisory members of the board of directors, without voting power or
power of final decision in matters concerning the business of the association,
may be appointed by resolution of a majority of the full board of directors, or
by resolution of shareholders at any annual or special meeting. Honorary or
advisory directors shall not be counted for purposes of determining the number
of directors of the association or the presence of a quorum in connection with
any board action, and shall not be required to own qualifying shares.
FOURTH: There shall be an annual meeting of the shareholders to elect
directors and transact whatever other business may be brought before the
meeting. It shall be held at the main office or any other convenient place the
board of directors may designate, on the day of each year specified therefore
in the bylaws, or if that day falls on a legal holiday in the State in which
the association is located, on the next following banking day. If no election
is held on the day fixed, or in event of a legal holiday, an election may be
held on any subsequent day within 60 days of the day fixed, to be designated by
the board of directors, or, if the directors fail to fix the day, by
shareholders representing two-thirds of the shares issued and outstanding. In
all cases at least 10 days advance notice of the meeting shall be given to the
shareholders by first class mail.
In all elections of directors, the number of votes each common shareholder may
cast will be determined by multiplying the number of shares he or she owns by
the number of directors to be elected. Those votes may be cumulated and cast
for a single candidate or may be distributed among two or more candidates in
the manner selected by the shareholder. On all other questions, each common
shareholder shall be entitled to one vote for each share of stock held by him
or her.
Nominations for election to the board of directors may be made by the board of
directors or by any stockholder of any outstanding class of capital stock of
the association entitled to vote for election of directors. Nominations other
than those made by or on behalf of the existing management shall be made in
writing and be delivered or mailed to the president of the association and to
the Comptroller of the Currency, Washington, D.C., not less than 14 days nor
more than 50 days prior to any meeting of shareholders called for the election
of directors; provided, however, that if less than 21 days notice of the
meeting is given to shareholders, such nominations shall be mailed or delivered
to the president of the association and to the Comptroller of the Currency not
later than the close of business on the seventh day following the day on which
the notice of meeting was mailed. Such notification shall contain the
following information to the extent known to the notifying shareholder.
(1) The name and address of each proposed nominee.
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(2) The principal occupation of each proposed nominee.
(3) The total number of shares of capital stock of the association that
will be voted for each proposed nominee.
(4) The name and residence address of the notifying shareholder.
(5) The number of shares of capital stock of the association owned by the
notifying shareholder.
Nominations not made in accordance herewith may, in his/her decision, be
disregarded by the chairperson of the meeting, and the vote tellers may
disregard all votes cast for each such nominee. No bylaw may unreasonably
restrict the nomination of directors by shareholders.
A director may resign at any time by delivering written notice to the board of
directors, its chairperson, or to the association, which resignation shall be
effective when the notice is delivered unless the notice specifies a later
effective date.
A director may be removed by shareholders at a meeting called to remove him or
her, when notice of the meeting stating that the purpose or one of the purposes
is to remove him or her is provided, if there is a failure to fulfill one of
the affirmative requirements for qualification, or for cause, provided, however,
that a director may not be removed if the number of votes sufficient to elect
him or her under cumulative voting is voted against his or her removal.
FIFTH: The authorized amount of capital stock of this association shall be
5,000 shares of common stock of the par value of One Hundred Dollars ($100)
each; but said capital stock may be increased or decreased from time to time,
according to the provisions of the laws of the United States.
No holder of shares of the capital stock of any class of the association shall
have any preemptive or preferential right of subscription to any shares of any
class of stock of the association, whether nor or hereafter authorized, or to
any obligations convertible into stock of the association, issued, or sold, nor
any right of subscription to any thereof other than such, if any, as the board
of directors, in its discretion may from time to time determine and at such
price as the board of directors may from time to time fix.
Unless otherwise specified in the articles of association or required by law,
(1) all matters requiring shareholder action, including amendments to the
articles of association must be approved by shareholders owning a majority
voting interest in the
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outstanding voting stock, and (2) each shareholder shall be entitled to one
vote per share.
Unless otherwise specified in the articles of association or required by law,
all shares of voting stock shall be voted together as a class, on any matters
requiring shareholder approval. If a proposed amendment would affect two or
more classes or series in the same or a substantially similar way, all the
classes or series so affected, must vote together as a single voting group on
the proposed amendment.
Shares of the same class or series may be issued as a dividend on a pro rata
basis and without consideration. Shares of another class or series may be
issued as a share dividend in respect of a class or series of stock if approved
by a majority of the votes entitled to be cast by the class or series to be
issued unless there are no outstanding shares of the class or series to be
issued. Unless otherwise provided by the board of directors, the record date
for determining shareholders entitled to a share dividend shall be the date the
board of directors authorizes the share dividend.
Unless otherwise provided in the bylaws, the record date for determining
shareholders entitled to notice of and to vote at any meeting is the close of
business on the day before the first notice is mailed or otherwise sent to the
shareholders, provided that in no event may a record date be more than 70 days
before the meeting.
If a shareholder is entitled to fractional shares pursuant to preemptive
rights, a stock dividend, consolidation or merger, reverse stock split or
otherwise, the association may (a) issue fractional shares, or (b) in lieu of
the issuance of fractional shares, issue script or warrants entitling the
holder to receive a full share upon surrendering enough script or warrants to
equal a full share, (c) if there is an established and active market in the
association's stock, make reasonable arrangements to provide the shareholder
with an opportunity to realize a fair price through sale of the fraction, or
purchase of the additional fraction required for a full share, (d) remit the
cash equivalent of the fraction to the shareholder, or (e) sell full shares
representing all the fractions at public auction or to the highest bidder after
having solicited and received sealed bids from at least three licensed stock
brokers, and distribute the proceeds pro rata to shareholders who otherwise
would be entitled to the fractional shares. The holder of a fractional share
is entitled to exercise the rights for shareholder, including the right to
vote, to receive dividends, and to participate in the assets of the association
upon liquidation, in proportion to the fractional interest. The holder of
script or warrants is not entitled to any of these rights unless the script or
warrants explicitly provide for such rights. The script or warrants may
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be subject to such additional conditions as (1) that the script or warrants
will become void if not exchanged for full shares before a specified date, and
(2) that the shares for which the script or warrants are exchangeable may be
sold at the option of the association and the proceeds paid to scriptholders.
The association, at any time and from time to time, may authorize and issue
debt obligations, whether or not subordinated, without the approval of the
shareholders. Obligations classified as debt, whether or not subordinated,
which may be issued by the association without the approval of shareholders, do
not carry voting rights on any issue, including an increase or decrease in the
aggregate number of the securities, or the exchange or reclassification of all
or part of securities into securities of another class or series.
SIXTH: The board of directors shall appoint one of its members president of
this association, and one of its members chairperson of the board and shall
have the power to appoint one or more vice presidents, a secretary who shall
keep minutes of the directors' and shareholders' meetings and be responsible
for authenticating the records of the association, and such other officers and
employees as may be required to transact the business of this association. A
duly appointed officer may appoint one or more officers or assistant officers
if authorized by the board of directors in accordance with the bylaws.
The board of directors shall have the power to:
(1) Define the duties of the officers, employees and agents of the
association.
(2) Delegate the performance of its duties, but not the responsibility for
its duties, to the officers, employees, and agents of the association.
(3) Fix the compensation and enter into employment contracts with its
officers and employees upon reasonable terms and conditions consistent
with applicable law.
(4) Dismiss officers and employees.
(5) Require bonds from officers and employees and to fix the penalty
thereof.
(6) Ratify written policies authorized by the association's management or
committees of the board.
(7) Regulate the manner in which any increase or decrease of the capital
of the association shall be made, provided that nothing herein shall
restrict the power of shareholders to increase or decrease the capital
of the association in
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accordance with law, and nothing shall raise or lower from two-thirds
the percentage required for shareholder approval to increase or reduce
the capital.
(8) Manage and administer the business and affairs of the association.
(9) Adopt initial bylaws, not inconsistent with law or the articles of
association, for managing the business and regulating the affairs of
the association.
(10) Amend or repeal bylaws, except to the extent that the articles of
association reserve this power in whole or in part to shareholders.
(11) Make contracts.
(12) Generally to perform all acts that are legal for a board of directors
to perform.
SEVENTH: The board of directors shall have the power to change the location
of the main office to any other place within the limits of Dallas, Texas,
without the approval of the shareholders, and shall have the power to establish
or change the location of any branch or branches of the association to any
other location permitted under applicable law, without the approval of the
shareholders, subject to approval by the Office of the Comptroller of the
Currency.
EIGHTH: The corporate existence of this association shall continue until
terminated according to the laws of the United States.
NINTH: The board of directors of this association, or any one or more
shareholders owning, in the aggregate, not less than five percent of the stock
of this association, may call a special meeting of shareholders at any time.
Unless otherwise provided by the bylaws or the laws of the United States, or
waived by shareholders, a notice of the time, place, and purpose of every
annual and special meeting of the shareholders shall be given by first-class
mail, postage prepaid, mailed at least 10, and no more than 60, days prior to
the date of the meeting to each shareholder of record at his/her address as
shown upon the books of this association. Unless otherwise provided by the
bylaws, any action requiring approval of shareholders must be effected at duly
called annual or special meeting.
TENTH: An director of the association or such director's heirs, executors,
or administrators may be indemnified or reimbursed by the association for
reasonable expenses actually incurred in connection with claims made against
such director to the extent
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allowed by applicable law, including 12 CFR 7.5217, and regulatory and public
policy.
ELEVENTH: these articles of association may be amended at any regular or
special meeting of the shareholders by the affirmative vote of the holders of a
majority of the stock of this association, unless the vote of the holders of a
greater amount of stock is required by law, and in that case by the vote of the
holders of such greater amount. The association's board of directors may
propose one or more amendments to the articles of association for submission to
the shareholders.
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BY-LAWS
U.S. TRUST COMPANY OF TEXAS, N.A.
ARTICLE I
MEETING OF SHAREHOLDERS
Section 1.1. Annual Meeting. The regular annual meeting of the
shareholders for the election of directors and the transaction of whatever
business may properly come before the meeting, shall be held at such time,
within six months after the close of the Corporation's fiscal year, and place as
the Board of Directors may designate. Notice of such meeting shall be mailed,
postage prepaid, at least ten days prior to the date thereof, addressed to each
shareholder at his address appearing on the books of the Corporation. If, from
any cause, an election of directors is not made on the said day, the Board of
Directors shall order the election to be held on some subsequent day, as soon
thereafter as practicable, according to the provisions of law; and notice
thereof shall be given in the manner herein provided for the annual meeting.
Section 1.2. Special Meetings. Except as otherwise specifically provided
by statute, special meeting of the shareholders may be called for any purpose
at any time by the Board of Directors or by any one or more shareholders
owning, in the aggregate, not less than ten (10) percent of the stock of the
Corporation. Every such special meeting, unless otherwise provided by law,
shall be called by mailing, postage prepaid, not less than ten days prior to
the date fixed for such meeting, to each stockholder at his address appearing
on the books of the Corporation, a notice stating the purpose of the meeting.
Section 1.3. Nomination for Director. Nominations for election to the
Board of Directors may be made by the Board of Directors or by any stockholder
of any outstanding class of capital stock of the Corporation entitled to vote
for the election of directors.
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Section 1.4. Proxies. Shareholders may vote at any meeting of the
shareholders by proxies duly authorized in writing, but no officer or employee
of this Corporation shall act as proxy. Proxies shall be valid only for one
meeting, to be specified therein, and any adjournments of such meeting.
Proxies shall be dated and shall be filed with the records of the meeting.
Section 1.5. Quorum. A majority of the outstanding capital stock,
represented in person or by proxy, shall constitute a quorum at any meeting of
shareholders, unless otherwise provided by law; but less than a quorum may
adjourn any meeting, from time to time, and the meeting may be held, as
adjourned, without further notice. A majority of the votes cast shall decide
every question or matter submitted to the shareholders at any meeting, unless
otherwise provided by law. Shareholders may participate in said meeting by
means of a conference telephone or similar communications equipment allowing all
persons participating in the meeting to hear each other at the same time.
Participation by such means shall constitute presence at a meeting.
Section 1.6. Action Without a Meeting. Any action required by law, these
By-laws, or the Articles of Incorporation of the Corporation to be taken at any
annual or special meeting of shareholders of the Corporation, or any action
which may be taken at any annual or special meeting of such shareholders, may be
taken without a meeting, without prior notice and without a vote, if a consent
in writing, setting forth the action so taken, shall be signed by the holders
of all outstanding stock entitled to vote thereon.
ARTICLE II
Directors
Section 2.1. Board of Directors. The Board of Directors shall have the
power to manage and administer the business and affairs of the Corporation.
Except as expressly limited by law, all corporate powers of the Corporation
shall be vested in and may be exercised by said Board of Directors.
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Section 2.2. Numbers. The Board of Directors shall consist of not less
than five nor more than twenty-five persons, the exact number within such
minimum and maximum limits to be fixed and determined from time to time by
resolution of a majority of the full Board of Directors or by resolution of the
shareholders at any meeting thereof; provided, however, that a majority of the
full Board of Directors may not increase the number of directors to a number
which exceeds by more than two the number of directors last elected by
shareholders.
Section 2.3. Organization Meeting. The Secretary, upon receiving the
result of any election, shall notify the directors-elect of their election and
of the time at which they are required to meet at the Main Office of the
corporation for the purpose of filing their affidavits accepting such
directorship, as required by law, organizing the new Board of Directors and
electing and appointing officers of the Corporation for the succeeding year.
Such meeting shall be held on the day of the election or as soon thereafter as
practicable, and, in any event, within thirty days thereof. If, at the time
fixed for such meeting, there shall not be a quorum present, the directors
present may adjourn the meeting, from time to time, until a quorum is obtained.
Section 2.4. Regular meetings. At least one regular meeting of the
Board of Directors shall be held in the months of January, February, March,
April, May, June, July, September, October and November upon notice. Written
notice of the time and place of such regular meetings of the Board of Directors
shall be given to each Director by either personal delivery, telegram,
facsimile transmission, or any other form of electronic communication, unless
prohibited by law, at least two (2) days before the meeting or by notice
mailed to the Director at least five (5) days before each meeting. One or more
representatives designated by the sole shareholder shall receive prior notice
of, and an invitation to attend, any meeting of the Board of Directors.
Section 2.5. Special Meetings. Special meetings of the Board of
Directors may be called by the President of the Corporation, or at the request
of two or more directors. Each member of the Board of Directors shall be given
notice stating the time and place, by telegram, letter, facsimile transmission
or other electronic communication, or in person, of each such special meeting
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Section 2.6. Quorum. A majority of the directors shall constitute a quorum
at any meeting, except when otherwise provided by law; but a lesser number may
adjourn any meeting from time to time, and the meeting may be held, as
adjourned, without further notice. Members of the Board of Directors or any
committee thereof may participate in a meeting of such Board or committee by
means of a conference telephone or similar communications equipment allowing all
persons participating in the meeting to hear each other at the same time.
Participation by such means shall constitute presence in person at a meeting.
Section 2.7. Vacancies. When any vacancy occurs among the directors, the
remaining members of the Board of Directors, in accordance with the laws of the
State of Texas, may appoint a director to fill such vacancy at any regular
meeting of the Board of Directors, or at a special meeting for that purpose.
Section 2.8. Action Without a Meeting. Any action required to be taken at a
meeting of the Board of Directors of the Corporation, or any action which may be
taken at a meeting of the Board of Directors or a committee thereof, may be
taken without a meeting if a consent in writing, setting forth the action so to
be taken, signed by all of the directors, or all the members of the committee,
as the case may be, is filed in the minutes of the proceedings of the Board of
Directors or of the committee. Such consent shall have the same effect as a
unanimous vote.
ARTICLE III
Committees of the Board
Section 3.1. Examining Committee. The Board of Directors shall annually
appoint a committee of two or more directors, which shall, at least once during
each calendar year and within fifteen months of the last such examination make
suitable examinations of the affairs of the Corporation, or cause suitable
examinations to be made by examiners responsible only to the Board of Directors,
to ascertain whether the Corporation is in sound financial condition, whether
internal controls and procedures are being maintained, and shall recommend to
the Board of Directors such changes in the manner of conducting the affairs of
the Corporation as shall be deemed advisable. Such reports shall state the
results of such examinations in writing to the Board of Directors at the next
regular meeting thereafter.
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Section 3.2. Executive Committee. There shall be an Executive Committee
composed of two or more directors which shall have and may exercise all the
authority of the Board of Directors when the Board of Directors is not in
session, except that such committee shall not have the authority to:
(a) approve or recommend to shareholders actions or proposals
required by law to be approved by shareholders,
(b) designate candidates for the office of director, for purposes of
proxy solicitation or otherwise,
(c) fill vacancies on the Board of Directors or any committee
thereof,
(d) amend the By-Laws, or
(e) authorize or approve the issuance or sale of, or any contract to
issue or sell, shares, except that the Board of Directors, having provided
general authorization for the issuance or sale of shares, or any contract
therefore, may, pursuant to a general formula or method specified by the
Board of Directors, by resolution or by adoption of a stock option or
other plan, authorize the Executive Committee to fix the terms of any
contract for the sale of the shares and to fix the terms upon which such
share may be issued or sold; provided however that the Executive Committee
shall secure the consent or approval of U.S. Trust Corporation on behalf
of the sole shareholder of the Corporation evidenced by (i) a resolution
of its Board of Directors or (ii) written approval of its Chairman or
President to such action.
The Executive Committee shall keep minutes of its meetings, and such
minutes shall be submitted at the next regular meeting of the Board of
Directors at which a quorum is present, and any action taken by the Board of
Directors which respect thereto shall be entered in the minutes of the Board of
Directors.
The Executive Committee shall meet at least once in each calendar month in
which a regular meeting of the Board of Directors is not scheduled.
ARTICLE V
Officers and Employees
Section 4.1. Chairman of the Board. The Board of Directors shall appoint
one of its members to be Chairman of the Board of Directors to serve at the
pleasure of the Board of Directors. Such person shall preside at all meetings
of the Board of Directors. The Chairman of the Board of Directors shall
supervise the carrying out of the policies adopted or approved by the Board of
Directors; shall have general executive powers, as well as the specific powers
conferred by these By-Laws; shall also have and may exercise such further
powers and duties as from time to time may be conferred upon or assigned by the
Board of Directors.
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Section 4.2. President. The Board of Directors shall appoint one of its
members to be President of the Corporation. In the absence of the Chairman, the
President shall preside at any meeting of the Board of Directors. The President
shall have general executive powers, and shall have and may exercise any and
all other powers and duties pertaining by law, regulation or practice to the
Office of President, or imposed by these By-Laws. The President shall also have
and may exercise such further powers and duties as from time to time may be
conferred or assigned by the Board of Directors.
Section 4.3. Vice President. The Board of Directors may appoint one or
more Vice Presidents. Each Vice President shall have such powers and duties as
may be assigned by the Board of Directors. One Vice President shall be
designated by the Board of Directors, in the absence of the President, to
perform all the duties of the President.
Section 4.4. Secretary. The Board of Directors shall appoint a Secretary,
Cashier, or other designated officer who shall be Secretary of the Board of
Directors and of the Corporation, and shall keep accurate minutes of all
meetings. The Secretary shall attend to the giving of all notices required by
these By-Laws to be given; shall be custodian of the corporate seal, records,
documents and papers of the Corporation; shall provide for the keeping of
proper records of all transactions of the Corporation; shall have and may
exercise any and all other powers and duties pertaining by law, regulation or
practice, to the Offices of Secretary or Cashier, or imposed by these By-Laws;
and shall also perform such other duties as may be assigned from time to time
by the Board of Directors.
Section 4.5. Other Officers. The Board of Directors may appoint one or
more Assistant Vice Presidents, one or more Trust Officers, one or more
Assistant Secretaries, one or more Assistant Cashiers, one or more Managers and
Assistant Managers of Branches and such other officers and attorneys which from
time to time may appear to the Board of Directors to be required or desirable
to transact the business of the Corporation. Such officers shall respectively
exercise such powers and perform such duties as pertain to their several
offices, or as may be conferred upon, or assigned to them by the Board of
Directors, the Chairman of the Board of Directors, or the President.
Section 4.6. Tenure of Office. The President and all other officers shall
hold office for the current year for which the Board of Directors was elected,
unless they shall resign, become disqualified, or be removed; and any vacancy
occurring in the Office of the President shall be filled promptly by the Board
of Directors.
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ARTICLE V
Trust Department
Section 5.1. Trust Department. There shall be a department of the
Corporation known as the Trust Department which shall perform the fiduciary
responsibilities of the Corporation.
Section 5.2. Trust Officer. There shall be a Trust Officer of this
Corporation whose duties shall be to manage, supervise and direct all the
activities of the Trust Department. Such person shall do or cause to be done
all things necessary or proper in carrying on the business of the Trust
Department in accordance with provisions of law and applicable regulations; and
shall act pursuant to opinions of counsel where such opinion is deemed
necessary. Opinions of counsel shall be retained on file in connection with all
important matters pertaining to fiduciary activities. The Trust Officer shall
be responsible for all assets and documents held by the Corporation in
connection with fiduciary matters.
The Board of Directors may appoint such other officers of the Trust
Department as it may deem necessary, with such duties as may be assigned.
Section 5.3. Trust Investment Committee. There shall be a Trust
Investment Committee of this Corporation composed of two or more members, who
shall be capable and experienced officers or directors of the Corporation. All
investments of funds held in a fiduciary capacity shall be made, retained or
disposed of only with the approval of the Trust Investment Committee, and the
Committee shall keep minutes of all its meetings, showing the disposition of
all matters it considers and passes upon. The Committee shall, promptly after
the acceptance of an account for which the Corporation has investment
responsibilities, review the assets thereof, to determine the advisability of
retaining or disposing of such assets. The Committee shall conduct a similar
review at least once during each calendar year thereafter.
The Trust Investment Committee or any sub-committee thereof shall additionally
exercise the Department's fiduciary authority over matters such as
discretionary distributions, account overdrafts, acceptance of new accounts,
closing of accounts, exceptions or changes to the published fee schedules, and
all other matters which require a high degree of corporate discretion.
A report of all investment reviews and other Committee actions shall be
noted in the minutes of the Committee.
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Section 5.4. Trust Department Files. There shall be maintained in
the Trust Department files containing all fiduciary records necessary to assure
that its fiduciary responsibilities have been properly undertaken and
discharged.
Section 5.5. Trust Investments. Funds held in a fiduciary capacity
shall be invested in accordance with the instrument establishing the fiduciary
relationship and permissible by law.
ARTICLE VI
Stock and Stock Certificates
Section 6.1. Transfers. Shares of stock shall be transferable on
the books of the Corporation, and a transfer book shall be kept in which all
transfers of stock shall be recorded. Every person becoming a shareholder by
such transfer shall, in proportion to his shares, succeed to all rights of the
prior holder of such shares.
Section 6.2. Stock Certificates. Certificates of stock shall bear
the signature of the Chairman (which may be engraved, printed, or impressed),
and shall be signed manually or by facsimile process by the Secretary,
Assistant Secretary, Cashier, Assistant Cashier, or any other officer appointed
by the Board of Directors for that purpose, to be known as an Authorized
Officer, and the seal of the Corporation shall be engraven thereon. Each
certificate shall recite on its face that the stock represented thereby is
transferable only upon the books of the Corporation properly endorsed.
ARTICLE VII
Corporate Seal
Section 7.1 The President, the Cashier, the Secretary or any
Assistant Cashier or Assistant Secretary, or other officer thereunto designated
by the Board of Directors, shall have the authority to affix the corporate seal
to any document requiring such seal, and to attest the same. Such seal shall be
substantially in the following form:
( Impression )
( of )
( Seal )
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ARTICLE VIII
Miscellaneous Provisions
Section 8.1. Fiscal Year. The Fiscal Year of the Corporation shall
be the calendar year.
Section 8.2. Execution of Instruments. All agreements, indentures,
mortgages, deeds, conveyances, transfers, certificates, declarations, receipts,
discharges, releases, satisfactions, settlements, petitions, schedules,
accounts, affidavits, bonds, undertakings, proxies and other instruments or
documents may be signed, executed, acknowledged, verified, delivered or
accepted on behalf of the Corporation by the Chairman of the Board, or the
President, or any Vice President, or the Secretary, or the Cashier, or, if in
connection with exercise of fiduciary powers of the Corporation, by any of
said officers or by any Trust Officer. Any such instruments may also be
executed, acknowledged, verified, delivered or accepted on behalf of the
Corporation in such other manner and by such other officers or agents as the
Board of Directors may from time to time direct. The provisions of this Section
8.2 are supplementary to any other provision of these By-laws.
Section 8.3. Records. The Articles of Incorporation, the By-laws and
the proceedings of all meetings of the shareholders, the Board of Directors,
and standing committees of the Board shall be recorded in appropriate minute
books provided for the purpose. The minutes of each meeting shall be signed by
the Secretary, Cashier or other Officer appointed to act as Secretary of the
meeting.
ARTICLE IX
By-laws
Section 9.1. Inspection. A copy of the By-laws, with all amendments
thereto, shall at all times be kept in a convenient place at the Main Office of
the Corporation, and shall be open for inspection to all shareholders, during
business hours.
Section 9.2. Amendments. The By-laws may be amended, altered, or
repealed, at any regular or special meeting of the Board of Directors, by a
vote of a majority of the total number of the Directors.
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ARTICLE X
Idemnification
Section 10.1. Idemnified Person. To the extent permitted and in the
manner prescribed by law, the Corporation shall indemnify any person
("indemnified person") made or threatened to be made a party to any action,
suit or proceeding, whether civil or criminal, by reason of the fact that he,
his testator or intestate, is or was a director, advisory board member or
officer of the Corporation or served any other corporation of any type or kind,
domestic or foreign, or any partnership, joint venture, trust, employee benefit
plan or other enterprise in any capacity at the request of the Corporation,
against judgements, fines, amounts paid in settlement and reasonable expenses
(which the Corporation may advance), including attorney's fees, actually and
necessarily incurred as a result of such action, suit or proceeding, or any
appeal therein. The foregoing right of indemnification shall not be exclusive
of any other right to which any such person may be entitled but shall not apply
in the event of misconduct or gross negligence of the proposed indemnified
person.
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