<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
March 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ....... to .......
Commission File Number 0-21894
SOURCE MEDIA, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 13-3700438
(State of Incorporation) (I.R.S. Employer
Identification Number)
5400 LBJ Freeway, Suite 680
Dallas, Texas 75240
(Address of Principal Executive Offices)
(972) 701-5400
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Number of shares of Common Stock outstanding at May 7, 1999: 13,354,018
<PAGE> 2
SOURCE MEDIA, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Page Number
<S> <C> <C>
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets (Unaudited)
December 31, 1998 and March 31, 1999 3-4
Consolidated Statements of Operations (Unaudited)
Three months ended March 31, 1998 and 1999 5
Consolidated Statements of Cash Flows (Unaudited)
Three months ended March 31, 1998 and 1999 6
Notes to Consolidated Financial Statements (Unaudited) 7-13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14-20
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20-22
Item 2. Changes in Securities and Use of Proceeds N/A
Item 3. Defaults Upon Senior Securities N/A
Item 4. Submission of Matters to a Vote of Security Holders N/A
Item 5. Other Information N/A
Item 6. Exhibits and Reports on Form 8-K 22
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
SOURCE MEDIA, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
----------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $11,662 $ 9,336
Restricted investments 11,716 11,870
Trade accounts receivable, less allowance
for doubtful accounts of $387 and $173
in 1998 and 1999, respectively 3,596 3,062
Deferred expenses 447 304
Prepaid expenses and other current assets 937 1,154
------- -------
Total current assets 28,358 25,726
Property and equipment:
Production equipment 6,050 6,123
Computer equipment 3,273 3,298
Other equipment 1,150 1,256
Furniture and fixtures 660 660
------- -------
11,133 11,337
Accumulated depreciation 6,733 7,402
------- -------
Net property and equipment 4,400 3,935
Intangible assets:
Patents 14,945 14,945
Goodwill 6,698 6,698
Contract rights 11,933 11,933
------- -------
33,576 33,576
Accumulated amortization 14,557 15,793
------- -------
Net intangible assets 19,019 17,783
Other non-current assets 4,812 4,606
------- -------
Total assets $56,589 $52,050
======= =======
</TABLE>
3
<PAGE> 4
SOURCE MEDIA, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
----------- ---------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
Current liabilities:
Trade accounts payable $ 2,501 $ 1,326
Accrued interest 2,000 5,000
Accrued payroll 540 757
Other accrued liabilities 1,619 1,621
Unearned income 1,750 1,796
--------- ---------
Total current liabilities 8,410 10,500
Long-term debt 100,000 100,000
Minority interests in consolidated subsidiaries 3,840 3,840
Note receivable and accrued interest from minority
stockholder, net of discount of $53 and
$43 in 1998 and 1999, respectively (780) (794)
--------- ---------
3,060 3,046
Senior redeemable payment-in-kind (PIK) preferred stock,
$25 liquidation preference, $.001 par value, net of
discount
Authorized shares - 1,712; Issued and outstanding
shares 914 and 944 in 1998 and 1999, respectively 16,628 17,344
Stockholders' equity (capital deficiency):
Common stock, $.001 par value:
Authorized shares - 50,000
Issued shares - 13,021 and 13,422 in 1998
and 1999, respectively 13 13
Less treasury stock, at cost - 280 and 280 in 1998
and 1999, respectively (2,770) (2,770)
Capital in excess of par value 80,269 81,234
Accumulated deficit (148,943) (157,238)
Notes receivable and accrued interest
from stockholders (78) (79)
--------- ---------
Total stockholders' equity (capital deficiency) (71,509) (78,840)
--------- ---------
Total liabilities and stockholders' equity (capital deficiency) $ 56,589 $ 52,050
========= =========
</TABLE>
See accompanying notes.
4
<PAGE> 5
SOURCE MEDIA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
1998 1999
------------------------------
<S> <C> <C>
Monetary revenues $ 5,191 $ 4,943
Nonmonetary revenues 675 409
-------- --------
Total revenues 5,866 5,352
Monetary cost of sales 2,305 2,697
Nonmonetary cost of sales 675 409
-------- --------
Total cost of sales 2,980 3,106
-------- --------
Gross profit 2,886 2,246
Selling, general and administrative expenses 5,618 5,550
Amortization of intangible assets 2,621 1,236
Research and development expenses 754 830
-------- --------
8,993 7,616
-------- --------
Operating loss (6,107) (5,370)
Interest expense 3,241 3,209
Interest income (628) (282)
Other (income) expense (21) (2)
-------- --------
Net loss ($ 8,699) ($ 8,295)
Preferred stock dividends 766 716
-------- --------
Net loss attributable to common stockholders (9,465) (9,011)
======== ========
Basic and diluted net loss per common share ($ 0.79) ($ 0.70)
======== ========
Weighted average common shares outstanding 11,983 12,830
======== ========
</TABLE>
See accompanying notes.
5
<PAGE> 6
SOURCE MEDIA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1998 1999
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss ($ 8,699) ($ 8,295)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 610 669
Amortization of intangible assets 2,621 1,236
Stock based compensation 233 408
Non-cash interest expense 238 206
Non-cash interest income (317) (154)
Provision for losses on accounts receivable 211 150
Other, net (15) (15)
Changes in operating assets and liabilities:
Trade accounts receivable (1,796) 384
Prepaid expenses and other assets (72) (217)
Deferred expenses (19) 143
Trade accounts payable and accrued liabilities 2,811 2,044
Unearned income 292 46
-------- --------
Net cash used in operating activities (3,902) (3,395)
INVESTING ACTIVITIES
Capital expenditures (569) (204)
Redemption of short-term investments 2,302 --
Capitalized acquisition costs (2) --
-------- --------
Net cash provided by (used in) investing activities 1,731 (204)
FINANCING ACTIVITIES
Payments of financing fees and expenses (168) --
Proceeds from issuance of common stock upon exercise
of stock options and warrants 194 1,273
Other 27 --
-------- --------
Net cash provided by financing activities 53 1,273
Net decrease in cash and cash equivalents (2,118) (2,326)
Cash and cash equivalents at beginning of period 8,431 11,662
-------- --------
Cash and cash equivalents at end of period $ 6,313 $ 9,336
======== ========
</TABLE>
See accompanying notes.
6
<PAGE> 7
SOURCE MEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Unless the context otherwise requires, all references to the "Company"
or "Source" include Source Media, Inc. and its wholly-owned subsidiaries, IT
Network, Inc. ("IT Network"), Interactive Channel, Inc. ("Interactive
Channel"), SMI Holdings, Inc. ("Holdings"), and Interactive Channel
Technologies, Inc., marketed under the name of VirtualModem(TM) ("ICT" formerly
known as Cableshare, Inc.).
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions for Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, these financial statements
include all adjustments, consisting of normal recurring accruals, necessary to
present fairly the financial position, results of operations and cash flows of
the Company and its consolidated subsidiaries for the periods indicated.
Operating results for the three months ended March 31, 1999 are not necessarily
indicative of the results that may be expected for the year ended December 31,
1999. The balance sheet at December 31, 1998, has been derived from the audited
financial statements at that date. For further information, refer to the
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1998.
2. Computation of Net Loss Per Common Share
Net loss per common share is calculated in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share".
Dilutive earnings per share has not been presented because the options and
warrants are anti-dilutive.
3. Translation of Foreign Currencies
The financial positions and results of operations of ICT and the
numbered company, 997758 Ontario, Inc. are measured using local currency
(Canadian dollar) as the functional currency. Assets and liabilities of these
subsidiaries are translated at the exchange rate in effect at each balance
sheet date. Statement of operations accounts are translated at the average rate
of exchange prevailing during the period. Translation adjustments and foreign
currency gains and losses have not been significant and accordingly, have not
been separately presented.
4. Commitments and Contingencies
On May 11, 1998, ICT and Holdings filed an action in U.S. District
Court for the District of Delaware against WorldGate Communications, Inc.
("WorldGate") alleging that WorldGate has infringed four of the Company's
patents. Each party has filed a Motion to Dismiss certain claims and no date
has been set for a hearing by the district court. The Company intends to
aggressively defend its patents.
7
<PAGE> 8
On January 11, 1999, Brite Voice Systems, Inc. ("Brite") filed a
lawsuit against IT Network, Inc. and Source Media, Inc. (together with IT
Network, the "Defendants") in the United States District Court for the District
of Kansas. Brite alleged three claims against Defendants: (1) breach of a
September 23, 1997 Asset Purchase Agreement for which Brite seeks recovery of
alleged damages in an amount in excess of $111,950.18; (2) breach of an October
30, 1997 Lease and Service Agreement in connection with the September 23, 1997
Asset Purchase Agreement, for which Brite seeks recovery of alleged damages in
the amount of $30,472.53; and (3) declaratory judgment pursuant to which Brite
seeks a declaration of rights in connection with all indemnity claims of which
IT Network has provided Brite written notice pursuant to the September 23, 1997
Asset Purchase Agreement. On April 23, 1999, the Company and Brite executed a
Settlement Agreement resulting in Brite voluntarily dismissing the case with
prejudice. The terms of the settlement are confidential, but do not adversely
affect the Company's results of operations or its financial condition.
A total of fourteen class action complaints were filed against Source
Media, Inc. and certain of its officers and directors in the United States
District Court for the Northern District of Texas asserting violations of
sections 10(b) and 20(a) of the Securities Exchange Act and Rule 10b-5 of the
accompanying regulations. The fourteen complaints were consolidated by Judge
Buchmeyer into the first filed case, Hartsell, et al. v. Source Media, Inc., et
al., Civil Action No. 398-CV-1980-R (filed August 21, 1998), on October 9,
1998.
Plaintiffs filed a motion for the appointment of lead plaintiff and
lead plaintiffs' lead counsel on October 20, 1998. Plaintiff proposed the
appointment of three law firms to serve as "Co-Lead Counsel," Weiss & Yourman,
Abbey, Gardy & Squitieri, and Milberg Weiss Bershad Hynes & Lerach, LLC. On
November 12, 1998, defendants filed a statement of non-opposition to
plaintiffs' motion. The Court granted plaintiffs' motion on January 5, 1999.
Plaintiffs filed a consolidated amended complaint on March 3, 1999.
Defendants filed a motion to dismiss the consolidated amended complaint on
April 19, 1999. Plaintiffs' opposition to the motion is due on May 24, 1999,
and defendants' reply brief is due on June 14, 1999. The Court has not yet set
a hearing date for the motion. A trial date is expected to be set sometime
during the first half of 2000.
On July 17, 1998, IT Network, Inc. filed a lawsuit against a former
employee of Brite Voice Systems, Inc., Michael Shell ("Shell"), the two
companies he founded, Interactive Media Services, Inc. ("IMS") and Interactive
Information Services, LLC ("IIS"), and a third company called Talking
Directories, Inc. ("TDI"). The lawsuit was filed in the Western District of
Michigan and alleged two causes of action, one for copyright infringement
against all of the defendants arising out of the defendants' alleged use of IT
Network's 1997 BDR Audio Guide (the "Catalogue") and the thousands of narrative
scripts that correspond to the subject matter categories contained in the
Catalogue (the "Scripts"), and a second for breach of contract against TDI
arising out of TDI's alleged wrongful termination of its information services
contract with IT Network. IT Network moved for a preliminary injunction on July
17, 1998. The Court granted IT Network's motion on August 14, 1998,
preliminarily enjoining the defendants from further infringing IT Network's
Catalogue and Scripts. On December 4, 1998, the defendants moved to set aside
the preliminary injunction as to the Catalogue on the ground that they had new
evidence that IT Network did not own the Catalogue and therefore could not
enforce a copyright in it. IT Network filed an opposition to defendants' motion
on January 8, 1999. To date, there has been no ruling on the motion.
8
<PAGE> 9
On December 3, 1998, IT Network filed a First Amended Complaint which
added a new claim against Shell, IMS and IIS for copyright infringement of
certain proprietary satellite broadcast software IT Network acquired from
Brite. IT Network moved for a preliminary injunction on the software on
December 28, 1998. Defendants filed an opposition to the motion on January 27,
1999, and IT Network filed a reply brief on March 1, 1999. Oral argument has
not yet been scheduled. On April 21, 1999, TDI filed a motion to compel
arbitration of the breach of contract claim. By stipulation of the parties, IT
Network's opposition to that motion is due on June 7, 1999. Discovery in the
case is underway, and a trial date has been set for November, 8, 1999.
On October 6, 1998, Advanced Interactive, Inc. filed a complaint in
U.S. District Court for the Northern District of Illinois, Eastern Division,
against ICT and the following companies: Matsushita Electric Corporation,
Matsushita Electric Industrial Co., Ltd., Sharp Electronics Corp., Sharp Corp.,
Thomson Consumer Electronics, Toshiba Consumer Products, Inc., Toshiba America,
Inc., Toshiba Corporation, General Instruments Corp., Scientific Atlanta, Inc.,
ATI Technologies, Inc., ADS Technologies Inc., Gateway 2000, Inc., STB Systems,
Inc., Hauppauge Computer Works, Inc., WebTV Networks, Inc. and WorldGate
Communications, Inc. (collectively the "Defendants"). Advanced Interactive
alleges that ICT infringed two claims of one of its patents by manufacturing,
using and/or selling or offering to sell "Sourceware(TM) ChannelLink(TM)". The
same allegation is made against each Defendant for its particular product or
service. The Plaintiff seeks damages, but makes no claims against the patents
of ICT or any other Defendant. ICT, and each of the Defendants, have filed an
Answer and have collectively joined the Motion for Partial Summary Judgment
submitted by Matsushita Electric Corporation of America, Sharp Electronics
Corp., Sharp Corp. and the Toshiba Defendants. The court has not yet considered
the Defendant's collective Motion for Partial Summary Judgment. The Company
believes this case is totally without merit and intends to vigorously defend
itself.
In addition, the Company is aware of certain claims against the
Company that have not developed into litigation, or if they have, are dormant,
and in any case are not expected to have a material adverse affect on the
Company. Further, the Company is party to ordinary routine litigation, none of
which is expected to have a material adverse effect on the Company's results of
operations or its financial condition.
The Company has employment agreements with three executives. The
agreements provide that the Company will pay a base salary amount and grant
stock options over a set term to the employees. In the event of a termination
without cause, the Company remains obligated to make certain payments as
defined in the agreements. Two contracts terminate in 1999 and the third in
2002.
On February 11, 1999, the Company signed a Letter of Intent with
Prevue Ventures, Inc. to enter into a joint venture. The Letter of Intent
requires that the parties negotiate the definitive documents in good faith,
with commercially reasonable efforts, and exclusively with each other for 90
days. If either the Company or Prevue fails to use its good faith commercially
reasonable efforts as such, the other has agreed to pay as liquidated damages
$3.0 million plus out-of-pocket costs and expenses associated with due
diligence and negotiation. In addition, the Company has agreed to pay such
liquidated damages and costs and expenses if it breaches the exclusivity
agreement prior to execution of definitive documents and, within 240 days after
the execution of the Letter of Intent, enters into a significant transaction
with a third party.
9
<PAGE> 10
Upon the execution of definitive documents, the Company intends to
seek the approval of its common stockholders, as well as the approval of the
holders of its long-term debt and preferred stock. The consummation of the
definitive documents will also be subject to any required clearance under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 ("Hart-Scott"). If for any
reason the transaction is not consummated after the execution of definitive
documents, other than a failure to satisfy the condition relating to
Hart-Scott, the Company would be required to grant to Prevue a perpetual and
non-exclusive license to the Company's intellectual property. Such license
would require payments of royalties to the Company in an amount equal to .001%
of revenues attributable to the intellectual property, but in no event less
than $50,000 annually. If the transaction is not consummated after the
execution of definitive documents as a result of the Company's breach of the
exclusivity agreement and the Company enters into a significant transaction
with a third party within one year after the execution of the Letter of Intent,
in addition to such non-exclusive license grant, the Company would be required
to pay Prevue as liquidated damages $10.0 million plus out-of-pocket costs and
expenses, provide for two Prevue representatives on a seven-member Board of
Directors of the Company and issue to Prevue five-year warrants to acquire
3,208,700 shares of the Company's common stock at an exercise price of $7.125
per share.
5. Long-Term Debt
On October 30, 1997, the Company issued Senior Secured Notes (the
"Senior Secured Notes", or the "Notes"), in the principal amount of $100
million, which bear interest at the rate of 12% per annum through November 1,
2004. Interest on the Notes is payable semi-annually on May 1 and November 1 of
each year commencing on May 1, 1998, to holders of record at the close of
business on April 15th or October 15th immediately preceding the interest
payment date. The Company placed approximately $22.6 million of the net
proceeds from the offering, representing funds sufficient, together with
interest thereon, to pay the first four interest payments on the Notes, into an
escrow account. At March 31, 1999, $11.9 million remains in escrow to pay the
interest due in 1999.
The Notes are fully and unconditionally guaranteed, jointly and
severally, by each of the Company's subsidiaries (the "Subsidiary Guarantors").
The guarantees are senior obligations of the Subsidiary Guarantors and are
secured by substantially all of the assets of the Subsidiary Guarantors. The
guarantees rank pari passu in right of payment with all existing and future
senior indebtedness of the Subsidiary Guarantors and 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
Senior Preferred Stock (the "Preferred Stock"), dividends on the Preferred
Stock and corporate overhead. The assets of Source consist solely of
investments in its subsidiaries and invested proceeds from the Notes and the
Senior PIK Preferred Stock and related warrants. Financial statements for the
Subsidiary Guarantors and the parent, Source Media, Inc., are not presented
because management has determined that they would not be material to investors.
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 various redemption prices set forth in the
indenture governing the sale of the Notes,
10
<PAGE> 11
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
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 $65.0 million of the aggregate principal
amount of the Notes remain outstanding immediately after each such redemption.
The Notes are not subject to any sinking fund requirement. Upon the occurrence
of a change in 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 the
repurchase. The indenture contains certain covenants including, but not limited
to, limitations on indebtedness, restricted payments, liens, restrictions on
distributions from restricted subsidiaries, sales of assets and subsidiary
stock, affiliate transactions, issuances of capital stock of restricted
subsidiaries and sale/leaseback transactions. As of March 31, 1999, the dealer
quoted value of a Note was $0.75 per dollar resulting in an aggregate fair
market value of approximately $75.0 million.
6. Senior PIK Preferred Stock
On October 30, 1997, the Company issued 800 units (the Units) for an
aggregate purchase price of $20 million, each Unit consisting of 1,000 shares
of non-voting Preferred Stock with a liquidation preference of $25.00 per share
and 558.75 warrants (the "October 1997 Warrants") to purchase one share of the
Company's common stock at a purchase price of $0.01 per share. In the
aggregate, the October 1997 Warrants represent the right to purchase 447,000
shares of common stock. The Units were sold in connection with the Company's
acquisitions of certain assets.
Dividends on the Preferred Stock are payable quarterly on each
February 1, May 1, August 1 and November 1, commencing February 1, 1998, at an
annual rate of 13 1/2% of the liquidation preference per share. At the
Company's option, on any dividend payment date occurring on or prior to
November 1, 2002 dividends may be paid either in cash or by the issuance of
additional shares of Preferred Stock with a liquidation preference equal to the
amount of such dividends; thereafter, dividends will be paid in cash. The
certificate of designation governing the sale of the Units limits the amount of
cash dividends that may be paid on the Preferred Stock. 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 liquidation value of
the Preferred Stock with the cash proceeds of one or more equity offerings at a
redemption price equal to 113 1/2% of the liquidation preference thereof, plus
accumulated dividends, on 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 various redemption prices, plus accumulated and unpaid
dividends, to the date of redemption. Upon the occurrence of a change in
control, the Company will be required to make an offer to purchase the
outstanding shares of the Preferred Stock at a price equal to 101% of the
liquidation preference thereof, plus accumulated and unpaid dividends, to the
date of purchase. The Preferred Stock will be subject to mandatory redemption
in whole on November 1, 2007, at a price equal to 100% of the then effective
liquidation preference thereof, plus, without duplication, all accrued and
unpaid dividends to the date of redemption. The certificate of designation
contains certain covenants including, but not limited to, limitations on
indebtedness, restricted payments, affiliate transactions, issuances of capital
stock of restricted subsidiaries and sale/leaseback transactions.
11
<PAGE> 12
The Preferred Stock ranks senior to all classes of common stock and to
each other class of capital stock or series of preferred stock with respect to
dividend rights and rights on liquidation, winding-up and dissolution of the
Company. The Preferred Stock is non-voting except in certain circumstances. The
Company may not authorize any new class of preferred stock that ranks senior or
pari passu to the Preferred Stock without the approval of the holders of at
least a majority of the shares of Preferred Stock then outstanding, voting or
consenting, as the case may be, as one class, provided, however, that the
Company can issue additional shares of Preferred Stock to satisfy dividend
payments on outstanding shares of Preferred Stock; and further provided that
the Company can issue shares of preferred stock ranking pari passu with the
Preferred Stock if after giving effect thereto, the Consolidated Coverage
Ratio, as defined in the certificate of designation, is greater than 1.7 to
1.0.
The estimated fair market value of the October 1997 Warrants, which
was estimated to be approximately $5.5 million, was credited to capital in
excess of par value and the Preferred Stock was recorded at a corresponding
discount. Additionally, $1.2 million of issuance costs were recorded on the
Preferred Stock. The discount and issuance costs on the Preferred Stock are
being accreted as additional preferred stock dividends using the effective
dividend rate method over a ten year period, resulting in an effective dividend
rate of 19.9%. As of March 31, 1999 the dealer quoted fair market value of the
preferred stock was $17.50 per share for an aggregate value of $16.5 million.
On February 1, 1998 and 1999, the quarterly dividends due on the
Preferred Stock were paid through the issuance of additional Preferred Stock
having a liquidation preference of $0.7 million and $0.8 million, respectively,
with terms identical to those of the Preferred Stock. The estimated fair market
value of the stock issued in lieu of a cash payment on February 1, 1998 and
1999 was approximately $0.5 million and $0.6 million, respectively, which was
recorded as preferred stock dividends.
8. Stock Based Compensation
The Company has granted stock options to employees in excess of shares
authorized by the shareholders at the date of grant. The portion of unauthorized
options are treated as a variable compensation plan through the date the shares
are authorized by shareholders. The Company recognizes stock compensation
expense over the vesting period of the related options. Total non-cash stock
based compensation for the three months ended March 31, 1998 and 1999 amounted
to $0.2 million and $0.4 million, respectively.
9. Segment Reporting
The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131") in the year ended December 31, 1998.
In accordance with SFAS 131, the Company has identified two reportable
operating segments, IT Network and Interactive TV, for disclosure purposes.
These two segments are regularly reviewed by the Company's management for
determination of the allocation of resources to these businesses.
12
<PAGE> 13
IT Network sells advertising and related support services to clients who
sponsor a promotional message with interactive content supplied primarily by IT
Network.
Interactive TV has designed and is developing proprietary software and
interactive programming services that can enable digital, two-way television
systems equipped with digital (or advanced analog) set-top boxes to deliver
two-way, interactive programming with the touch of a set-top remote or the use
of a wireless keyboard.
The total revenues, expenses and assets by reportable operating segments
are used in the Company's operations and do not include general corporate
overhead and assets not allocated to the operating units. These assets and
expenses have been separately disclosed for reconciliation purposes.
<TABLE>
<CAPTION>
Three Months Ended March 31,
1998 1999
---- ----
(IN THOUSANDS)
<S> <C> <C>
Monetary revenues:
IT Network $ 5,110 $ 4,901
Interactive TV 81 42
-------- --------
Total monetary revenues $ 5,191 $ 4,943
======== ========
Nonmonetary revenues:
IT Network $ 675 $ 409
Interactive TV -- --
-------- --------
Total nonmonetary revenues $ 675 $ 409
======== ========
Net revenues:
IT Network $ 5,785 $ 5,310
Interactive TV 81 42
-------- --------
Total net revenues $ 5,866 $ 5,352
======== ========
Operating Loss:
IT Network $ (2,168) $ (976)
Interactive TV (2,835) (2,685)
Corporate (1,104) (1,709)
-------- --------
Total operating loss $ (6,107) $ (5,370)
======== ========
December 31, 1998 March 31, 1999
----------------- --------------
Identifiable assets:
IT Network $ 19,408 $ 19,203
Interactive TV 8,401 7,276
Corporate 28,780 25,571
-------- --------
Total identifiable assets $ 56,589 $ 52,050
======== ========
</TABLE>
13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Unless the context otherwise requires, all references to the "Company"
or "Source" include Source Media, Inc. and its wholly-owned subsidiaries, IT
Network, Inc. ("IT Network"), Interactive Channel, Inc. ("Interactive
Channel"), SMI Holdings, Inc. ("Holdings"), and Interactive Channel
Technologies, Inc., marketed under the name of VirtualModem(TM) ("ICT" formerly
known as Cableshare, Inc.).
FORWARD LOOKING INFORMATION AND RISK FACTORS
The Company or its representatives from time to time may make, or may
have made, certain forward-looking statements, whether orally or in writing,
including without limitation any such statements made, or to be made, in the
Management's Discussion and Analysis of Financial Condition and Results of
Operations, press releases and other information contained in its various
filings with the Securities and Exchange Commission. The Company wishes to
ensure that such statements are accompanied by meaningful cautionary
statements, so as to ensure to the fullest extent possible the protections of
the "safe harbor" established in the Private Securities Litigation Reform Act
of 1995. Accordingly, such statements are qualified in their entirety by
reference to, and are accompanied by, the following discussion of certain
important factors that could cause actual results to differ materially from
those projected in such forward-looking statements.
The Company cautions you that this list of factors does not describe
all of the risks of an investment in our common stock. We operate in a rapidly
changing business environment, and new risk factors continually emerge. We
cannot predict every risk factor, nor can we assess the impact of all these
risk factors on our business or the extent to which any factor, or combination
of factors, may cause actual results to differ from those projected in any
forward-looking statements. Accordingly, you should not rely upon
forward-looking statements as a prediction of our actual results.
Among the factors that could cause actual results to differ materially
from the Company's expectations are the Company's high degree of leverage and
its ability to service debt, the need for additional financing, the Company may
not have sufficient collateral to repay its indebtedness in full, the potential
for a change of control that would require the Company to purchase their notes
and preferred stock, historical and projected losses, risks related to the
proposed transaction with Prevue, access to channels on cable systems and
uncertainty of subscriber acceptance, the uncertainty of a market for
interactive television, the availability of programming, our reliance on
proprietary technology, the further technical development needed to improve the
economics of deploying interactive television to multiple cable systems, a
delay in digital roll-out, the integration of technology with digital set-top
boxes, competition within the industry, the evolving nature of business,
anti-takeover effects of a shareholder rights plan, stock volatility, the
market price of the Company's common stock, the Company's ability to resolve
Year 2000 issues in a timely manner, reliance on key personnel, government
regulation and other factors discussed from time to time in the Company's
Annual Report on Form 10-K and other Securities and Exchange Commission
filings.
14
<PAGE> 15
GENERAL
Source Media, Inc. operates through its subsidiaries SMI Holdings,
Inc., IT Network, Inc. Interactive Channel, Inc., and Interactive Channel
Technologies Inc. in two business segments: IT Network and Interactive TV.
IT Network sells advertising and related support services to clients
who sponsor a promotional message with interactive content supplied or
otherwise managed by IT Network. IT Network's products and services are
distributed primarily through the Company's Publisher Partners which include
Yellow Page directories and daily newspapers. IT Network's products and
services are available in North America, Hawaii and the Caribbean. Products and
services are also promoted and distributed over radio, television and the
Internet.
The Company's Interactive TV business consists of the combined efforts
of the Interactive Channel and ICT subsidiaries. The Company has designed and
is developing proprietary software and interactive programming services that
can enable digital, two-way television systems equipped with digital (or
advanced analog) set-top boxes to deliver two-way, interactive programming with
the touch of a set-top remote or the use of a wireless keyboard.
On January 14, 1997, the Company acquired all of the outstanding
shares that it did not already own of ICT in exchange for 1,390,000 shares of
the Company's common stock, making ICT a wholly-owned subsidiary of the
Company. Holdings owns all the patents and the proprietary technology utilized
by the Company for the Interactive Channel. ICT developed the Company's
patented technology 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.
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,
a unit of Tribune Company, for $9.0 million. Throughout the second quarter of
1998, a significant portion of the customer contracts purchased in the Brite
acquisition were cancelled or not renewed. As a result, the Company reviewed
the value assigned to the contract rights and certain related intangible assets
acquired in the Brite purchase and found them, along with the goodwill
associated with the Brite acquisition, to be impaired, resulting in a write-off
of $25.9 million in the second quarter of 1998.
On February 11, 1999 the Company and Prevue Ventures, Inc. and its
parent, UV Ventures, Inc. (collectively, "Prevue") executed a Letter of Intent
to form a joint venture ("Newco") to exploit the Company's Interactive TV line
of business. The Letter of Intent is subject to the execution of definitive
documentation, including representations and warranties, covenants and
conditions to closing. There can be no assurance that the Company and Prevue
will be able to agree on the form of such definitive documents or that, if
agreed upon, the transaction will be consummated. See further discussion in the
Company's Form 10-K, Item 1 - Business.
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
Monetary revenues decreased 5% to $4.9 million for the three months
ended March 31, 1999 from $5.2 million for the same period in 1998. This
decrease is primarily due to decreases
15
<PAGE> 16
of $0.9 million in system management and information services offset by an
increase of $0.6 million in advertising sales. The decrease in system management
and information services is attributable to increased industry competition,
customers migrating to their own systems and year 2000 hardware issues at
customers. Advertising sales increased primarily from sales under certain new
advertising agreements in 1999 under which revenue is earned at the time of the
directory distribution.
Monetary cost of sales increased 17% to $2.7 million for the three
months ended March 31, 1999 from $2.3 million for the same period in 1998 as a
result of $0.6 million of communications, content and page costs related to the
increased advertising sales partially offset by $0.2 million of cost savings in
Interactive TV in 1999 due to the completion of the Colorado Springs analog
pilot in the first quarter of 1998.
Nonmonetary revenues and nonmonetary cost of sales declined 39% to
$0.4 million for the three months ended March 31, 1999 from $0.7 million for
three months ended March 31, 1998 as the Company continues to reevaluate its
focus on barter business. Nonmonetary sales account for 8% of revenues for the
three months ended March 31, 1999 compared to 12% of revenues for the same
period in 1998.
SG&A expenses remained unchanged at $5.6 million for the three months
ended March 31, 1999 and 1998. Increased expenses of $0.2 million of non-cash
variable compensation expense for certain stock options granted to employees in
excess of shares authorized and increased legal fees of $0.2 million, were
offset by the elimination of transition costs reported in the year earlier
period for the integration of acquired businesses.
Amortization of intangible assets declined by 53% to $1.2 million for
the three months ended March 31, 1999 from $2.6 million for the same period in
1998 due to a lower intangible asset balance resulting from the write-off in
second quarter 1998 of certain intangible assets related to the Brite
acquisition described in the Company's Form 10-K.
Research and development expenses increased 10% from $0.7 million for
the three months ended 1998 to $0.8 million for the same period in 1998 as a
result of license fees and the development of the Company's Internet products.
Interest expense remained essentially unchanged at $3.2 million for
the three months ended March 31, 1999 and 1998. This expense is associated with
a $100 million debt financing completed by the Company in October 1997 and
described in detail in the Notes to Consolidated Financial Statements.
Interest income decreased 55% to $0.3 million for the three months
ended March 31, 1999 from $0.6 million for the same period in 1998 due to lower
cash balances as a result of debt interest payments and normal operating
expenditures.
PIK preferred stock dividends of $0.7 million and $0.8 million for the
three months ended March 31, 1999 and 1998, respectively, relate to a $20
million PIK preferred stock financing completed by the Company in October 1997
and described in detail in the Notes to Consolidated Financial Statements.
16
<PAGE> 17
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has experienced substantial operating
losses and net losses as a result of its efforts to develop, deploy and support
IT Network and develop, conduct trials and commercially launch Interactive TV.
As of March 31, 1999, the Company had an accumulated deficit of $157.2 million
and had used cumulative net cash in operations of $79.4 million. The difference
at March 31, 1999, between the accumulated deficit and cumulative net cash used
in operations since inception was attributable primarily to nonmonetary charges
related to financing incentives and extinguishment of debt, variable
compensation expense, write-downs of analog set-top boxes and intangible assets,
depreciation and amortization and other non-cash expenses. The effect of the
lost customers associated with the Brite acquisition will continue to have a
negative impact on the Company's revenues and profitability. The Company will
continue to incur operating losses at least through 1999, although it expects
that cash generated in IT Network operations excluding related interest expense
will be sufficient to meet IT Network's operating requirements. Any launch of
the Company's television products and services may require additional
expenditures, which may require the Company to raise additional capital.
Closing the joint venture with Prevue under the terms contained in the
letter of intent, would provide both immediate and long-term liquidity benefits
and potential liquidity risks to the Company: (i) at closing, the Interactive
TV research and development costs and certain other costs would become costs of
Newco; (ii) at closing, Prevue would pay the Company $12.0 million cash for
842,105 shares of common stock; (iii) at closing, Prevue would receive warrants
which they could exercise at any time within five years to buy approximately
14.2 million shares of the Company common stock at $14.25 per share, which if
fully exercised, would result in proceeds of approximately $200 million and
give Prevue an approximate 40% ownership of the Company; and (iv) the Company
could face capital calls for Newco and would have committed to a proportionate
share of the second $10.0 million of funding and could face dilution for
capital calls it did not meet. Also, in connection with the proposed
transaction with Prevue, the Company could face liquidated damages upon the
occurrence of certain events. There can be no assurance that the joint venture
with Prevue can be consummated.
Since its inception, the Company has financed its operations primarily
through an aggregate $156.6 million raised from various financing activities,
including the incurrence of debt and issuance of the Company's common stock and
preferred stock. In October 1997, the Company issued $100.0 million of Senior
Secured Notes (the "Notes") and $20.0 million of preferred stock. The interest
escrow account created pursuant to the indenture has been and will be used to
fund the first four interest payments on the Notes. Interest payments from the
interest escrow account were made on May 1, 1998, November 1, 1998 and May 1,
1999. The Company's primary source of liquidity is its cash, cash equivalents
and short-term investments, which totaled $21.2 million at March 31, 1999. This
cash position consisted of $11.9 million held in escrow for interest payments,
(a portion of which was used for the May 1, 1999 interest payment) and $9.3
million of operating cash. The Company's first interest payment not currently
held in escrow is due May 1, 2000.
The Company has received approximately $1.1 million in cash in the
three months ended March 31, 1999 from the exercise of certain warrants. In
addition, in April 1999, an additional $1.0 million has been received from the
exercise of warrants and stock options.
17
<PAGE> 18
The Company currently 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 the Interactive Channel,
ICT, and IT Network through the fourth quarter of 1999.
The Company's future capital requirements will depend on many factors,
including, but not limited to the following factors, some of which are outside
the Company's control: (i) the operating results of IT Network, including the
Company's ability to successfully integrate its acquired businesses into its
existing business, and to retain and grow its customer base, (ii) the success
and timing of the development, introduction and deployment of the Interactive
Channel, (iii) the extent to which the Company is able to generate revenues
from licensing its proprietary technology, (iv) the number of file servers and
other equipment which the Company purchases in support of the Interactive
Channel, (v) the levels of advertising expenditures necessary to increase
awareness of the Interactive Channel, (vi) the extent of market acceptance of
the Company's products, (vii) potential acquisitions or asset purchases, (viii)
the deployment of digital set-top boxes incorporating the Company's technology,
(ix) the capital required to address the Company's Year 2000 issue; (x) the
proposed transaction with Prevue and (xi) competitive factors.
YEAR 2000 DISCLOSURE
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs or hardware that have date-sensitive software or
embedded chips may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities.
Based on recent assessments, the Company determined that it will be
required to modify or replace portions of its software and certain hardware so
that those systems will properly utilize dates beyond December 31, 1999. The
Company presently believes that with modifications or replacements of existing
software and certain hardware, the Year 2000 issue can be mitigated. However,
if such modifications and replacements are not made, or are not completed in a
timely manner, the Year 2000 issue could have a material impact on the
operations of the Company.
The Company's plan to resolve the Year 2000 issue involves the
following four phases: assessment, remediation, testing and implementation. To
date, the Company has completed its initial assessment of all systems that
could be significantly affected by the Year 2000. The Company's three operating
subsidiaries: ICT, Interactive Channel and IT Network as well as the Corporate
unit were included in the assessment. The assessment indicated that most of the
Company's significant information technology systems could be affected. That
assessment also indicated that software and hardware (embedded chips) used in
the IT Network's interactive voice response systems also are at risk
(hereinafter referred to as operating systems). In addition, the Company is
gathering information about the Year 2000 compliance status of its significant
suppliers and subcontractors and is continuing to monitor their compliance.
Regarding its information technology, the Company is approximately 85%
complete on the remediation phase and expects to complete software
reprogramming and replacement for all
18
<PAGE> 19
systems no later than October 31, 1999. Once software is reprogrammed or
replaced for a system, the Company will begin testing and implementation. These
phases run concurrently for different systems. To date, the Company has
completed approximately 90% of its testing and has implemented approximately
45% of its remediated systems. Completion of the testing phase for all
significant systems is expected by July 31, 1999, with all remediated systems
fully tested and implemented by October 31, 1999.
The Company has initiated the remediation phase of its operating
equipment. The remediation of operating equipment is significantly more
difficult than the remediation of the information technology systems because
some of the software operating systems are no longer supported by the
manufacturers of that equipment. Testing of this equipment is also more
difficult than the testing of the information technology systems; the Company
is approximately 50% complete with the testing of its remediated operating
equipment. Once testing is complete, the operating equipment will be ready for
immediate use. The Company expects to complete its remediation of operating
equipment by July 31, 1999. Testing and implementation of affected equipment is
expected to be completed by October 31, 1999.
The Company is in the process of working with third party vendors to
ensure that the Company's systems that interface directly with third parties
are Year 2000 compliant by December 31, 1999. The Company has completed
approximately 90% of its remediation efforts on these systems and is
approximately 70% complete with the testing phase. Testing of all significant
systems is expected no later than July 31, 1999. Implementation is
approximately 60% complete and is expected to be completed by June 30, 1999.
The Company is querying its significant suppliers and subcontractors
that do not share information systems with the Company (external agents). To
date, the Company is not aware of any external agent with a Year 2000 issue
that would materially impact the Company's results of operations, liquidity, or
capital resources. However, the Company has no means of ensuring that external
agents will be Year 2000 ready. The inability of external agents to complete
their Year 2000 resolution process in a timely manner could materially impact
the Company. The effect of non-compliance by external agents is not
determinable.
Additionally, the Company is exposed to the risk that customers may
elect to discontinue receiving telephone information services due to the
customer's equipment not being upgraded to address Year 2000 problems, although
various hardware and software solutions exist. This could result in a loss of
revenues to the Company.
The Company will utilize both internal and external resources to
reprogram, or replace, test, and implement the software and operating equipment
for Year 2000 modifications. The total cost of the Year 2000 project is
estimated at $1.2 million and is being funded through operating cash flows. To
date, the Company has incurred approximately $0.3 million, related to all
phases of the Year 2000 project. Of the total remaining project costs,
approximately $0.8 million is attributable to the purchase of new software and
operating equipment, which will be capitalized. The remaining $0.1 million
relates to repair of hardware and software that will be expensed as incurred.
Management of the Company believes it has an effective program in
place to resolve the Year 2000 issue in a timely manner. The Company has not
yet completed all necessary phases of the Year 2000 program. There can be no
assurance that the Company's efforts to solve its potential Year 2000 problems
will be successful, or even partially successful. In the event that the Company
does not complete any additional phases, the Company may be unable to take
customer orders, provide services and products, invoice customers or collect
payments. In addition, disruptions in the economy generally resulting from Year
2000 issues could also materially adversely affect the Company. The Company
could be subject to litigation for
19
<PAGE> 20
computer systems product failure, equipment shutdown or failure to properly
date business records. The amount of potential liability and lost revenue
cannot be reasonably estimated at this time.
The Company has contingency plans for certain critical applications
and is working on such plans for others. These contingency plans involve manual
workarounds, telecommunication alternatives, staff adjustments and other
appropriate actions.
NET OPERATING LOSS CARRYFORWARDS
At December 31, 1998, Holdings had net operating loss carryforwards of
approximately $87.4 million for U.S. Federal income tax purposes, which begin
to expire in 2003. The Internal Revenue Code of 1986, as amended, imposes
limitations on the use of net operating loss carryforwards if certain stock
ownership changes occur. Consequently, the Company's utilization of a portion
of the net operating losses is limited to approximately $9.0 million in a given
year.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to changes in interest rates related primarily
to its Notes and Preferred Stock arrangements. Under its current policies, the
Company does not use interest rate derivative instruments to manage exposure to
interest rate changes. At March 31, 1999, the Company had Notes outstanding of
$100.0 million, due November 1, 2004, which bear interest at a fixed rate of
12% and Preferred Stock outstanding of $23.6 million due November 1, 2007,
which bears interest at a fixed rate of 13 1/2%. The fair value of the Notes
and Preferred Stock at December 31, 1998 was approximately $75.0 million and
$16.5 million, respectively, based upon dealer quoted market prices.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
On May 11, 1998, ICT and Holdings filed an action in U.S. District
Court for the District of Delaware against WorldGate Communications, Inc.
("WorldGate") alleging that WorldGate has infringed four of the Company's
patents. Each party has filed a Motion to Dismiss certain claims and no date
has been set for a hearing by the district court. The Company intends to
aggressively defend its patents.
On January 11, 1999, Brite Voice Systems, Inc. ("Brite") filed a
lawsuit against IT Network, Inc. and Source Media, Inc. (together with IT
Network, the "Defendants") in the United States District Court for the District
of Kansas. Brite alleged three claims against Defendants: (1) breach of a
September 23, 1997 Asset Purchase Agreement for which Brite seeks recovery of
alleged damages in an amount in excess of $111,950.18; (2) breach of an October
30, 1997 Lease and Service Agreement in connection with the September 23, 1997
Asset Purchase Agreement, for which Brite seeks recovery of alleged damages in
the amount of $30,472.53; and (3) declaratory judgment pursuant to which Brite
seeks a declaration of rights in
20
<PAGE> 21
connection with all indemnity claims of which IT Network has provided Brite
written notice pursuant to the September 23, 1997 Asset Purchase Agreement. On
April 23, 1999, the Company and Brite executed a Settlement Agreement resulting
in Brite voluntarily dismissing the case with prejudice. The terms of the
settlement are confidential, but do not adversely affect the Company's results
of operations or its financial condition.
A total of fourteen class action complaints were filed against Source
Media, Inc. and certain of its officers and directors in the United States
District Court for the Northern District of Texas asserting violations of
sections 10(b) and 20(a) of the Securities Exchange Act and Rule 10b-5 of the
accompanying regulations. The fourteen complaints were consolidated by Judge
Buchmeyer into the first filed case, Hartsell, et al. v. Source Media, Inc., et
al., Civil Action No. 398-CV-1980-R (filed August 21, 1998), on October 9,
1998.
Plaintiffs filed a motion for the appointment of lead plaintiff and
lead plaintiffs' lead counsel on October 20, 1998. Plaintiff proposed the
appointment of three law firms to serve as "Co-Lead Counsel," Weiss & Yourman,
Abbey, Gardy & Squitieri, and Milberg Weiss Bershad Hynes & Lerach, LLC. On
November 12, 1998, defendants filed a statement of non-opposition to
plaintiffs' motion. The Court granted plaintiffs' motion on January 5, 1999.
Plaintiffs filed a consolidated amended complaint on March 3, 1999.
Defendants filed a motion to dismiss the consolidated amended complaint on
April 19, 1999. Plaintiffs' opposition to the motion is due on May 24, 1999,
and defendants' reply brief is due on June 14, 1999. The Court has not yet set
a hearing date for the motion. A trial date is expected to be set sometime
during the first half of 2000.
On July 17, 1998, IT Network, Inc. filed a lawsuit against a former
employee of Brite Voice Systems, Inc., Michael Shell ("Shell"), the two
companies he founded, Interactive Media Services, Inc. ("IMS") and Interactive
Information Services, LLC ("IIS"), and a third company called Talking
Directories, Inc. ("TDI"). The lawsuit was filed in the Western District of
Michigan and alleged two causes of action, one for copyright infringement
against all of the defendants arising out of the defendants' alleged use of IT
Network's 1997 BDR Audio Guide (the "Catalogue") and the thousands of narrative
scripts that correspond to the subject matter categories contained in the
Catalogue (the "Scripts"), and a second for breach of contract against TDI
arising out of TDI's alleged wrongful termination of its information services
contract with IT Network. IT Network moved for a preliminary injunction on July
17, 1998. The Court granted IT Network's motion on August 14, 1998,
preliminarily enjoining the defendants from further infringing IT Network's
Catalogue and Scripts. On December 4, 1998, the defendants moved to set aside
the preliminary injunction as to the Catalogue on the ground that they had new
evidence that IT Network did not own the Catalogue and therefore could not
enforce a copyright in it. IT Network filed an opposition to defendants' motion
on January 8, 1999. To date, there has been no ruling on the motion.
On December 3, 1998, IT Network filed a First Amended Complaint which
added a new claim against Shell, IMS and IIS for copyright infringement of
certain proprietary satellite broadcast software IT Network acquired from
Brite. IT Network moved for a preliminary injunction on the software on
December 28,1998. Defendants filed an opposition to the motion on January 27,
1999, and IT Network filed a reply brief on March 1, 1999. Oral argument has
not yet been scheduled. On April 21, 1999, TDI filed a motion to compel
arbitration of the breach of contract claim. By stipulation of the parties, IT
Network's opposition to that motion is due on June 7, 1999. Discovery in the
case is underway, and a trial date has been set for November, 8, 1999.
21
<PAGE> 22
On October 6, 1998, Advanced Interactive, Inc. filed a complaint in
U.S. District Court for the Northern District of Illinois, Eastern Division,
against ICT and the following other companies: Matsushita Electric Corporation,
Matsushita Electric Industrial Co., Ltd., Sharp Electronics Corp., Sharp Corp.,
Thomson Consumer Electronics, Toshiba Consumer Products, Inc., Toshiba America,
Inc., Toshiba Corporation, General Instruments Corp., Scientific Atlanta, Inc.,
ATI Technologies, Inc., ADS Technologies Inc., Gateway 2000, Inc., STB Systems,
Inc., Hauppauge Computer Works, Inc., WebTV Networks, Inc. and WorldGate
Communications, Inc. (collectively the "Defendants"). Advanced Interactive
alleges that ICT infringed two claims of one of its patents by manufacturing,
using and/or selling or offering to sell "Sourceware(TM) ChannelLink(TM)". The
same allegation is made against each Defendant for its particular product or
service. The Plaintiff seeks damages, but makes no claims against the patents
of ICT or any other Defendant. ICT, and each of the Defendants, have filed an
Answer and have collectively joined the Motion for Partial Summary Judgment
submitted by Matsushita Electric Corporation of America, Sharp Electronics
Corp., Sharp Corp. and the Toshiba Defendants. The court has not yet considered
the Defendant's collective Motion for Partial Summary Judgment. The Company
believes this case is totally without merit and intends to vigorously defend
itself.
In addition, the Company is aware of certain claims against the
Company that have not developed into litigation, or if they have, are dormant,
and in any case are not expected to have a material adverse affect on the
Company. Further, the Company is party to ordinary routine litigation, none of
which is expected to have a material adverse effect on the Company's results of
operations or its financial condition.
Item 2 - Changes in Securities and Use of Proceeds - not applicable
Item 3 - Defaults Upon Senior Securities - not applicable
Item 4 - Submission of Matters to a Vote of Security Holders - not applicable
Item 5 - Other Information - not applicable
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10.1 - Employment agreement with Victoria Hamilton.
Exhibit 10.2 - Employment agreement with Stephen Pulley.
Exhibit 10.3 - Employment agreement with W. Thomas Oliver.
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K during the three months ended March 31, 1999.
Form 8-K (Date of Event February 11, 1999) filed on February 16,
1999, announcing the Company executing a Letter of Intent to
enter into a joint venture to establish a new business entity
with Prevue Ventures, Inc., a subsidiary of United Video
Satellite Group, Inc.
Form 8-K amendment filed on March 16, 1999 updated Form 8-K filed
on February 16, 1999.
22
<PAGE> 23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
as amended, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
SOURCE MEDIA, INC.
(Registrant)
Date: May 14, 1999 By: /s/ PAUL TIGH
--------------------------------------
Paul Tigh
Chief Financial Officer and Treasurer
(Principal Financial Officer and Duly
Authorized Officer)
24
<PAGE> 24
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
10.1 Employment agreement with Victoria Hamilton.
10.2 Employment agreement with Stephen Pulley.
10.3 Employment agreement with W. Thomas Oliver.
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT (the "Agreement"), dated as of March 11, 1999
(the "Effective Date"), by and between SOURCE MEDIA, INC., a Delaware
corporation (the "Company"), with offices at 5400 LBJ Freeway, Suite 680,
Dallas, Texas 75231 and VICTORIA HAMILTON ("Executive"), residing at 136 East
64th Street, Apt. 5A, New York, New York 10021.
W I T N E S S E T H:
WHEREAS, the Company desires to secure the services of Executive and
to enter into an agreement embodying the terms of such employment; and
WHEREAS, Executive desires to accept such employment and enter into
such agreement;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the Company and Executive hereby agree as follows:
1. Employment.
(a) Agreement to Employ. Upon the terms and subject to the conditions
of this Agreement, the Company hereby employs Executive, and Executive hereby
accepts employment by the Company.
(b) Term of Employment. Except as provided in Paragraph 6(a), the
Company shall employ Executive for the period commencing on the Effective Date
and ending on the earlier of (i) August 10, 1999 or (ii) the closing of a
Contemplated Transaction. For purposes of the foregoing sentence, "Contemplated
Transaction" means the transactions contemplated by the Letter of Intent dated
February 11, 1999 between the Company, Prevue Ventures, Inc. and United Video
Satellite Group, Inc., or any other transaction involving the Company and/or
its subsidiaries similar in scope and significance to the Company. The period
during which Executive is to be employed hereunder, including any extension
thereof to which the parties may agree, shall be referred to as the "Employment
Period."
2. Position, Other Employment.
(a) Position. Executive shall be duly appointed by the Board of
Directors of the Company (the "Board") as an officer of the Company with the
title
<PAGE> 2
of Interim Chief Operating Officer and shall serve in that position during the
Employment Period. Executive shall be located in New York, New York, and
Executive's services hereunder shall be performed at offices to be selected by
Executive in New York, New York, subject to such reasonable travel as the
performance of Executive's duties and the business of the Company may require,
in Executive's sole judgment.
(b) Other Employment. The Company acknowledges that Executive has
clients for whom she provides consulting services, that Executive also serves
as an elected Director of BioReliance, Inc. and a principal of the Washington
Advisory Group, that Executive will devote a portion of her time, but in no
event more than, on average, one business day per week to work for her other
clients and in connection with her other responsibilities as noted above, and
that such work shall not constitute a breach of Executive's obligations
hereunder.
3. Compensation.
(a) Base Salary. During the Employment Period, the Company shall pay
Executive a base salary ("Base Salary") at a rate of $50,000 per month, payable
in semi-monthly installments.
(b) Stock Options. As of March 29, 1999, Executive shall be awarded a
grant of Stock Options (the "Options") to purchase 100,000 shares of the Common
Stock of the Company, par value $.001 per share (the "Stock"), under the
Company's 1995 Performance Equity Plan, as amended and restated (the "Plan"),
pursuant to the Stock Option Agreement in the form annexed hereto as Exhibit A.
The Company represents and warrants that all necessary Committee approvals (as
defined in the Plan) have been obtained with respect to the grants of the
Options and the form of the Stock Option Agreement.
(c) Consulting Services. The Company acknowledges that, at the request
of the Board, Executive has been providing consulting services for the Company
since January 11, 1999. The Company agrees to pay Executive, prior to March 19,
1999, $50,000 for such consulting services. The Company further agrees to
reimburse Executive for all out-of-pocket expenses incurred in connection with
such consulting services. Such reimbursement shall be made within 14 days after
presentation of statements with respect thereto.
4. Benefits, Expenses, Indemnification and Insurance.
(a) Benefits. Executive shall be entitled to up to four weeks (i.e.,
20 business days) paid vacation annually, to be accrued at the rate of 1.7 days
per
2
<PAGE> 3
month, and customary holidays, in accordance with the Company's policies and
practices.
(b) Business Expenses. The Company shall pay or reimburse Executive,
within 14 days of presentation of statements with respect thereto, for all
reasonable expenses incurred or paid by Executive in the performance of
Executive's duties hereunder and all legal fees and costs incurred in
connection with the negotiating and drafting of this Agreement. The Company
acknowledges that such expenses may include, without limitation, costs
associated with travel to the Company's offices in Texas.
(c) Indemnification. The Company shall indemnify Executive and hold
Executive harmless from and against any claim, loss, damages, expense,
liability or cause of action (whether now pending or subsequently commenced),
including, without limitation, liability in connection with suits by
shareholders, debtholders, prospective joint venturers or strategic partners,
or current or former employees, arising from or out of Executive's performance
as an officer or employee of, or consultant to, the Company or in any other
capacity, including serving as a fiduciary, in which Executive serves or has
served at the request of the Company, to the maximum extent permitted by
applicable law and the Company's charter and bylaws. If for any reason the
foregoing indemnification is unavailable or insufficient to hold Executive
harmless, then the Company shall contribute to the amount paid or payable by
Executive as a result of such claim, loss, damages, expense, liability or cause
of action in such proportion as is equitable. If any claim is asserted
hereunder for which Executive reasonably believes in good faith she is entitled
to be indemnified, the Company shall pay Executive's legal expenses (or cause
such expenses to be paid) on a monthly basis, for Executive's chosen counsel,
within 14 days of the presentation of statements with respect to such expenses.
(d) Insurance. The Company shall provide Executive with Directors and
Officers ("D&O") liability insurance coverage, and shall reimburse Executive
for any deductible or other expenses not covered by the Company's D&O insurance
policy. The Company shall ensure that such coverage for claims against
Executive shall be maintained throughout the Employment Period, and continuing
through the period ending six years after the termination of the Employment
Period. The Company represents and warrants that:
(i) The Company's current D&O policy has a $5 million "per
incident" and "per policy period" limitation of liability
(including defense costs);
3
<PAGE> 4
(ii) The Company has confirmed with its D&O carrier that
Executive will be covered under the D&O policy from the
Effective Date;
(iii) The Company has confirmed with its D&O carrier that, as of
the Effective Date, no more than $500,000 of the policy
limits have been exhausted.
The Company shall increase the amount of its D&O policy coverage if,
in consultation with the Company's General Counsel, Executive determines that
the current policy limits are insufficient. However, the obligation for
maintaining sufficient coverage remains solely with the Company.
5. Confidentiality.
Executive shall not use or disclose any confidential or proprietary
information of the Company or any affiliate thereof except (i) as required in
the course of Executive's employment or (ii) as required by law (including,
without limitation, when required by any governmental agency having supervisory
authority over the business of the Company or by any administrative or
legislative body with apparent jurisdiction to order disclosure of such
information), it being understood that Executive will promptly notify the
Company of such requirement so that the Company may seek to obtain a protective
order. Upon termination of Executive's employment, Executive shall return to
the Company all confidential and/or proprietary information that exists in
written or other physical form (and all copies thereof) under Executive's
control.
6. Termination of Employment.
(a) Early Termination of the Employment Period. Notwithstanding
Paragraph l(b), the Employment Period shall end upon a termination of
Executive's employment on account of (i) Executive's death, (ii) a Termination
Due to Disability, (iii) a Termination for Cause, or (iv) a Termination for
Good Reason, all as defined in Subparagraph (c) hereof.
(b) Benefits Payable Upon Termination. As soon as practicable, but in
no event more than 30 days after the end of the Employment Period, Executive
(or in the event of her death, her estate) shall be paid any Base Salary
earned, but unpaid, for services rendered to the Company on or prior to the
date on which the Employment Period ended. If Executive's employment ends
because of a Termination for Good Reason or for any reason other than a
Termination for Cause, death, or a
4
<PAGE> 5
Termination Due to Disability, Executive shall also be paid one additional
month's Base Salary.
(c) Definitions. For purposes of this Paragraph 6:
"Termination Due to Disability" means a termination of Executive's
employment by the Company because Executive has been incapable of substantially
fulfilling the position set forth in this Agreement because of physical, mental
or emotional incapacity resulting from injury, sickness or disease for a period
of at least 45 consecutive days.
"Termination for Cause" means a termination of Executive's employment
by the Company due to (i) Executive's conviction of a felony, (ii) Executive's
willful malfeasance or gross misconduct in connection with her employment
hereunder which has had a material adverse effect on the business of the
Company or (iii) a substantial and continual refusal by Executive in breach of
this Agreement to perform her position, which refusal is not cured within 10
days' of the date a written notice referring to this provision and describing
such refusal is given by the Board to Executive. This definition, and not the
definition of Cause included in the Stock Option Agreement, shall govern for
purposes of Paragraph 6(a).
"Termination for Good Reason" means (i) a termination of Executive's
employment by either Executive or the Company following the appointment of a
new Chief Executive Officer whose employment commences during the Employment
Period or (ii) a termination of Executive's employment by Executive following:
(A) a material reduction in Executive's authority or responsibilities from
those Executive has performed to date or from those that are usual and
customary for a senior executive of the Company of similar title, (B) a
material breach of this Agreement by the Company or (C) a Change of Control (as
hereinafter defined) other than a Contemplated Transaction approved by the
Board. A termination under Subparagraph (i) herein shall be made upon two
weeks' written notice.
"Change of Control" means any transaction or event, or series of
transactions or events, whether voluntary or involuntary, that results in, or
as a consequence of which, any of the following events shall occur: (i) any
person that is not an owner of 50% of the shares of capital stock of the
Company on the Effective Date shall acquire, directly or indirectly, beneficial
ownership (as defined in Rule 13d-3 of the Securities Exchange Act of 1934, as
amended) of more than 50% of the voting stock of the Company, (ii) any sale of
all or substantially all of the assets of the Company or (iii) a proxy contest
for the election of directors of the Company results in the persons
constituting the Board immediately prior to the initiation of such
5
<PAGE> 6
proxy contest ceasing to constitute a majority of the Board upon the conclusion
of such proxy contest.
(d) Survival. The provisions of Subparagraphs 4(c) and 4(d) and of
Paragraphs 5, 6, 7 and 8(f) shall survive the termination of this Agreement.
7. Governing Law; Arbitration; Costs; Jurisdiction. This Agreement shall
be governed by the laws of the State of New York without regard to conflict of
law rules. Any dispute or controversy between the Company and Executive,
arising out of or relating to this Agreement, the breach of this Agreement, or
otherwise, shall be settled by arbitration in New York, New York administered
by the American Arbitration Association in accordance with its Commercial Rules
then in effect. The Company shall reimburse Executive, upon demand, for all
costs and expenses (including without limitation attorneys' fees) reasonably
incurred by Executive in connection with any arbitration initiated pursuant to
this paragraph for compensation or amounts owing to Executive hereunder, as
well as for all such costs and expenses reasonably incurred by Executive in
connection with entering, confirming, or enforcing the award rendered by the
arbitrator. In the event that the Company commences an arbitration or other
proceeding against Executive in which Executive prevails, the Company shall
reimburse Executive, upon demand, for all costs and expenses (including without
limitation attorneys' fees) reasonably incurred in connection therewith. The
Company and Executive acknowledge that this Agreement evidences a transaction
involving interstate commerce. Notwithstanding any choice of law provision
included in this Agreement, the Federal Arbitration Act shall govern the
interpretation and enforcement of this arbitration provision. The parties agree
to submit to the exclusive jurisdiction of the federal and state courts within
the State of New York in connection with any suit arising out of the
confirmation or enforcement of any award rendered by the arbitrator, and waive
any defense based on forum non conveniens or improper venue.
8. Miscellaneous.
(a) Binding Effect. This Agreement shall be binding on the Company and
any person or entity which succeeds to the interest of the Company (regardless
of whether such succession occurs by operation of law) by reason of the sale of
all or a portion the Company's securities or assets, or by a merger,
consolidation, or reorganization involving the Company. This Agreement shall
inure to the benefit of Executive's heirs, executors, administrators and legal
representatives.
(b) Assignment. Except as provided under the preceding subparagraph
(relating to binding effect), neither this Agreement nor any of the rights
6
<PAGE> 7
or obligations hereunder shall be assigned or delegated by any party hereto
without the prior written consent of the other party.
(c) Entire Agreement. This Agreement, together with the Stock Option
Agreement annexed as Exhibit A, constitutes the entire agreement between the
parties hereto with respect to the matters referred to herein and supersedes
all agreements between the parties (written or oral), and no amendment or
modification of this Agreement, oral or otherwise, shall be binding between the
parties unless it is in writing and signed by the party against whom
enforcement is sought.
(d) Severability. In the event that one or more of the provisions of
this Agreement shall become invalid, illegal or unenforceable in any respect,
the validity, legality and enforceability of the remaining provisions contained
herein shall not be affected thereby.
(e) Waiver. Waiver by any party hereto of any breach or default by the
other party of any of the terms of this Agreement shall not operate as a waiver
of any other breach or default, whether similar to or different from the breach
or default waived. No waiver of any provision of this Agreement shall be
implied from any course of dealing between the parties hereto or from any
failure by either party hereto to assert its or her rights hereunder on any
occasion or series of occasions.
(f) Notices. Any notice required or desired to be delivered under this
Agreement shall be in writing and shall be delivered personally, by courier
service or by certified mail, return receipt requested, and shall be effective
upon actual receipt by the party to which such notice shall be directed, and
shall be addressed as follows (or to such other address as the party entitled
to notice shall hereafter designate in accordance with the terms hereof):
7
<PAGE> 8
If to the Company:
Board of Directors
Source Media, Inc.
5400 LBJ Freeway
Suite 680
Dallas, Texas 75231
with a copy to:
Robert L. Winikoff, Esq.
Cooperman Levitt Winikoff Lester & Newman, P.C.
800 Third Avenue
New York, New York 10022
If to Executive:
Victoria Hamilton
136 East 64th Street, Apt. 5A
New York, New York 10021
with a copy to:
Ellen A. Harnick, Esq.
Friedman Kaplan & Seiler LLP
875 Third Avenue
New York, New York 10022-6225
(g) Headings. Headings to paragraphs and subparagraphs in this
Agreement are for the convenience of the parties only and are not intended to
be part of or to affect the meaning or interpretation of the Agreement.
(h) Counterparts. This Agreement may be executed in counterparts, each
of which shall be deemed an original but all of which together shall constitute
one and the same instrument.
8
<PAGE> 9
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by its duly authorized officer, and Executive has hereunto set her
hand, as of the day and year first above written.
SOURCE MEDIA, INC.
By: /s/ TIMOTHY P. PETERS
-------------------------------------
Timothy P. Peters
Chairman of the Board
VICTORIA HAMILTON
/s/ VICTORIA HAMILTON
-----------------------------------------
9
<PAGE> 1
EXHIBIT 10.2
EMPLOYMENT AGREEMENT, dated as of March
29, 1999, by and between SOURCE MEDIA,
INC., a Delaware corporation
("Company"), and STEPHEN W. PALLEY (the
"Employee").
-------------
Company desires to engage Employee to perform services for Company,
and Employee desires to perform such services, on the terms and conditions set
forth below:
NOW, THEREFORE, the parties agree as follows:
1. EMPLOYMENT. The Company hereby employs Employee as its Chief
Executive Officer, and Employee hereby accepts such employment, upon the terms
and conditions hereinafter set forth.
2. TERM. The term (the "Term") of employment of Employee pursuant to
this Agreement shall commence on the date hereof and shall terminate on the
third anniversary of the date hereof. The Term shall automatically be renewed
for successive one year periods unless either party gives the other written
notice to the contrary at least 90 days prior to the end of the Term or any
such renewal thereof.
3. DUTIES AND SERVICES. Employee shall devote his full time and best
efforts to the business and affairs of the Company, and perform, in a competent
manner, such executive and managerial functions and duties commensurate with
his position as Chief Executive Officer of the Company, as the Board of
Directors of the Company may reasonably prescribe from time to time. The
Employee shall report directly to the Board of Directors. Employee shall also
serve as a member of the Board of Directors without additional compensation.
The Company shall not relocate the Employee's principal place of business
outside of New York City without the written consent of the Employee.
4. COMPENSATION.
A. SALARY. For all services to be rendered by Employee hereunder,
the Company shall pay Employee an annual base salary of $200,000. The Company
shall pay Employee's salary in accordance with the Company's standard payroll
practices as in effect from time to time, with appropriate deductions required
by applicable laws, rules and regulations.
<PAGE> 2
B. DISCRETIONARY BONUS. On an annual basis, the Board of Directors
shall consider a bonus payment to Employee based on his performance, and the
Company's results of operations. The timing and amount of any such bonus
payment shall be in the sole and absolute discretion of the Board of Directors.
C. STOCK OPTION PARTICIPATION. Employee shall receive a ten-year
option to purchase 500,000 shares of the common stock, par value $.001 per
share, pursuant to the Stock Option Agreement in the form attached hereto as
Exhibit A.
D. GROSS-UP FOR EXCISE TAXES. In the event that Employee receives
any payment or benefit (including but not limited to payments or benefits
pursuant to Section 4(c) above) (a "Payment") that is subject to the excise tax
under Section 4999 of the Internal Revenue Code of 1986, as amended, the
Company shall pay to Employee, as soon as practicable, an additional amount
(the "Gross-Up Payment") such that the net amount retained by Employee after
deduction of any excise tax on the Payment and any federal, state and local
income taxes and any excise tax upon the Gross-Up Payment, shall be equal to
the Payment. The determination of whether an excise tax is due and the amount
of any Gross-Up Payment shall be made by an independent auditor jointly
selected by the Company and Employee.
5. EXPENSES. The Company shall reimburse Employee for all reasonable,
ordinary and necessary expenses incurred on behalf of the Company by Employee.
Employee shall submit to the Company an expense report and receipts or other
verification of expenses to be reimbursed in accordance with the Company's
standard policies.
6. BENEFITS. Employee shall be entitled to such insurance and
retirement plan benefits as are generally available to other senior management
employees of the Company, pursuant to Company policy in effect from time to
time, such as health insurance, disability and life insurance, and the right to
participate in any retirement plans maintained by the Company.
7. VACATION AND PERSONAL DAYS. Employee shall be entitled to twenty
(20) business days of paid vacation during each calendar year (pro-rated for
1999). Employee will also be entitled to ten (10) sick and/or personal days
which may be taken as paid vacation days if not used, and two (2) floating
holidays. Vacation, sick and/or personal days and floating holidays shall
accrue at the beginning of each calendar year (or, upon the commencement of
employment of Employee by the Company, in the case of 1999), and shall be taken
in accordance with the Company's published guidelines.
2
<PAGE> 3
8. TERMINATION PROVISIONS.
A. TERMINATION FOR CAUSE. Notwithstanding the provisions of Section
2 above, the Company, on two days prior written notice, may terminate the
employment of Employee for any of the following reasons (for "cause"), without
the payment of any compensation to Employee, except accrued salary and vacation
pay due for the period prior to the date of termination of employment.
(i) Employee shall be convicted of a felony;
(ii) Commission of any willful misconduct by the Employee that
is materially injurious to the financial condition or business reputation of
the Company, including by reason of material breach by the Employee of the
provisions of this Agreement, provided that Employee has been provided written
notice of such willful misconduct, which notice shall describe the willful
misconduct in reasonable detail, and such willful misconduct is not cured in
the reasonable and good faith judgment of the Board, within thirty (30) days of
the date of the notice.
B. TERMINATION BY COMPANY OTHER THAN FOR CAUSE, DEATH OR
DISABILITY.
(i) If the employment of Employee is terminated by the Company
other than for cause, death or disability, the Company shall pay to Employee as
severance, in equal monthly installments, the remaining base salary payments
that Employee would have earned if he had continued his employment throughout
the Term, and an amount equal to any accrued and unpaid vacation days on the
date of termination of employment. Such payments shall cease in the event
Employee obtains other employment following termination of employment.
(ii) The Company will continue life, medical, dental and
disability coverage substantially identical to the coverage maintained by the
Company for Employee and his dependents prior to termination of his employment,
except to the extent such coverage may be changed in its application to all
Company employees on a nondiscriminatory basis. Such coverage shall cease when
Employee obtains other employment.
C. TERMINATION ON ACCOUNT OF DISABILITY, OR DEATH.
(i) In the event Employee shall, during the term of this
Agreement, become physically or mentally disabled so that he is unable, or can
reasonably be expected to be unable, to perform his duties hereunder for a
period of seventy five (75) consecutive days, or ninety (90) non-consecutive
days within any twelve (12) month period, the Company shall have the right to
terminate Employee's employment, provided that (a) the Company provides the
Employee with not less than five (5) days prior written notice of the
termination of his employment and (b) the Company makes the payments to
Employee referred to in clause (ii) below. Any determination of disability
shall be made by a physician selected by the Company and reasonably acceptable
to the Employee.
3
<PAGE> 4
(ii) In the event the Company terminates the Employee's
employment for disability as set forth in clause (i) above ("Disability
Termination"), Employee shall be entitled to receive, in monthly installments,
the base salary Employee would have received in the following twelve months had
his employment continued for one year past the date of Disability Termination.
All payments made pursuant to this paragraph shall be made in accordance with
the Company's standard payroll practices as in effect from time to time, with
appropriate deductions required by applicable laws, rules and regulations. In
addition, the Company, at its expense, for a period of one year following the
date of Disability Termination, will continue medical and dental insurance
coverage substantially identical to the coverage maintained by the Company for
Employee and his dependents prior to termination of employment, except to the
extent such coverage may be changed in its application to all Company employees
on a non-discriminatory basis.
(iii) In the event of the death of Employee, the Company shall
make the payments referred to in clause (ii) above to the estate of the
Employee or his legal representative.
D. TERMINATION BY THE EMPLOYEE.
(i) Notwithstanding the provisions of Section 2 above, the
Employee will be considered to have resigned his employment for "good reason"
if (x) the Company, without the express written consent of the Employee,
materially breaches this Agreement, provided that the Company has been provided
written notice of such breach, which notice shall describe the breach in
reasonable detail, and such breach is not cured in the reasonable and good
faith judgment of the Employee within thirty (30) days of the date of the
notice, or (y) the Employee resigns his employment with the Corporation within
a 60-day period beginning six months after a "change of control."
(ii) Without limitation, it shall be considered a material
breach of this Agreement by the Company if the Company (i) fails to secure the
Employee's election to the Board of Directors by its next regularly scheduled
Annual Meeting of Stockholders, provided the Employee has delivered to the
Company his written consent to serve as such prior to the mailing of the Proxy
Statement relating to such meeting, or (ii) materially reduces the Employee's
duties or authority (whether or not accompanied by a change of title) or
diminishes his title in any way, or transfers his principal place of business
outside New York City.
(iii) In the event that the Employee resigns from his employment
for good reason, the Company shall be obligated to provide the Employee with
the severance payments and insurance coverage as required if the Company had
terminated the Employee other than for cause pursuant to Section 8B above.
(iv) In the event that the Employee resigns from his employment
without good reason, the Company shall be obligated to provide the Employee
with the payments as required if the Company had terminated the Employee for
cause pursuant to Section 8A above.
4
<PAGE> 5
(v) For purposes of this Agreement, "change of control" means
the happening of any of the following:
(i) When any "person," as such term is used in Sections 13(d)
and 14(d) of the Securities Exchange Act of 1934 (the
"Exchange Act") (other than the Company, a subsidiary of
the Company, a Company employee benefit plan, including
any trustee of such plan acting as trustee, or United
Video Satellite Group, Inc. or any of its affiliates) that
is not an owner of 5% or more of the Company capital stock
on the date hereof becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Company representing
twenty-five percent (25%) or more of the combined voting
power of the Company's then outstanding securities
entitled to vote generally in the election of directors;
or
(ii) The stockholders of the Company approve a merger or
consolidation of the Company with any other corporation,
other than a merger or consolidation which would result in
the voting securities of the Company outstanding
immediately prior thereto continuing to represent (either
by remaining outstanding or by being converted into voting
securities of the surviving entity) at least fifty percent
(50%) of the total voting power represented by the voting
securities of the Company or such surviving entity
outstanding immediately after such merger or
consolidation, or the stockholders of the Company approve
an agreement for the sale or disposition by the Company of
all or substantially all the Company's assets; or
(iii) A proxy contest for the election of directors of the
Company results in the persons constituting the Board
immediately prior to the initiation of such proxy contest
ceasing to constitute a majority of the Board upon the
conclusion of such proxy contest.
9. REPRESENTATIONS AND WARRANTIES. Employee represents and warrants
that Employee is not subject to or a party to any agreement, contract,
covenant, order or other restriction which in any way prohibits, restricts or
impairs Employee's ability to enter into this Agreement and carry out his
duties and obligations hereunder. Each party hereto represents and warrants to
the other that (i) it has the full legal right and power and all authority and
approvals required to enter into, execute and deliver this Agreement and to
perform fully all of his or its obligations hereunder; and (ii) this Agreement
has been duly executed and delivered by it and constitutes a valid and binding
obligation of such party, enforceable in accordance with its terms.
5
<PAGE> 6
10. NON-COMPETITION AND SECRECY.
10.1 NO COMPETING EMPLOYMENT. For so long as Employee is employed
by Company and for a period of the lesser of (i) twelve (12) months after
termination of employment and (ii) the expiration of the Term (such period
being referred to hereinafter as the "Restricted Period"), Employee shall not,
directly or indirectly, own an interest in, manage, operate, join, control,
lend money, or render financial or other assistance to or participate in or be
connected with, as an officer, employee, partner, stockholder, consultant or in
a similar capacity, any sole proprietorship, partnership, firm, corporation or
other business organization or entity that competes with the Company in any
business in which it is engaged during the Term or at the time of the
Employee's termination; provided, however, that nothing in this Section 10.1
shall prohibit Employee from (i) making a non-controlling and passive
investment in a corporation or other entity whose shares are publicly traded;
or (ii) engaging in any activity referred to above in any geographic area in
which the Company is not engaged in business during the Term or at the time of
the Employee's termination. The foregoing restriction shall not apply (i) in
the event that the Employee is terminated without cause or resigns his
employment for good reason or (ii) to the holding of a passive investment
interest in a venture to develop and license the television show "Absolute
Cobbler" in various media and territories throughout the world.
10.2 NO INTERFERENCE. During the Restricted Period, Employee shall
not, whether for his own account or for the account of any other individual,
partnership, firm, corporation or other business organization (other than
Company), intentionally solicit, endeavor to entice away from Company, or
otherwise interfere with the relationship of Company with, any person who is
employed by the Company at the time of the termination of the Employee's
employment.
10.3 SECRECY. Employee recognizes that the services to be performed
by him hereunder are special, unique and extraordinary in that, by reason of
his employment hereunder, he may acquire confidential information and trade
secrets concerning the operation of the Company, the use or disclosure of which
could cause the Company substantial loss and damages which could not be readily
calculated and for which no remedy at law would be adequate. Accordingly,
Employee covenants and agrees with the Company that he will not at any time,
except in performance of Employee's obligations to the Company hereunder or
with the prior written consent of the Company, directly or indirectly, disclose
any secret or confidential information that he may learn or has learned by
reason of his association with the Company. The term "confidential information"
includes, without limitation, information not previously disclosed to the
public or to the trade with respect to the products, facilities, applications
and methods, trade secrets and other intellectual property, systems,
procedures, manuals, confidential reports, product price lists, customer lists,
technical information, financial information (including the revenues, costs or
profits associated with any of its products), business plans, prospects or
opportunities but shall exclude any information already in the public domain.
Notwithstanding anything to the contrary herein contained, Employee's
obligation to maintain the secrecy and confidentiality of the confidential
information under this Section 10 shall not apply to any such confidential
information which is disclosed through any means other than as a result of any
act by Employee constituting a breach of this Agreement or which is required to
be disclosed under applicable law.
6
<PAGE> 7
10.4 EXCLUSIVE PROPERTY. Employee hereby agrees to keep all such
records in connection with Employee's employment as the Company may from time
to time direct, and all such records shall be the sole and exclusive property
of the Company.
10.5 INJUNCTIVE RELIEF. Without intending to limit the remedies
available to the Company, Employee acknowledges that a breach of any of the
covenants contained in this Section 10 may result in material irreparable
injury to the Company for which there is no adequate remedy at law, that it
will not be possible to measure damages for such injuries precisely and that,
in the event of such a breach or threat thereof, the Company shall be entitled
to seek to obtain a temporary restraining order and/or a preliminary injunction
restraining Employee from engaging in activities prohibited by this Section 10
or such other relief as may be required to specifically enforce any of the
covenants in this Section 10.
11. PARAGRAPH HEADINGS. The titles to the Sections of this Agreement
are solely for the convenience of the parties and shall not be used to explain,
modify, simplify, or aid in the interpretations of the provisions of this
Agreement.
12. NOTICES. All notices, demands and requests provided or permitted
to be given pursuant to this Agreement, shall be given in writing, sent by
certified mail, return receipt requested, and addressed as follows or to such
other address so designated in the appropriate manner by the parties. All
notices shall be deemed effective when mailed.
Company: Source Media, Inc.
5400 LBJ Parkway
Suite 680
Dallas, Texas 75240
Attention: Board of Directors
With a copy to:
Robert L. Winikoff, Esq.
Cooperman Levitt Winikoff Lester & Newman, P.C.
800 Third Avenue
New York, New York 10022
Employee: Stephen Palley
45 East End Avenue
New York, New York 10004
7
<PAGE> 8
13. ASSIGNMENT AND ASSUMPTION. The rights of each party under this
Agreement are personal to that party and may not be assigned, delegated or
transferred to any other person, firm, corporation, or other entity without the
prior written consent of the other party, except that the Company may transfer
its rights under this Agreement to any Affiliate or other entity which
succeeds, by contract or operation of law, to all or substantially all of the
business of the Company and agrees in writing to assume the Company's
obligations under this Agreement.
14. GOVERNING LAW. This Agreement shall be governed by, construed and
enforced in accordance with the laws of the State of New York without giving
effect to the conflicts of law principles of the laws of said state. The
Company shall reimburse the Employee for all reasonable fees and disbursements
incurred by the Employee in connection with any dispute over the enforcement of
the Employee's rights under this Agreement, but only if the Employee
substantially prevails in such dispute.
15. ENTIRE AGREEMENT. This Agreement, and the stock option agreement
evidencing the stock option referred to in paragraph 4C, shall constitute the
entire agreement between the parties and any prior written or oral
understanding or representation of any kind, or any oral communications shall
not be binding upon either party except to the extent incorporated in this
Agreement. This Agreement supercedes any and all prior agreements between the
parties.
16. MODIFICATION OF AGREEMENT. This Agreement can be modified only in
writing and shall be binding only if executed with and under the same formality
by the parties hereto or their duly authorized representatives.
17. NO WAIVER. The failure of either party to this Agreement to insist
upon the performance of any of the terms and conditions of this Agreement, or
the waiver of any breach of any of the terms and conditions of this Agreement,
shall not be construed as thereafter waiving any such terms and conditions, but
each same shall continue and remain in full force and effect as if no such
forbearance or waiver had occurred.
18. EFFECT OF PARTIAL INVALIDITY. The invalidity or unenforceability
of any provision or covenant of this Agreement shall not be deemed to affect
the validity or enforceability of any other provision or covenant. In the event
that any provision or covenant of this Agreement is held invalid or
unenforceable, the same shall be deemed automatically modified to the minimum
extent necessary to make such provision or covenant enforceable and the parties
agree that the remaining provisions shall be deemed to be and to remain in full
force and effect.
8
<PAGE> 9
19. COUNTERPARTS. This Agreement may be executed in counterparts and
all counterparts so executed shall constitute one and the same agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
SOURCE MEDIA, INC.
By: /s/ TIMOTHY P. PETERS
-------------------------------------
Timothy P. Peters
Chairman of the Board
/s/ STEPHEN W. PALLEY
-----------------------------------------
Stephen W. Palley
9
<PAGE> 1
EXHIBIT 10.3
EMPLOYMENT AGREEMENT
This AGREEMENT is dated as of the 10th day of June, 1996, by and between
Source Media, Inc., (the "Company") and W. Thomas Oliver (the "Employee").
In consideration of the mutual covenants and agreement contained herein,
the parties, intending to be bound legally, agree as follows:
1. Employment.
(a) Term. The Company hereby agrees to employ the Employee as
President and Chief Operating Officer of a division known as "The
Interactive Channel" for the period commencing on June 10, 1996 through
June 9, 1999, unless the Employee's employment under this Agreement is
earlier terminated or extended pursuant to Paragraphs 7, 8 and 9 below
(the "Term" of this Agreement).
(b) Duties. The Employee shall be President and Chief Operating
Officer of a division of the Company to be called "The Interactive
Channel" and shall have the obligations, duties and responsibilities
customary for such a position. The Employee shall report only to the CEO
and Chairman of the Board of Directors of Source Media, ("Chairman of the
Board").
(c) Relocation.
(i) The Employee shall be reimbursed by the Company for the
reasonable incremental cost of the Employee commuting between Los
Angeles and the Company's corporate offices in Dallas and for the
1
<PAGE> 2
Employee's apartment and automobile rental in Dallas through June
10, 1997. Such expenses shall be determined at the sole discretion
of the Employee except that the Company shall not reimburse the
Employee in an amount greater than $40,000 for such expenses
described in this paragraph 1(c).
(ii) In addition, should the Employee decide to move in his
sole discretion to the Dallas area or to such other area which might
be designated as the operating headquarters of The Interactive
Channel and provide such notice in writing addressed to the
Chairman of the Board of Directors prior to June 10, 1997, then, in
addition to the payment described in 1(c)(i) above, the Company
shall promptly and fully reimburse the Employee for all reasonable
moving expenses incurred by Employee, such expenses to include
packing, loading and transport of personal property of Employee and
travel expenses for Employee's family.
2. Compensation.
(a) Base Salary. The Employee shall be paid a base salary during
the Employee's employment under this Agreement, on the same payroll cycle
as other management employees of the Company, at an annual rate of Two
Hundred Fifty Thousand Dollars ($250,000). Employee shall be entitled to
normal merit increases as per Company policy granted during the term of
this Agreement.
2
<PAGE> 3
(b) Bonus. The Employee shall be paid an annual bonus based on his
performance during each calendar year, or portion thereof, during his
employment with the Company. The total bonus shall be up to forty-five
(45) percent of the Employee's then base salary. Sixty (60%) percent of
that bonus shall be paid annually within sixty (60) days after the end of
the calendar year for which the Employee's performance is being evaluated.
Such annual bonus shall be based on goals mutually agreed to by the
Employee and the Chairman of the Board in writing in advance of each year.
Forty (40%) percent of that bonus shall be paid quarterly during the
calendar year in four installments, with each such installment of up to a
maximum of 10 (ten) percent of the total maximum bonus in that calendar
year. The quarterly bonus shall be based on goals mutually agreed to by
the Employee and the Chairman of the Board in writing in advance of each
quarter and paid within sixty (60) days of the end of that quarter.
(1) The 1996 Bonus. For the Employee's performance during
the period from June 10, 1996 to December 31, 1996, Sixty (60%)
percent of the Bonus will be paid by no later than March 1, 1997,
and shall be based on the following goals:
i) the successful launch of The Interactive Channel,
Colorado Springs,
ii) the staffing of The Interactive Channel operations both
senior and middle level,
iii) the successful launch of The Interactive Channel,
Yonkers, and
3
<PAGE> 4
iv) the implementation of the TAP Program.
For purposes of this Paragraph 2, "successful launch" is defined as the
acquiring of customers for The Interactive Channel and their retention of the
service.
The Company shall pay the remaining forty (40%) percent of the 1996
maximum bonus quarterly in installments of ten (10%) percent each, based on
goals mutually agreed to by the Employee and the Chairman of the Board in
writing in advance of each quarter. For the period of June 10, 1996 through
September 30, 1996, the goals are as follows:
i) setting up operations and staff of Interactive Channel
offices in Dallas and Colorado Springs,
ii) establishing a Colorado Springs programming template,
and
iii) developing the launch advertising campaign.
3. Benefits.
The Employee shall be eligible to participate in any benefit plan made
generally available to senior executives of the Company, including any such
pension plan, hospitalization plan, medical and dental service plan, disability
plan, life insurance plan, death benefit plan, stock purchase program
(notwithstanding the provisions of such stock purchase program, the Employee
shall be entitled to purchase stock at no less than a fifteen (15) percent
discount to the then market price of the stock of the Company), 401K plan,
retirement plan or any other employee benefit plan, which may be in effect at
any time or from time-to-time during the Employee's employment under this
Agreement, subject to the amendment or termination of any such plan or benefit.
The Company's hospitalization plan, medical and dental service plan shall also
provide hospitalization, dental and medical
4
<PAGE> 5
coverage for the Employee's dependents, including his spouse and minor children.
Prior to such time as the Employee becomes eligible for coverage under the
Company's group health insurance plan, the Company shall make the premium
payments necessary to permit the Employee to continue group health insurance
coverage for the Employee and his eligible dependents under COBRA and to
continue his current disability policy until coverage under the Company's
disability policy begins.
4. Stock Option Plan.
The Employee shall be eligible to participate in the Company Stock Option
Plan. Upon execution of this Agreement, the Company, pursuant to the Source
Media, Inc.'s 1995 Performance Equity Plan ("the Stock Option Plan") as amended,
hereby irrevocably grants to the Employee the right and option to purchase
200,000 shares of the common stock, par value $0.001 of the Company at a
purchase price of $10.50 per share. The option is intended to be a "qualified
stock option plan" to the maximum extent allowable by law, the remainder of the
option to be a "non-qualified stock option" subject to the provisions of Section
83 of the Internal Revenue Code of 1986, as amended from time to time. The
option shall be exercisable:
(a) On or after June 10, 1996 to the extent of 25,000 shares;
(b) On or after June 10, 1997, an incremental increase of 50,000
shares to a total of up to 75,000 shares;
(c) On or after June 10, 1998, an incremental increase of 50,000
shares to a total of up to 125,000 shares;
5
<PAGE> 6
(d) On or after June 10, 1999, an increase of 75,000 shares to a
total of up to 200,000 shares.
The unexercised portion of the option shall automatically and without notice
irrevocably terminate and become null and void on June 9, 2006.
5. Business Expenses.
Upon presentation of receipts within sixty (60) days after date incurred
by the Employee, the Company shall reimburse the Employee for all reasonable
travel, entertainment and other similar business expenses incurred by him in the
performance of his duties hereunder. The Company will reimburse the Employee for
all reasonable expenses incurred by the Employee in equipping, maintaining and
operating a phone, fax and computer for the equivalent of an at home office in
Los Angeles.
6. Vacation.
The Employee shall be entitled to reasonable vacations as may be
consistent with the generally applicable vacation policies of the Company, but
in no event less than four (4) weeks of paid vacation per year.
7. Termination of Employment.
(a) By the Company. Notwithstanding Section 1(a) of this Agreement, the
Employee's employment hereunder may be terminated by the Company, prior to
the expiration of the Term of this Agreement, as follows:
(1) Automatically, upon the death of the Employee.
6
<PAGE> 7
(2) On the date on which the Company notifies the Employee of the
termination of his employment due to his Disability. For purposes of
this Agreement, "Disability" shall mean the Employee's inability to
perform his duties under this Agreement, due to his physical or
mental condition, for a continuous period of five months or for any
non-continuous periods totalling six months in any twelve month
period.
(3) On the date on which the Company notifies the Employee of the
termination of his employment for Cause. For purposes of this
Agreement, "Cause" shall mean the conviction of a felony or
Employee's entering of a plea of guilty or nolo contendere to a
felony, or Employee's conviction of a felony or any lesser crime or
offense involving the property or affairs of the Company or any of
its affiliates, or the Employee's misappropriation or conversion of
the assets or opportunities of the Company or any of its Members or
any of their affiliates.
(4) On the date on which the Company notifies the Employee in
writing of the termination of his employment Without Cause. For
purposes of this Agreement, "Without Cause" shall mean any reason
for termination other than the Employee's death, Disability, Cause
or the expiration of the Term of this Agreement.
(b) By the Employee. Notwithstanding Section 1(a) of this Agreement, the
Employee's employment hereunder may be terminated by the Employee, prior
to the expiration of the Term of the Agreement, as follows:
7
<PAGE> 8
(1) On the date on which the Employee notifies the Company that he
is resigning from the Company. The Employee has the right to resign
from the Company.
(2) On the date on which the Employee notifies the Company that he
is terminating his employment for Good Reason. For purposes of this
Agreement, "Good Reason" shall mean without the Employee's written
consent, the Company breaches the terms of this Agreement. The above
notwithstanding, the Employee may not terminate his Employment
hereunder for Good Reason, unless the Employee has first given the
Company thirty (30) days advance notice of his intention to
terminate his employment for Good Reason and specified in such
notice his detailed reasons therefor and the Company has failed
during such thirty (30) day period to cure such Good Reason.
8. Consequences of Termination.
Following the termination of the Employee's employment pursuant to Section
7, above, the Company shall have no further obligation to the Employee and no
further payments shall be made to the Employee, except to the extent provided in
this Section 8 and except to the extent that the Employee is eligible for any
benefits under the terms of any benefit plan or Stock Option Plan for which the
Employee is eligible pursuant to Paragraph 3 or 4, above.
(a) In the event the Employee's employment is terminated due to his
death, the Company shall pay to the Employee's legal representatives or
named beneficiaries
8
<PAGE> 9
(as the Employee may designate from time to time in a notice to the
Company) the Employee's base salary for the remainder of the month in
which the Employee's death shall have occurred and an amount equal to the
pro-rata portion of the bonus which the Employee would have been paid for
his performance for the calendar year in which his death occurs but in no
event less than six months of the then current base salary.
(b) In the event the Employee's employment is terminated due to his
Disability, the Company shall pay the Employee severance pay in a lump sum
payment in an amount equal to one year of the Employee's then current base
salary, and the accrued but not yet paid portion of the Employee's bonus.
(c) In the event the Employee's employment is terminated for Cause, the
Company shall pay the Employee any base salary earned by the Employee
through the date of the termination of the Employee's employment, but not
yet paid to the Employee and the pro-rata portion of the Employee's bonus.
(d) In the event the Employee's employment is terminated Without Cause,
the Company shall pay the Employee severance pay in lump sum payment in an
amount equal to the sum of (1) the greater of (i) the Employee's then
current annual base salary; or (ii) the Employee's base salary to be paid
through June 9, 1999, and (2) all accrued but yet unpaid bonuses.
(e) In the event the Employee's employment is terminated by the Employee
for Good Reason, the Company shall pay the Employee a lump sum payment in
an amount equal to the sum of (1) the greater of (i) the Employee's then
current annual
9
<PAGE> 10
base salary; or (ii) the Employee's base salary to be paid through June 9,
1999, and (2) all accrued but yet unpaid bonuses.
(f) Notwithstanding anything to the contrary contained herein or
contained in the Stock Option Plan, the following shall be the
consequences upon termination to the Employee's vesting under such Stock
Option Plan. The unexercised portion of the option shall automatically and
irrevocably terminate and become null and void on June 9, 2006 or, if
earlier, upon the occurrence of any of the following:
(i) the expiration of one year following the date of termination
of the Employee's employment by reason of death or Disability and,
in which case, the unexercisable portion of the option shall become
fully exercisable;
(ii) the expiration of ninety (90) days following the date of
termination of the Employee's employment in the event the Employee's
employment is terminated for Cause;
(iii) the expiration of five (5) years following the date of
termination of the Employee's employment in the event the Employee's
employment is terminated Without Cause or by the Employee for Good
Reason and, in which case, the unexercisable portion of the option
shall become fully exercisable;
(iv) the expiration of ninety (90) days following the date of
Employee's resignation from the Company in the event the Employee
exercises his right to depart from the Company.
(g) No duty of Mitigation. The Employee's rights to the payments
described herein are not subject to any duty to mitigate.
10
<PAGE> 11
(h) Reimbursement of Expenses. In all incidents of termination of
employment, voluntary or involuntary, the Company shall reimburse the
Employee for all reasonable expenses Employee incurred in connection with
his employment and supported by receipts submitted to the Company within
60 days of the date of termination.
9. Expiration and Renewal.
This Agreement shall automatically renew for additional terms of one year
each unless at least six months prior to the expiration of each Term of this
Agreement, the Company shall notify the Employee in writing that it elects not
to renew the Agreement for such an additional term. The Company so notifies the
Employee that the Company elects not to so renew this Agreement, then the
Company shall pay the Employee a lump sum payment at the conclusion of the Term
of the Agreement equal to six months of the Employee's then current annual base
salary.
10. Assignment of Rights.
The Company may assign all of its rights and obligations under this
Agreement to any person or entity acquiring the principal assets used and useful
in the operation of the Company, provided such assignee is financially able to
honor the obligations to the Employee under the terms of this Agreement. Upon an
assignment of this Agreement or a transfer of control of the Company (a
"transfer of control" is defined as a transfer or sale of twenty-five percent
(25%) or more of the outstanding and issued shares of stock in the
11
<PAGE> 12
Company, all of the stock options set forth in Paragraph 4 of this Agreement
shall be exercisable by the Employee.
11. Confidentiality and Related Matters.
(a) The Employee shall not, for a period commencing upon the Termination
Date and ending upon the one year anniversary thereof, either directly or
intentionally (i) make known to any person or entity the names and addresses of
any of the customers of the Company or contacts of the Company within the
industry or any other information pertaining to such customers or contacts
except to the extent such information is otherwise available or generally known
in the industry or was known to the Employee prior to his employment with the
Company, or (ii) recruit or attempt to recruit, directly or by assisting others,
any other management employee of the Company or any of its affiliates.
(b) The Employee agrees that a breach or violation of this covenant not
to compete by the Employee shall entitle the Company, to its rights of
injunction issued by any court of competent jurisdiction, restraining any
further or continued breach or violation of this covenant. Such right to an
injunction shall be cumulative and in addition to, and not in lieu of, any other
remedies to which the Company may show itself justly entitled.
(c) The representations and covenants contained in this Paragraph on the
part of the Employee will be construed as ancillary to and independent of any
other provision of this Agreement, and the existence of any claim or cause of
action of the Employee against the Company or any officer, director, or
shareholder of the Company, whether predicated on this Agreement or otherwise,
shall not constitute a defense to the enforcement
12
<PAGE> 13
by the Company of the covenants of the Employee contained in this Paragraph so
long as Company is not in breach of its obligations under this Agreement. In
addition, the provisions of this Paragraph shall continue to be binding upon the
Employee in accordance with their terms for a period of one year past the
termination date, notwithstanding the termination of the Employee's employment
hereunder for any reason.
(d) If any court shall determine that the time, geographical area, or
scope of activity of any restriction contained in this Paragraph is
unenforceable, it is the intention of the parties that such restrictive covenant
set forth herein shall not thereby be terminated but shall be deemed amended to
the extent required to render it valid and enforceable.
(e) Confidentiality. The Employee recognizes and acknowledges that the
Company's trade secrets and other confidential or proprietary information, as
they may exist from time to time, are valuable, special, and unique assets of
the Company's business, access to and knowledge of which are essential to the
performance of the Employee's duties hereunder. The Employee confirms that all
such trade secrets and other information constitute the exclusive property of
the Company. Such information shall be marked or otherwise designated by the
Company as "trade secret" or "confidential" during the term of this Agreement.
During the Employment Term and thereafter for a period of one year past the
Termination Date, the Employee shall hold in strict confidence and shall not
disclose or reveal to any person, or use for his own personal benefit or for the
benefit of anyone else, any trade secrets, confidential dealings, or other
confidential or proprietary information so designated by the Company during the
term of the Agreement (whether or not acquired, learned, obtained, or developed
by the Employee alone or in conjunction with others during the term of this
Agreement) belonging to or concerning the Company or any
13
<PAGE> 14
of its subsidiaries, or any of their customers or clients or others with whom
they now or hereafter have a business relationship, except (i) with the prior
written consent of the Company duly authorized by its Board of Directors, (ii)
in the course of the proper performance of the Employee's duties hereunder,
(iii) for information (x) that becomes generally available to the public other
than as a result of unauthorized disclosure by the Employee or his affiliates or
(y) that becomes available to the Employee subsequent to the termination of his
employment hereunder and on a nonconfidential basis from a source other than the
Company or its subsidiaries who is not bound by a duty of confidentiality, or
other contractual, legal, or fiduciary obligation, to the Company or such
customers, clients, or others having a business relationship, or (iv) as
required by applicable law or legal process. The provisions of this Paragraph
shall continue in effect notwithstanding termination of the Employee's
employment hereunder for any reason for a period of one year past the Employee's
Termination Date. However, the Company acknowledges that the Employee brings
with him various knowledge, skills and contacts related to the Company's
business which the Employee acquired prior to his employment with the Company.
Nothing in this Agreement is intended to nor shall preclude the Employee from
continuing to work in the same business and industry as the Company upon
termination of employment and continuing to use such information acquired prior
to employment with the Company in any such employment.
(f) Business Records. Given the secretive and competitive environment in
which the Company does business and the fiduciary relationship that the Employee
will have with the Company hereunder, the Employee agrees to promptly deliver to
the Company, upon termination of his employment hereunder, or at any other time
when the Company so
14
<PAGE> 15
requests, all memoranda, notes, records, drawings, manuals, and other documents
(and all copies thereof and therefrom) in any way relating to the business or
affairs of the Company or any of its subsidiaries or any of their clients,
whether made or compiled by the Employee or furnished to him by the Company or
any of its employees, customers, clients, consultants, or agents, which the
Employee may then possess or have under his control. The obligation of
confidentiality set forth in Paragraph (e) shall continue notwithstanding the
Employee's delivery of any such documents to the Company. The provisions of this
Paragraph shall continue in effect up to and until termination of the Employee's
employment hereunder for any reason.
12. Representations and Warranties.
The Employee represents and warrants to the Company that he is under no
contractual or other restriction or obligation which would prevent the
performance of his duties hereunder, or interfere with the rights of the Company
hereunder. The Company represents and warrants to the Employee that this
Agreement has been duly authorized, executed and delivered by the Company, is
the legal obligation of the Company and is enforceable as to the Company in
accordance with its terms.
13. Governing Law.
This Agreement has been executed by the Employee in the State of Texas and
shall be construed in accordance with, and shall be governed by, the laws of the
State of Texas without giving effect to rules governing conflicts of law.
15
<PAGE> 16
14. Entire Agreement.
This instrument contains the entire understanding and agreement between
the parties relating to the subject matter hereof, except as otherwise referred
to herein, and supersedes any prior employment agreement between the parties,
whether written or oral. Neither this Agreement nor any provision hereof may be
waived, modified, amended, changed, discharged or terminated, except by an
agreement in writing signed by the party against whom enforcement of any waiver,
modification, change, amendment, discharge or termination is sought. To the
extent any employee handbook or similar policies of the Company are inconsistent
with the Agreement, this Agreement shall control and govern.
15. Counterparts.
This Agreement may be executed in counterparts, each of which shall be
deemed an original, and such counterparts together shall constitute a single
instrument.
16. Provisions Severable.
To the extent any one or more of the provisions of this Agreement shall be
invalid, illegal or unenforceable in any respect, the validity, legality and
enforceability of the remaining provisions contained herein shall not in any way
be affected or impaired thereby but shall remain in full force and effect.
16
<PAGE> 17
17. Headings.
The section headings herein are for convenience only and shall not be used
in interpreting or construing this Agreement.
18. Notices.
Any notice required or permitted to be given under the provisions of this
Agreement shall be in writing and shall be deemed to have been duly delivered
and received (i) on the date of personal delivery, or (ii) on the date of
receipt (as shown on the return receipt) if mailed by certified or registered
mail, return receipt requested, postage prepaid, or sent by Federal Express or
similar courier service, with all charges prepaid, in each case addressed to the
following persons at the following addresses, or to such other person or other
addresses as either party may designate by notice in writing to the other party
to this Agreement:
(a) To the Employee:
William Thomas Oliver
542 Warner Avenue
Los Angeles, California 90024
With Additional Copy to:
David E. Alexander, Esquire
Peyser & Alexander Management, Inc.
500 Fifth Avenue, Suite 2800
New York, New York 10110
(b) To the Company:
Tim Peters
8140 Walnut Hill Lane, #1000
Dallas, Texas 75231
17
<PAGE> 18
With Additional Copy to:
Maryann Walsh, Esq.
8140 Walnut Hill Lane, #1000
Dallas, Texas 75231
19. Survival.
The termination of the Employee's employment and the termination of this
Agreement shall not affect the rights and obligations which customarily survive
the termination of an employment arrangement, including, without limitation, the
terms of Paragraphs 8, 10, 16 and 19 of this Agreement.
20. No Third Party Beneficiaries.
This Agreement does not create, and shall not be construed as creating,
any rights enforceable by any person not a party to this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first hereinabove written.
SOURCE MEDIA, INC.
By: /s/ TIM PETERS
---------------------------
TIM PETERS
EMPLOYEE:
/s/ W. THOMAS OLIVER
------------------------------
W. THOMAS OLIVER
18
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 9,336
<SECURITIES> 0
<RECEIVABLES> 3,062
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 25,726
<PP&E> 11,337
<DEPRECIATION> 7,402
<TOTAL-ASSETS> 52,050
<CURRENT-LIABILITIES> 10,500
<BONDS> 100,000
17,344
0
<COMMON> 13
<OTHER-SE> (78,853)
<TOTAL-LIABILITY-AND-EQUITY> 52,050
<SALES> 5,352
<TOTAL-REVENUES> 5,352
<CGS> 3,106
<TOTAL-COSTS> 7,616
<OTHER-EXPENSES> (284)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,209
<INCOME-PRETAX> (8,295)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,011)
<EPS-PRIMARY> (.70)
<EPS-DILUTED> (.70)
</TABLE>
